Pre-tax time checklist for Warrnambool property investors

Posted on 19/05/2020 by Andrew Morris in Mortgage Broking
Andrew Morris
Andrew joined Sinclair Wilson in May 2017 as Mortgage Broker, having spent the past 10 years in the banking industry. With a small business background - in hospitality, no less...

Tax time is approaching again! Was that a groan? We understand.

If you’re like most property investors in the Warrnambool, Hamilton, Colac, Camperdown or Mt Gambier regions, trawling through receipt upon receipt to tally up your allowable deductions is probably not your idea of fun.

So, as tax time looms we wanted to share our pre-tax time checklist to help make things just a bit easier for you.

  1. Organise your receipts and records

Hopefully, you’re not one of those investors who shoves their receipts and paperwork into a shoebox… but even if you are, you need to get it in order.

If you do maintain the physical receipts (rather than scan them into an app, or online record), a bank statement will still suffice of evidence of when a purchase was made.

You should also be sorting your expenses into categories. A start might be categories such as:

  • Strata levies
  • Rates
  • Water Charges
  • Property management fees
  • Maintenance and repairs

We love an excel spreadsheet – this can be a good way of keeping track of expenses, but also consider an expense-tracking mobile app. Either option will make it much easier to track your expenses month-by-month, and help save a lot of time and angst as tax time approaches.

  1. Consult your tax accountant

The old saying goes, ‘if you think it’s expensive using an expert, try using an amateur’.

You wouldn’t get just anyone to cut your hair, right? Or fix your broken car? Or mend a broken leg?

Tax advice is no different. The result you will get from using an educated, experienced professional will be far better than if you try to navigate this on your own – or in consultation with someone who does not have formal qualifications and plenty of experience (like the Accountants we have at Sinclair Wilson do.)

Tricky questions you’ll need answered include:

  • Do you need to pay Goods and Services tax in relation to your rental income?
  • Should you set up Pay As You Go tax instalments (which could be necessary if you make a profit from your rental property).
  • What deductions might you qualify for?

We know it can be tempting to take the advice of a friend or colleague who has already been there, done that… but if they aren’t a qualified, professional accountant, with access to the regular industry updates, mandatory upskilling and education programs our Accountants are, then you are risking getting only some of the information you need to benefit.

  1. Allowable deductions – tally them up

While it’s true there are a lot of expenses associated with your investment property than can be deductible, not all will be. It’s likely there will be some expenses that you will only be able to partially claim.

There are also deductions you can claim in the tax year that you incurred them, and deductions that have to be spread across several years (such as capital works expenses.)

The Australian Tax Office’s Guide for rental property owners, Rental Properties 2019, is a great tool for trying to make sense of your potential tax deductions. Following are the types of deductions you may be able to claim.

But, once again, as per point number two – a good Accountant is going to be the best way to make sure you are doing – and getting – what you should. An outline of the deductions you might be eligible for is below.

  • Immediate Deductions

According to the ATO guide mentioned above, you may be able to claim an immediate deduction (in the year you incur them) for expenses you incur for:

  • owning, managing and maintaining your property:
  • property management fees
  • advertising for tenants
  • insurance
  • interest on loans
  • land tax
  • legal expenses
  • pest control
  • maintenance, repairs and so on.

With the tax time just around the corner, it may be a good idea to attend to any maintenance or repairs that may be required on your investment property now. Depending on your circumstances, it could be possible to claim the expenses as tax deductions on your 2019-20 tax return.

  • Expenses deductible over several years

Borrowing expenses, amounts for decline in value of depreciating assets, and capital works deductions may be claimed over a number of income years.

It’s important to have a professionally prepared depreciation schedule if you want to claim for depreciating assets, so contact your local Quantity Surveyor for assistance if you need to organise or update an existing one prior to submitting your tax return.

  • Borrowing expenses

Borrowing expenses include:

  • loan establishment fees
  • title search fees charged by the lender
  • costs for preparing and filing mortgage documents
  • mortgage broker fees (we don’t charge fees, but some do)
  • stamp duty charged on the mortgage
  • fees for a valuation required for loan approval and lender’s mortgage insurance.

Borrowing expenses exceeding $100 are spread over five years or the term of the loan, whichever is less, otherwise they are deductible in the year incurred.

  • Depreciating assets

When you buy an investment property, you’re essentially purchasing the building plus other items of ‘plant’, such as the air-conditioner, cooker and hot-water service.

These are depreciating assets and you can claim depreciation for them, provided you have a proper depreciation schedule, as mentioned above.

If you have a depreciation schedule, you can deduct an amount equal to the decline in value of the depreciating asset during the income year.

  • Capital Works Deductions

Certain kinds of construction expenses can be claimed as capital works deductions.

For example, if you add a room or remove an internal wall, these deductions are claimable once the construction is finished, and are generally spread over a period of 25 or 40 years.

The capital works deductions you claim will be taken into account when working out your capital gain or capital loss from the rental property.

  1. Determine your assessable rental income

For those who are new to property investing, your rental income is the total amount of rent and associated payments you receive, or become entitled to, when you rent out the property.

The full amount of rent you earn must be noted in your tax return. Talk to your accountant if you have any issues working it out.

  1. Review your loans and finances

The end of the financial year is a great time to review how your investment property is performing, and to review how well your loan is serving you. To make sure your investment loan is still right for your needs, speak to us and we’ll compare the market for you and show you what’s out there.

There are many kinds of finance options for investment property mortgages that you may want to consider.

For example, an option that is popular with many property investors is a loan that allows them to pay interest only in advance. This is a fixed rate loan that allows you to prepay 12 months of interest in advance.

This option could allow you to receive a discount on your interest rate, protect you from rate rises during the year and help you to maximise your cash flow knowing there will be no further repayments until next year.

Depending on your financial circumstances, it could also be very beneficial to you come tax time (but again, we do recommend that you consult one of our Accountants to see if this is the right strategy for you).

  1. Start planning for the year ahead

It always pays to plan ahead so you can arrange your finances accordingly.

As your mortgage broker, we can help you determine if you can access your equity to renovate, or perhaps expand your investment portfolio. Remember, asking us to give you a free property investment loan review could potentially save you money, so it’s worth giving us a call.

We hope these tips come in handy when preparing for tax time. Alternatively, you could talk to us about how you could use it to continue building wealth for your future through your property investments. If that’s the case, just give us a call. We are only too happy to help!