Final Call – Tax Planning for Investment Properties
With the end of the financial year fast approaching, if you haven’t already, now is the time to start planning and considering opportunities for ways to minimise your tax. Shane Scott from Ingrilli & Scott Taxation Services shares his tips on Tax Planning for Investment Properties.
The first element of this involves the issue of timing. Rental income is assessable in the year in which it is received and expenses are deductible in the year they are paid. With this in mind if it is possible to defer the receipt of income until 1 July or ensure the payment of expenses occurs prior to 30 June you can reduce your income in the current tax year. So if there are repairs (be careful to differentiate between capital improvements which aren’t immediately deductible) that need doing such as painting, repairing broken sections of fences, repairing gutters, fixing leaks etc. consider bringing them forward into the current tax year.
This can lead to cash flow benefits if you then lodge your tax return soon after the end of the financial year because the tax refund be received and can help offset the payment of the expense. If you are selling your property and are fortunate enough to be able squeeze the signing of the contract into the next financial year, you will give yourself an additional year before you have to pay any capital gains tax which means you can put those funds away in an interest bearing account and earn a little extra on your investment. On this point, a common misconception is that the relevant date for CGT purposes is the settlement date. It’s not, it’s the contract date.
While we are on the topic of capital gains, it’s important to remember that any capital losses can be used to offset the gain made. So if you find yourself in the unfortunate position of holding an investment that has decreased in value, it is worth contemplating selling that asset to crystallise the loss and make it available to reduce the tax payable on gains. This is particularly easy to implement with investments such as shares, but not as easy with assets that take longer to sell such as property. This strategy can also allow you to reassess your investment strategy and take the proceeds on those under performing investments and reallocate them into better alternatives.
If you have previously lived in your investment property there is the potential to reduce your capital gain by utilising the main residence exemption. Most people are aware that there is no capital gains tax payable on the disposal of their own home, what they might not realise is that they can be absent from a home they have previously lived in and either retain the capital gains tax exemption in full or reduce it. If you are fortunate enough to be in this position, discuss the relevant dates and timings with your accountant so you can plan accordingly.
Capital components of your investment such as the physical building and the equipment and fittings within can be depreciated or written off under the capital works allowance provisions as a deduction. It is advisable to get a depreciation report prepared by a suitably qualified quantity surveyor to support these claims. For newer buildings especially, the claims can amount to significant amounts and the benefit is they are non cash claims – that is you are not incurring the cost in the current year to be able to claim the deduction.
What’s more, a quantity surveyor can usually retrospectively prepare the report allowing you to claim for the entire current year and subject to limits on amendment periods, amend prior year returns to claim amounts relative to those years.
The most important thing to remember is, there is no one size fits all strategies with investing and tax and individual circumstances can make or break the strategies discussed above. The best piece of advice I can give to anyone is to keep your accountant and advisers informed on what is happening in your life. Not just around your investments, but about everything. Looking to buy an investment, looking to sell an investment, looking to put money into super, looking to take money out of super, considering retirement, considering moving overseas, whatever.
If your accountant is aware before you undertake any of these actions they can let you know if there is any planning you can undertake to make it more beneficial for you.
If you want to discuss any of these issues and how they can be used benefit you, contact Shane Scott at Ingrilli & Scott Taxation Services on (08) 9321 2829.
Note: Readers should always seek their own independent advice prior to making any decisions regarding property or finances