EOFY: Seven ways to slash your property tax bill before the end of financial year

Smart investors should see tax time as an opportunity to make sure they are maximising their deductions.

Property owners are able to claim a wide range of the expenses associated with owning a rental property to reduce taxable income and minimise their tax bill.

Most investors would know about typical tax deductions, such as interest on loans, repairs and management fees, but there are lesser-known ways investors can reduce their taxable income this financial year.

1. Pre-pay interest and expenses

For borrowers with fixed-rate loans, paying interest now for the next 12 months allows investors to claim the deduction this financial year.

Expenses such as gardening or agents’ fees can also be prepaid, and service providers may even offer a discount.

This strategy is particularly useful when an investor’s annual income is higher than normal, pushing them into the next tax bracket, according to H&R Block director of tax communications Mark Chapman.

“The pros are that you are accelerating your tax deduction,” he said. “The cons are that you actually have got to have the cash, and that’s going to rule out most people.

“Secondly, it’s only a timing difference, so sooner or later things will even out.”

2. Hire a quantity surveyor

Depreciation is one of the most valuable deductions property owners can claim. Investors can deduct the amount that assets used to produce income have declined in value over that financial year.

Estimating these declines is complex, so a quantity surveyor should be engaged to create a depreciation schedule.

“Depreciation is not claimed correctly by 70 or 80 per cent of investors, so they’re leaving money on the table,” BMT Tax Depreciation chief executive Bradley Beer said.

He said investors often expected accountants to take care of depreciation, or were put off by the cost, which is usually about $700.

“You should compare that with what you are claiming,” he said. “The first full-year deduction across our 70,000 reports was about $10,000.”

Investors who haven’t been claiming depreciation properly in the past can amend up to two years of tax returns, Mr Beer said. “As you come up to tax time, don’t do another tax return and then forget about it.”

Fortunately, quantity surveyor’s fees are tax deductible, and depreciation schedules purchased before June 30 can be claimed this financial year.

3. Replace low-value items now

While depreciation for expensive items such as hot water systems is claimed over several years, a 100 per cent deduction is available for items costing under $300 in the year the items are purchased, according to Mr Beer.

“Whenever you replace a plant and equipment item, you get to claim depreciation against the new one,” he said. “For anything worth less than $300 that needs replacement, replace it in June rather than July.”

4. Claim borrowing expenses

The costs to take out a loan, including establishment fees, mortgage stamp duty and mortgage broker fees can be also be claimed, although these deductions must be spread out over five years.

“A lot of people forget to claim mortgage protection insurance that they might be taking out if they’re getting a larger mortgage,” said Mr Chapman.

5. Ensure claims are still valid

Recent changes mean some notable deductions are no longer allowed, which CPA Australia head of policy Paul Drum said could come as a shock to some investors.

“A landlord is no longer able to claim travel deductions for inspecting, maintaining and collecting rent,” he said

“The fact that they’ve changed the travel rules indicates that the ATO and the government believe that travel claims were being abused.”

Additionally, investors can no longer claim depreciation on second-hand items, or previously used items in property purchased or turned into an rental after May 9, 2017, as this deduction now only applies to new items.

6. Find a good accountant

Tax for rental properties can be especially complex, and a DIY approach may prove a false economy.

“Most accountants should be able to give you the kind of advice you need to get your taxes right,” Mr Chapman said. “But it is worthwhile checking that they do have experience with rental properties and how many clients they have in that space.

“Ask them questions about your specific tax affairs and what advice they would be giving you.”

7. Don’t lie

The ATO is cracking down on dodgy deductions by property investors, and the punishment for rorting the system can far exceed any expected savings.

“The penalties can be up to double the tax avoided plus interest,” Mr Drum said.

Owners of holiday houses in particular are in the ATO’s crosshairs, with a focus on people using their property for personal use and claiming deductions that are disproportionate to the income received.

“The ATO is also on the lookout for properties that are truly available for rent or not,” Mr Drum said, citing owners who charge artificially high rents or fail to adequately advertise a property as practices that are being targeted.

What property investors can claim as a tax deduction

• Advertising for tenants
• Bank charges
• Body corporate fees and charges
• Cleaning
• Council rates
• Annual power guarantee fees for electricity and gas
• Gardening and lawn mowing
• In-house audio and video service charges
• Building, contents and public liability Insurance
• Interest on loans
• Land tax
• Preparation, registration and stamp duty expenses for lease documents
• Legal expenses (excluding acquisition costs and borrowing costs)
• Mortgage discharge expenses
• Pest control
• Property agent’s fees and commissions (including prior to the property being available to rent)
• Expenses incurred in attending property investment seminars to improve the performance of a current income-producing property
• Quantity surveyor’s fees
• Costs incurred in relocating tenants into temporary accommodation if the property is unfit to occupy for a period of time
• Repairs and maintenance
• Cost of a defective building works report in connection to repairs and maintenance conducted
• Secretarial and bookkeeping fees
• Security patrol fees
• Servicing costs, for example, servicing a water heater
• Stationery and postage
• Telephone calls and rental
• Tax-related expenses
• Water charges

What property investors can claim over a number of years

• Amounts for decline in value of depreciating assets
• Capital works deductions
• Loan establishment fees
• Title search fees charged by your lender
• Costs for preparing and filing mortgage documents
• Mortgage broker fees
• Stamp duty charged on the mortgage
• Fees for a valuation required for loan approval
• Lender’s mortgage insurance billed to the borrower

What property investors can’t claim as a tax deduction

• Acquisition and disposal costs (although these may be added to your cost base when selling)
• Expenses not actually incurred by you, such as water or electricity usage charges borne by your tenants
• Expenses that are not related to the rental of a property, such as:
  • Expenses connected to your own use of a holiday home that you rent out for part of the year
  • Costs of maintaining a non-income producing property used as collateral for the investment loan
• Expenses incurred in relocating assets between rental properties prior to renting
• Travel expenses
  • to rental seminars about helping you find a rental property to invest in
  • to inspect a property before you buy it
• Travel expenses from the July 1, 2017 onwards
  • to inspect a property you own
  • for maintenance of a property
  • for rent collection

Source: ATO