Tax is a necessary evil. While the revenue collected through tax means the federal and various state governments are able to fund a range of projects, services and initiatives, it also means the ordinary taxpayer loses out on some of the income they were putting toward their retirement. According to the Australian Taxation Office (ATO), $419.2 billion worth of revenue was collected from Australians in 2013-14 alone.
That's why, each year, the end of June occasions a mad scramble by all Australians to minimise their tax bills as much as possible. It's an especially large concern of high-earning Australian property investors, who stand to see a much larger share of their yearly income siphoned off.
Fortunately, there is a wide assortment of strategies investors can take advantage of to reduce their tax burdens, ranging from the obvious to the more obscure. Here are 10 we find most notable.
1. A separate transaction account for your investments
First of all, in order to claim any tax offsets that are worth more than $300, you have to be able to provide evidence of these expenses. However, keeping accurate tax records can be difficult when the money that goes toward maintaining your investment is intermingled with your regular, everyday spending. It can be tough to distinguish between the two, much less prove it to the ATO.
Avoid this issue by setting up a separate account devoted to your investment property. By having all your transactions and payments go into and out of it, it will make it much simpler to track your expenditure on the property, as well as total it up.
2. Take advantage of depreciation
Many investors already know the benefits of depreciation. All homes, as well as their contents, experience general wear and tear, seeing a gradual decline in value - even older ones. As an income-producing asset, however, your investment property's depreciation can be claimed as a tax offset. Just how much the depreciation benefits will be worth will depend on factors like the type of structure it is, its age and what it's used for.
The items that depreciate include everything from appliances like fridges, air conditioners and washing machines to features like rugs, window treatments, curtains and blinds - also known as 'plant and equipment'. You can also claim for the construction costs and structural elements, such as the property's brickwork or concrete slab. You'll need to contact a quantity surveyor to draw up a depreciation schedule before you lodge your tax return.
3. Pre pay your expenses
Did you know you could pay for the next financial year's expenses now? There's a good chance you probably already know what kind of costs you'll end up footing next year for your positively geared property. If any of these costs are less than $1,000, they are immediately deductible from your tax, a year in advance. This can be advantageous if you need an extra infusion of cash for investment one year.
Note that the good or service is only claimable in advance if the tax year that you pay for the expense, and the tax year that the good or service is actually provided, are different. For instance, if you wanted to prepay the cost of advertising for tenants, you would have to pay before July 2015, and the advertisement would have to run during any of the months of the 2015-16 tax year.
4. Claim mortgage costs
Many of the borrowing costs associated with a property can be claimed as tax deductions that can save you money in the long term. Establishment fees, mortgage broker fees, the costs involved in preparing and filing mortgage documents and even the stamp duty charged on investment finance for your property - these can all be claimed. That's just a short list, so be sure to investigate further.
This can be a significant cost. In New South Wales, for instance, mortgage duty is charged at a rate of $5 up to the total of $16,000, then $4 for every $1,000 of the loan above this number. This can easily come to hundreds of dollars.
5. Claim interest expenses
This is one that's well known by experienced investors, but it's worth discussing. If you borrow money in order to purchase the property itself, make renovations or even to buy a depreciation asset for it - such as a new dishwasher - the interest on the loan is deductible. Many people use this strategically, taking out an interest-only loan and watching their property grow in value while they pare down their tax bill.
6. Set up an offset account for your residential mortgage
Speaking of strategy, a 100 per cent offset account can be the key to make interest expenses work in favour of your tax bill. Consider having the rent from your investment property go toward this account, thus lowering the interest you pay on your regular mortgage, which isn't deductible. This way, you'll be maximising the deductible interest you accrue on your investment loan while saving money on the regular mortgage that you can't claim as a tax offset.
7. Claim maintenance costs
Part of being a decent landlord is making sure the property stays in good shape for your tenants. This involves numerous tasks, from undertaking regular repairs, to paying for professional cleaning services and even hiring pest control to get rid of an annoying infestation.
According to the Australian Pest Control Association, just to inspect your property for termites costs in the ballpark of $250-$350. For the average home to receive treatment for a termite infestation can be another $2-$5,000. Just as well this can be used to reduce how much you owe the tax man.
8. Prepare a 'scrapping schedule' if renovating
If you're planning on making renovations to your property - whether out of necessity or not - there could be tax advantages in it for you. Any depreciating assets that you're going to replace or get rid of wholesale can be claimed as a tax deduction.
All of these items will hold some residual value, so it's worth taking some kind of financial advantage of them. Items classed as 'plant and equipment', tend to have the highest depreciation, so should receive most of the focus. Just as with depreciation, hire a quantity surveyor to draw up what's known as a 'scrapping schedule' for these items.
9. Hold on to your property
What's true of most things is also true of property investment: Timing is everything. At DPN, we advise our clients to take a long-term approach to capital growth, rather than a quick flip strategy. Not only is this a more sound method in general, but there's also an added incentive: If you wait at least 12 months before selling a property, you qualify for a 50 per cent exemption from the capital gains tax. Remember that this time period relates to the sale contract dates, however - not the settlement dates.
10. Make use of tax variation
Some people find filling out a pay as you go (PAYG) withholding variation application useful, particularly if their investment is currently not getting them the returns they expected. Under this arrangement, an employer will take out less tax every pay day, giving you a larger amount of cash in pocket to work with. While you'll receive a smaller refund at the end of the tax year, it does free up cashflow throughout the year, which can be useful in a sticky situation.