Tax tips for investment properties
One of the greatest benefits of owning an investment property (besides the additional income) is your entitlement to tax benefits.
Expenses you can and cannot claim
While your property is rented or available to rent, you can claim immediate deductions for rates and taxes, property management, fees, insurance, body corporate fees, cleaning and gardening, and repairs and maintenance when your tenants were living in the property. You can claim deductions for capital works (building costs) and borrowing costs over several years. Costs related to the property purchase such as stamp duty, as well as expenses paid by tenant cannot be claimed as a deduction.
If your rental property is only available for rent for part of the year, only part of the property is available to rent, or the property is rented at non-commercial rates, you must apportion your expenses to determine the deductible amounts.
Property investors who have adequate cash flow t prepay interest on a loan can do so and claim an immediate deduction. It is also possible to prepay and claim a deduction for your upcoming property insurance premiums.
Bring forward maintenance expenditure
If there are maintenance tasks that you know will need to be completed the you may wish to complete them before 30 June in order to minimise your tax bill in the current financial year.
Record keeping measures
Investors must keep good records to substantiate their claims. The ATO requires you to keep records such as proof of earned rental income, all expenses incurred, periods of private use by you or your friends, periods the property was used as your main residence, loan documents and efforts to rent out the property.
Preparing for single touch payroll
The tax office is urging employers with 20 or more employees to prepare for the introduction of single touch payroll.
From 1 July 2018, single touch payroll will be introduced requiring employers to report their employee’s tax and super information to the ATO through Single Touch Payroll approved software.
Employers will report each time they pay their employees, i.e. weekly, fortnightly or monthly. The information that will be reported includes withholding amounts, superannuation liability information or ordinary times earnings (OTE) and salary, wages, allowances and deductions.
Employers must prepare by organising the following:
- Determine how many employees they have as of 1 April 2018 to check if there in 20 or more. If numbers drop down to 19 or less, you will still continue to report through single touch payroll unless you apply for and are granted an exemption.
- Talk to your software provider about how and when your product will be ready.
- These without a software provider will need to find a provider the offers single touch payroll
- Update your payroll software when its ready.
- Start using single touch payroll.
Employers with 19 or less employees have until 1 July 2019 to prepare, however, they can start reporting as soon as their software is update.
ATO targeting holiday homes
The Australian Tax Office (ATO) is focusing on rental property owners the tax season with a large number of mistakes, errors and false claims made by some using their own property for personal holidays.
The ATO is reminding owners they cannot claim deductions for holiday homes that are not actaully available for rent or only available to friends and family.
Private use is entirely legitimate although it does reduce an owner’s ability to earn income from the property.
Properties must be genuinely available for rent to claim deductions. This means you cannot use the property for your personal use or let friends and family stay rent-free and claim a deduction.
For those who rent the property to friends or family at mates rates, they must only claim deductions for expenses up to the amount of the income received.
In addition to rental properties, the ATO is investigating cases where taxpayers claim their property is available for rent but there is no intention of renting it out. Rental rates well above market rates and unreasonable conditions for prospective renters are just a couple of ways owners can be doing this.
The ATO will also be scrutinising incorrect rental property claims. Data matching technology allows the tax office to pick up attempts at over-claiming regardless of whether the mistake was deliberate or an accident.
Property owners are advised to double-check their claims before lodging their tax return. They must remember to declare all rental income and only claim deductions for periods that the property is rented or genuinely available at market rates.
End of financial year: super strategies
As the end of financial year is fast approaching it pays to start thinking about how you can grow your superannuation while seeking some generous tax breaks.
The spouse super tax offset allows higher earning taxpayers who contribute super for their non-working or low income earning partners to be eligible for the maximum offset of $540 for the 2017/2018 financial year, you must contribute to your spouse’s super fund (whether de facto or married) and your spouse’s income must be $37,000, the tax offset will gradually reduce and completely phase out at $40,000.
Low to middle income earners can receive a government co-contribution of up to $500, provided the meet eligibility criteria. To receive a co-contribution you must have made one or more eligible personal super contributions during the financial year, be less than 71 years old at 30 June, not hold temporary visa at any time during the financial year (unless you are a NZ citizen or it was a prescribed visa) and you must lodge your tax return for the relevant financial year.
Additionally, you must pass two income tests (income threshold and 10% eligible income test). If your total income is equal to or less than the lower threshold ($36,813 for 2017/18) and you make personal contributions of $1,000 to your super account, you will receive the $500 contribution. If your total income is between the lower threshold and the higher threshold ($51,813 for 2017/18), your maximum entitlement will reduce as your income rises.
Also, 10% or more of your total income must come from employment-related activities, carrying on a business, or both.
Concessional (before-tax) contributions include employer contributions, salary sacrifice and personal contributions you claim as a personal super contribution deduction. The concessional contributions cap is $25,000 for everyone as of 1 July 2017.
The non-concessional (after-tax) contributions cap is $100,000 per year for the 2017/18 financial year and future financial years. Individuals aged between 65 and 74 years old can access this cap provided they meet the work test. If you have a total super balance cap at the end of 30 June of the previous financial year, your non-concessional cap is reduced to nil.
Deadline approaching for CGT relief
SMSF trustees electing to apply transitional CGT relief to their 2016/17 returns or amend a previously lodged return will need to do so before 30 June 2018.
Transitional CGT relief was introduced after the 1 July 2017 to allow SMSF trustees who adjusted their asset allocations to comply with the transfer balance cap and transition to retirement income stream reforms.
The CGT relief ensures that, for certain assets that were supporting super income streams in retirement phase before 1 July 2017, an SMSF trustee can still receive a tax exemption on capital gains accrued but not realised.
CGT relief will apply differently, depending on what method was used to calculate exempt current pension income (EPCI) at the start of the pre-commencement period – from 9 November 2016 to 30 June 2017.
There are two methods:
- Segregate: calculated your EPCI by selecting specific assets to support your income streams.
- Proportionate:calculated your EPCI by allocating a percentage of income streams.
Where the fund is 100 per cent in pension phase, the ATO will accept that the fund is using the segregated method.
Regardless of which method is used, your fund must have held the assets throughout the entire pre-commencement period and must have been a complying super fund from 9 Novmber 2016 until the date of relief if applied.
If a trustee changed from the proportionate method to the segregated method between 9 November 2016 and 30 June 2017, they are not eligible for CGT relief under either method.
Effects of CGT relief
The deemed sale when CGT relief is applied creates a capital gains event for the asset, and when the asset is deemed to be repurchased it has the effect of being a new asset for CGT purposes. The asset must then be held for at least 12 months after this time to qualify for the CGT discount.
The indexation method for assets originally acquired before 21 September 1999 will no longer be available.
CGT relief can apply at the parcel-to-parcel level for shares or units, meaning the trustee can choose which particular shares in an overall holding to reset the cost base for. For unit trusts, CGT relief applies to the units, and not the underlying assets held by the trust.
SMSF trustees are reminded that CGT relief is irrevocable, so appropriate planning and care should be exercised.
Crackdown: work-related expenses
The Tax office has it sights on ‘other’ work-related expense deductions this tax time.
The ATO will be paying close attention to claims for work related expenses at label D5 this year. Before an individual makes a claim, they must show that they spent the money themselves and were not reimbursed; the expense was directly related to earning their income and they have kept a record to prove it.
Tax payers are reminded to apportion their claims for work and private use, as deductions can only be claimed for the work-related portion. For example, if you use your mobile phone or internet for work and personal purposes, you can only claim the percentage the reasonably relates to work use.
Individuals must also be aware that they are not automatically entitled to claim standard deductions. It is necessary to keep evidence of how the claim was calculated, i.e, records of incurred expenses and so forth.
Before claiming a deduction, individuals must consider if their employer would confirm the expenses were required to earn their income and that they were not reimbursed. Remember, receiving an allowance from an employer does not necessarily entitle you to a deduction.
Contact us today to discuss your end of financial year plans.
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