By now most people would have, at the very least, thought about their tax returns for last financial year. For a lot of us, the amount we get back from the government hardly seems fair, considering how much we give them every year.
While the average Australian will pay around $15,000 a year to the government through income tax, the average tax return is only $2,300. This varies depending on your job and what you are able to claim every year. But what if there was a way to receive an extra $7,000-$12,000 back in your tax return every year?
Now when most people think about property and tax, their minds race straight to negative gearing and they automatically think that the only way it works is by losing money on an investment property.
This is not the case. In fact, by carefully selecting the correct property you can use negative gearing to create a cash flow positive investment.
So how can you do this?
The answer is through tax depreciation’s and ensuring you have the best team around you to maximise your tax benefits. Depending on your personal situation, along with the financial and legal structure of your purchase, you may be able to claim any of the following:
1) Depreciation – building
You can claim 2.5% of the building cost every year for 40 years. This means that if the cost to build your property is valued at $200,000, you will be able to claim $5,000 every year for the next 40 years.
This value is determined by a quantity surveyor, which is why we help our clients submit the correct forms, so they can claim the benefits from day one.
This depreciation is a factor that you need to look at when choosing your property, as selecting a property with good depreciations can help turn your investment into positive cash flow. For instance, a second hand property won’t allow you to claim as much depreciation as a new property, because the cost to build a house 10-15 years ago was a lot lower than the cost today.
2) Depreciation – fittings
If you were to go into your house with a screw driver, anything you could take out with you would be classed as a fixture or fitting. These can all be claimed through depreciation’s, but all have varying life spans. On average you can claim around $5,000 for the first few years, but if the right strategy for your situation was to claim as much tax back as possible, then you could find some very high quality properties that can depreciate fixtures & fittings at over $10,000 in your first few years. This could be the difference between having a cash flow negative and cash flow positive investment property.
Again these values will be determined by a quantity surveyor, which is why it is important to get these depreciation schedules done early.
Another thing to be wary of for this depreciation is from 9 May 2017, you can only claim the depreciation’s if you were the initial purchaser of these fixtures and fittings. In other words, you cannot claim this depreciation on second hand properties unless you go out and purchase all new fixtures and fittings. This defeats the purpose of claiming depreciation’s to increase cash flow, so with this new law, purchasing new properties has become far more attractive for investors.
3) Loan interest and expenses
The interest that you pay on your investment loan and also any costs associated with setting the loan up, can all be claimed against your rental income.
One of the biggest fears for Australian’s right now is ‘what if interest rates go up?’ Well, through tax depreciation, you can claim these extra expenses back against your income. This, combined with the increase in rents that will occur, help to keep your investments safe if interest rates begin to climb.
4) Rental expenses
Rental expenses include any costs related to your rental property. As with anything when it comes to tax, these claims aren’t straight forward but can include, Agent’s commission, letting fees, rates, insurance, and any general maintenance or repairs just to name a few.
5) Travel, phone costs and stationary
Since 9 May 2017, any travel related expenses can no longer be claimed as a tax depreciation. As a result, it is even more important now to ensure you have a good property manager either onsite, or through a good real estate agency to look after your property.
You can still claim anything that is related to your investment, in terms of phone bills or technology expenses. This can get tricky, so you must have a good accountant and ensure you keep a diary of everything you use that relates to the investment. Similarly, you can also claim the cost of any stationary that you have to buy, which is directly related to working on your investment properties.
As you can see when it comes to tax, things begin to get very complicated, so it is essential to have a good accountant as part of your team. A good accountant can look at your situation and work closely with your property strategist to ensure your overall strategy fits in well with where you are at now, and where you ultimately want to be.
If you already have an accountant then speak to them about how property can benefit you at tax time next year. If you don’t, or your accountant doesn’t specialise in property-related tax, then now is the perfect time to get in touch with someone who does, so you can get the most out of this financial year. We have a number of great accountants who we can recommend to you, so if you want to get even more tax back this financial year, then get in touch with us by filling in your details below.