Hedland & Newman

Investing tax mistakes you could be making

May 27th, 2015 • 3 comments

Yep! Tax time is just around the corner and smart investors know it’s a great time to claim back a portion of their investment expenses.

It seems however according to the ATO, there are common mistakes made when it comes to claiming tax. The tax man keeps a close eye on those who over claim but nobody tells you if you are under claiming. Here are the top mistakes the ATO listed and the ones here at CPG we come across from investors.

Please note to seek legal and financial advice from qualified professionals to ensure you claim accurately.

Not using an accountant who understands property
Using the right accountant is extremely valuable, especially as a property investor using an accountant that understands property is worth their weight in gold! Ask your accountant what experience they have in property investing before making your decision.

Paying down tax-deductible debt before non-deductible debt
Most experienced investors will know that it can be tax effective to pay down non-tax deductible debt before tax deductible, such as your home. Most investors will have their investment properties on an interest only arrangement until they have eliminated non-deductible debt.

No depreciation schedule
A depreciation schedule is the schedule of items that can be depreciated at a certain rate allowing you to claim a tax deduction against your taxable income. It is amazing how many people don’t even have one! It is wise to get your accountant to assist you with this as this can save you thousands.

Trying to claim expenses you can’t.

There are certain types of property investing expenses that cannot be claimed as part of your tax return. For example property improvements must be claimed over several years as capital works deductions where repairs can be claimed in the same tax year. Also any conveyancing expenses that you incur during the purchase and selling process cannot be deducted. Instead, these costs make up part of the cost based for capital gains tax purposes.

Keeping the right records

Property investors must keep accurate records, regardless if they prepare their tax returns themselves or not. A record must be kept of the following:

  • Rental income and deductible expenses and these need to be kept for 5 years.
  • All documents relating to the ownership of the property including all purchasing and selling costs, again these need to be kept for 5 years.

By keeping all of these documents handy, it will be a lot easier to make accurate calculations and enlist the help of a tax professional.

Although tax losses are great, the goal of property investing is to earn more income than you pay in expenses. Set your goal for profit as a tax loss is still a loss that costs you money but ensure you are claiming all that you are legally entitled to at the same time.

Leave us your comments below!? Which tip could help you maximise your tax return?

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Hi a lot is written about the benefits of having a depreciation schedule. However little is written about having to pay depreciation back when an investment property is sold. I believe the tax department takes the deducted depreciation back if a capital gain is made? Would you mind explaining to everyone, including myself, how this aspect works? Many thanks John

Comment by John on May 28, 2015 at 1:15 pm

Hi John,

I put this question to the investment property experts at Pike Skinner Chartered Accountants and Financial Services (www.pikeskinner.com.au) and this response was provided by their senior accountant, Elliott Brannen:

You are right to an extent – rather than the ATO taking it back, the capital works deduction claimed on the building actually reduces the cost base of the property when it is sold. To give you an example, say you purchased a property for $400,000, and received a depreciation report that showed you could claim a capital works deduction of $5,000 per year. You own the property for four years, so the total deduction you have claimed is $20,000. That means when you come to sell it, the cost of the property for tax purposes is now $380,000.

Of course, if you owned the property as an individual or through a trust and own it for more than a year, you will receive the benefit of the 50% capital gains tax discount, which reduces the gain you include in your tax return by half, so the effect of the cost base reduction is halved.

Please note that the information provided is general in nature and you should contact your own tax adviser if you require any more detailed information.


Comment by Crawford Realty on June 5, 2015 at 8:24 am

Hi Ryan. I own two investment properties plus a vacant block of land. As I have no income from the block can the expenses of keeping that block (rates etc) be used to claim against the income I receive from the other properties. They are all in my name.

Comment by Keith Godfrey on August 13, 2015 at 5:41 am