Top 12 tax-reduction strategies for investors

Many investors are focused on tax-reduction strategies and want the best tax-reduction tips, but it is important not to lose sight of the bigger picture. The end of financial year is an opportune time to evaluate your current financial position and review your investment plan for the year ahead.

To assist you with this process, I have outlined a few end-of-financial-year tax tips to help you on your way:

1. Don’t assume your accountant knows everything

I am not trying to give your accountant a hard time, but it is important not to assume they know absolutely everything when it comes to property investment. No doubt they will know a number of tax-reduction strategies based on your actions during the past financial year, but are they proactively making suggestions about what you can do before the end of this financial year to strengthen your position?

A good accountant is worth their weight in gold, but I encourage you to educate yourself and speak to other trusted professionals such as financial planners and investment specialists for advice. As the saying goes, ‘Two heads are better than one’, and you might be surprised what useful tax-reduction tips or recommendations you can pick up from other skilled professionals.

2. Are you making the most of the current economic climate?

There are some tax-related considerations that don’t change from year to year – they are the law. But it is also important to consider the current economic climate and whether there is anything you could be doing to strengthen your position.

For example, interest rates are currently low, so now is a good time to use them to your advantage. There might be merit in paying more against the principal of your investment loan to build a buffer in the event of rental reductions or vacancies in a tougher market. If you have equity in an existing asset you might be able to take advantage of lower rates and purchase another property to extend your portfolio. All these actions need careful consideration, and it is important to look at the bigger picture as well as the usual tax-reduction strategies and deductions.

3. If you are expanding your portfolio – it pays to buy new!

If you are planning on buying an investment property before 30 June or within the next financial year, remember it always pays to buy a brand-new property so you can claim full depreciation benefits.

4. Pay it forward

Did you know you can pre-pay interest on your investment loan to bring forward deductions that would otherwise have to wait until the end of the next financial year? This also applies to pre-paying next year’s insurance premiums or other expenditures that would otherwise be spent after 30 June. This is a useful way to potentially offset any gains you have, or better manage your finances from year to year.

You can also bring forward your expenses if you will not be renting your investment property in the next financial year, or if your tenants have moved out. It is important to incur any planned expenses before the end of the current financial year, which means organising the work (even if you haven’t paid for it yet), because if you don’t incur the costs now, you can’t claim them in the next financial year if you do not earn a rental income on the property. This is an important tax-reduction strategy for all investors, and although your accountant is most likely aware of it, they cannot bring it to your attention if you don’t communicate your intentions for the property in advance.

5. Consider the best time to buy appliances and equipment

Appliances and equipment such as ovens and hot water systems depreciate over time, so if you buy an item in June, you will only be able to claim one month of depreciation, which will be a fraction of what you have spent. If you have any big items that you know need to be replaced in the near future, consider doing it early in the next financial year.

6. Items under $300 can be written off immediately

Take this into consideration when purchasing an item around this value. Spending $340 on an item as opposed to $280 can affect your ability to immediately write it off. Investment property tax deductions of this nature are something easy to keep in mind.

Surprisingly enough, the number of property owners and their percentage of ownership can have a serious impact on the claiming of investment property tax deductions. For example, the $300 test applies to the individual owner’s share of the property. If a new item cost $580 and the property is owned equally between two people, then it will qualify for an immediate write-off as it’s under $300 per owner. This is one of those quirky tax-reduction tips that many investors aren’t aware of!

7. Know the difference between repairs and improvements!

As an investor, it is important to understand the difference between a repair and an improvement, and the impact this will have on your tax calculations. Any initial repairs to an established property are not tax-deductible, and are another reason why it pays to buy a new property rather than an established investment.

Any repairs that do not return the item back to its original state may be considered improvements, and therefore not tax-deductible. For example, if there are cracked tiles on the roof and you replace the entire roof with a new metal roof, this is considered an improvement and is not tax-deductible, even though the repair work was necessary.

8. Don’t forget to claim your travel

Tax and investment property claims are not just related to the property itself. In fact, all your costs incurred to inspect your investment property are tax-deductible (including travel), so remember to apportion the appropriate component when looking at your investment property tax deductions. This is one of the easiest tax-reduction tips but is often completely overlooked.

9. Foreign investment properties

If you own an investment property overseas, be sure to disclose any income you receive. The ATO is receiving more data each year from other tax jurisdictions, making it easier for them to identify anyone who fails to disclosure the correct information. Not only can this land you in hot water, but it will attract unwanted attention and closer scrutiny each year, resulting in more work and headaches for both you and your accountant. It’s not worth the risk!

10. Keep good records and supporting documentation

On the subject of closer scrutiny, make sure you keep good records and all your receipts to substantiate any claims or deductions with the ATO.

11. Are you planning for your retirement?

With a number of proposed changes to the pension, you should be aware of how they could potentially affect you and your retirement. Over 300,000 hard-working Aussies could be worse off, and you might be one of them, as the changes are set to affect the amount of assets you can own before your pension drops.

If you are planning for your retirement, there may also be advantages to having a self-managed super fund (SMSF), particularly if property investment is an important part of your retirement strategy. They are easy to set up and can bring considerable tax-related advantages, not to mention more control over your super compared to a traditional retail fund.

12. Have you considered a trust?

Similar to an SMSF, there are advantages to setting up a trust for property investors, as they provide better asset protection and flexibility. However, if you are using a trust, make sure it is established and operated correctly to ensure you can still deduct interest, which is allowed by the ATO if you meet the eligibility criteria.

There are many tax-reduction strategies and things to consider in the lead-up to the end of financial year, and the prospect is not intended to be daunting. This time of year should be approached with enthusiasm as it provides all investors with the opportunity to evaluate their current investment strategy and implement proactive changes to strengthen their financial position.

As mentioned, the best thing you can do is find yourself a good accountant and seek the advice and recommendations of experienced professionals, such as financial planners and investment specialists, to arm yourself with as much useful knowledge as possible.