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Property tax can easily be one of the most daunting aspects of investing in property, particularly for beginners. Australian Taxation Office’s Adam O’Grady shares the most common tax mistakes made by home owners and how they can avoid them.
According to Mr O’Grady, acting assistant commissioner of individuals and intermediaries at the ATO, interest stands as one of the most complicated taxation components for a lot of home owners.
For one, most home owners mix up their personal and investment expenses, which ultimately affects the very nature of their home loan, if applicable.
“Most properties have finance over them and your interest expenses are a claimable expense. So, the $50 billion figure of expenses, almost half of that is made up of interest – a huge amount. What we see though is people mixing their investment line with personal or private expenses,” Mr O’Grady explained.
“The common scenario we see is they want to take the family away on a holiday and they are able to redraw from the investment loan. They might redraw $20,000, take the holiday, but by doing that, they’ve actually changed the nature of the loan.
“The entire loan is no longer deductible. That is now apportion to interest expenses from that loan. You can’t just repay the $20,000 because, again, it’s all apportion.”
For this reason, he strongly encouraged investors to review and evaluate their investment loan before redrawing or refinancing, particularly when there’s a private expenditure such as holidays and home renovations on primary residence involved.
“It will change what you’re allowed to claim and what you’re not allowed to claim,” he said.
Those who are moving on to buying their second home after almost paying off the mortgage on their primary residence are also prone to making mistakes concerning interest, according to him.
If they move into the second house and then decide to rent it out, Mr O’Grady reminded them that they couldn’t claim the interest on the loan because it is technically considered their primary place of residence.
“The interest on the loan that you’ve just taken out for the new property is not claimable because it’s your own house. You cannot transfer the loans between properties, so you have to be really clear on what the loan’s for because it’s your evidence of what you can claim or what you can’t,” he said.
Further, for properties with shared ownership, particularly for couples in a 50-50 split, Mr O’Grady said that it’s important that the shareholders report their income and expenses in line with the ownership.
“You can’t choose to change who claims what income or what expenses and you certainly can’t change it year-on-year. So, if you’ve got $40,000 worth of expenses and you’re a couple, it’s $20,000 each in your returns, regardless of what other income you may have,” he highlighted.
“You really need to make sure you’re reporting exactly in line with that ownership percentage.”
Changes in tax regulations can easily affect the movement of the property markets and, as such, the wealth-creation journey of investors. Mr O’ Grady, therefore, strongly encouraged investors to seek the guidance of property professionals in order to make the right financial decisions and ultimately maximise earning potential.
Accountants are well equipped to advice regarding the different types of home loans and their accompanying features. Each of them can play a role in helping the investor reach their goals, whether cash flow, capital growth or a good balance of both.
While it is wise to choose loans based on financial capabilities and lifestyle, Mr O’Grady reminded investors to consider tax implications as well since it can very well affect their finances.
“People set up their investment around creating returns and ease and these regional facilities because they can see the advantages of doing that for their lifestyle, but don’t necessarily consider the tax implications of setting up in such a way or having that facility and how they may use it,” according to him.
“So, when you’re making those decisions, bring the tax lens over what you’re doing upfront so you really understand how your decisions can change the tax treatment down the track.”
Investors are encouraged to take advantage of the innovations in the packaging of financial products, which carry benefits such as allowing them to minimise interest to be paid.
Tune in to Adam O’Grady’s episode on The Smart Property Investment Show to know more about statistics around the property investment space in Australia and the key policy changes which investors should be aware of.