Expert advice: Top three tips on property tax

1. Track your income and expenses

When declaring income, investors must include all rental-related income, including the full amount of rent and other associated payments that they receive or become entitled to when the property is rented out, such as insurance payout.

All income, whether received by the investor or the agent, must be declared in the tax return.

Apart from cash, income may also be acquired as goods and services. To report, the investor must work out the monetary value of these goods and services received based on their current market value.

“Make sure you report all that income as part of your return,” he highlighted.

Similarly, investors should also keep track of their expenses so they have a clear idea of which of them can be claimed as a deduction.

Rental expenses are divided into three categories: expenses for which you can claim immediate deduction in the income year that the expense was incurred, expenses for which you can claim deductions over a number of income years, and expenses for which you cannot claim deductions.

Mr O’Grady said: “Ensure that it’s for the period that your property was actually rented, all available for rent. It wasn’t when you first purchased it. Make sure you’re actually eligible to claim it. Make sure you can claim it for that year in full.”

“If you renovate a bathroom, you can’t claim all of that in one go. That needs to be spread over a number of years. So, consider when you’re allowed to claim it.

“There’s also that apportionment issue, which does not only refer to your ownership percentage, but also on for how long the property was rented.”

2. Keep all records

Mr O’Grady said that while record keeping is naturally one of the most important tasks for investors, it is also one where they often fall short.

The Australian tax system relies on the self-assessment of taxpayers, which is why investors must be able to work out the income they need to declare and the expenses they can claim and show how they came up with the figures provided.

“It’s really important to keep your records and keep a bit of a running tally or diary of what’s happening with the property. So, when you’re buying the property, that’s your contracts, your loan documents and all those sorts of things,” he said.

“If you’re making repairs to the property, that’s your receipts from your builder, your plumber.”

In some cases, investors may be required to show written evidence to support their claims. Thus, they are strongly encouraged to keep important records relating to their asset.

Apart from serving as proof of correct information, good records can also help investors ensure that they are able to claim all their entitlements, reduce the risk of tax audits and adjustments, resolve issues relating to disputed assessments and adjustments and avoid penalties.

If they are working with a tax adviser, having well-prepared records can also minimise the cost of the management of their tax affairs.

“When you sit down to do your tax return, by yourself or with your agent, you can provide that in full and say, ‘Look, this is what I’m doing, these are all my records, this is what it means.’ It makes it a really simple, straightforward process to complete the return. We’d tap those records you’ve got in our home,” Mr O’Grady highlighted.

While there is no set list of records to keep, investors are advised to keep as much as they can for an average of five years from the date of the lodgement of tax return.

The property tax expert encourages investors to establish a system or process of mapping, documenting and registering the records related to their properties, especially if they plan to build a sizeable portfolio in the future.

This “central system” or “repository of information”, when well structured, can help them strategise for the long-term and ultimately maximise opportunities in the market.

“And you make tax time a breeze when most people dread it,” he said.

“It removes so much pain and stress and it’s also an enabler to the point of being able to get mortgage finance easy, if you’ve got all these records.”

3. Pay attention to CGT

Capital gains tax (CGT) is the tax that the investor pays on their capital gains, or the profit made after selling an asset. It is considered part of your income tax and paid upon the sale of the asset, with a few exemptions.

As soon as a person enters the market and buys a property for the purpose of gaining income, Mr O’Grady encourages taking CGT into consideration in order to be able to manage their finances well moving forward.

“Capital gains apply in the property market. As soon as you are using property to invest in, even if your priorities are around trying to gain rental income or a bit of side income for the short term, capital gains is in play and it will apply as soon as you sell that property,” according to the expert.

“So, your obligations don’t finish as soon as you’ve sold the property. You still have more after the fact.”

To calculate the CGT, the investor have to determine the following variables:

• Cost base, or the purchase price plus other costs associated with acquiring, holding, and selling the property
• Capital gain, or the difference between the profit you made and the cost base
• Capital loss, which you usually get when you sell an asset for a price lower than your cost base
• Net capital gain or loss, which is the amount that goes on your income tax return

There are discounts around CGT that can help alleviate financial responsibility, which is why Mr O’Grady strongly encourages investors to get in touch with their accountants and other property professionals to make the best decisions for their portfolio and their finances.

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.