Tax traps, beware…
Property investors, are you absolutely certain you’re declaring your income correctly come tax time?
We’re seeing a very common trend of investors being audited (and worse still, fined) on account of not fully understanding (or perhaps ignoring) some of the guidelines around lawful deductions on investment property.
Recently, Australian Taxation Office (ATO) has reminded property investors to beware of common tax traps that can delay refunds or lead to an audit. According to the ATO, the most common mistake being failure to declare all their property income, including capital gains from selling an investment property.
Rental seems to be a grey area too with investors and landlords getting tripped up with vacant or partially vacant properties. Is your investment property set up for renting but currently vacant, or been vacant for a proportion of the tax year? Then you cannot claim a tax deduction on the full year. According to the ATO,
“Your property must be genuinely available for rent to claim a tax deduction. This means:
you must be able to show a clear intention to rent the property
advertising the property so that someone is likely to rent it and set the rent in line with similar properties in the area
avoiding unreasonable rental conditions.”
(See link to ATO page above for more information on common mistakes.)
Other mistakes investors are making include claiming for interest charges on personal loan amounts and immediately claiming the full amount of capital works.
“If you take out a loan to buy a rental property and rent it out at market rates, the interest on that loan is deductible. However, if you redraw money from that mortgage for personal use, such as buying a boat, or going on a holiday, you can’t claim the interest on that part of the loan,” according to the ATO.
“We also see taxpayers claiming capital works as a lump sum rather than spreading the cost over a number of years. Capital works include a new building or an extension, renovations or structural improvements.”
There are plenty lawful tax breaks for property investors, and if you can correctly claim income and deductions and consult a trusted accountant before completing your return you stand to receive a very good return from your investment. To avoid delay, or an audit, the 3 most important things to remember, as is with all tax claims, are;
· Include ALL income
· Get your expenses right, and
· Keep your records.
Feel free to speak to us about any other property investing “tax-traps”, or seek more information from the ATO’s helpful resources found here: investors toolkit and its depreciation and capital allowances tool.