Claiming and Prepaying your Investment Property Expenses

Tracking all expenses on your investment property and claiming proper tax deductions means that you can offset much of the cost of owning that property.

When you own rental property that is currently being rented, you can usually claim any expense associated with earning that income. These landlord expenses are deductions from your taxable income – or split deductions if you own the property jointly – and there are lots of them to consider.

An expense must be incurred in the line of earning an income from the property, so if it was not rented out, there is usually no deductions applicable.

Your accountant will do all the checking... but just to be sure you claim all the allowable deductions on your next tax return, here is a list of 25 Rental Property expenses for you to consider:

  • Advertising for tenants

  • Bank charges if a separate property mortgage account

  • Body corporate fees, if in a Strata Title

  • Cleaning costs, e.g. if they moved out and a cleaner had to be assigned

  • Council rates

  • Electricity and gas bills – portion you paid

  • Gardening and lawn mowing

  • Insurance – landlords, building, possibly contents, public liability

  • Interest on loans

  • Land tax, if you are a multi-property owner

  • Legal expenses related to managing the property. (Legal fees on the purchase of the property are not claimable).

  • Lease costs – preparation, registration, stamp duty

  • Mortgage discharge expenses

  • Pest control

  • Property agent’s fees and commissions

  • Capital Works – a deduction on the cost of altering the fixed building or surrounds (see the ATO description)

  • Quantity surveyor’s fees (such as for a rental property deduction schedule)

  • Repairs and maintenance

  • Bookkeeping fees

  • Security patrol fees

  • Servicing costs, e.g. servicing an A/V system or water system

  • Stationery and postage

  • Tax-related expenses

  • Water charges

Some investors would perhaps like an instant tax deduction. If you prepay one or more of your rental property expenses (e.g. insurance) that covers a period of 12 months, and the period ends on or before June 30, you can claim an immediate deduction. Some prepayments that don’t meet these two criteria might still be claimable but will need to be spread out over two or more years. (Just check with the accountant first).

Note:  From 1 July 2017, travel to inspect rental properties or collect rental for individual, residential property investors cannot be claimed as an expense


Claiming your Expenses on the Fly

When you looked at the list above, did you realise that you haven’t been claiming all the expenses you could have? At Team Accounting, we’re happy to answer all your questions on what is allowable.

We could also implement a system whereby you scan receipts straight away (on your smartphone) and enter them in categories in the app of a SAAS bookkeeping tool (e.g. Xero, Quickbooks). This will save the data to the Cloud for later tax return analysis. Custom expense categories can also be created inside the Chart of Accounts area.

What Rate of Company Tax will you Pay?

There seems to be some confusion around company tax rates, especially whether a small to medium business is eligible for the lower tax rate.

The lower tax rate of 27.5 percent, rather than 30 percent, depends on two factors: whether the business was considered a small business entity in the 2016 and 2017 financial years, and whether it was a base rate entity for the 2018 financial year (the current measure).

A small business entity is ‘a business that has aggregated turnover below $10 million and is trading for at least part of the financial year.’ That was the old measure to determine eligibility for the lower company tax rate in 2016-17. It has been replaced by the base rate entity model.

A base rate entity, according to the ATO, is a company that is carrying on a business which has an aggregated turnover less than the turnover threshold of $25 million in 2017-18.

Which Entity Type is Your Business?

Many of our small business clients will likely fit the description of base rate entity, but always ask us if your business income sits close to those lines.

This lower tax rate of 27.5 percent will remain until 2024-25, whereupon it is planned to fall 0.5 percent and then 1 percent (twice) in three FY stages.   

From this financial year (2018-2019) on, many larger SMEs will enjoy a larger aggregated turnover threshold of $50 million, which will allow many businesses to enjoy this slightly lower tax rate from now on.

Plan your Tax Minimisation

Don’t forget, when planning your expenditures and PAYG for the year, to compare this 27.5 percent tax rate with your own individual income tax rate on drawings and salary. It may not be all that different, but just check. Also discuss this tax planning with your accountant, before making any firm decisions to raise or lower your salary for tax purposes. 

How our Financial System is Not Serving You

In wake of the banking royal commission, we really got a rude shock: Australians are not being taken care of with regards to their financial advice needs.

However, are we partly to blame? Clients who invested their super entirely in cash (via AMP) and had fees taking out more than it grew (as found in the Royal Commission) were ill advised, no doubt about that. But analysts and university professors argue that as consumers we must become more financially literate and more aware of financial risks and rewards.

One business school professor in this article claims that too many Australians cannot work out simple math calculations, with regard to percentages.

Complexity plays an even bigger part. A 2017 survey by ASIC revealed that around a third of respondents said dealing with money was stressful or overwhelming. Perhaps that’s why they come to a financial professional in the first place; it is fairly complex after all.

‘Fees for no service’ have passed many of us by, and it continues to be a point for investigation in the royal commission. The reason it has thus far been ignored is because an unfair administration fee is merely a line item on a super statement or insurance account. It does not highlight itself in yellow and say ‘look at me, I’m robbing your nest egg’.

So it is a great idea to keep in touch with the advisor who first gave you some life insurance or super allocation advice, to see if your funds are still on track to meet your objectives, among other reasons.

Luckily, when you are aware of your lifetime goals and know your risk tolerance, you can then go along to an accountant at Team Accounting to get a broad outline of the steps you can take... or perhaps the financial structure you might need. This is such a safe step because accountants cannot legally give specific investment product advice.  

Then, if you do want a proper financial plan, a financial advisor who is not affiliated with any particular big fund, i.e. one who charges a fee for service, could be the next step to help plan your financial future. You might as well receive a decent service for the fees you ultimately pay in the line of saving for retirement or insuring your life.

Could you Apply for a Business Grant to Enable Growth?

Every year, government agencies distribute millions of dollars in grants to eligible small and medium businesses. But, securing funding is not easy, as you can imagine. Those successful have undertaken detailed research and solid preparation.

You’ll first need to assess if your business has enough time and the resources to make an application – because the research and planning takes quite some work. Here’s basically what you need to do:

·         Read the funding program’s guidelines and start the process plenty of time before the grant’s due date.

·         Gather a business plan or detailed description of business

·         A detailed project description (why you are applying for it, aims and outcomes)

·         A list of your team’s experience and skills, and

·         Complete the application forms.

Typical Grants for Business Growth

While we missed the deadline on the Small Business Digital Grant for this year, there are also grants to help a business innovate.

The Entrepreneurs' Infrastructure Program, delivered by the Australian Government Department of Industry, Innovation and Science, provides easy to access practical support and funding. This programme is the Government’s ‘flagship’ initiative for business competitiveness and productivity. It aims to help small and medium enterprises to commercialise novel products, services and processes. It supports with business management advice in your industry, start-up incubator support, and innovation facilitators’ connections (a bit like a mentor) and accompanying connections grant.

Part of this program that might be of interest is the Business Growth Grant. This provides matched funding of up to $20,000 for the cost of hiring an expert to help with implementing the advice and strategies. It is accessed once you have undertaken advice from Business Evaluation, Growth Services, Supply Chain Facilitation or Tourism Partnerships programs.

For Queensland-headquartered, high-growth aspiring businesses with a turnover of at least $500,000 last year (and fewer than 50 employees), there is also the Business Growth Fund. Government provides funding of up to $50,000 for eligible businesses wanting to purchase specialised equipment or services (e.g. feasibility study, engaging an advisory board) that directly enable more growth. A co-contribution of 25 to 50% to the total project cost is requested.   

It is interesting to note that ‘high-growth’ is considered to be at least a 20% increase in turnover or employment rates within the next two years.

Need financial support?  Take a ride through the Queensland Govt Grants Finder.

Cash-flow Projections

When planning your cashflow and budgets for innovation or digital business growth, consider taking the time to get a Cashflow and Budget Analysis done with your business accountant.

This session is more than just looking at current numbers; it will help you see what figures are needed for your objectives and what would potentially come in from the changes (i.e. return on investment). Having a clear path to financial growth may also take the angst out of making the bigger decisions.

Don't Let a Misstep Curb Your Retirement Fun
 Those retirement years. Picture: Pixabay. CCL.

Those retirement years. Picture: Pixabay. CCL.

On the way to planning our retirement, some of us take a misstep because we trust the words and hype of someone offering investments. 

Whether it be mortgage debentures that fold, time shares/hotel clubs, off-the-plan developments that sink once bought, or just plain scams, a setback like this can cost you many thousands. Losing part of your nest egg is emotionally devastating as well as detrimental to your level of comfort whilst retired. 

There is a simple rule you can use to prevent this pain. It's as simple as asking yourself: "is this decision powered by fear or greed?"

These two enemies of wealth will both get you in trouble - you may be torn between hope and doubt in an effort to save more for retirement.  

There is always the option to seek the opinion of a licensed financial planner and, if hovering over a contract, also a solicitor.

When you want tax advice, you might need your accountant to calculate cash flow, but if you want an opinion on the actual investment itself - then only financial advisers with a RG146 can help you, under the law. We have several here, from the team at Lifetime Wealth Partners

This step of asking for advice can give you much-needed time to do your due diligence. You can find out what the investment is -- when your mind is not caught up in exciting visions of compounding growth or lazy beach holidays. (Incidentally, many of those holiday club apartment time shares make shockingly poor investments.)  

No matter what pretty graphics or strong growth projections are parried about, it is important to take time to remove caught-up emotions and ensure any new investment is based on solid fundamentals, like a history of growth, steady dividends, not too much debt, and good management. 

What if You've Been Burned Already?

If you've already taken the plunge and bought a dud investment, try not to let it spook you from all forms of share investing, property investing, or other funds. Not all are created equal.

If the Royal Commission had you worried, then Noel Whittaker advises you to become engaged in your Super again, understand the fees, and use it for the growth and wealth-building tool it can be. (See Courier-Mail, 2 July).  

And if you want a holistic look at your retirement and wealth goals, it might pay to get a financial plan with a licensed financial adviser. Twenty years or so out from retirement is ideal because your family has time to change things in the right direction and ride out the blips of a downturn. 

An Exciting Discussion about Tax-Deductible Investing

Coming up to the tax reporting season, many of us consider viable tax deductions… oh wait.  If you’re a business owner, you won’t even be thinking of doing end-of-year tax preparation now. But you might be finalising needed purchases that are within the $20,000 immediate asset deductible limit. As a canny business owner, you may be considering ways your business and life can improve in the next Financial Year.

Rather than focussing on short term tax planning, what about investing for the longer term?

So let’s talk about Deductible Debt. Excited? Good.

This is debt where the interest and costs may well be tax deductible – either in advance or in arrears.  A song to the hearts of many a medium to high individual earner on the 32.5% or 37% marginal tax rate. But remember your tax-free margin – making it a little tricky to work out in the head.

You could be deciding whether to invest through company, or through individual, or through a trust. The base rate entity company tax is 27.5% for the companies with aggregated turnover threshold less than $25 million for 2017-18.  Trust taxes – it depends on the trust beneficiaries’ tax rates.

Where to Invest for the Future

Some of the areas where you might consider expending on an investment and then getting tax deductible interest – now or at the end of next financial year – are:

  • Commercial premises – buying your own or a nearby premises. (As well as accounting advice, you’ll need a commercial loans broker for this big step)
  • Share/ETF investing – possibly with margin lending and deductions on the interest rate. (Currently it varies depending on whether in advance or in arrears and how long, but say around 6.49% topline, quite a bit less after tax deduction)
  • Super – on personal drawings, rather than just 9.5% SG, you might elect to pay in 11 – 15% of your pre-tax individual income, as a director or shareholder. However, your ability to pay only 15% contributions tax is limited to the concessional cap, which has gone down to $25,000 per year from 2017-18, for every age.  

Getting a tax-deductible loan is only one reason to invest, so ensure all the other variables are in place first, like a secure and growing asset.

Most newer premises have tax deductible components on the building and fittings that can also aid cash-flow (the Depreciation Schedule will clue you in). And franked dividends are by nature, already taxed either on part or 100% of the amount. The thing with shares and ETFs is they are more liquid and while they should be held more than one year, they can be sold right away if in dire need.  

Helping your Net Wealth

The exciting part comes in to play when you realise that your personal wealth can be helped by the leverage combined with some growth in:

a)  the ASX, or b) commercial property, or c) a mix of assets in your super.

It also helps to diversify away from having every wealth hope based on your business’s future. Call us if you would like some holistic advice on investing in a tax-minimising manner.

Changes in Personal Superannuation

A raft of government changes to Superannuation means that you might need to take action before lodging your tax return, if you plan to make voluntary super contributions. 

You can now claim a tax deduction for personal concessional contributions, even if your employer contributes for you (or you as Director contributes). The ATO says that most people between 18 and 75 years are eligible to claim a tax deduction for personal super contributions - including 65 to 74 year olds who meet the work test.

We all want to see our super grow over time. There are two main ways to increase your personal super payments, and which way you choose will depend on your work situation and income.

If you are employed, your employer can agree to pay a portion of your pre-tax salary as an extra 'concessional' contribution to super (a salary sacrifice). This can be tax-effective if you earn more than $37,000 a year. 

 >>> A concessional contribution is a payment put into your super fund from your pre-tax income. A concessional contribution is taxed at 15% when received by the Super fund. These are capped at $25,000 per year, including employer contributions. >>>

The other way is to simply deposit some money into your super. These are called after-tax super contributions or non-concessional contributions. You can make $100,000 in non-concessional amounts per financial year. It can be done through setting up a BPay monthly or quarterly payment, if you like automatic saving.

<<< A non-concessional contribution means it won't be taxed on entry to your super fund because that income was already taxed >>>  

Super Co-contribution Instead

If you earn less than $51,813 per year (before tax) and make after-tax super contributions, you are eligible for co-contributions from the government. Those earning less than $36,813 will receive a max of $500 per year as a government payment. Once you lodge your tax return, it will all happen automatically, providing the personal contributions showed up correctly in your super account. Thus you folk won't need to claim the tax deduction. 

We advise to take some professional tax advice before making personal super contributions that you want to claim a tax deduction on, however, following is a rough guideline. 

How to Lodge your Intent to Claim a Deduction

If you receive any major type of income, and you want to make contributions to super AND get a superannuation contribution deduction, follow this guide:

Intent to claim or vary a deduction for personal super payments can become complicated if you contribute to one particular super fund and then change your super fund before lodging the claim. So be sure to get the claim done before you make the change, for simplicity's sake. 


Paying Superannuation Monies to Employees

Is your organisation a little behind in paying employees the superannuation guarantee?

The Australian Government has recently introduced legislation to ensure workers are paid the superannuation entitlements they are owed. There will be a one‑off, twelve month amnesty for historical underpayment of Superannuation Guarantee, running from 24 May 2018.

To use the amnesty and avoid fines, employers must pay all the money that is owing to their employees, including the high rate of nominal interest. However, the amnesty will make it easier to secure outstanding employee entitlements, by setting aside the penalties for late payment that are normally paid to the Government by employers.

It's time to take action, because those employers that don't take advantage of the one-off amnesty will face higher penalties when they are subsequently caught.

See the full release:

Jennifer Lancaster
Which Update in the 2018 Federal Budget Affects You?
 Photo by from Pexels

Photo by from Pexels

The $20,000 Immediate Write-Off for Small Business is Extended

The Government will extend the $20,000 immediate write-off for small business to 30 June 2019 for businesses with aggregated annual turnover less than $10 million. So, small businesses will be able to immediately deduct purchases of eligible assets costing less than $20,000 first used or installed ready for use by 30 June 2019.  Only a few assets are not eligible (such as horticultural plants and in-house software). 

Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to qualify for the simplified depreciation pool -- depreciated at 15% in the first income year and 30% each income year thereafter. The pool can also be immediately deducted if the balance is less than $20,000 over this period (including existing pools). 


No Withholding Payments - No Tax Deduction

From 1 July 2019, businesses will no longer be able to claim a tax deduction for:

• Payments to their employees such as wages where they have not withheld any amount of PAYG from these payments (despite the fact the PAYG withholding requirements apply). 

• Payments made by businesses to contractors where the contractor does not provide an ABN and the business does not withhold any amount of PAYG (despite the withholding requirements applying).

Other Business Changes

Under the contractor payment reporting system, businesses are required to report payments to some external contractors to the ATO.  In addition to building & construction, cleaning and courier sectors, the Government has announced it will further expand the contractor payment reporting system to the following industries: 

  • security providers and investigation services; 
  • road freight transport; and
  • computer system design and related services.

Personal Tax Changes

Another change that might affect you personally is from 1 July 2018, the Government will increase the topmost threshold of the 32.5% personal income tax bracket from $87,000 to $90,000. The Medicare Levy is no longer changing, and will stay at 2% of income.

Future proposed changes in July 2022 include extending the top threshold of the 32.5% personal income tax bracket from $90,000 to $120,000. But as we all know, a change of Government may well overturn future-dated decisions.


Superannuation Changes

The Government are working to reunite people with their lost Super. Accounts under $6,000 will be effected, from 1 July 2019, the Government will introduce a 3% annual cap on passive fees charged by superannuation funds on accounts. Government will ban exit fees on all superannuation accounts.

The new rules for SMSFs from 1 July 2019 allow a maximum of six (6) rather than four members in a SMSF, which is good news for the joint management of retirement savings in large, working or retired families.

If you have a question about the new May 2018 Budget Changes, or general tax planning, please contact one of our friendly Accountants at Team Accounting today.