Property owners' top tips to win the tax marathon

Australia’s tax regime is regarded as one the most complex in the world, where working from home or renting out a room can generate more recordkeeping than a vinyl music collector.

But if Australia is record holder for generating tax minutiae, it also necessitates the need for a strategy worthy of a world record marathon runner. It’ll probably take more than the record-setting two hours, one minute and 39 seconds achieved by Kenyan Eliud Kipchoge in the Berlin Marathon, but some attention to detail will likely result in a run of savings.

SMATS Group, who provide Australian taxation, finance and property investment services, have provided API Magazine with their top five tips to ensure property investors and buyers can go for gold, both literally and metaphorically.

1. Capital gains tax (CGT) implications on claiming occupancy expenses on your current residential address

Occupancy expenses include things like your rent or mortgage interest, property insurance, land taxes or rates. You can only claim occupancy expenses if you can show:

• it was necessary for you to work from home because your employer doesn't provide you with an alternative place from which to work
• the area of your home that you use for work is exclusively or almost exclusively used for work purposes.

When you claim a deduction for occupancy expenses, the capital gains exemption that applies to your main residence when it is sold (the exemption that makes the sale tax-free) is partially reduced. The reduction is based on the percentage of the floor area of your home that is considered a place of business.

This may result in a tax consequence upon its sale. Due to this, it’s not usually recommended that you claim this method if you own your home.

2. Obtaining a depreciation report

We recommend obtaining a depreciation report (or schedule), if the property was built after September 1985 (or had major renovations performed after 1991).

Obtaining a depreciation schedule allows a tax deduction claim for the building costs along with any new fixtures that have been installed. The depreciation report only needs to be ordered once for the life of the property but normally provides an annual tax deduction of many thousands of dollars.

Note that the tax deduction can be claimed against an investment (rental) property on the year it was incurred, however, if the property was not genuinely available for rent, then the depreciation not claimed in the tax year in question will form part of your reduced cost base.

3. Capital gains tax discount for individuals who were foreign-tax residents during the time they owned the property

Up to 8 May 2012, any resident or foreign-tax resident individuals that held investment properties for at least 12 months before selling the asset were qualified for the 50 per cent CGT discount.

The 50 per cent CGT discount is no longer available for foreign-tax residents from 9 May 2012.

If an individual sells an investment property after 8 May 2012 while a foreign tax resident, and the property is expected to generate capital gains upon its sale, then it is recommended you obtain a market valuation as of 8 May 2012.

This will allow the 50 per cent CGT discount to be applied from the date the property was purchased to 8 May 2012.

If a market valuation is not obtained for an investment property as of 8 May 2012, the CGT discount percentage will then be recalculated, not taking into account the 50 per cent CGT discount for gains accumulated up to 8 May 2012.

Additionally, if the market value of the investment property as of 8 May 2012 is equal to or higher than the actual selling price, then the foreign-tax individual will be entitled to the full 50 per cent CGT discount.

4. The temporary absence rule

When an investment property was a taxpayer’s main residence for only part of the ownership period, then a partial main residence exemption is applied upon its sale.

In this situation, the ‘temporary absence rule’ allows a taxpayer to choose to continue to treat the dwelling as their main residence for all or part of the period they did not reside in it.

The temporary absence rule applies for the following:

• The taxpayer can treat the dwelling as their main residence indefinitely if the property is not used for income producing purposes after the taxpayer moves out; or
• The property can be treated as the taxpayer’s main residence for a maximum period of six years while it is used for income-producing purposes during a single period of absence after the taxpayer moves out (e.g., it is rented out).

5. Negative gearing, borrowing, or leveraging

Your investment property is said to be geared when a loan is taken out to purchase a rental property.

It is common for an Australian residential property to incur running expenses greater than the rental income received. If this is the case, a negative gearing loss arises.

The taxable loss generated from the negative gearing can be offset against other assessable income, including employment income, therefore providing tax savings.

These negative gearing losses are available to accrue forward (over multiple tax years) and can be offset against Australian taxable income in the future, including:

• Australian business income
• employment income
• capital gains.

For Australian tax residents, if you expect your rental property to generate a loss in the financial year, you can contact the tax office to reduce the amount of tax withheld from your salary (known as PAYG Withholding Variation), allowing for a cash flow boost.

Disclaimer: All information provided is of a general nature only and does not take into account your personal financial circumstances or objectives. Before making a decision on the basis of this material, you need to consider, with or without the assistance of a financial adviser, whether the material is appropriate in light of your individual needs and circumstances. This information does not constitute a recommendation to invest in or take out any of the products or services.