The Tax Office releases a list of targets for tax time at this time each year, but a perennial target is property investors. That's because landlords, particularly new landlords, often get their claims wrong and because of the sheer size of the claims made.
Landlords claim about $40 billion in tax deductions each financial year. Property investment is particularly attractive in Australia because of negative gearing. This is where the interest costs on the money borrowed to buy the property investment and other costs of the investment are greater than the rental income.
The shortfall reduces the investor's income on which income tax is paid. Other investments such as shares can be negatively geared, but it is the landlords who receive the lion's share of taxpayer subsidies for their loss-making property investments.
Almost 1.3 million people own at least one investment property. About two-thirds of those, about 867,000 landlords with rental income, report a loss on their investment. For many property investors, it is a capital gains play - they eventually sell the property for sufficient capital gains to make up for the losses accumulated along the way.
One of the biggest areas where landlords make gains is when they claim expenses for 100 per cent of the year when they are staying in the property for part of the year. This is more likely to occur with holiday-type properties such as those by the beach, where the demand is seasonal. The Tax Office allows deductions on a pro-rata basis for the period the holiday house is genuinely available for rent. Landlords also should be careful not to under-claim their legitimate deductions. One of the biggest areas of under-claiming is depreciation.
Propell National Valuers chief executive Bart Mead says only residential properties built after July 18, 1985, are eligible for depreciation on construction costs. But properties built before this date are eligible for depreciation benefits if major alterations and additions have been made. The list of items that can be depreciated inside and outside a dwelling is extensive, and older properties can benefit from these depreciations.
Mead says decks, extensions, carpets, window treatments, hot-water systems, airconditioning, furniture and pools can depreciate in value in old and new properties. Other claims often overlooked include fees associated with the mortgage. Other deductable expenses are advertising for tenants, agent management fees, body corporate, pest control, cleaning, mortgage interest, land tax and the cost of travel to inspections.
Mead says landlords should also be aware that the Tax Office allows "PAYG withholding variation", which allows tax savings from negatively geared properties to be received on an ongoing basis, rather than received as a lump sum at the end of the financial year.