Buying income earning property has always been a preferred strategy for Australians to put away a “nest egg” for their retirement. Negative gearing puts it within reach of ordinary wage and salary earners and now residential rental properties are part of almost every investment portfolio. The tax advantages of buying and holding this type of property continue to make it very attractive, even to young people just starting out on their financial journey.
Here at the Fountain Property Group we provide information and advice to clients to assist them find and manage excellent, income earning properties. One of the things we always stress to our clients is to have their income tax returns done by an accounting professional. We know of a number of situations where a lack of understanding of tax matters by people doing their own returns has caused them problems.
Common Tax Mistakes Identified by the ATO
The ATO (Australian Taxation Office) has identified a number of common mistakes made by people doing their own returns, and have published them to assist others to avoid these mistakes. A big issue they find is not understanding the definition of construction costs and claiming excessive amounts as a result. Basically, it is permissible to claim for certain types of construction including alterations, extensions and structural improvements. However, the value of the land where the rental property sits cannot be included in these costs.
Another issue is the question of depreciation. The ATO allows assets in residential rental properties such as blinds, curtains, stoves, dishwashers, hot water systems and others to be depreciated as they decline in value. The ATO sets the percentage allowable, but to calculate it correctly, a depreciation schedule is needed. This is a routine task for an accountant and ensures that no deduction is missed.
Keep All Records for Five Years
Rental residential owners must keep all records associated with their income producing assets for five years, to substantiate the claims on their tax returns in the event of a tax audit. This means records of rental income and expenses, and records of ownership including all costs of acquiring and disposing of these types of assets. They must also declare to the ATO any capital gain made on the sale of such assets.
Now that buying properties in smsf (self managed superannuation funds) is allowed, it is even more important to get specialist advice about the tax treatment of these assets. We don’t want any of our clients to lose money on real estate assets we have helped them acquire, just because they tried to do their own tax returns.