Monday 28 May 2012
The government is cracking down on arrangements that tie home borrowings to other types of debt.
Some investors make the mistake of linking their personal home loan to a property investment loan. They need to watch out because the Australian Taxation Office (ATO) is cracking down on taxpayers who claim deductions for interest expenses on certain kinds of loan arrangements.
Since the start of the year, the ATO has been actively rejecting claims by property owners who use some or all of the rental income from an investment property to pay off their own home loan.
These investors mix up their private home loan with an investment loan, then add the interest from the investment loan to the principal and claim it as a deduction.
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In a determination made in March, the ATO effectively put the kybosh on any loan arrangement that leads to the capitalisation of interest on an investment loan while the loan repayments are used to pay down the principal of a private loan.
It's not surprising the ATO looks closely at the tax returns of investors. More than 1.5 million Australians own investment properties and the tax benefits associated with buying all this real estate accounted for a big percentage of the $24.7 billion in tax refunds paid out last financial year.
When claiming deductions, investors should err on the conservative side and avoid claiming any compounding interest on investment loans. They also need to be familiar with the tax system.
Only by doing so, or by engaging an accountant who's fully up to speed with investing, can they claim their full, legitimate entitlements.
A lot of investors focus on the most obvious deduction areas, such as interest, council rates and property-management fees. These involve an investor paying out money and then claiming back a percentage of the loss against tax.
But the best tax deductions are those that don't cost anything to generate. A director of BMT Tax Depreciation, Bradley Beer, says investors often miss out on deductions because they don't commission a tax depreciation report from a quantity surveyor.
In North America, quantity surveyors are called ''cost engineers'', a term that better sums up their work. These professionals value and depreciate everything from curtains and light fittings to the exterior skin of a new building and new kitchens in older properties.
Beer says more investors should look to free up their cash flow by applying to the tax office for a pay as you go (PAYG) variation. This allows a property owner's employer to reduce the tax withheld to reflect set deductions on a rental property and decreases the tax paid by an investor in each pay period.
Paul Bennion, the managing director of DEPPRO, another national quantity surveyor group, says investors in Melbourne are more aware of tax compliance these days and most try to ensure their claims are legitimate.
''Fewer are choosing to do it themselves, and progressively more investors are turning to depreciation specialists to ensure the legitimacy of their tax returns,'' he says.
Tax office figures show refunds to investors are increasing. Still, Bennion says many investors are not taking full advantage of deductions, particularly their entitlements to common areas in unit complexes and depreciation claims on old properties.
He says regardless of a property's age, there are always depreciation benefits available. ''Interestingly, investors generally don't realise the asset is given a new life from the date of settlement, and [some] renovations can also be claimed as part of tax refunds,'' he says.