12 tips for property investors to reduce their tax bill: Ken Raiss

Christmas comes but once a year, but so does a tax return, and this can also produce plenty of winter bounty, especially if tax minimisation rules are explored to their fullest extent. 

Reducing tax is in everyone’s interest, and there is no harm in treating it like a game of skill given the complex guidelines set by the ATO. However, like any game there will always be those who try and bend the rules, and the ATO will never tolerate cheats and nor should it. 

The complex nature of tax legislation and interacting with the ATO is often blamed as the root cause of problems encountered by people who play outside the rulebook. This is nonsense, and may I add by way of warning, where tax is the dominant purpose of any action then this is tax avoidance and the ATO would ignore any potential tax benefits and tax accordingly. 

As with any game of skill its knowledge and experience that wins the day, and as with other team sports it can pay to bring on other more experienced substitutes to improve your chances of winning in the shape and form of a tax expert. 

At this time of year there are many articles identifying tax tips, but these do not normally identify some of the smarter, less known strategies. 

Chan & Naylor has compiled a non-exhaustive “smart list” of ATO-approved winning formulas not always considered in strategies relating to property investment tax reduction. 

• You can claim interest expenses on any borrowing used to purchase investments. The purpose of the loan determines deductibility not what asset was used by the bank as security. For example if the home is used as security to buy an investment then interest is deductible. 

• The proper use of trusts (such as Chan & Naylor’s Property Investor Trust ®) can legally allow negative gearing at marginal tax rates while allowing additional benefits of estate planning and asset protection. 

• Depreciation on the building and fixtures and fittings is an easy one, but many investors do not claim depreciation or use an inappropriate schedule that underestimates the depreciation claim. The rule of thumb here is not to underestimate what can be depreciated. Even old properties can have a reasonable deduction so use a specialist quantity surveyor to prepare the schedule. 

• When conducting renovations a quantity surveyor should prepare a scrapping or demolition schedule to place a value on all items being thrown away or demolished for an immediate tax deduction and on completion of the renovation or construction a new depreciation schedule will be needed. 

• All costs for a holiday or personal use property (other than main residence) including interest expense, repairs and maintenance can be added to original costs when calculating capital gains in the event of a sale.

• When selling an investment property you should include all possible associated costs such as conveyance to buy and sell, stamp duty (different in ACT where costs are immediately deductible), selling agent’s fees, buyer agent’s fees, costs associated with marketing the property (for example touch-up paint, temporary furniture etc.) and the balance of borrowing costs (which are amortised over five years). 

• If refinancing you can expense any balance of the original borrowing costs or exit fees. 

• Land tax costs are deductible. 

• Interest expense on borrowings to purchase land is deductible if the intention is to build an investment property on the land, even if construction has not yet commenced. 

• Remember to consider the timing of a sale. Tax is triggered at date of contract not settlement. 

• If an investment property is sold after 12 months then a 50% capital gains tax discount applies if the property was originally purchased with the intention to keep. 

• If an investment property is sold before 12 months then the gains are still a capital gains (but without the 50% discount), which can be used to offset any capital losses. 

If you have sold a property used to operate your business you may be eligible for the 50% small businesses exemption (active asset) on top of the 50% CGT general discount. Yes, two 50% deductions.

Ken Raiss is a certified accountant and director of Chan & Naylor national accounting firm. Chan & Naylor offers a free five-minute question-and-answer session on its website under the "Ask the Experts" section.