How property investors can prepare for a very different tax season in 2021

author-avatar By on March 30, 2021
How property investors can prepare for a very different tax season in 2021

Tax time is always a crucial period for property investors, but thanks to COVID-19, the last 12 months or so have made it even more important.

In their tax returns, property investors must include information on their rental income as well as land and property taxes, capital gains tax (CGT) if applicable, and any deductions they're eligible for. 

The onset of the coronavirus caused a huge shift for everyone, investors included, and 2020/21 saw multitude of legislation changes from the government such as working from home claimsJobKeeper and JobSeeker payments, grants and subsidies, lending deferrals, and more. 

Leah Oliver, founder of Minnik Chartered Accountants, says getting investment tax returns right this year is essential. 

"The Covid working from home calculations were made particularly complex, and in fact when compared across the four available methods*, the recommended 'made easier' method favoured the ATO over the taxpayer," Ms Oliver told Savings.com.au. 

"There were assessable and non assessable relief components, the latter example being a cash flow boost for business.  We actually saw in several instances this 'income' erroneously being treated as taxable. 

"Tax planning with your advisor around the pandemic is crucial, as the tax savings we have been able to achieve for taxpayers have been quite substantial."

*See the different tax-claiming methods explained

Ms Oliver also said the property market conditions seen in 2020 may change capital gains tax strategies for investors. 

"Imagine you have a property in a Covid impacted area that is unlikely to recover in the long term because it's not in a position to withstand any such crisis to start with.  Rather than hold on to this property, it may be time to think about the cost of maintaining it to no avail, and letting it go," she said. 

"Due to a fall in value, this may result in a capital loss in the current financial year.  You may have another property that you are looking to offload to release debt as part of your 'recession plan'. 

"The gain on one absorbs the loss on the other, and right there is your capital gains tax minimisation strategy."

While everyone's conditions are unique, Ms Oliver said the underlying message is to "revisit your investment profile". 

Related: How to sell an investment property


Buying an investment property or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for investors.

Lender
Advertised rate Comparison rate Monthly repayment Rate TypeOffsetRedrawOngoing FeeUpfront FeesLVRLump Sum RepaymentAdditional RepaymentsPre-approval
VariableMore details
GET A FULL OFFSET ACCOUNT FOR NO EXTRA COST

Low Rate Home Loan - Prime (Principal and Interest) (Investment) (LVR < 60%)

  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
GET A FULL OFFSET ACCOUNT FOR NO EXTRA COST

Low Rate Home Loan - Prime (Principal and Interest) (Investment) (LVR < 60%)

  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
VariableMore details
AN EASY ONLINE APPLICATION

Yard Investment Loan (Principal and Interest) (LVR < 80%)

  • No application fee
  • Unlimited additional repayments
  • Unlimited free redraws
AN EASY ONLINE APPLICATION

Yard Investment Loan (Principal and Interest) (LVR < 80%)

  • No application fee
  • Unlimited additional repayments
  • Unlimited free redraws
VariableMore details
  • For a chance to win $100K towards your home loan, apply with Athena before Oct 31 & be approved by Dec 15
  • The more you pay down your loan, the more we’ll lower your rate
  • Athena charges zero fees
VariableMore details
FREE REDRAW FACILITY

Smart Investor Home Loan (Principal and Interest) (LVR < 80%)

  • Option to add an offset for 0.10%
  • Fast turnaround times, can meet 30 day settlement
  • No on-going or monthly fees
FREE REDRAW FACILITY

Smart Investor Home Loan (Principal and Interest) (LVR < 80%)

  • Option to add an offset for 0.10%
  • Fast turnaround times, can meet 30 day settlement
  • No on-going or monthly fees

Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to made on variables as selected and input by the user. All products will list the LVR with the product and rate which are clearly published on the Product Provider’s web site. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. Rates correct as of September 25, 2021. View disclaimer.

How much can investors get back in tax? 

There are potentially thousands of dollars available in tax refunds for property investors each year, as Australia has fairly generous incentives. 

National Australian Taxation Office (ATO) data found over three million people claimed deductions on rental properties in 2016/17 worth $47.4 billion.

That's an average of more than $15,000, and more recent research from Chartered Accountants showed depreciation alone is worth an average of $9,250 in claims

Ms Oliver said how much investors can get back from their tax returns is specific to individuals, and is dependent on the extent of an investors assets, liabilities, and income.

"The important thing to remember is that tax saving strategies are secondary to wealth decisions," she said. 

"Strong investments are key, applying tax strategies to the management of these investments result in various tax savings, which in turn support your wealth profile."

Top tips to prepare for this year's tax returns 

To help property investors prepare for tax season in July and to get the most back from their investment as possible, Ms Oliver has put together the following exhaustive checklist: 

  1. Understand how your property investments are performing, get your data in order by establishing and maintaining a personal account file
  2. Connect bank accounts, backdate feeds to 1 July, bring your bookkeeping up to date and reconcile all personal bank, card and loan accounts
  3. Upload supporting documents to your accounting file and attach to transactions, use an app for paperless efficiency and storage
  4. Review real estate agent rental statements for accuracy.
  5. Ensure all deductions are included in rental statements, e.g.advertising for tenants.
  6. Obtain annual, bi annual, or quarterly statements for body corporate rates and levies
  7. Gather loan statements for geared properties to calculate interest and borrowing costs deductions
  8. Upload quarterly statements for council and water rates
  9. Upload annual statements for property insurances
  10. Ensure your property is registered with the revenue office and you have applied for an annual land tax notice of assessment
  11. Upload invoices and receipts from gardeners, cleaners, pest control etc. 
  12. For holiday houses, include utilities electricity and gas, internet, replenishing of supplies and incidentals of running the business
  13. For relatively new or renovated properties (within 10 years), arrange a depreciation schedule with a quantity surveyor
  14. Ensure office related deductions in relation to your properties are being captured in your file - stationery, postage, telephone etc.
  15. Prepare details of unforeseen circumstances, like legal disputes or natural disasters
  16. If you are unsure of a claim, include it anyway, your accountant will advise.
  17. For properties purchased or sold during the financial year, upload copies of signed contract of sale, settlement statement, and legal invoices for capital gains tax purposes.
  18. For properties purchased during the financial year include the date the property became "available for rent"
  19. For properties sold during the financial year include a timeline of the life of the property, such as date ranges for principal place of residence vs investment property, periods of renovations etc.

"We recommend establishing and maintaining a personal accounting file for wealth management, planning and tax admin purposes," she said. 

 "If you're not into cloud services and you prefer to continue in paper mode, it comes down to a basic filing system.  Request from your accountant or advisor an 'investor checklist' for tax time.  Or prepare one yourself. 

"Work through the checklist and compile your data. Contact suppliers for missing documents. Scan and file in order ready to send to your accountant at tax time."


Photo via The New York Public Library on Unsplash

Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2020. They are (in descending order): Great Southern Bank, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
  • If you click on a product link and you are referred to a Product or Service Provider’s web page, it is highly likely that a commercial relationship exists between that Product or Service Provider and Savings.com.au

Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.

In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.

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William Jolly joined Savings.com.au as a Financial Journalist in 2018, after spending two years at financial research firm Canstar. In William's articles, you're likely to find complex financial topics and products broken down into everyday language. He is deeply passionate about improving the financial literacy of Australians and providing them with resources on how to save money in their everyday lives.

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