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Tax Planning Tips for Property InvestorsPosted by Eddie Chung (BDO (QLD)) on 13th July 2011

As the end of another financial year is just around the corner, here are some tax planning tips that may come in handy for property developers...

1.DON’T CHASE YOUR TENANT for rent until after the end of the year. Unless you are carrying on a property leasing business, rent is generally derived and becomes assessable income when you have received it. Therefore, for once in the year, it might actually be beneficial if the tenant pays their rent late.

However, watch out for “constructive receipts” – you are deemed to have received the rent if, for instance, the real estate agent which manages your property has received the rent on your behalf.

 

2.EXCLUDE ANY UNEARNED RENT from your taxable income for the year ending 30 June 2011 if your tenant has prepaid you amount of rent that is attributable to the period after 30 June 2011, provided that the lease agreement requires you to refund the prepaid rent should the tenant vacate the property before the period covered by the prepayment.

 

3.BRING FORWARD TAX-DEDUCTIBLE EXPENSES if you have the cash to do so. For instance, if the tenant has been hassling you to repair certain items in the property, now is the time to incur the expense to fix them, which will give you upfront tax deduction this year.

However, you need to differentiate between repairs and improvements. Repairing something generally returns it back to its original condition and is tax-deductible.

Improving something enhances the asset beyond its original state, which will render the cost not immediately tax-deductible (eg, the cost may be eligible for a depreciation claim or the capital works deduction).

 

4.PREPAY TAX-DEDUCTIBLE EXPENSES such as interest and insurance premium if you are eligible to claim the entire prepayment as a tax deduction upfront. The current rule is – only individuals who are not carrying on a business or a “small business entity” (with a grouped annual turnover of less than $2 million) can claim a tax deduction on a prepayment upfront, provided that the prepaid amount only relates to the next 12 months or less.

For other taxpayers, a prepayment will only be immediately deductible if the expenditure is less than $1,000 or required to be incurred by a law. Also, it should be borne in mind that prepaying an expense only provides a one-off timing advantage and you need to keep doing it after the first year to ensure that the benefit is not negated.

 

5.BUY LOW VALUE DEPRECIATING ASSETS costing less than $300 if your property investments do not constitute a leasing business, which would only be so if you have multiple properties and the scale and extent of the activities amount to a business. The general rule is - if the cost of a depreciating asset that is used to derive passive rental income does not exceed $300, it will be immediately deductible.

If a GST input tax credit has been claimed on the cost (eg, if you have a commercial property), it is the GST-exclusive amount that is relevant in determining if the cost exceeds $300. Otherwise, the $300 limit applies to the GST-inclusive amount.

However, if the asset is part of a set of assets, the immediate write-off will not be available if the cost of each individual asset does not exceed $300 but the entire set costs more than that amount.

 

6.KEEP PROCURING TENANTS if your property is vacant. The tax deductions you may claim on an investment property will need to be apportioned if the property was not available for rent for some period during the year, eg, if you use the property for private purposes.

On the other hand, the fact that the property was vacant for a while does not mean that the apportionment of expenses is required.  So long as the property was available for rent, eg, you continue to advertise it for rent, the expenses attributable to the vacant period will remain tax-deductible.

 

7.TIME YOUR PROPERTY SALE and, where possible, consider delaying it until after 30 June to defer any capital gains tax (CGT) payable.

A property is generally deemed to have been sold on the date of the contract for CGT purposes, rather than the settlement date, so executing a sale contract on or before 30 June 2011 amount to a sale in the income year ending 30 June 2011, even if settlement does not take place until after that date.

The reverse applies if you are selling the property at a loss, which may be offset against other capital gains you may have derived during the year. In which case, you will need to ensure that the contract is dated on or before 30 June 2010 to crystallise the capital loss in the income year ending 30 June 2011.

 

8.MAKE SUPERANNUATION CONTRIBUTIONS if you are eligible to claim a tax deduction (eg, if you are self-employed or substantially self-employed). The tax deduction will offset the rental income from your properties and reduce your tax bill. Generally, the closer you are to retirement age, the more attractive is superannuation’s low tax environment.

To be able to claim the tax deduction though, the contribution must be made and received by your complying superannuation fund on or before 30 June 2011.  Making the contribution after that date will defer the deduction to the year after.

On the other hand, if your assessable income and reportable fringe benefit amount together (“adjusted taxable income”) do not exceed $31,920 and at least 10% of your income comes from your employment activities, the Government will match you dollar for dollar for any non-concessional (ie, not tax-deductible) contributions you make up to $1,000.

However, the co-contribution amount will progressively be reduced when your adjusted taxable income exceeds $31,920 and will completely be phased out as your adjusted taxable income reaches $61,920.

 

Regards,

Eddie Chung (Partner, BDO (QLD)   Telephone +61 7 3237 5999)
Tax & Advisory, Private & Entrepreneurial Clients - Property & Construction

Important disclaimer: No person should rely on the contents of this article without first obtaining advice from a qualified professional person. This article is provided on the terms and understanding that the author and BDO (QLD) Pty Ltd are not responsible for the results of any actions taken on the basis of information in this article, nor for any error in or omission from this article. The article is provided for general information only and the author and BDO (QLD) Pty Ltd are not engaged to render professional advice or services through this article. The author and BDO(QLD) Pty Ltd expressly disclaim all and any liability and responsibility to any person in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this article.

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