TAXATION PLANNING & STRATEGY

TAX PLANNING FOR INDIVIDUALS

Rental Properties

Interest Deductions

Have extra cash available to pay off your home loans? If you have the choice of paying money off the loan for the home you live in or paying money off your rental property loan, you are generally better to pay money off the loan for the home you live in as the interest on your rental property loan will be tax deductible, while the interest on the home you live in will generally not be. To take this one step further, assuming you pay a similar interest rate on both your home loan and your rental property loan, you will obtain a better tax outcome from changing your rental property loan to an interest only loan, and paying the principal that you would otherwise have paid on the rental property loan off your private home loan instead of paying principal off both loans. If both loans have the same interest rate, collectively you will be paying the same amount of interest each year, but a higher portion of it will be tax deductible. Please give us a call to discuss how this applies to your specific situation from a tax perspective. We recommend you discuss your eligibility and aspects associated with switching your investment property loan to an interest only payment facility with your loan broker or financial planner.

Interest Pre-payments

You can claim interest that you have pre-paid up to 12 months in advance on a rental property. While this just moves the deduction forward, this can be quite useful if you have higher income in one year than is expected in the following year and wish to claim your interest at a more tax effective time when exposed to a higher marginal tax rate. You may also be able to pre-pay other expenses and claim a tax deduction for them. Talk to us about this to see if it can of any tax benefit to you.

Special Building Write Off (Building Depreciation)

In addition to common claims allowable on rental properties such as interest expense, council rates, body corporate fees, repairs and maintenance, cleaning fees, pest control and gardening, there are also many claims that Australian’s miss every year costing them $1,000s in lost tax savings. A common oversight is the special building write off, where a percentage of the building’s construction cost (excluding land) is claimed as depreciation each year.

An investor may be able to claim this allowance relating to a residential rental property if its construction commenced after 18 July 1985. The rate claimable is dependent on the construction commencement date and different rates apply to non-residential buildings, short term travelers’ accommodation and structural improvements.

A qualified quantity surveyor can be engaged to report what the construction cost would have been in order to assist in the calculation of these claims. It is important to remember that it is the construction cost that is relevant for building write off and not what you paid to purchase the property.

Missed special building write off claims can be costly. As an example, if a house is 7 years old and it cost $300,000 to build, the building write off deduction would be around $7,500 each year for this property. This represents an ongoing deduction of $7,500 every year for the next 33 years, which could otherwise go unclaimed.

The quantity surveyors report will also provide details of depreciation for existing fixtures in the property such as air-conditioners, hot water systems, carpet etc. These items have a shorter expected life span than a building and will be claimable at higher rates if not yet fully depreciated.

Buying or Selling a Rental Property?

Are you buying a rental property and want to check the income tax and capital gains tax implications associated with buying it jointly with your spouse verses buying it either solely in your own name or your spouse buying it soley in their name or even buying it in a different entity all together? Give us a call and we can discuss this with you. We can also fill you in on how different costs associated with the property purchase will be treated for tax purposes, discuss how you are financing the purchase of the property (to ensure that any interest incurred on monies drawn down for the purchase are identifiable as being incurred for tax deductible purposes), and to also discuss potential ongoing deductions available on the property (some properties will yield greater special building write off claims than others).

If you are thinking of selling your property you should also give us a call so you know well in advance of any capital gains tax implications. We can also discuss whether there were any periods of ownership which may be eligible for exemption from capital gains tax if you ever lived in the property, or inherited the property.
See our information of Capital Gains Tax and Main Residence Exemption below.

Superannuation Government Co-Contribution

If you have income of less than $58,445, you may be eligible for the superannuation co-contribution. The government will pay 50 cents for every $1 that you contribute personally to super. The maximum amount the government will contribute is $500. There are minimum and maximum income thresholds which apply and there is also a definition of what your income is for the purposes of calculating your co-contribution entitlement.

For the 2024 financial year the lower income threshold is $43,445, so those with an income lower than this will be eligible for the full co-contribution. The higher income threshold for 2024 is $58,445. If your income is between the lower and higher income thresholds, when your entitlement is calculated it is subject to a taper/reduction rate. In order to be eligible for the co-contribution, you also need to satisfy what is called the 10% eligible income test, where 10% of more of your total income must come from employment-related activities, carrying on a business or a combination of both. We can discuss and explain your eligibility to you. Here is a link to the Tax Office’s information on the super co-contribution:

https://www.ato.gov.au/Individuals/Super/In-detail/Growing/Super-co-contribution/

Capital Gains Tax And Main Residence Exemption

The sale of a dwelling owned and used by an individual as his/her main residence will usually (but not always) be exempt from capital gains tax. This capital gains tax concession is generally seen to be driven by the traditional Australian policy that residential housing should be tax-free. However the capital gains tax provisions can go quite a bit further than that. There are rules which exist to both extend the exemption and limit the exemption. These rules lead to strategic choices that can be made by the Taxpayer (particularly where multiple properties are involved) which will impact capital gains ultimately declared. A Taxpayer can generally not claim the main residence exemption on two properties for overlapping time periods.

Rules that may extend the exemption include:

• Rules which permit the individual to be able to obtain relief for the period after the dwelling is acquired
  through to the date when it is first practicable for the individual to move in (so long as they do move
  in).
• Rules that provide that for a period of up to 6 months a taxpayer can have concurrent exemptions for two dwellings when they are in the process of changing main residences.
• Rules which extend the exemption during a period of absence from the main residence (so long as the exemption is not claimed on another property concurrently). The period can last up to 6 years where the property is rented out and the 6 year period can start again each time the individual moves back into the property. Where the property is not used to generate income (i.e. used by a relative instead), the 6 year limit is not applicable.
• Rules also exist to permit a taxpayer to choose to treat a period of time (up to 4 years maximum) during
  which a main residence was being constructed, repaired, renovated or finished as a period for which the
  main residence exemption can apply.
• The main residence exemption can also continue to apply to vacant land which is sold where the dwelling that was on it was accidentally destroyed.

Rules that may limit the exemption:

• Where adjacent land is sold separately to the dwelling. As the main residence exemption is an exemption which applies to a dwelling (and land connected to it) rather than land (with a dwelling fixed to it), if land is sold in a separate transaction to the exempt dwelling, the land will not be exempt from capital gains tax. Conversely it may be possible for land which is used for private purposes near the main dwelling (including land on a separate title) to be eligible for the main residence exemption if it is sold at the same time as the land to which the dwelling is attached is sold.
• The total exemption available to a husband and wife is restricted to one dwelling in total, even where they have different main residences or have interests in more than one or different dwellings.
• A limitation applies where a dependent child has a dwelling which is not the same as the individual’s main residence.
• Where a dwelling was not a main residence for the whole period of the taxpayer’s ownership, the amount of the gain that is exempt may be restricted and the taxpayer may only be entitled to a partial exemption.
• Where the dwelling is used to produce assessable income, such as where a business operates from home, the main residence relief is limited only to the part that relates to the use of the property as a dwelling.

Let us discuss with you any concerns you may have over your main residence exemption, and also let us look at whether a property can be considered to have been your main residence, and any choices which may be available.