Damian O’Connor, Managing Principal of Tax + Law, discusses how investors can maximise after-tax returns and minimise tax risk for residential rental properties this tax season.
Maximising after tax returns and minimising tax risk
Most of the time there is no such thing as a “free lunch” in the world of tax. If clients want to get the best tax outcome their advisors need to apply complex laws, have solid evidence to support claims and be aware of ATO targets.
This is certainly the case for residential rental properties. We know there have been a lot of tax disputes about the fine line between a repair (immediately tax deductable) and an improvement (deductable over time) or the private use of the beach front rental unit. The cost of getting deductions wrong can be significant, including time and energy spent in dealing with auditors, extra tax payable and penalties.
Landlords face some new tax challenges when they are preparing their 2018 tax returns. From 1 July 2017 deductions will be denied for travel expenditure and depreciation on previously owned items.
This change targets travel expenses incurred in producing income from residential premises. The new rules use the GST meaning of residential premises and interestingly don’t impact on all classes of taxpayers. If you are an individual, discretionary trust or SMSF you are caught. If you are a company (which is not a trustee) or certain other types of taxpayer it is business as usual. Additionally, if you are carrying on a business (e.g. commercial residential accommodation) travel deductions remain available.
While these changes may have been prompted by claims for landlords inspecting the Gold Coast unit for a couple of weeks during a sunny Queensland winter they have a wider impact than that. Any travel associated with rental of residential premises may be denied, including travel to real estate agents or to collect rent.
In broad terms landlords will now be denied immediate income tax deductions for depreciation on plant and equipment (e.g. dishwashers and furniture) unless they were acquired new. There are some carve outs (such as items in premises supplied to the landlord within 6 months of first becoming “new” residential premises); however, the general thrust is that items acquired second hand, previously used in your own residence or acquired as part of an existing residential premises won’t be depreciable. You may need to brush up on your GST law to recognise the difference between new and existing residential premises to get to the right answer.
Take away points
As with most tax rules the devil is in the detail. On the positive side the denial of travel expense claims won’t apply to every landlord, and some “old” items will still qualify for immediate depreciation deductions.
On the other hand, the Tax Commissioner will want to show that these new rules are being enforced and producing more tax.
In this environment it makes sense for professional advisers to alert their clients to the new rules and the steps they need to take to make sure they are not on the Tax Office radar.
Damian O’Connor has a wealth of experience in tax, commercial law and family legal issues in Melbourne and Brisbane, as a lawyer and a tax partner with national law firms. Damian provides practical technical advice on complex tax issues, commercial and family wealth structuring advice and legal documentation. He has decades of experience in managing high risk, high stress interactions with revenue authorities.
He has been recommended as a leading Tax Lawyer in Doyle’s Guide, and contributes to the continued development of tax expertise through his involvement with the Tax Institute and presentations for Television Education Network, Legalwise Seminars, Law Central, the Law Institute of Victoria, the Queensland Law Society and other professional bodies, professional associations and universities. Contact Damian at [email protected]