Australians’ love affair with property remains strong, and for many will be the largest asset within their portfolio. The value of the Australian residential property market is currently sitting at approximately $6.4 trillion, while the value of our superannuation system is just $2.8 trillion. When it comes to investing in property in Australia, it’s important that you’re planning ahead, considering the tax implications, and ensure that you’re making the most of any tax benefits available.
One of the most common misconceptions and mistakes that we see Australian residents and expats making is failing to understand the requirements to be eligible to claim tax deductions on their property in Australia. Before we start exploring the deductions that are available, it’s important to first understand that you can’t claim tax deductions on non-income producing assets. When it comes to Australian property, this would be a situation whereby you had purchased an investment property, however decided either not to rent it out or to allow a family member to live in the property rent-free.
It is all too common for many Australian expats to purchase property back home for their children, parents or other family members to live in and decide not to charge them any rent. It may in fact be far more beneficial to charge them a nominal amount of rent each week or month, to ensure that you can at least claim some of your allowable deductions. This highlights the importance of doing your homework before jumping into the market.
Let’s explore what tax deductions you can in fact claim when your investment property is rented out and you’re generating taxable Australian income. I’ve outlined the key deductible expenses below:
- Interest on your mortgage
If you have borrowed money from the bank or another lender to invest in an Australian property, you can claim the interest charged on the loan as a deduction. Do note that for Australian expats who are non-residents of Australia for tax purposes, it is only the interest charged on loans for investment properties rather than any loans taken out to invest in shares or other assets. If you’re an Australian resident for tax purposes, then you can typically claim the interest from the loan taken out to invest in shares and other assets, not limited to property.
By way of example, let’s assume that you have purchased an investment property for $600,000 and to purchase the property you’ve borrowed $480,000 from the bank (80% of the value of the property). The bank is charging you 3.5% interest on this loan, which equates to $16,800 per year. This $16,800, which is the interest component of your repayments is deductible from your taxable income, which can be used to offset the cost of your property.
- Depreciation of the building costs
As your property ages, it is reasonable to expect some general wear and tear, particularly if you have tenants moving in and out of your property over time. This process is referred to as depreciation, and can create a further tax deduction. Typically, the building costs for your investment property will be depreciated at 2.5% over a 40 year period, which can save you thousands over the lifetime of your investment.
To illustrate how this works, let’s assume that you’ve purchased a new property for $800,000, and $350,000 of this amount represents the construction costs of the house itself. This $350,000 can be depreciated at 2.5% per year, creating a tax deduction of $8,750 each year for 40 years. As you can see, this is a very attractive component of the Australian tax system.
- Depreciation of the fittings
In a similar manner to the depreciation of the building costs, you can also expect wear and tear over time to the fixtures and fittings within your property. This includes items such as lights, power sockets, showers, sinks and other fittings in your property.
To calculate the allowable depreciation amounts that you can claim each year for your property, it is important to request a quantity surveyor to provide you with a depreciation report for your property. As long as your property is genuinely used for investment purposes, and was built after 1985, you may be eligible to claim the depreciation of both your buildings costs and the wear and tear of your property’s fixtures and fittings.
- Rental expenses
There are often costs associated with renting out your property, and can often include the following:
- Body corporate fees
- Property management fees
- Advertising costs for a tenant
- Land tax
- Water rates
- Council rates
- Insurances such as landlord’s insurance
- General maintenance
- Cleaning costs
These costs can quickly add up each year, so it’s quite important that you ensure you’re claiming all of your eligible costs to reduce your tax liability in Australia. If you’re working with a property manager, they will provide you with an annual summary of all of the costs that have been incurred for that financial year so that you can complete your tax return.
- Financing and loan costs
You may incur costs for your loan and financing outside of just the interest component. These could include items such as lender fees, establishment fees, stamp duty payable for the loan itself (note that this is different to the stamp duty paid for the property), and mortgage insurance (if applicable). These costs can also quickly add up, so it’s important to ensure you’re claiming these as a deduction if you’re eligible.
- Accounting costs
Finally, you can also claim the cost of managing your tax affairs, such as the fee that your accountant charges you to complete your tax return as a deduction. While this may not be your largest expense with holding your investment property (and I’d certainly hope it isn’t), this is a handy deduction to add to the list.
When it comes to Australian property investment strategies, there is no one-size-fits-all approach, so it’s important to consider your own goals and ensure that you’re making the most of any tax benefits and deductions that may be able to you.
To Your Financial Success!
Jarrad Brown is an Australian-trained and qualified Fee-Based Financial Planner with Australian Expatriate Group of Global Financial Consultants Pte Ltd providing specialist financial advice and portfolio management services to Australian professionals in Singapore. Jarrad Brown is an Authorised Representative of Global Financial Consultants Pte Ltd – No: 200305462G | MAS License No: FA100035-3
Australian Expatriate Group is a division of Global Financial Consultants in Singapore providing specialist advice to Australians living abroad.
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General Information Only: The information on this site is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision.
*Please note that Jarrad Brown is not a tax agent or accountant and none of the content outlined here should be taken as personal advice. You should consult your tax agent and financial adviser to review your current personal finances and financial goals to consider whether this strategy is appropriate for you.