The most obvious strategies for many are the most difficult to implement. And, for the taxation of rental properties the most obvious strategy a Perth tax accountant will talk to you about is keeping good records as part of planning your property portfolio.
If you do not keep good tax records and tax receipts for your Perth rental property, you will not enjoy the best possible after-tax returns for your property.
Rental agent summary
If you engage a real estate agent, they will almost always provide you with an annual statement summarising your total rental income and total rental expenses paid. This document is critical for doing your annual tax return.
Sometimes, a real estate agent will only give monthly statements, and you will not have an annual statement. This is a poor outcome. You are better off getting the real estate agent to prepare an annual statement so your Perth tax accountant is not required to manually add up individual months of income to determine the annual position. Even if there is a small charge for this service it is well worth it.
Even if you add up the numbers, your Perth tax accountant will likely add them up as part of the license obligations (or test your work), so you will not really save on fees.
Empower the agent
You should ensure your annual rental property statement is as complete as possible. So, it’s a good idea to get the agent to pay almost all the expenses from the rental income. This reduces the risk of error, as almost all your costs are contained in one sheet.
The payment and recording of costs paid by the real estate agent will extend to other costs like land tax and shire rates.
Ask for information
Your annual statement should be supported by the invoices paid. While the information paid on the annual statement is good evidence, you will ultimately need the tax invoices to support your tax claim.
Also, your Perth tax accountant might need to review some of the costs paid to see if you can enjoy a tax deduction in your income tax return. This will particularly happen for costs like repairs. So, having all the tax invoices behind the annual rental property tax statement is prudent.
Simplify your loan statements
Many banks will summarise their annual interest paid to them on the June bank statement. So, rather than produce all 12 statements to your accountant, just send through the total interest paid.
Simplify loan refinancing
If you have refinanced a loan during the year, you have more complex tax affairs. First, a loan refinance on a rental property must be notified to the ATO, and you must also clearly track the refinance. So a refinanced loan is more complex.
Most often, a refinance is easy (Westpac pays NAB $1.2m to clear the loan). However, sometimes a loan is bundled together with a range of loans to get a better deal, and it is difficult to trace how the money has gone into the new financing arrangement. So, providing the settlement statement on the refinance is essential to understand how the new loan relates to the rental property.
Retain purchase records
Your purchase documents will ultimately reduce the tax you pay when you sell a property. So, it’s important to have a system to retain the original purchase contract and settlement statement (supported with tax invoices).
The purchase documents are needed when the property is sold, so the common substantiation rule to retain these documents for 4 years is not technically true. You need to retain these tax documents for at least 4 years from when the property is sold (with the clock starting from when the tax return is lodged).
Sometimes, the purchase documents are not clear-cut. If you lived in the property and made it a rental, the tax purchase documents are supported by a market valuation. If you acquired the property through a divorce or an inheritance, your tax purchase documents might look through your transaction to the original purchase.
If you could claim the Goods and Services Tax on purchasing your property your purchase documents should reflect the GST claimed. The GST refunded will lower your property purchase price and tax cost base. It can also create a possible GST liability on selling your property.
Quantity surveyor reports
The additional benefits of tax building depreciation are often talked about. And it is critical to retain the quantity surveyor reports for the whole period of ownership. Simply because you claimed a tax building depreciation claim 10 years ago does not allow you to claim it now – the QS report from 10 years ago lets you claim that amount now. And you need the QS report, prepared 10 years ago, to support it.
Further, the QS reports will erode the property’s tax purchase price. So retaining evidence of the total QS claimed over the property’s life is important when you sell it.
Software
For sophisticated investors with a range of properties, the burden of tracking and retaining records is significant. So, programs like Xero with HubDoc are ideal to retain tax records for rental property management. Alternatively, for those people with only a single property the myDeductions tool from the ATO is ideal to retain records.
If you own a property through your self managed superannuation fund you can consider programs like BGL 360 and Xero.
Conclusion
Property investing can be a financially rewarding investment. However, poor taxation advice can reduce your family’s tax returns by over half.
This is where Westcourt shines. With our award-winning deep technical tax excellence, commitment to independent advice, deep global network, whole-of-taxation approach, and single focus on families in business, we are the clear choice when it comes to structuring, recording, and reporting on your family’s property portfolio—so why not give us a call?
