April 8, 2021
The recent Government changes to how property investments are taxed prompted concern among many property investors about the additional costs of holding onto their investment.
While it’s important that you get good, independent tax advice from your accountant, here are some options you may be able to explore to minimise the impact of not being able to claim your interest expenses as a cost.
Using losses from previous years
If your investment property has made losses in the past, you will likely be able to ‘carry forward’ those losses and apply it to profits made in current or future years. That will serve to reduce your profit and thus your tax liability. You may also be able to use the losses of one property in your portfolio against the profits of another in your portfolio – provided they’re owned by the same entity on a ‘portfolio’ basis.
Claiming the depreciation of chattels.
You haven’t been able to claim depreciation on the building itself for the past 10years, but you can claim the depreciation of chattels, meaning furniture, fittings, appliances etc. If the chattels are new, the ‘cost’ is the price, soi t’s fairly easy to work out. If they’re not new, it may involve having a valuation of those chattels. You could do this yourself to avoid the $400-$500 cost, as long as you’re confident that you can justify your calculations to an auditor.
Doing without a property manager for a while
Personally, I value professional management of my properties, because it makes it a sustainable commitment for me time wise, and it means it’s done to a professional standard. However, it does tend to be 8-10% of the weekly rent, so taking a DIY approach could be an option, even for a short period – providing you’ve schooled yourself up on the rules.
Looking at your own spending
If the tax changes are going to have an impact on your personal finances and you can’t offset it in other ways, might be time to look at the fritter in your own spending, to see where you could make changes. Young people are told to cut costs and make sacrifices to get on the property ladder – so it’s not unreasonable for those on the property ladder to also make sacrifices to get ahead through investment property.
Raising the rent
Obviously, this is not a politically popular option and nor is it an option you should take lightly, but it is an option to consider when the cost of owning the property has gone up. You’d want to balance that with wanting to hold onto great tenants, and whether your rent is currently at, above or below market value.
Remember, it’s being phased in!
There is no immediate impact on your tax liability from the changes, so you don’t have to rush out and do anything other than assess your options. It’s being phased in over 4 years, so there’s no impact until October, and even then, you’re able to claim 75% of the interest cost for the final 6 months of the financial year. So, run the numbers to work out what the changes will mean to you each year, because that will help you work out what you need to do about it.
Rejigging your properties
New builds are exempt from both policies, (subject to consultation as to what constitutes a ‘new build’) which would suggest if the changes are going to impact your properties significantly then you could look to sell existing property and buy new, instead. Given the impact isn’t 100% upfront, you have some time to figure that out – and by the time it is phased in you may no longer be subject to the 5- year bright line test. 'New' also has many other benefits – it requires a smaller deposit, new builds are compliant with healthy homes regulations, there’s less maintenance and repairs to fund, you tend to have a 10 year build guarantee, and new builds are only subject to the 5-year bright line test.
Hannah McQueen is a chartered accountant, financial strategist, best-selling personal finance author, has her Masters in Tax and is the founder of enable.me.