Investors frequently overlook deductions that can significantly improve their cash flow. Understanding and claiming all eligible deductions can optimise your tax position and increase your net investment return.
Key Deductions You Might Be Missing
The most commonly missed deductions include depreciation on plant and equipment (Division 40), capital works deductions (Division 43), and certain investment-related expenses. Under Division 40, you can claim depreciation on assets like air conditioning, carpets, and appliances. However, post-9 May 2017, second-hand residential property investors face restrictions on claiming these unless the property was acquired before this date. Division 43 allows deductions on the building's structure, typically over 25-40 years, and remains unaffected by these changes. Pre-paid expenses related to your investment property, such as insurance or interest on loans, are also deductible if they cover a period of 12 months or less.
How This Works in Practice
Consider a 2015-built 3-bedroom townhouse in Richmond, Melbourne, purchased for $850,000. Let's say the property includes $30,000 worth of plant and equipment and $150,000 in capital works. By claiming depreciation, you could reduce your taxable income by approximately $10,000 in the first year alone. At a 37% marginal tax rate, this equates to a tax saving of $3,700, directly improving your cash flow.
Professional Insight
In our experience, one common oversight is not updating depreciation schedules after renovations. Investors often miss out on claiming new assets or additional capital works. Another frequent error is neglecting to claim deductions for travel expenses related to inspecting properties, which was allowable for non-residential properties until recent changes. Investors also often overlook the potential to prepay expenses before June 30 to bring forward deductions. What most investors don't realise is that small, seemingly insignificant expenses, such as pest control or garden maintenance, can add up and should be claimed. Lastly, failing to engage a Chartered Quantity Surveyor to prepare a detailed depreciation schedule can mean missing out on thousands of dollars in deductions.
When Does the Answer Change?
When Should You Seek Professional Advice?
You should seek professional advice when dealing with complex investment structures, such as properties held in trusts or SMSFs, or when significant renovations have been undertaken. A Chartered Quantity Surveyor can accurately assess depreciation claims, while an accountant can ensure all deductions align with your tax strategy.