While it is possible for investors to use their property portfolio to offset income tax, it’s crucial that this is executed in a compliant manner. 

In order to ensure investors don’t fall victim to a dodgy tax return, nowadays, more than ever, you need to be enlisting the expertise of a registered tax agent. While loopholes to the system can seem tempting to some, being subject to an audit is not something to take lightly. 

The last financial year saw a record number of tax audits. With this ramp up of ATO audits, property investors looking at offsetting tax need to ensure they go about it the right way.

The first step is determining whether a deduction is a ‘capital cost’ or ‘running cost’. By definition, ‘capital costs’ are fixed, one-time expenses incurred on the purchase of a property required required to bring your asset to a commercially operable status. Capital costs are added to the cost of the property, so when you set it, you can reduce your exposure to Capital Gains Tax. 

‘Running costs’, also know as ‘operational expenses’ are costs required for the day-to-day functioning of your property, and can be claimed against the rental income the property is deriving.

Let’s look at some examples:

Capital costs are usually associated with acquiring the property, and include costs such as:

  • Stamp duty
  • Legal fees
  • Research fees
  • Mortgage insurance
  • Conveyancing
  • The cost of capital itself (interest paid on money used to invest)

Running costs are those you incur by holding and maintaining a property, including:

  • Council fees
  • Body Corporate fees
  • Strata fees
  • Depreciation 
  • Repairs and/or renovations
  • Advertising
  • Insurance
  • Property management fees

Some of the more obscure deductions for investment properties include cost such as:

  • Wheelie bins
  • Spas
  • Outdoor barbecues
  • Swimming pools
  • Outdoor furniture
  • Backyard sheds
  • Phone costs relating to the transaction or management/maintenance of the property

And even…

  • Garden gnomes (featured already in a Domain article)

Yearly, the ATO issues updated and detailed guidance to ensure Australian’s are clear on how to correctly disclose income and expenses in their tax return. Each financial year, there may be tax changes, which is why investors need to be informed. At DDP Property, we strong recommend our clients enlisting the expertise of a registered tax agent to avoid any hiccups at tax time.

This article was written by Matt Wilson, General Manager of DDP Property