If you are investing in Australian real estate, you must be aware of all possible tax deductions. So you reduce your tax liabilities as much as you can. This guide to investing Australia covers property tax and tax deductions. For more detailed advice, find out more here.
Guide to investing Australia – tax deductions
The reason real estate experts Australia and real estate agents Australia recommend Australia. As a residential investment location is because of the favorable tax environment. Residential property offers excellent opportunities for reducing tax.
In this article, we have set out the main tax deductions. So you can ensure you are making the greatest possible deductions.
Property Depreciation
Tax authorities in Australia allow investors to depreciate the cost of their building structure. As well as the fixtures and fittings.
How does it work?
As the value of a property increases, it is not the value of the whole property which increases. In fact, what happens is the value of the land on which the property sits increases. But the value of the building and its fixtures and fittings decrease.
The scarcity of land drives its value as a finite resource land is limited, as demand increases and the price of land increases. This is due to the basic economic concept of supply and demand. As the population increases, more people are looking to buy land, but the supply remains the same, which drives up the value.
At the same time, the value of the building and its fixtures and fittings go down. This is called depreciation. Depreciation is an accounting term that refers to the reduction in an asset’s value over time. Building depreciation is the decrease in the value of a building due to wear and tear. Buildings typically have a physical life of around 40 years and are depreciable over that time period. Buildings are typically depreciated using a straight-line method, meaning that the same amount of depreciation is taken every year over the asset’s life.
What are the rules in Australia?
In Australia, investors can claim depreciation on the economic loss of the wear and tear each year of the building and its fixtures and fittings. These are often referred to as non-cash expenses.
Building and Built Improvements
A residential investment property depreciates at an average of 2.5% p.a., which is 40 years from its construction.
Fixtures and Fittings
Fixtures and fittings such as carpets, bathroom furniture and cabinets can be depreciated at between 10% to 20% p.a. Over a period of five to ten years’, depending on the individual item.
Example
For example, if you purchase a property for $1,000,000 where the building has a value of $400,000 and the fixtures and fittings a value of $50,000. You could potentially claim the following depreciation expenses:
- Building = $400,000 / 40 years = $10,000 p.a.
- Fixtures and fittings = $50,000 / 10 years = $5,000 p.a.
Therefore, you could claim $15,000 p.a. in depreciation expenses.
How do you claim?
The good news is that you don’t need to calculate each of these items individually, you can receive a Depreciation Schedule from a Quantity Surveyor. The Depreciation Schedule will be valid for the entire term of the asset’s lifespan.
Interest Expenses on your mortgage
In Australia, 100% of your interest expenses for a mortgage are tax deductible. Unlike, many other countries around the world where the amount is limited (UK) or limited to new-build property (New Zealand).
For example, if you purchase a property for $1,000,000 with a $200,000 deposit and had a $800,000 mortgage with a 4% interest only loan. In this scenario, the $32,000 amount in interest would be 100% tax deductible.
Loan Costs
When you purchase an investment property the interest you pay on your loan is not the only cost you pay. The other costs which you incur when you purchase a property are also tax deductible. Costs such as broker fees, registration charges, management fees, loan establishment fees as well as the stamping costs are all tax deductible. These costs all add up and are worth recovering.
Other Tax Deductions
If you already own a rental property, you will already know that there are a huge number of other costs which can be claimed against your tax liability. A full list is available on the Australia Taxation Office (ATO) website, some of these include:
- Property Repairs and Maintenance
- Insurance
- Water Rates
- Land Taxes
- Strata fees and charges
- Advertising the property for rental
- Property agent fees and charges
Accounting Costs
Most investors use an accountant to submit their tax returns. Not only will an accountant provide the best possible advice on claiming back all of the tax you can. Even better their fees are totally tax deductible.
Are you thinking about investing in Australia?
Australia offers significant tax benefits for both domestic and international investors. If
It is important to clearly understand why they are investing and their objectives. You might be interested to checkout our investor checklist here.
Du Val Global
We built Du Val Global, real estate investment software designed to help investors make better investment decisions when they buy property in Australia.
Financial Analysis – a property investment tool that investors can use to create financial models to determine net return after tax and return on investment. Investors can understand specific tax implications. Our property comparison tool allows investors to compare investments on an after-tax basis to determine the best investment for them. Investors can even compare properties in different countries.
Want to find out more? Check it out at here
