When looking to invest in a rental property there are various factors that can contribute to achieving maximum tax deduction benefits.
We often hear the term “negative gearing” in relation to investment properties. Negative gearing is where the interest on borrowings and expenses on the property exceed the income of the property per annum. Using a negative gearing strategy can be an effective tax strategy, however it is not suited to all investors. For example, negative gearing is generally not suitable for investors who sit within the lowest marginal tax rate. Because super funds and low-income earners have a tax rate of 15% applied to earnings, every dollar spent results in a tax benefit of 15%. This is quite low when compared to individuals who are taxed at the highest rate of 47%, where each dollar they spend attracts a tax benefit of 47%.
One of the most effective ways to maximise the tax deductibility of investment properties is using non-cash deductions to offset higher tax rates. Non-cash deductions, such as depreciation, mean that your cash has not been used to pay for deductible expenses.
To access and calculate depreciation, it is helpful to obtain a Quantity Surveyor report, which will also include a Depreciation Schedule. The younger the property, the higher the opportunity for depreciation which is why newer properties are often more popular choices as investment properties.
When you sell the property, the depreciation is added back for tax purposes, however if the property is held for more than 12 months a 50% capital gains discount applies to the landowners (excluding company-owned assets). Super funds receive a 33% capital gains discount. For more information, please contact our Tax & Business Advisory team.