Tax-time triumph: How this investor is maximising her returns

This article has been republished from the August edition of the digital magazine.

Monica Rouvellas is an entrepreneur with a background in business law, who started investing in property in her late twenties.

“It was always something I wanted to do, but whenever I went to see a broker, they would say you need to save more, or you need a bigger deposit,” she told Your Investment Property Magazine.

“Finally, I was able to buy my first property going halves with my brother, we did some renovations and built up equity and a good rental yield as well.”

These days, she owns three rental properties, including complete ownership of the original property after buying out her brother's share. She has taken advantage of her knowledge of tax rules to maximise her portfolio’s profitability.

Tax time

Monica avoids negative gearing because she wants her taxable income to be as large as possible to maximise her borrowing power. Come tax season, she has a simple goal: break even.

“Any profit I make on the property, I try to offset with expenses, so I claim everything from the interest on the loans to repairs to loss of rent,” she said.

She said this means she is usually very open to any requests tenants might make about adjustments to the property. Every repair or installation is an adjustment after all, which helps reach the magic breakeven point, so she thinks investment property owners shouldn’t hold back.

“I had one tenant ask for CCTV cameras, which I had no issues putting in because of the tax deduction,” she said.

“There’s a lot of hype at the moment about landlords not doing repairs. I think it’s very silly for landlords not to do that considering most of the property maintenance is a taxable deduction.”

Monica also said lots of landlords make the mistake of assuming they can only recoup expenses from lost rent through insurance.

”A lot of property owners think you can’t claim loss of rent, and try to get landlord insurance to cover that.

“I learnt the hard way with landlord insurance that you can only claim after four weeks of lost rent.

“No insurer will pay you out for the initial four weeks. If the house is empty for six weeks, you claim the last two weeks on insurance and the other four weeks at tax time.”

You probably know repairs and maintenance on an investment property can be claimed as a tax deduction, but there are several other eligible expenses you might not have thought about including in your tax return.

Tax Deductions you might be forgetting about

• Professional fees: The fee for anyone you hire for services concerning your investment property is deductible. If you commissioned a conveyancer when you were buying or selling, or hired an accountant to manage your income from investment property, you can claim the entire portion that regards your investment properties.
• Insurance: The cost of keeping your investment property insured, including for building and contents, public liability and even loss of rent, can be claimed at tax time.
• Fees: It’s pretty hard to forget to claim $10,000 worth of interest, or whatever the property management company charges. However, there are several smaller fees you might have paid without thinking too hard, which are also deductible. Loan application charges and landlord or homeowner association membership fees are good examples.
• Depreciation on fixtures: Over time, carpets, blinds and other fixtures will deteriorate. While you can’t hold your tenants responsible for natural wear and tear, you can make a claim each year according to a depreciation schedule as these fixtures gradually lose value.

Trusts

Monica is one of many investors who buys property through a trust. For the uninitiated, a trust technically refers to the relationship between the ‘trustee’, who owns and controls the assets in the trust, and the beneficiaries, for whom the trust is set up. The assets are owned on behalf of the beneficiaries and the income is held for them. Helpfully for investors who set themselves up as a trustee, the trustee can also be a beneficiary (just not the only one, because this would defeat the purpose of the trust). For tax purposes, a trust is treated as a separate tax-paying entity. Monica uses a discretionary trust, which means the trustee (her) controls the distribution of income to the beneficiaries.

For investors, there are a bunch of benefits to buying properties through a trust, including asset protection, discounts on capital gains tax and flexibility at tax time.

Why property investors like trusts so much

• Asset protection: The trustee is the owner of all the properties in the trust. This means that if one of the beneficiaries who receives rental income runs into financial or legal trouble, the property is protected from creditors or the law.
• Flexibility with distributions: Monica said one of the main reasons she buys property through a discretionary trust is the flexibility this offers come tax time. The trustee can distribute income to the beneficiaries however they choose, which can be helpful when the tax man comes calling. Imagine a married couple (we’ll call them Richard and Judy) who own an investment property through a trust. Both are beneficiaries and Judy is the trustee. Judy earns a lot more than her husband and is several tax brackets above him. Therefore, she might decide to disproportionately appropriate income from the property to Richard, so that less of it is taxed.
• Capital Gains Tax concessions: Under certain conditions, the ATO allow reduced or eliminated capital gains tax for small businesses, which trusts can be eligible for. There are a few criteria you’ll need to meet, but it’s absolutely worth exploring.

Property tax

The sand in the bed of any property investor, minimising your land tax obligations is another important way to maximise your income. As Monica explains, there’s no one size fits all strategy since rules vary from state to state.

“[Investors should] structure [their] portfolio differently according to the state you are buying in,” she said.

“For example in NSW, you could use either a unit fixed trust or a special company set up to minimise land tax once you have a few properties in the portfolio.”

There are a few broad ways to structure your portfolio to bring down your land tax obligations. Firstly, you could simply choose properties in states that charge less of a land tax imposition - in the Northern Territory, for example, where land tax doesn’t exist. Should you buy properties across different states, your landholdings in each taxable area will be far less than your overall portfolio, so you will be charged a lot less than if you had all your eggs in one basket.

If you are investing in one particular state, you could consider spreading your portfolio across several different entities. Let’s say a married couple decides they want a property empire, but all in Queensland, where the land-holding tax threshold is $600,000. They could buy a unit with a land value of $300,000 in one spouse's name, another worth $400,000 in the other’s, and set up a discretionary trust through which they purchase a townhouse with a land value of $550,000. Since no single entity owns more than the threshold, no land tax applies.

It’s also worth pointing out that land tax is based on the value of the land the property sits on, not the property itself. This gives units a bit of an advantage because the portion of the property value that comes from the land is usually a lot less than houses. A $500,000 unit might only be sitting on land worth $200,000, for example, whereas the land underneath a $500,000 house is likely to be a much bigger proportion of $500,00.

Don’t forget these tax deductions!

1. Professional fees. If you’ve ever hired anyone to help you manage your investment property, you can claim these as a tax deduction.

2. Insurance: The ATO currently allows you to claim immediate deductions for premiums to insure your rental property i.e. landlord insurance.

3. Small fees. Don’t forget to claim the little fees, like loan application charges, bookkeeping fees, tax agent fees, etc.

4. Depreciation. Over time, fixtures like blinds, carpets or floorboards will naturally deteriorate. The ATO allows deductions for depreciation of assets that cost over $300, over its ‘effective, useful life.’