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Empower Wealth Blog post by Empower Wealth

Tax Planning Tips to Maximise your Returns (Part One)

To celebrate (or more accurately, prepare) for the upcoming tax season, we’re back with the second episode of our new Property Tax education series called “Talking Property Tax with Julia Hartman”.

As the old saying goes, “By failing to prepare, you are preparing to fail”.

We believe this holds true today which is why our newest episode is all about organising your taxes in the lead up to 30 June 2022. We’ll be covering: 

  • How to top up your own super 
  • The best practices for personal tax bookkeeping (particularly for hybrid workplaces)! 
  • Plus, tips around car and property taxes! 

Basically, we’re covering how you can maximise your tax return in 2022!!

We’re also giving you 3 FREE reports which you can download below:

And if you’re interested in our free and no-obligation initial consultation, you can learn more about it here or simply fill in the form below and one of our qualified tax accountants will get in touch with you soon.

  • VIC | NSW | QLD | SA | ACT | NT | TAS | WA | International

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Transcript

(Please note that this is an automated transcription and as such there might be typos/inaccuracies in the transcript below.)

Ben Kingsley:

Hi, I’m Ben Kingsley and we are in episode two of “Talking Property Tax with Julia Hartman”. Now, Talking Property Tax is an educational tax series led by Julia Hartman, who is one of Australia’s leading tax experts when it comes to property investment taxation and personal tax matters.

Julia is the founder of the BAN TACS group of accounting practices across Australia, of which Empower Wealth tax and personal accounting is a member. Julia is also our Chief Technical Tax Advisor and I’m thrilled to be talking to Julia today in episode two. Now, if you’re new to this series, I would recommend you check out episode one, where we talk about the top five tax planning rules for every property investor should know. So, that is episode one, go and check that out.

In this episode (episode two) we’re talking about getting your tax house in order leading up to 30 June. So, we’re going to be talking about personal tax contributions. We’re going to be talking about your tax bookkeeping in terms of the hybrid work from the home office and working from the office, and giving you a few tips around cars taxes, but we’re going to come back for that. Also, we’re going to finish off with property, what do you need to do in terms of property investment before 30 June as well. So, I just want to … very excited to be welcoming Julia back for episode two. So, thanks for joining us, Julia.

Julia Hartman:

Thank you for having me back again, Ben.

Ben Kingsley:

So, let’s jump straight into it. The first one, which is something close to me is making your money work harder for you, and there’s no better way in some respects than your superannuation. So, let’s talk about personal super contributions. So, what can I do before 30 June that will give me an opportunity to potentially top up my super?

Julia Hartman:

Well, assuming you are an employee, it gets a bit complicated but if you can put extra money into super, if your employer has already put $27,500 in there for you, there’s nothing more you can do. But if there’s a bit of a gap, then you take, let’s say it was a $10,000 gap, so you take $10,000 of your income, but let’s say it was before tax wages. Then if you took it yourself, odds are you’re going to have about $6,500 after tax that you put in your pocket to maybe … people like to pay down their mortgage at 2%. I don’t get that but anyway, that’s what they tend to do. Instead, you take the whole $10,000 and you put it into super. Then you’re only going to get taxed 15 cents in the dollar on that unless your income’s over $250,000, but most people only 15 cents in the dollar on that.

So you’ve got $8,500 working for you and what’s super done in the last few years? About 9%, or 7%, I’ll be conservative, say 7%, compared to paying down your mortgage at 2% to 3%. But it gets complicated because you don’t want to go over that $27,500 cap. You won’t get a deduction for the money. If you go over, it’ll just go into your undeducted cap, assuming that you haven’t already used that up. So, it’s not the end of the world, but because you don’t get a deduction for it and you’ve got to wait until you’re 65 or whatever, depending before you get to use it. So, you’ve got to find out how much your employers put in there.

That is the problem because while they might say on your payslip for the month of June, “We’re going to put another $1,000 into super for you.” They might not put it until July and super, it’s all about when the cash is received by the fund. It’s the same with you. You need to start working on this early in June to be sure but you’re really going to have to quiz your pay area, to find out. Some employers put it in before the 30th of June if they want the tax induction, others if their cashflow is short, wait until July. So, you really need to check that out.

Ben Kingsley:

So Julia, what a lot of people miss around superannuation is that it’s taxed at a different rate. So, you were talking earlier about the benefits you get in terms of your money working harder for you. But if I’ve got a pay-as-you-go tax rate and I’ve got a scaled rate, effectively I put money into super at a 15% tax rate versus what I have to pay based on the income that I earn. So, explain that to our community.

Julia Hartman:

Okay. So if you are earning between $45,000 and $120,000, your tax rates are about 34.5 cents, including Medicare, but it does vary a little bit with the offset, but I won’t go into that. Then between $120,000 and $180,000, the tax rate is 39 cents on the dollar with Medicare. Then once you go over the $180,000, it’s 47 cents on the dollar.

Ben Kingsley:

Right, so what’s important about that is effectively you can have half the tax rate if you’re putting money in. So, if you’ve had a good year, a good financial year all round, and you’ve got a bit of savings, you’ve got a bit of money in your offset account and so forth because what also people need to understand Julia is, does it have to come from the pay office to start with? Or can you make that contribution at a later date?

Julia Hartman:

You can do it through the pay office, but the trouble is you might not have enough pay. If you want to put 10 grand in it’s too late, you mightn’t have that much in unused pay. So, you can do it yourself and you go get onto your super fund and you ask them for the BPAY details, but you’ve got to be very careful what you say to them. They will have their own different terminology, but this is definitely a member contribution, not an employer contribution, a member contribution. If you ask them that you want them to send out the form you need to complete to claim it as a tax deduction, they’ll get it. They’ll realize what sort of deduction and you don’t fill out that form until you do your tax return because as long as the money’s in there, then your accountant can say, “Oh look, really, you’re only in the 19 cents on the dollar tax bracket, maybe we won’t claim it. Maybe we will.” Generally, we do anyway. So yeah, but you don’t have to fill out that form until you do your tax return, providing you fill it out before the following 30th of June. You have to get the money in well and truly before.

Ben Kingsley:

So Julia, there’s obviously a lot of terms and conditions and nuances when it comes to super. So, what we were talking about there was the member contribution and there is a cap of $27,500. We also know that there are obviously some qualifications around additional contributions for funds that are under $500,000. Then there’s a further larger amount that you will be able to potentially add to your super, which is another variation again. So, what’s the advice here in terms of when we are talking about $110,000 a year, can you explain what this $110,000 amount is in addition or separate to the member contribution that we’ve just been talking about around that cap?

Julia Hartman:

Yeah, this is another cap of the amount of money per you to put into super, you can draw forward a couple of years if you need to put, say $330,000 in, but you don’t get a tax deduction for any of this. It’s just a great way of putting money aside where you can get your 15 cents in the dollar on its earnings, at least. Whereas if you had it in your own name, you’d be paying more on its earnings. But it’s also a nice safety net. You do go over your $27,500, it’ll just go into your undeductible cap. You won’t get penalized, they won’t kick the money back out, but you’ll be at least still there in super, earnings getting taxed at 15 cents in the dollar.

Ben Kingsley:

Okay. So there’s again, what we’re talking about is a tax-deductible contribution, which is the member contribution. There’s the compulsory super from the employee and then there’s also this amount that doesn’t have a tax benefit attached to it, but it has a benefit in terms of building up the wealth inside your super. So, I think the message from my point of view is that there are a lot of moving parts in here, there are thresholds and if you get those thresholds wrong, the penalties are the highest tax rate or it’s even higher than that, isn’t it? There’s a large fine that you get charged on tax. So, there are a lot of different elements here.

So, what I’m advising people to do is talk to their accountant after they’ve got an amount from their superannuation provider. So, is that the first step, go to the superannuation company, get a sense of how much has been contributed, work out what your cap amount will be closer to that $27,500 and then talk to your accountant about some tax planning before 30 June?

Julia Hartman:

Well, your accountant from the portal can find out how much your employer’s contributed so far. What they can’t do is work out what your employer’s going to do over the next few weeks. So, it’s talking to your employer, find out whether they’re going to put your guarantee or after the 30th of June, then your accountant can work out the rest for you, but don’t stress about it too much because it won’t get taxed at the maximum rate if you go over your $27,500 and or anything like that, because I’m assuming you haven’t used your $110,000 cap, it’ll just pop into there, still a good outcome, just no tax deduction.

Ben Kingsley:

Okay. So, there’s an opportunity before 30 June to put money into super and tax effectively, legally in terms of what we’re talking about here. So again, talk to your employee, obviously, your accountant then has great access to getting your contribution balance as it stands before 30 June, but those two numbers together. If there’s a shortfall, you may want to add additionally to your superannuation as part of that story. But I think there’s no doubt that it’s a good reason to have a good conversation with your tax accountant in preparation for 30 June. So, that’s personal superannuation. There are always lots of moving parts in it and that’s why I love talking about it because even I get confused in terms of what’s in what’s out and what’s possible. What’s not possible.

All right, let’s now turn our attention to our tax bookkeeping in preparation for that. So, we have seen this year and during the pandemic, working from home has become a really, really … part of the fabric of work. So, there are now lots of people working from home and there’s potential for tax deductions when it comes to the home office. So, let’s talk through the classic case of home office claims and then let’s talk about how the ATO has potentially tried to make it easier, but what are some of the other pitfalls there, Julia?

Julia Hartman:

Oh well, I think there you’d be referring to this 80 cents an hour that they’re saying you can claim. Used to be 52 cents an hour, but that’s still there. So, if you were working from home, you’d get 52 cents an hour to cover electricity and wear and tear on the office furniture, that sort of stuff. But you could still claim on top of that 52 cents an hour, your stationery, depreciation on your computer, your phone, your internet, depreciation on your printer, ink cartridges, all that sort of stuff. There was a lot of stuff over the top that you could claim. Now 80 cents they’ve given you as a gift apparently, but you don’t get to claim your phone or anything. It’s all in that 80 cents an hour. So, the majority of the time I find I’m claiming 52 cents an hour because the person’s using their mobile phone for work and all that sort of stuff. So, it’s no bargain, but the bottom line is your accountant can work that out, they can go … What you need to do now before the 30th of June is create a diary that they can work from.

We need to know how many hours a week spend in your home office. It doesn’t now have to be a separate room. It can be everyone in the same room. We just need to know how many hours per week and buy a month-long diary for you to keep. They will allow you, if you permanently from home, you work 40 hour week. You submit a timesheet, obviously, that sort of stuff is fine too. But most people end up working longer than that. They might do their 9:00 to 5:00 and sure as eggs, two hours before they go to bed, they’re back on doing some things. So, you’d be surprised. In fact, that’s the thing with all this substantiation tends to … once you get people doing it, the claims go up, they’re too generous with the ATO most of the time, despite what the ATO thinks of us.

Ben Kingsley:

So, let’s talk about bookkeeping. So, you mentioned there that it needs to be a month-long. What is the critical information that I need to be recording inside there to ensure that I’ve done my bookkeeping correctly?

Julia Hartman:

Righto, so for the home office, it’s just how many hours you’re in there. It’s straightforward, not too much at all, but when it comes to claiming your phone, you have to apportion the calls between private and work use. So, you need to put in theory, T on a piece of paper for a month and go private, business, private, business to tick, tick, tick, every call you make. Yeah, very difficult to get anyone-

Ben Kingsley:

And the duration of the calls. So, in other words, if I’m on a monthly subscription on my phone and that’s say, $80 per month and I’ve got unlimited calls, am I then working out the call duration? And from that call duration, I’m then working out my blend of versus business?

Julia Hartman:

No, fortunately, they’re not that bad with you. Most people have a plan now that it’s a flat fee, regardless of how many calls you make. But what I find is people won’t keep that piece of paper. So, what I encourage clients to do is every year they come in to see us, they sit there with their phone and they tend to be fiddling with it because they’re bored stiff. I say, “Right. I want you to go through your recent calls, and take a screenshot of a month’s worth of recent calls.” I get them to email it to me and I print it up and I put that in front of them. I say, “Right, against each call, put P or W for work or private.” Then I keep it in the file for next year because obviously, they’re seeing me in the next financial year. So, I can use that the following year.

Julia Hartman:

What I’m encouraging your viewers now to do is do it for this year. Because by the time you see your account, it’ll be too late. So, while you’re sitting there with this, do a screenshot of your last month’s recent calls and write W and P, take along to your accountant, they’ll be so impressed.

Ben Kingsley:

They will be so impressed. Can I use that for both years? How many years can I use that for? Is it just one year? So each year it’s-

Julia Hartman:

Every year they’ve got to do it, which is-

Ben Kingsley:

Every year, there’s a diary.

Julia Hartman:

It’s the way I make them do it every … while they’re sitting there.

Ben Kingsley:

So, I’ve got an idea. What about home internet before we start to talk about the power? I’m assuming that comes back to the time in the office spent, et cetera, that we’ll talk about. So, let’s talk about home internet. What can I claim when it comes to … because obviously from working from home, need the internet to be able to get my Teams meetings, my Zoom meetings, my email, et cetera. What am I able to claim from an internet point of view?

Julia Hartman:

You can do one of those diaries, but that diary’s got to include every member of your family because they’re using the internet too. Really, if you’ve got Foxtel and you’ve got kids, forget it. That’s one of the things where they’ve just set the bar too high to achieve.

Ben Kingsley:

So, even though it might be again, a fixed subscription per month, let’s say $80 for high-speed internet or whatever, and you are working from home, you’re saying that they are setting the bar so high, that the amount that you can claim is almost minimal?

Julia Hartman:

Well, the work involved in getting the claim. You try and get your kids to keep a diary for a month on how many hours they’re on the internet. It’s not going to happen. What you could consider doing is getting your employer to reimburse for it because as long as that sort of thing, they see it’s primarily used for work, they’re pretty much going to get a deduction for it.

Ben Kingsley:

Yep. And let’s then start talking about, so the diary, the timesheet that you’re making for the days that you worked at home, is that then correlating to power bills, water, and those types of heating and those types of things as well? How does that all play out?

Julia Hartman:

That’s what we’d use for the 52 cents because you still get all the other things for the 52 cents. We wouldn’t bother trying the power bills, I don’t think on actual meterage. The 52 cents is quite generous in that regard.

Ben Kingsley:

And obviously, the big change between what’s happened with hybrid work compared to people that were working from home and setting their businesses up from home, is there any impact on those people, for their principal place of residence and mixing that use for business? Can we just clear the air when it comes to that in terms of what the ATO believes is plausible?

Julia Hartman:

Yeah. They’ve clearly stated that working from home won’t qualify you to claim because some people would like to claim part of their rent, wouldn’t they? But there’s a difference between costs that increase because you’re there and occupancy costs that are going to be there anyway. Once you start trying to claim occupancy costs, then your home is exposed to capital gains tax. Now, the average worker just wouldn’t qualify for it. It’d be more the small business person that’s seeing clients there and can’t avoid it. Most people don’t want it.

Julia Hartman:

So yeah, from their point of view, that’s why you can’t claim your because they’re the same, regardless of whether you are working from home or not. It’s only the things that increase.

Ben Kingsley:

And so what is that example of that self-employed person who is seeing clients or is running their business out of that who are renting and it is a combination of personal use and be business use? Are they able to put a case forward in regards to a portion of their rent?

Julia Hartman:

Yeah. Basically, on a square meter basis, they’d be … As long as the room’s … whatever it is, is specifically set aside for the business, doesn’t really have any private purpose, a bit of signage, a bit of seeing people there, and renting, great because there are no capital gains tax consequences. But if it’s their own home, it’s not the end of the world because as long as they, for at least half the time they owned the property, or seven and a half years, whichever is the shortest period, as long as it was used in the business for that period of time, they’ll get the CGT small business concessions on the portion of the capital gain that’s not covered by their main residence exemption. They’re pretty generous concessions, used correctly you probably won’t pay capital gains tax there either.

Ben Kingsley:

As well. So, that’s not a bad story for those people who are self-employed, whose intention is to also run their small business out of their home for a duration until they either get bigger, or they sell the business, or whatever that looks like. So, that’s some good advice.

So, coming back to how we might summarize this, there are two treatments, there’s the 52 cents treatment versus the 80 cents treatment. There’s stationery and then are those other things. So, it’s best to make a judgment call on that once you have all of that bookkeeping and that information together as to which way to go and which one’s going to be more beneficial. Is that the way in which you approach this?

Julia Hartman:

Yeah, but it doesn’t take me long to realize that the phone’s going to tip you over. So, like I said, very rare we go to 80 cents. If their employer provides their phone, then I’m very interested.

Ben Kingsley:

All right. So Julia, let’s move our attention now over to car claims. We are going to cover this in a more detailed episode three, but I’m really just interested in just the bookkeeping piece because the reason why we wanted to just flag it now, is we’re recording this in early April, so it’s just an important message. So, I want to get those messages around what I should be recording and then, leave it at that, and then we’ll tell a deeper dive in the next episode when it comes to all the nuances. But take us through what you believe is the most important thing when it comes to car claims.

Julia Hartman:

Well obviously, substantiation receipts and that, but you’ve got to work out the portion of private to business use. So, there are two ways you can do that. One is a logbook for three months, kept every five years and that’s all right, don’t worry that you haven’t got three months left to do it, just start it in this financial year.

The other one is a detailed, reasonable estimate, but it only allows you to claim 5,000Ks per car, per owner of the car. So, obviously, spouses should be swapping cars. You get 72 cents a kilometre, so it’s a very attractive, that detailed reasonable estimate. So, the log book’s pretty clear. You’ve just put in the date of the journey, the speedo reading, the reason for the journey, who was the driver, that sort of stuff. Reason for the journey and the locations, which you’ve got to put on the description and most of those books come with a bit of detail anyway.

With the detailed reasonable estimate, to get your 5,000Ks, you could take a month’s diary, but you have to do it every year, you can’t just … it doesn’t last five years. Take a month’s diary and say, “Yeah, this is what I’m doing regular, look at that routine.” But then you might say, “But hang on a minute. I went to Townsville the other day, so that’s a bit extra on top of that.” That’s what you’re doing. You’re making a reasonable estimate. You had your month, but the month didn’t include that trip to Townsville. So, we multiply the month by 12, and we add in the trip to Townsville, all showing detail. You can’t just go, “5,000Ks, easy,” to try and get it up to the 5,000Ks and then you just reduce it back down to the 5,000.

Ben Kingsley:

Now, technology’s playing a bit of a role in this. So Julia, a question without notice, is there any sort of apps, or are you still using classic log books that you’d be able to get from the stationery supplier? What are people using these days? Is there any new technologies that it helps in terms of bookkeeping?

Julia Hartman:

Yeah, I believe there are. There’s a lot of stuff out there, but I’m afraid I don’t know about it, Ben. I’d say you do, maybe you should answer that question.

Ben Kingsley:

No, no, well, I mean I’m no longer a roving or in the car mortgage broker anymore. So, I don’t know what they were. I used to use the old, classic yellow covered book that I used to have to write basically everything in, but I do know that there are some applications out there that are trying to record your travel and that just makes life a little bit easier because obviously, the mobile phone is a moving GPS. So, that should be able to also help some of those people if they’re looking to remove some of that administrative effort in terms of that. But again, I’m sorry, I don’t know what the names of these things are, but I have heard that they’re out there.

So look, we’ll make sure that by episode three we’ll see what’s out there and we’ll report back to everyone. Give you a reason to come back to watch episode three, when we take a more detailed look at car claims because, as Julia rightly points out, at 72 cents in the dollar and with the cost of fuel and everything else, you do not want to you miss out on those deductions because they really are important and it’s not just the actual fuel costs, running costs, maintenance costs, repairs costs, upkeep of the car. And then also other travel costs, which also may form part of your deductions, whether you’re travelling for business or meal allowances or any of those other things that we’ve also got as part of that. So, there’s going to be more information that we’ll share in the next episode on this matter because it is … we’re starting to get into the nuances and our goal in Empower Wealth tax and personal accounting is to maximize the deductions, as is the team at BAN TACS. We love getting into the nitty-gritty and trying to find those claims where they’re legally permissible. So, that’s ultimately what we’re doing here.

If I can, before we go into the property side, one of the things that I’ve learned over my journey when it comes to taxation is not to tell your accountant a broader story or a fuller story about your situation, which means that if the inputs are weak, then the advice is limited. If the inputs are broad and your accountant can see the future with you in terms of what your intentions are, the advice that I then receive from that is far better.

I’ll give you a perfect example. I mean, I remember many, many years ago when I first started investing in property, nobody told me about the benefits of an offset account. So here I am, thinking I’m a superstar in terms of paying down the mortgage on the first property that I own, which I always knew was going to be a future investment property. All of a sudden, I didn’t see those benefits. So, that is a classic case of, I didn’t mention anything, I didn’t know anything. You’re also going to want your accountant to be asking you lots of questions to try and work out ways in which you can find those best opportunities.

So, the best accountants are the ones who are inquisitive and are detailed in their subject matter knowledge. That’s why we have Julie here because she’s elite at it. Just in those explanations so far, we’ve seen that we could have gone down rabbit warrens, and there are other aspects that we need to understand. So, we’re obviously just giving very general factual information today, the more you get personalized with your accountant, the more tax work they can do for you and the more benefits you get out of that. So, I think that’s an important way to finish off that home claims and superannuation stuff.

Let’s now put our property investor hats on, and let’s start talking about property taxes, because there are a couple of things in here, Julia, that I see coming up from time to time and some are better than others when it comes to that. The first one that I wanted to talk about was interest in advance. So, just explain to our community what that means in regards to how do I claim interest in advance and why would I do it? And what are the risks and the rewards?

Julia Hartman:

Right, so you’re bringing tax deductions from a future year back into this year, which means you won’t get to claim that next year. So, this year you might pay interest 12 months in advance. You can’t pay it any more than 12 months in advance. You’ve got to make sure the bank understands its interest in advance, so they charge you the interest. Otherwise, you’re just ahead on your loan, so you won’t get any deduction. Think about the overall strategy here.

Now this year, we are going to be in a relatively low tax bracket for most people because we’ve got all those low-income tax offsets still. Currently, for the next two years, we won’t have them. Who knows, we’ve got an election coming up? So in theory, next year, you’re going to be, and the year after, in a slightly … if your income remains the same, otherwise in a slightly higher tax bracket, and then come the 1st of July, 2024, anyone between $45,000 and $200,000 in income is only going to pay 30 cents in the dollar tax.

So, I can imagine the 30th of June, 2024, a lot of people will be paying their interest in advance to get it back in this high tax year, but who knows what your other situation is? So, obviously, you’d pay interest a year in advance before you went on maternity leave if weren’t going to be paid, or you went on an overseas trip because you know your income and your tax bracket are going to be lower the next year.

If you’ve got a big capital gain, you want to save that for the year you take your interest in advance because you’re only going to get to take it in advance once. Then you’re 12 months ahead, somewhere along the line to get back to normal, you’ve got to have a year you can’t claim any interest.

Ben Kingsley:

I think that is an important observation that I’ve seen. Again, back in my mortgage broking days, I had a couple of clients that every year we’d do an interest in advance. It’s a fair bit of work if there’s a lot of … and then once you start, technically, you can’t stop unless, as you say, you are planning it for that tax year where there’s a windfall. So, that’s the challenge for me in terms of, I don’t see a lot of people taking advantage of that anymore because of exactly that point. Unless they can be clever about their planning, unless they’re closer to retirement, some of those things can potentially … like if you’ve got a large windfall that’s coming because of a payout, or a bonus, or whatever that may look like, one of those things could help you for a year in terms of reducing attacks. But I think it’s very specialized and I’d be saying to a lot of people that it’s not necessarily something that I would be jumping at. But that’s not the only one that you can claim on interest in advance. What other things have you seen people explore with the “interest in the advance option”, Julia?

Julia Hartman:

Well, you could try and pay your rates or something in advance, but I mean, you’d still have to have a bill to pay and be very careful because your rates might already be six months in advance. You pay a year in advance if you could somehow do it. Insurance, maybe that sort of stuff.

Ben Kingsley:

Body corp, yep.

Julia Hartman:

But if you’ve paid 13 months in advances effectively, because the insurance still isn’t due. I suppose a good example is you’ve got … it’s June and you’ve already got your bill for August for the insurance and you pay it there. Or, if you’ve paid 12 months in advance and the two months that you’re already in advance, you’re 14 months in advance and therefore you have to pro-rata what you paid over the term. You don’t even get the first 12 months.

Ben Kingsley:

So I mean, the wash-up of that is we would say more broadly speaking, it’s not something that would be for everyone, not even close for everyone. It would be a very low percentage of people taking advantage of this. It would be a case by case scenario and that’s why you should be talking to your accountant about that in regards to what that looks like. So, that makes sense for me in regards to that.

The other one that, as we close out this whole interest in advance, what about if you own a commercial property and in that commercial property, let’s say your tenant says, “I’ve had a great year, a big profitable year and I want to pay you 12 months rent in advance.” Tell us a little bit about the consequences there.

Julia Hartman:

Well, generally that’s going to be income for you all in one year. That’s when you might want to pay your interest in advance, but you can try and argue the Arthur Murray principle, “But hang on a minute, I might have to pay that back. I haven’t earned it yet,” and try not to include it, but generally yeah be alert and alarmed.

Ben Kingsley:

So in other words-

Julia Hartman:

But you’d want the money anyway, wouldn’t you? It’s still worth it.

Ben Kingsley:

Yeah, I mean, if you want it for cashflow and for the opportunity to grow your business, it may be worth it. But in other cases, it’s like that might be a benefit to your tenant, but it’s not necessarily a benefit for you if that means you are going to have greater profitability and a bigger tax bill. So that’s why, again, it’s a case by case basis, which is important to them.

All right. So, I think we’ve covered off the interest in advance and what we’re saying is to move cautiously forward and understand the consequences, not only for this financial year but into the future. Now, let’s talk about repairs, improvements, and replacements. This is an area that we talk a lot about in our business. We talk about it with all of our property investors and our tax accountants, around what constitutes a repair, what constitutes a replacement and an improvement. So, let’s take a deeper dive into that. So, what are some of the things I should be thinking about before 30 June, Julia?

Julia Hartman:

Right. Well, first of all, before you go doing anything, think about whether it’s a repair because you’re only going to get a tax deduction if it is a repair. That’s very limited, obviously, if you replace something in its entirety, then you haven’t repaired anything, you’ve replaced it. So, it’s not going to be defined as a repair. You’re probably, generally things that you can replace in your entirety, like a stove or stuff like that, you’re going to then have to depreciate it.

If you do that 30th of June, well really, you’re not going to get a terrible lot of depreciation this year anyway. So, you’d be looking to spend your money possibly on something else if you’re looking for a tax deduction.

Now, the entirety can be the whole house, walls, roof, doors, that sort of stuff. So, if you replace the roof with similar materials, then you could get that as a repair, even though the whole roof because it needs the walls to hold it up. So, it is a repair to the entirety, but strangely enough, and this goes along on different cases and what the judge was feeling at the time I think, so if you replace all the kitchen cupboards, that’s a replacement in its entirety, it’s not going to consider a repair, but if you took all the doors off and put new flash doors on and left the cupboards there, then you get a repair. But the overriding factor I’d say in all this that I’m suggesting is you can’t improve it beyond the state it was in when you bought it. So, if you’ve just bought the property, then these are all initial repairs, which are improvements as such because it improved it beyond that state. They’re only going to get … If they’re a stove, yes, you get your written off over 10 years or whatever. But if it’s the kitchen cupboards, for example, you’re only going to be able to write them off over 40 years because it’s an initial improvement.

Ben Kingsley:

So, that’s a lower probability. I mean, inside the show notes, and we’re going to mention to everyone that we’ll package up the show notes into a downloadable, so you’ll be able to see these and Julia’s gone into some good detail here in terms of covering off what we’ve talked about in today’s episode, you make a reference to changing from a steel roof to a tiled roof as an example. I think you mentioned it there before, it’s about, is that a repair or would that be classed as an improvement? I think that’s the defining thing, isn’t it?

Julia Hartman:

Yeah. Well, that’s a great example, the roof. So, let’s say you’ve got a steel roof and you replace it with some sort of metal deck type, bond thing. Then that’s the current modern equivalent of the old corrugated iron roof. So yes, that’s just a repair, but if you then replace it with tiles instead, that’s an improvement and you’re not even going to get a deduction for what it would’ve cost you to put a metal deck or something on there.

Ben Kingsley:

Yeah. Again, and we’ve also got to remember that it’s got to be invoiced and paid by 30 June to be obvious, to be claimable, inside this financial year.

Julia Hartman:

Yeah, it’s got to be incurred. So you could try and argue, “I’ve sent this email to the builder. I’ve told him to go ahead. I’ve given him a deposit, therefore I’ve incurred the debt.” So, you could pull it forward on that basis. The cash doesn’t have to have changed hands and this is very important if you’re not going to rent it out the next year.

Ben Kingsley:

Yeah. Well, tell us that little tip there, Julia, in terms of yes, if you’ve got a renter in a property versus the next year when the property may not be rented, tell us a little bit about the consequences of that story.

Julia Hartman:

Well, to be able to claim a repair, you have to have earned rental income in the year. So, if your tenants move out in June, this is where you’ve got to really push the incurred bit if you’re going to put it on the market in July. As long as both the rent and the damage during the year relates to the period when you had tenants, you have no trouble claiming repairs you do in June and then put it on the market the next month, or whatever.

Ben Kingsley:

Yeah. Now, I want to drill in into things like improvements versus repairs, so we can get the community to have some takeaways there. I’ve got carpet and I remove that carpet and I realize that there are nice floorboards under there and I want to basically polish up those floorboards as a means to give the tenant quiet enjoyment of the property. What happens there? Would that be classed as an improvement because effectively it’s a different floor covering than what was existing?

Julia Hartman:

Excellent question. So, this is a classic of how it changes from one court case to the next. So, in this particular case, they ruled that it was a repair, not an improvement, the ripping up the carpet and polishing up the floorboards was a repair. Obviously, the carpet was plant and equipment, so you’ve already depreciated it or you write off what’s left, it’s undepreciated but the cost of doing up the floorboards was a repair. Yet, next thing you know, there’s another ruling where they say the building had subsided and they propped it up again and that was an improvement. Yet, it had subsided in the time of ownership. So yeah, no guarantees here on anything, but at least you’ve got those two rulings to go by.

Ben Kingsley:

All right. So, the other one that I’m normally also doing is I’m improving or repairing the bathroom. So, if I’ve got cracked tiles on the floor of the bathroom, and I’m attempting to do a like for like replacement of those tiles, would that be classed as a repair or an improvement?

Julia Hartman:

Yes, assuming, of course, it wasn’t cracked when you bought it, you should be able to get that repaired because the tiles can’t be removed easily from the floor without damage. Obviously, the only way you’re going to get them up is to break them. So, therefore their entirety is your whole building. So, replacing a group of tiles is a repair.

Ben Kingsley:

But you also gave a great little clue in there as well, about so long as they weren’t in that condition when you bought the property. So, a lot of people potentially buy these renovators’ delights and then automatically think that all of the improvements, I’m using that word, all of the repairs and improvements that they’re doing are going to be deductible. Now, the answer to that is they’re going to be deductible, but are they going to be constituted as a repair versus are they going to be constituted as something that will be an improvement that we depreciate over time?

Julia Hartman:

Yeah, they’re going to be caught over 40 years. So, don’t rush out and do those will you?

Ben Kingsley:

So, that is again, it’s all about them looking at each item as you’re looking at it. So, if the tiles were all cracked, even though they were, and it’s not fit for living, all of the changes that you’re making, wouldn’t constitute a repair, they’d constitute an improvement because it’s the first time that you’ve owned that property as part of your tax claimability.

Julia Hartman:

The only good thing is if it was your home and you cracked the tiles while it was your home, but you didn’t repair it until it was a rental. Then you get the deduction because you’re not improving it beyond the state it was in when you bought it.

Ben Kingsley:

See, that’s why Julia is a lead at this stuff in terms of knowing all of the little correct ways in which we can pull all that together. So, I want to now talk about plant and equipment. So, talk to me a little bit about the costs of certain amounts and the treatments around some of those costs. I see $300 here in our show notes and how we’re able to potentially make some certain claims as immediate write-offs.

Julia Hartman:

So, your plant equipment is things that can be removed from the property without damaging the property or the item too badly. So, you’ve got your hot water system, stoves, carpets believe it or not are included in there, air conditioners, fans. So, that’s your plant and equipment. Now, you are allowed to write off immediately the cost of anything that’s under $300, but there are conditions.

First of all, say you’ve got a fan that’s under $300, if you replace two fans, then you’ve got to add them together as part of a set so you’re over the $300 mark. But it’s $300 per owner of the property, so if you’ve got two owners and you’ve bought two fans for $290, you will get a tax deduction for those.

Ben Kingsley:

So, that would be instantly written off in that first year. You go on to the same sort of thing, another example we have in the show notes around a hot water system of $1,900. Again, if it’s owned by two people, how would that work in regards to certain claims?

Julia Hartman:

Well, it’s still going to have to be depreciated, but at least it goes in the low-value pool, which is for items under $1,000. So you get 18.75% in the first year and then 37% after that, all diminishing value.

Ben Kingsley:

Okay. So, what we’ve got there is the low-value pool that’s up to $1,000 and that means you can claim 18.75%, and that’s a thousand dollar item. So again, if there’s two of you, then ultimately that’s $2,000 and you’re going to be able to get 18.75% and then the following year, 37.5% the following year. So, that is going to be depreciated far quicker than what would be the 2.5 or the certain percentages. Now, this does lead into the schedule of items because there are different claims for different items, aren’t there Julia?

Julia Hartman:

Oh yes. Well yeah, air conditioners are at a different rate. Those fans, I think you can write them off over five years, but air conditioners, you’ve got 10 or 12 years. So yeah, different.

Ben Kingsley:

Carpets, curtains, floor coverings, all of those have a different schedule item there. So, it’s very, very important that you obviously provide that information to your tax accountant, so they can make the appropriate depreciation apportion to each of those items. But it just further highlights this whole idea that it is a little bit of a minefield when it comes to this type of area.

So, you really want to be talking to an accountant who specializes in property investment claims in terms of what’s possible. A quick phone call to your accountant to clarify or qualify something along those lines is going to be really helpful, in terms of some of that tax planning that you do till 30 June.

So Julia, we’ve covered a lot of ground here. I want to remind everyone who’s watching or listening to this recording, that we’ll have links to the show notes where you’ll be able to download this information. We’ll package this up into a nice downloadable, as part of episode two of Talking Property Tax with yourself.

What’s coming next episode is a deep dive into car and transport and travel deductions. That’s also another big part. So, we promise to get that out to you in a couple of weeks, giving you enough time before 30 June to make sure you’ve got your house in order there as well. So, I want to thank you Julia, for your time today. Look forward to catching up in a couple of weeks’ time when we record episode three and thank you for sharing your knowledge with our community.

Julia Hartman:

You’re welcome, Ben. Thank you, it’s been a pleasure.

Ben Kingsley:

So, if you’re interested in getting some tax advice on all of these areas, we’d be delighted here at Empower Wealth to have a chat with you about your tax affairs. We do offer a no obligation, free initial consultations, where you can meet one of our tax advisors and talk about your tax affairs. Getting your tax affairs right is really important as part of your overall wealth creation strategy. So, why not feel free to reach out to one of our team here and see if we can help you, help yourself.

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