As a property investor, you might find yourself implementing repairs and renovation work onto a property to ensure that you are maximising its value on the market. However, though both can be claimed on your tax return, it’s of paramount importance that you know how to claim them. Getting it wrong can be both costly, and unlawful.

A rental property improvement is a renovation where something is improved beyond its original state and must be claimed with depreciation. This means that you are claiming a deduction for the decline in the value over the effective life of the renovation. For example, a rental property improvement that could be claimable by a property investor could include a bathroom getting retiled.

Maintenance and repairs however can be claimed differently, with all records kept containing accurate information on that work. This will assist in working out the depreciation of assets of the property.

A depreciation schedule is a report that outlines all available tax depreciation deductions for a residential investment property or commercial building. These depreciations can be claimed in your tax return each financial year and could help you to save thousands.

Investors who renovate and lodge their tax returns prior to ensuring that they have updated their tax depreciation schedule correctly could get caught out in making a mistake between the two types of work. Those who fail to properly record rental property improvements in a tax depreciation schedule risk making inaccurate claims and inviting the scrutiny of the Australian Taxation Office (ATO).

Your tax obligations and entitlements when renovating your property may change depending on how you go about it. Depending on whether you are a personal property investor, engaged in the profit-making activity of property renovations or carrying on a business involved in renovating properties, you will have to abide by certain requirements outside of maintaining the depreciation schedule.

Personal Property Investor

As a personal property investor engaging in renovations to a property:

• The net gain or loss gained from the renovation is treated as a capital gain or capital loss.
• Capital gains tax concessions such as the CGT discount and the main residence exemption may reduce your capital gain.
• You will not be required to register for GST as you are not conducting an enterprise.

Profit-Making Activity of Property Renovations

Consider yourself a ‘flipper’ of properties? You will be required to:

• Report your net profit or loss from the renovation in your income tax return as a result of the profit-making activity.
• Have an Australian business number.
• May be required to register for GST if the renovations are substantial.

In The Business Of Renovating Properties

If you are carrying out the business of renovating or flipping properties:

• They are regarded as trading stock (even if you live in one for a short period of time.
• The costs associated with buying and renovating them form part of the cost of your trading stock until they are sold.
• You calculate the business’s annual profit or loss in the same way as any business with trading stock
• You’re entitled to an Australian business number (ABN)
• You may be required to register for GST if the renovations are substantial.

In this instance, CGT does not apply to assets held as trading stock. Similarly, the CGT concessions (such as the CGT discount, small business concessions and main residence exemption) will not be applicable to the income gained from the sale of the properties.

If you are concerned about any of the topics discussed above, or want to know more about claiming property improvements on your tax return, you can come and speak with us for further information and advice.

The government has changed capital gains tax (CGT) rules for foreign residents under the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019, which was granted assent on 12 December 2019.

The law change no longer allows foreign residents to claim the CGT main residence exemption, which will impact people who are overseas or will be going overseas and want to sell residential property in Australia while they are a tax non-resident of Australia. However, this may not apply if you were a foreign resident for tax purposes for a period of six years or less during a CGT event occurrence on your Australian residential property, and a ‘life event’ occurred, including if:

• You, your spouse or your underaged child had a terminal medical condition.
• Your spouse or underaged child died.
• The CGT event involved the distribution of assets between you and your spouse because of divorce, separation or other maintenance agreements.

Individuals who will be impacted by the changes are non-tax residents who:

• Sell a property bought after 9 May 2017 and do not experience a ‘life event’.
• Sell property after six years of becoming a tax non-resident of Australia, regardless of a life event.

If you were not an Australian resident for tax purposes while living in your property, then it is unlikely that you will meet the requirements for the CGT main residence exemption.

Taxpayers are responsible for safely storing a written backup copy of their tax record in case the original electronic form becomes inaccessible or unreadable. In the event that your records have been damaged or destroyed, there are a number of ways you can reconstruct them.

Where the tax records are accidentally lost or destroyed from a burglary or fire, the ATO will allow a taxpayer to claim a deduction for certain expenses, provided that:

• The taxpayer has a complete copy of a lost or destroyed document.
• The ATO is satisfied that the taxpayer took reasonable precautions to avoid the loss or destruction of the form. If the tax record was a written document, it is not reasonably possible to attain a substitute document.
• Taxpayers keep a record of these circumstances and inform the ATO in writing to back up the claim.

The ATO holds and can re-issue or supply copies of tax documents, such as:

• Income tax returns.
• Activity statements.
• Notices of assessment.

If you have lost your TFN, you can still access your tax information by phoning the ATO. They will allow for other information to verify identity, such as an individual’s date of birth, address or bank account details.

Employers should have copies of individuals PAYG payment summaries and banks should be able to provide bank records that have been destroyed. Registered agents may also have copies of individual records. In the event your bank charges a fee for replacing bank records and other services to help reconstruct records or provide information due to a disaster, individuals can claim a deduction in the income year that those fees are charged.

If you are unable to substantiate claims made in your tax returns or activity statements because records have been lost or destroyed, the ATO can accept the claim without substantiation, where it is not reasonably possible to obtain the original documents.

When you own a rental property, keeping records is important. These will help you meet tax obligations. Generally, only individuals with their names on the title deed declare income and claim expenses. 

Remember that the records must be kept in English or should be easily translatable into English, and kept for a minimum period of 5 years. 

The records you need to keep include: 

• Dates and costs of buying the property: These will help work out any capital gain or loss when the property is disposed of – the data entered into the contact is the purchase date, not the settlement date. 
• Any rent and rent-related income: This will be required to report tax return.
• Expenses associated with the property: These are important to claim deductions you may be entitled to. These records should include the name of the supplier, the amount of the expense, nature of the goods or services, the date the expense was incurred, date of the document
• Significant changes: These include repairs or improvements or partial or all sale of the property – the cost of repairs and improvements should be kept separate from depreciation costs so that deductions and capital gains and losses can be calculated correctly.
• Costs of selling or disposing of property: To be able to work out any capital gain or loss

Have you, over the course of the past financial year, received a government assistance payment, support payment or disaster relief supplement?

There have been a number of cases where people who received financial assistance from the government were hit with additional owed tax to the ATO, due to their payments increasing their income threshold.

When lodging your individual income tax return this year, you will need to declare certain Australian Government payments, pensions and allowances in your tax return. If you did not elect to pay tax on those payments, this could affect the payment received from your return (or mean that you actually owe money to the ATO).

Some of the taxable payments that you may need to include in your tax return include:

• the age pension
• carer payment
• Austudy payment
• JobSeeker payment
• Youth allowance
• Defence Force income support allowance (DFISA) where the pension, payment or allowance to which it relates is taxable
• veteran payment
• invalidity service pension, if you have reached age-pension age
• disability support pension, if you have reached age-pension age
• income support supplement
• sickness allowance
• parenting payment (partnered)
• disaster recovery allowance (but not in relation to 2019–20 bushfires)

Most of these pensions, payments and allowances will pre-fill in your tax return if you lodge online. You will need to make sure that all information submitted is correct though. Verify the pre-filled information with your own records to ensure that you are lodging the right information, and not missing anything.

Do you have concerns about your tax return this year? Uncertain about deductions, or if certain taxes will apply to you? Want a little more help or information about your government payments?

Be prepared for your individual income tax return with a consult with us. We can advise you on your tax returns, and potentially help you minimise the tax you will end up paying.