With both State and Federal Governments aware there is an acute shortage of rental properties there are some great tax incentives to make it more affordable for Australians to become landlords. But with a myriad of information it can sometimes be difficult to navigate what is available. Depreciation, NRAS and PAYG tax variations are areas that are often misunderstood, so we have broken it down to explain what they are and how they can be used to help investors maximise investment property returns and make sure they claim all the associated tax deductions available.
Depreciation
Depreciation is a deduction that can be claimed on residential investment properties that were constructed after July 17, 1985. Tax deductions can be claimed for depreciable assets such as the construction cost of the building itself as well as its fixtures and fittings, this can include items such as carpets, appliances and even curtains. The Australian Taxation Office has an excellent guide available to help investors claim as much depreciation as possible.
Claiming depreciation is a big part of making an investment property more affordable, especially in the early stages when you are able to claim the maximum at today’s value.
For example, a new home with say $30,000 worth of fixtures and fittings will give a tax deduction of roughly $80 per week through depreciation. Additionally a new investment home costing, say, $250,000 will create additional deductions totalling aprox. $6,250 for each year it is owned by the Investor.
NRAS
The National Rental Affordability Scheme (NRAS) is a federal government-backed program designed to provide 50,000 affordable rental properties by 2014. It is not a public housing program, but rather a tax incentive to induce more private investment in a range of the qualifying residential properties including units, townhouses and houses in selected locations t.
In return for investors offering rental properties to approved NRAS tenants at rents 20% below market rates, the NRAS scheme provides an annual incentive in excess of $10,000 per year for 10 years, with the incentive increasing each year in line with the consumer price index.
This incentive is tax free and is structured as a refundable tax offset. That means a taxpayer with a tax bill at the end of the financial year will have the NRAS incentive offset against his tax bill. If an investor has no tax to pay he would receive the incentive as a refund.
Furthermore, investors are still able to claim standard rental tax deductions, such as interest, depreciation, property management costs and some maintenance costs. And investors who buy an NRAS approved property off the plan can also access the usual benefits this type of property offers, including substantial stamp duty savings. Investors can also purchase NRAS approved property using their self-managed superfunds.
PAYG variations
It is also worth noting that you don’t have to wait until the end of the tax year to take advantage of tax savings from investing in property. If you lodge a PAYG Withholding Variation form, you can spread the tax refund that would normally be paid at year end throughout the year. This is a really effective way to improve monthly cash flow.
As you can see there are some excellent incentives to make the day to day running of an investment property more affordable for new property investors.