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Which expenses are deductible? The golden rules of tax deductions.
In our first episode of the new season of talkBIG, we answer one of the most common questions accountants hear during tax season: what expenses "count" as taxable deductions?
Our talkBIG hosts, Andrew, Chris, and Young, discuss the "golden rules" of managing tax deductions. Along the way, they cover the Australian Tax Office (ATO) rules, to keep you informed on recent and upcoming changes and how to factor in the impacts from COVID-19 when managing your taxes.
HIGHLIGHTS:
- 3 Golden rules of tax deductions
- Tax impacts of COVID-19
- Context-based taxation - why a football match is deductible for a coach but not a fan
- Superannuation changes
- Car expenses and lockdowns
- Keeping a logbook for travel deductions
- Do's and Dont's of claiming clothing and laundry expenses
- Education and training - when is it deductible?
- ATO scrutiny on expenses claimed for rental properties - how to stay out of trouble
If you've ever been unsure about what things can be deducted when doing your tax return in Australia - this episode is a must-listen!
Take a listen and subscribe to talkBIG on your favourite podcast platform.
EPISODE TRANSCRIPT:
Andrew Sykes: 0:01
Welcome to the RSM talk big podcast, helping you invest well, understand money and achieve the best tax outcomes. Your hosts today are Andrew Sykes, Chris Oates and Young Han. Well, hello everybody. And, thank you for joining us for the RSM talk big podcast. I'm your host, today. and I'm joined here with your regular hosts Young and Chris G'day guys.
Young Han: 0:30
Hi everyone.
Chris Oates: 0:30
G'day Andrew
Andrew Sykes: 0:32
So it's tax time. Let's talk some tax. It's a big tax year. There's a few changes and we are going to run through a few tips, a few golden rules, a few new tax changes and just some general hints advice and what you can do to improve your tax return. So let's kick off with our golden rules of deductibility. What's changed?
Chris Oates: 0:59
For the golden rules. So Young, I suppose it's about what can be claimed, can't be claimed or what the rules are around that.
Andrew Sykes: 1:09
Yeah. What makes something deductible?
Young Han: 1:11
Well, you need to make sure that there is a connection to your income generated. So if you can't show that the connection between the expenses that's actually been used for your work purpose, you obviously cannot claim.
Andrew Sykes: 1:25
So first golden rule is it has to be connected to your work.
Young Han: 1:29
That's correct.
Andrew Sykes: 1:31
Okay. What else do we need?
Chris Oates: 1:33
If you are working and you pay for it and your employer, let's say they'll give you some money back. They'll probably claim a deduction. Can you do it as well? Because it's come out of your bank account and you've paid for it.
Andrew Sykes: 1:45
That's a question we get asked all the time. So, if you get a reimbursement for an expense, it's not deductible for you.
Young Han: 1:52
That's correct. And you're not going to be taxed on it because the employer gave it back to you, but you're also not getting the deduction either. So it's just pure, you know, you spent it, you got it back. Just leave it at that and don't confuse yourself.
Andrew Sykes: 2:04
So second golden rule, you actually have to have incurred the expense.
Chris Oates: 2:09
So would that be, if I'm driving my car and I'm driving somewhere for work, so you can either, in your own tax return, claim your kilometres or your employer might pay you a certain amount of cents per kilometre travelled. So is that the example that we're, we're sort of talking about?
Young Han: 2:24
So you can only claim in your tax return, if your employer didn't pay you for that expenses. Sorry. If you are using the kilometre method and then you say, oh, I travel to Sydney for a conference. And then you're claiming that in your tax return and your employer didn't give you the money. Then you can claim in your tax return. But if your employer actually gave you some money for it, then you cannot.
Chris Oates: 2:45
Ah, yeah.
Andrew Sykes: 2:46
So. Next golden rule though, keeping records. Talk to me, talk to me about records. What, what kind of records do we need to keep to justify a tax deduction?
Young Han: 2:57
So you need to keep it for five years. And bank statement is not going to be sufficient for everybody because, your tax invoice needs to have the ABN, what it was used for. So for example, if you went to a petrol station, you know, fill up your car and you bought like a drink or chips, and then you paid for it, the bank, statement's not going to show you the breakup of the amount. So, that's why the ATO said, no, you can't use the bank statement to substantiate your expenses.
Andrew Sykes: 3:28
No, that's a hundred percent correct. And, just to clarify on that, what we can actually do is keep digital records. And I think it's a great idea. As soon as you incur an expense, take a photo of it. And file that photo away. And then that way you've got that for your record. So you don't have to keep pieces of paper, but what the tax office wants you to do is they want you to keep, a digital record or a physical one, a receipt that's going to show the name of the supplier, the amount of the expense, the nature of the goods and services, the date the expense was paid and the date of the document. Now, why is this so important? I've got to tell you if, I could buy something and get a 30 or 40% discount, I'd grab it. Quite often, we see people and they won't actually keep all their receipts. So they can't claim all their expenses, which means they're missing out essentially on that 30 or 40% of that expense, if it was related to work that they would get back. Makes it really expensive, paying for things for work, doesn't it?
Young Han: 4:34
That's right. If you want to get a benefit, you have to do a bit of work. That's the tips.C
hris Oates: 4:39And do I have to keep a record for everything or is there an amount? So if I travel for lunch, I buy a sandwich, which is $7 $8. Do I have to keep the receipt, even for that small amount?
Andrew Sykes: 4:51
No, what the ATO will allow you to do if it's an expense up to $10, you don't need to keep a receipt. As long as the total for that year is less than $200. So $10 or less, and the total of those receipts is less than $200. You don't need to keep it. And in fact, if your total expenses for the year are less than $300, you don't need to keep receipts for that either.
Chris Oates: 5:17
Wow.
Andrew Sykes: 5:18
Yeah, but you need to be able to justify it. So there was a period there where, lots of taxpayers were just putting down $300 as expenses. And, it can be an awkward conversation when someone from the tax office says, can you please explain how you calculated that? So you still need to be able to justify it. So that's our expenses and the last thing on record keeping, we need to keep those for five years. That's the advantage of digital records as well.
Young Han: 5:45
Yeah, because otherwise some of the tax invoices, it just fades away and you, you can't really see what's on it.
Chris Oates: 5:51
Yeah. I mean, times you clean out the car, clean out the centre console and you see you get your receipt and there's actually nothing on it. It's been there that long.
Andrew Sykes: 5:58
Yeah, that's right. So we've had a big year with, a continued pandemic and we've had a few changes throughout that year. What are some of the tax changes we've seen this year, Young? Particularly related to the pandemic.
Young Han: 6:11
So it will be, your interest will be about the money that you receive from Services Australia. If you had, COVID so you had to isolate, or you were unable to travel, whatever that might be, that actually stopped you from earning your income. And you receive the money from Services Australia. They are taxable payments, which means you have to include it on your tax return, but it's not going to necessarily show you on your Etax, the online system. You have to manually put them in.
Andrew Sykes: 6:41
Okay. So you're talking COVID 19 disaster payments. And what you're saying is that it's not actually going to show up on your PAYG summary from Services Australia.
Young Han: 6:51
That's right, because it's not like the job keeper payment. It's not the payment that came from the employer. It was the payment from Services Australia directly made to you. Therefore, your employers not going to have those records on your PAYG.
Andrew Sykes: 7:08
Okay. And it's still a taxable payment. So, you're going to have to get your receipt or some sort of verification from Services Australia and enter that manually in your tax return.
Young Han: 7:19
That's correct. You can get the confirmation from Services Australia to show how much you have received.
Andrew Sykes: 7:26
And they are fully taxable those payments?
Young Han: 7:29
Unfortunately, yes.
Andrew Sykes: 7:30
That's a shame. Isn't it? It's going to come back with a bite. So hopefully everyone's put aside a little bit for those payments. Now, a lot of us have had to, spend money on COVID 19 tests. Are there any rules around the deductibility for those tests and the costs that we incurred on it?
Young Han: 7:48
That's right. So if you can show or prove that it was for employment related purposes, then you can claim it. So if you're working in a health sector and your employer actually asks you to have a test result sent to them so that you can come to work, that is going to be the deductible expense. But if you had to do it for your kids to go to school, then obviously not.
Andrew Sykes: 8:12
Okay. So if you need to do it, that's, once again, if we go back to where we spoke about the golden rules, a connection with work.
Young Han: 8:20
That's correct.
Andrew Sykes: 8:20
So if you had to do a COVID 19 test to go to work, you can claim a deduction for the cost of that test.
Young Han: 8:28
That's correct. But if your employer paid for your expense, then no.
Andrew Sykes: 8:34
Okay.
Chris Oates: 8:35
And so that's, if I was in isolation as my work actually said, before you come back into the office, we want to see a negative COVID test. Then I can claim that test
Young Han: 8:46
That's correct. As long as your employer, doesn't give you the money for buying the test kit.
Andrew Sykes: 8:50
Okay. So if I just wanted to go to the football on the weekend, that's not deductible.
Young Han: 8:55
Obviously not.
Andrew Sykes: 8:57
Because of that connection to work. And I think it's something to remember with all of our deductions, how is this connected to earning assessable income or connected to your job?
Young Han: 9:08
That's right. But in that example, you just mentioned, if you are the coach... it's deductible!
Andrew Sykes: 9:15
If you're the coach of the football team. And you're being paid to be the coach though.
Young Han: 9:19
That's right.
Andrew Sykes: 9:19
Not if you're a volunteer coach, though.
Young Han: 9:21
NO......
Andrew Sykes: 9:21
Always a connection to assessable income.
Young Han: 9:24
Mm-hmm
Andrew Sykes: 9:25
And what have we seen in terms of super changes? That's a regular change, Chris.
Chris Oates: 9:29
Yeah. There's been quite a few changes, this year. So the biggest one is that, employers now have to pay 10 and a half percent. So, that's the compulsory super contribution. So if you own a business and you have employees, make sure you've paying 10 and a half percent instead of 10%, which it was last year. Tthen the other one as well is that we've had for a couple, few years now, the catch up contribution. So if you've got your super under 4500,000, you've been able to look back four years and well, and now it's five years of anything you haven't done under the, what call, the pre-tax limit, which is 27 and a half thousand. You've actually got a full five years to use this year, which is the first time there's been a phasing in rule. This is the first time you've actually got five years if you haven't done anything for that time.
Andrew Sykes: 10:18
Okay. So if you have a capital gain or a bit of windfall income, you can make a super contribution.
Chris Oates: 10:25
That's right.
Andrew Sykes: 10:25
And that will assist in managing the tax on it.
Chris Oates: 10:28
Yeah. That's exactly right.
Andrew Sykes: 10:30
Also assist with your long term saving and retirement goals.
Chris Oates: 10:33
Well, ifthere's more money in super, then you've got more when it comes to retirement.
Andrew Sykes: 10:37
That's generally a good idea.
Chris Oates: 10:39
That's exactly right. And the other, the other big one was that when you were over 67, so between 67 and 75 to actually put any money into super anymore, you had to be working. They've actually scrapped that rule. So if you are 70, you can actually put some money into super again. There's a lot of people that are really going to be able to benefit from that, that they sort of got to 67 and they thought can't get any, I'm still working. I want to put a bit more in, or you might have got an inheritance or something... But now that work test is gone.
Andrew Sykes: 11:11
Is that because of, with cost of living pressures, we're all going to be working till we're a hundred?
Chris Oates: 11:16
Maybe. Yes. Yeah, that's right.
Andrew Sykes: 11:17
So if I hear you, right, if you're over 70, and you don't have a job, you can't put any deductible contributions in, but if you're over 70, you're continuing to work... You can still claim super.
Chris Oates: 11:29
Yeah. So if you’re still working that's right. So to do the tax deductible one right up till 75, you do need to be working. But, just to put the bigger lump sum, you can put a bigger lump sum. So up to $110,000 a year, you can actually still put that in.
Andrew Sykes: 11:43
One of our biggest expenses is car expenses. And, I will say one of my cautions when I'm talking to clients about their car deductions this year in particular is, be really careful if you're going to claim on a per kilometre basis because we've had lockdowns.
Young Han: 12:00
That's right.
Andrew Sykes: 12:00
We've had people working from home and if you're going to claim a full 5,000 kilometres, a hundred kilometres a week, and you've been in lockdown for half the year, or you work from home two, three days a week, you really could get some scrutiny on justifying it.
Young Han: 12:14
That's right.
Andrew Sykes: 12:15
With the 5,000 kilometres, one of the key things is that you don't need to keep a record of each kilometre, but what you need to be able to do is justify it on inquiry.
Young Han: 12:26
Yeah, so if you say if ATO knocks on your door and says, how did you come up with 5,000 kilometres, then, then say, oh, I did a hundred kilometres per week. Then that's not going to cut the line because we had the lockdown and everyone had to work from home.
Andrew Sykes: 12:39
So what kind of travel can you claim for generally with a motor vehicle?
Young Han: 12:44
If you are traveling from home to work, that's your private expense so that you're not going to be able to claim the kilometres for those, but if you actually went to work and had to go another, office for a meeting, then that's work related travel. So you could claim those. Any travel that you've done for conferences or training, anything like that -client meeting- you can claim it as well. So we are going back to that rule. If it's work related, then it's a claim. You can claim that. But if it's anything to do with your private purpose, then you cannot.
Andrew Sykes: 13:18
So once again, the connection to work really, really important. So if I was to take my car and I drive from the office into work... No deduction there, but if I needed to go out and deliver something or go see a client or go to a meeting somewhere else, I can get a deduction for that. There are a couple of different ways you can do it. Talk me through the log book method.
Young Han: 13:42
So the log book, you have to keep it for 12 weeks. Usually you would want to use it for the period that you do most of your business travel so that we work out total kilometres you've done in that 12 weeks period. And then we work out how out of that 12 weeks kilometres, how much was for work related, and that becomes your proportion to be able to claim for the business expenses. So if you say 60% of your travel was work related, then we total up your fuel, your rego, your insurance, your service, anything related to your car maintenance. Then we can claim the 60% of that total.
Andrew Sykes: 14:22
Okay, I've got to tell you. It's a lot of work, keeping a log book and you really have to be meticulous, don't you?
Young Han: 14:29
That's right. If you want to get the deduction, you have to do some work.
Chris Oates: 14:32
And do I have to do that every year?
Young Han: 14:34
No, so if you've done it for 12 weeks, then, then you can use it for up to five years. But obviously if you change your job or you change your car, then obviously you have to do a new log book.
Andrew Sykes: 14:45
Yeah, I've tried keeping logbooks and I will say I only ever claim personally on the per kilometre method. And what I do is I just keep a note in my diary.
Young Han: 14:57
Yeah. That's a good way of doing it.
Andrew Sykes: 14:58
Yep. Yep. So, I probably do, most years I do the 5,000 kilometres, just a quick note in the diary, rough number of kilometres added up in the end of the year. And that makes it a lot easier.
Chris Oates: 15:11
And the other question that I always look at, and if you are driving, let's say before you leave your home and instead of going into the office, you're going to see a client or do something work related. Is that trip then to where you're going deductible?
Young Han: 15:28
That's right. As Andrew mentioned, if you're actually traveling from home to a place that's not your usual workplace than it is work related travel.
Andrew Sykes: 15:38
We've seen people asking us, well, I work from home now. And if I go into the office, no, that's not, if you work from home and you go into your office, that's still not a deduction.
Young Han: 15:50
That's correct.
Andrew Sykes: 15:52
So I think an area of scrutiny from the ATO this year. So I would be, particularly making sure that I had my records in order. Clothing and laundry is another common one. Who wants to talk us through the clothing and laundry expenses?
Young Han: 16:09
So if you are doing laundry that's for work related clothing, you can actually claim the expenses. But if you are, you know, dry cleaning or just a normal black pants and things like that, you cannot claim.
Andrew Sykes: 16:23
So if I went out, because I wear a suit to work, I can't get a deduction for that suit. Can I?
Young Han: 16:29
No, unless it's got an RSM logo on it.
Andrew Sykes: 16:32
Is that a reason why work uniforms are normally quite ugly?
Young Han: 16:37
Oh, you're getting better at it.
Andrew Sykes: 16:40
No, but it's true. But that is the rule. If it's a piece of clothing that you can wear elsewhere... For a social occasion, for example, you can't get a deduction. If it's, for example, you know, high -vis. You can't wear, you're not going to wear high vis to a party hopefully.
Young Han: 16:56
Unless it's a dress-up party,
Andrew Sykes: 16:58
Unless it's a dress-up party, or as you touched on, if it's got your company logo on there and that company logo's visible from about, 10 meters, I think it is.
Young Han: 17:07
And, this common one that I often get asked is about people working in the hospitality that are actually asked, if I get a black shirt or black pants, comfortable shoes, can I claim it? No you can't, because it's not specific to your occupation. And also it doesn't have a logo on it.
Andrew Sykes: 17:27
What about steel caps for a worksite?
Young Han: 17:31
Steel caps. Yes.
Andrew Sykes: 17:32
Because they're protective clothing. Aren't they?
Young Han: 17:35
Yes.
Andrew Sykes: 17:35
Yep. So, and laundry, laundry is one where we can claim an amount each year. How do we calculate how much we can actually claim?
Young Han: 17:44
The ATO say a dollar per load. If the load is just made up of only work related clothing. For instance, my husband is a builder, so I don't mix up his clothing with my clothing or the kids. So if I just do it for him for, with his own clothing, I can claim a dollar per load. But if you actually mix it up with other clothing, then it's 50 cents.
Chris Oates: 18:07
Okay. Is there a limit on how much you can claim?
Young Han: 18:10
Oh, it depends how much washing you do.
Andrew Sykes: 18:14
Your water bill might take out your deduction. But if we look at just making those, we're going to have to wash our clothes, might as well get a deduction. If it's available, it's a little bit of record keeping. But not a lot.
Chris Oates: 18:28
Yeah. Doesn't take that long. If you can just write it down, as you said with same as your kilometres, put it in the diary.
Young Han: 18:33
Yes. So even with the laundry, if it's $150 or less, then you don't have to keep receipts. But obviously if you're going to say like $500 for the laundry, then the ATO will question you.
Chris Oates: 18:45
Now, normally we would run through travel expenses in this podcast at this time of year, but who's been traveling right?
Andrew Sykes: 18:53
That's right, there isn't a lot, but one thing we're seeing quite a bit on is self education because people have used the pandemic to up their skills and self education -If it's related to your work it can be deductible, can't it?
Young Han: 19:07
That's right. A lot of things that I got asked during the year was about, okay, if I'm getting coaching about resilience, is that deductible? What do you think, Andrew?
Andrew Sykes: 19:19
I would say no, because that's personal, it is not related to earning your income.
Young Han: 19:24
That's right. But what if the person actually works in coaching as a professional?
Andrew Sykes: 19:31
If it adds to their skillset and increases their ability to earn income. And that's always the key I look for in self education expenses. Is this going to lead to you generating further income in the future? Well, then you're a good shot at it being deductible.
Young Han: 19:47
So it's not going to be a one size fits all for everybody. You have to look at the person's occupation, what they are doing and, and going back to just golden rules. Is that going to be related to your income generating activities? And is that actually going to be applicable for now or is there something more general and it's a more like a lead in increasing your income in the future, which is not necessarily connected to your current job, then you cannot claim that.
Chris Oates: 20:14
But it has to be related to the job you're doing at the time. So for example, financial planner, if I do a finance course, I could claim that, but not if I say, learn how to drive a truck.
Andrew Sykes: 20:27
Yeah, exactly.
Young Han: 20:28
That's right. But at the same time, if you get a HELP debt, the HECS debt, then no, you have to pay for it.
Andrew Sykes: 20:34
Well, there you go. It's also, it's not just formal education, is it? So one area that we see is, any trade professional or academic journals are deductible and people quite often forget about those. If you need to get a textbook to review and study for your profession, other resources. So of course... Definitely tuition fees.
Young Han: 20:57
Oh yeah. And also the study time. So if you can justify that you have spent this much time at home studying. You can claim home office expenses relate to the study.
Andrew Sykes: 21:09
Okay. Which, can start to add up also when you add in their computer consumables, a portion of internet.
Young Han: 21:15
Yep.
Chris Oates: 21:15
And that's when you tie into the home office that you mentioned, if you've got a particular spot at home, because there's a couple of different ways, isn't there of how you claim your time at home, being at home or working from whether it's study or your work. Whether you've got a set space or whether you're just claiming, the set rate method.
Young Han: 21:34
That's right. So similar to the motor vehicle expenses, you can just do an hour. So how many hours you spent and then we just use the set, per hour method. Or if you’re wanting to claim a proportion of the expenses, then you need to have a dedicated space for just the work or the study. And then you can do that. But I will be very mindful of using that method because it could have impact on your capital gains tax when it comes down to selling your house.
Andrew Sykes: 22:02
Yeah, that's right. So that's a good reminder. If you claim any portion of home expenses, even if it's self education or work... It impacts on your CGT main residence exemption. Doesn't it?
Young Han: 22:14
That's right. My clients’ actually living in a rental property, I would look at both methods and then work out, which one gives them a better deduction and then choose that method. But if they're living in their own house, then I'll always just recommend using the hourly method.
Andrew Sykes: 22:30
Yeah. And it's interesting, you mentioned cars and deductions. You can actually get a deduction for travel between home and your place of education. So if you record that and also between your workplace and the place of education.
Young Han: 22:44
That's right. So, because it's related to your education. It's not for the work, so that's why it's not the usual. So you would be claiming under the, the self education expenses for that travel, not necessarily on the travel expenses.
Andrew Sykes: 22:59
Yeah. And I've also been asked about the deductibility of any HELP loans. Well, unfortunately they're not deductible, so the loan itself is not deductible, but any fees related to it, are.
Young Han: 23:11
That's right.
Andrew Sykes: 23:12
So self education is a great one. And it's one that, once again, creates more record keeping. There's no easy way around the record keeping, unfortunately. But you can actually do it there's a bunch of Apps online services. Or as I said, great way to keep any records for me is just the phone. I email it to myself and I have a folder there for tax deductions on my Outlook. And I just file it under that and just keep it as I go and then sort it out at the end of the year. Another focus this year, we think is going to be rental properties. So the tax officers flag to us that they're going to have a look at rental property expenses. Particularly now that we have seen a lot more people who had previously had holiday houses and now, either working from them or they're keeping them for holidays because they're not going overseas. And it's quite a fraud area. Isn't it?
Young Han: 24:06
That's right. It comes back to the golden rules. So if you used it for your private use, like you mentioned the holiday house for your own use, obviously you can't claim the expenses. So you'd have say, out of the 12 months, I actually stay there for three months and then rent it out for nine months. Then, obviously for those three months you can't claim the deduction. So you work out the total expenses and then proportion it accordingly.
Andrew Sykes: 24:32
Yeah. The ATO requires us to do that by the day. So not just by the month or week. So if you stayed there for that three months, so 90 days out of 365, you would have to reduce all of your expenses claimed by that proportion. So 90 divided by 365, that portion of everything would be considered private. Yeah?
Young Han: 24:53
That's right.
Chris Oates: 24:54
So if you used a short one of those, the short term Stays or Airbnb. And then, so you did that for a few months of the year, but then you used it for the rest of it. So what you're saying is it's only that time that it was rented and somebody else was paying you to use your place, that you can get any deductions for.
Andrew Sykes: 25:13
That's exactly right. So it's not just when somebody's paying you, it's when it's available for rental.
Chris Oates: 25:19
So if you've got it advertised yep. And it's available.
Young Han: 25:22
Yep. So even if it was vacant, that you didn't use it and it was available for renting, but no one took the place, then you can, it's still eligible. You can still claime expenses because it was available for rent. Just didn't have any tenants in it.
Andrew Sykes: 25:36
That's correct. And look. There's a rental shortage at the moment. So you'd want to have a really good reason as to why it wasn't rented for a long period of time. And the ATO has advised what they will do is look at how commercial your rate of rent is. So if you have a place, for example, that would normally rent for $500 per week, and you've got it on the market at a thousand, you're likely to be denied any deductions on it.
Young Han: 26:02
That's right.
Andrew Sykes: 26:03
And we don't want to be denied deductions because they lead to penalties and interest as well.
Young Han: 26:08
Mm-hmm what about if you rented a lot lower than the market rate?
Andrew Sykes: 26:13
That's your problem? So only if it's to a non-related party. If you rented at a lower rate to say your brother or your child you're going to have to put in commercial rent. If you want to claim your deductions.
Young Han: 26:29
That's right.
Andrew Sykes: 26:30
You can't rent it out to family at a lower rate and get full deductions. But if you're happy to rent it out at a lower rate to strangers, non-related arms length, not a problem there at all. Unfortunately the commissioner of taxation can tell you how to run things, but not if you have to run them well, if you're silly enough to do that, that's on you. So what else do we have on rental properties? I think this issue of capital versus income is going to be a big one. Repairs and maintenance in particular, what do we look for with repairs and maintenance?
Young Han: 27:07
So if it was like a wear and tear, if you've done the painting touch up between the tenants. Obviously, I would say that that's a repair and maintenance and therefore you can claim it on your rental schedule. But if you had the house renovation, so, you actually improved the value of the house. And you've done it as a part of your renovation. I would regard that as capital expense.
Andrew Sykes: 27:30
Yeah. The one I really like is the roof example. So say for example, you had a tiled roof and the tiles were cracked and started leaking. Obviously you're going to fix that. You can't let water damage go. We all know that. So, if you replace those with tiles, that's going to be fully deductible?
Young Han: 27:48
That's correct.
Andrew Sykes: 27:49
If I replaced it with say a nice colour bond, tin roof?
Young Han: 27:53
No, that's a capital.
Andrew Sykes: 27:54
So it has to be like for like.
Young Han: 27:56
That's right.
Andrew Sykes: 27:57
So really if you're going to improve anything, it's capital. If you're not it's repairs and maintenance.
Chris Oates: 28:03
And the other examples that I hear come up about that is for example, heating and cooling. If you've got maybe split systems somewhere and you wanted to do a big ducted system, it's going to cost a fair amount of money, but you're actually putting in a lot better bigger system that probably improves the value of the home because of efficiency and the other one's roller doors. So the old put the key in why put the roll the door up versus driving up nicely and pushing the button? So that'd be classed as improvements.
Andrew Sykes: 28:30
That'd be classed as improvement. And it doesn't mean that you don't get a deduction. But what you’re required then to do is depreciate it at the ATO rates over a period of time. So it might take you 10 years to get that deduction rather than in just the one year. So I think for rental properties, our really two key areas of focus is genuine rental and income arrangements for this year. And making sure that you're not overclaiming because you've decided you want to use it more. So now you'll spend it to improve the property, making sure that we have genuine repairs and maintenance.
Young Han: 29:03
Another one that I wanted to touch base on is the new property. So if you bought the new property, I would strongly suggest getting a building depreciation report. So that you can actually claim those expenses. They're not the cash expenses you had, but it is the depreciating value of the building, which enables you to claim the expense on your tax return to bring down your rental income.
Andrew Sykes: 29:28
Yep. So once again, the rental property schedules and depreciation schedules are great, because they do the record keeping for you don't they?
Young Han: 29:36
That's right.
Andrew Sykes: 29:36
And normally that goes over what? The life of the depreciable assets. You get it done once?
Young Han: 29:41
Mmhm.
Chris Oates: 29:41
Yep. It's a great thing to do.
Andrew Sykes: 29:44
Well, guys, there's some, really great views and hopefully some really good tips that are useful for our listeners there today. So thank you for joining me, Young and Chris.
Chris Oates: 29:53
Thanks, Andrew.
Young Han: 29:54
Thank you.
Andrew Sykes: 29:55
This has been the RSM talkBIG podcast. You can subscribe to our podcast wherever you normally get your favourite podcast from. My name's Andrew Sykes and on behalf of RSM and the talkBIG crew. Thank you very much for listening.
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