But It’s Secured Against The Investment Property!

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This is the first part in our 12-month series entitled: “The Australian Investor's Tax Guide: Avoiding 12 Costly Tax Mistakes Australian Investors Often Make. Do You?”

Having spent over two and a half decades advising Australians in my capacities as a lawyer or tax accountant, I've encountered many misunderstandings regarding the application of laws.

A personal annoyance of mine is the often-heard statement, "My friend's accountant does X, and they said it's fine." This usually involves accountants prompting clients to claim non-deductible expenses, leading the clients to believe they are somehow protected because their accountant advised them to do so.

However, this belief is misplaced. Tax filings are based on self-assessment, and taxpayers are fully responsible for their claims, emphasizing the importance of seeking accurate advice rather than relying on questionable sources.

It's crucial to understand that if the Australian Taxation Office (ATO) imposes fines or penalties for incorrect claims, the excuse "my accountant said it was fine" will not hold. Therefore, it's vital to claim only what you're legally entitled to.

Conversely, many investors seemingly fail to fully utilize their tax claims due to their or their accountants' lack of understanding of investments, such as;

• Crypto Currency, including specialized areas such as mining and staking,

• Foreign Investment Income,

• NANE Income,

• Exchange Traded Funds,

And many more...

The accountant plainly doesn’t understand or have the experience either personally or on a professional level, so they will have limited knowledge on how to maximize your return.

Shockingly, many accountants lack a comprehensive understanding of how to fully leverage tax deductions for Australia's preferred investment category, residential property investment.

Common oversights include:

• Not having a full depreciation schedule of the capital works, plant and equipment, and low-value pool obtained from a qualified quantity surveyor, specifically for your investment, or

• Not claiming all the borrowing costs associated with your investment loan over several years, or

• Not knowing which jurisdictions in Australia where stamp duty is tax deductible.

However, the most significant oversight I've observed, as a specialist in investment property taxation, is the misunderstanding surrounding loan deductibility and how to optimize it. Both accountants and investors often misinterpret when loans are deductible and how to maximize or jeopardize their loan's deductibility.

A fundamental misunderstanding is the nature of loan deductibility and its relationship to the security used. It's crucial to grasp that the security for obtaining a loan is irrelevant; what matters is how the loan proceeds are utilized.

For instance, using equity from an investment property to finance a personal holiday does not make the loan interest deductible, despite the investment property being used as security.

While you may think, "Well, this is obvious,” what I have seen over and over is people using equity from an investment property to fund their deposit for a new home purchase (their principal place of residence) and assuming or being advised that this loan is tax deductible.

Proper advice on loan structuring would prevent such errors, enabling a more beneficial financial setup.

Even some mortgage brokers, who you would think should be loan structure experts, are giving the wrong advice.

What should have been undertaken by the investor in order to minimize the investor’s non-deductible loan for their home (principal place of residence) was that when the original loan facility for the investment property was made, it should have had a corresponding offset account.

So ….

It is clear and crucial that you need to make sure you have the right team of experts, including mortgage brokers, financial planners, lawyers, property advisors, tax agents, and accountants, in your corner who have the knowledge and expertise to help you maximize your overall benefit.

While this example highlights frequent mistakes, there are many other pitfalls that investors encounter. Tax ProActive aims to share these errors and mistakes through next parts our 12-month series “The Australian Investor's Tax Guide: Avoiding 12 Costly Tax Mistakes Australian Investors Often Make. Do You?”

Watch out for the second part of this series in our next post, entitled "Aren't they the same thing? Lines of Credit vs. Offset Accounts," ~ more details and real-life examples of the use of an offset account to maximize tax deductibility will be discussed.

If you're looking to strengthen and enhance your financial future, obtain accurate advice, create income streams for your family, and implement strategies to achieve the lifestyle you desire ~ Reach out to Tax ProActive today!

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