Claiming GST on your residential rental property expenses

Discussion in 'Accounting & Tax' started by Rob G, 26th Oct, 2016.

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  1. Rob G

    Rob G Well-Known Member

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    The subject of FBT and GST crops up from time to time on this residential property investor forum.

    Residential rent is an input taxed supply, consequently property investors are not entitled to an input tax credit on their acquisitions.

    Many investors are also employees. Their employers may have flexible salary packaging arrangements.

    The employer is almost invariably carrying on an enterprise and entitled to claim an input tax credit on expense payment benefits provided to employees. Where the otherwise deductible rule applies, the FBT liability for the employer is zero.

    If an employee incurs costs in relation to their residential property that includes a GST component then they could salary sacrifice an amount in respect of the employer paying/reimbursing the expense.

    The employer will be entitled to an input tax credit and consequently the 'cost' to the employer is lower. If they operate a truly equitable salary packaging system (many don't !!) then the only loss in salary for the employee would be that GST-exclusive value.

    e.g.

    Repairs $110 GST-inclusive.

    Employer reimburses employee for $110. Employee provides the tradie's tax invoice and a declaration that the expense is incurred in earning assessable income (otherwise deductible).

    Cost to employer is $100 GST-exclusive. ITC claimed by employer is $10.

    Salary sacrifice for employee is $100.

    GST has effectively been claimed indirectly in making input taxed supplies.

    The key principle is that you consider the ITC entitlement from the viewpoint of the employer who is making creditable acquisitions in relation to their enterprise ... remunerating employees via provision of benefits (making supplies) is a business cost.

    Note that this principle is compromised where an employee contribution is required in relation to amounts that are not otherwise deductible. That is because GST will be payable by the employer on the employee contribution. So be careful with packaging private expenses or amounts that would not have otherwise been an immediate deduction.
     
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  2. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Good point but the amount of GST paid by owners of most rental IPs is fairly slim

    eg agent fees, repairs (take care it is deductible as Rob indicates !!) and strata. Most other costs such as interest, rates, water etc are GST free or contain no GST. I did a draft paper on this issue and from memory determined if you exploited this benefit the annual tax savings for the troubles would amount to little. ie $350pa for a std IP with strata costs and under $200 without. Then discount the "saving" by around 40% for the tax refund effect and its lower still.
     
    Last edited: 26th Oct, 2016
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  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    But for someone with multiple properties it could all add up.
     
  4. Rob G

    Rob G Well-Known Member

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    Don't double count the after-tax effect of the deduction.

    The employee salary sacrifice of $100 (the GST-exclusive cost) is no longer assessable income, effectively getting a tax deduction for a $100 (GST-exclusive) expense.
     
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  5. BennEznElle

    BennEznElle Well-Known Member

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    What are the implications for when something is a depreciating asset. For example if an air conditioner was installed at the rental property and was depreciated, does the otherwise deductible rule apply?
     
  6. Rob G

    Rob G Well-Known Member

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    Not my understanding.

    The otherwise deductible rule requires the employee to have notionally been entitled to a once-only deduction.

    This means an immediate deduction, as opposed to a deduction apportioned across years.
     
  7. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    On a $110 item... $70 cashflow better off v's claiming a deduction at say 40cents in dollar.
     
  8. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Remember the old double dip on that one if it was an expense payment benefit for a exempt asset (laptop, phone etc). You could get a 100% reimbursement AND claim depreciation. Damn you KRudd.
     
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  9. Rob G

    Rob G Well-Known Member

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    The 'double dip' was based on sound commercial reasoning.

    It was a shame that newspapers seized on certain commentators claims of a 'tax rort' and played into government politics to shut it down.

    The employee had contributed valuable labour which was recognised in the cost of the depreciating asset. A perfectly rational commercial reason.

    Much the same as being able to depreciate an asset where it has previously been gifted to you and you later apply it to earning assessable income, consequently depriving yourself of personal opportunity.
     
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  10. big_ben02

    big_ben02 Well-Known Member

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    I've used this strategy quite effectively over the last few years. Whilst the GST saved on R&M, management fees etc has been a bonus. The big kicker has been in allowing me to claim Family Tax Benefit.

    By salary sacrificing my rental property expenses, I no longer claim a rental loss in my tax return, so my adjustable taxable income is the same as my net taxable income. As my properties are all negatively geared, this has meant my (adjustable) taxable income is now at a level where I am eligible for family tax benefit.

    It also reduces my income below the level where I have to pay the Medicare Levy Surcharge as I don't have Private Health Insurance.

    Over the last 3 years, this has added between $7k and $12k per year to my cashflow and effectively turned my negatively geared portfolio into a positively geared portfolio.

    The downside has been that banks don't really understand the strategy, which has meant extra time when refinancing or applying for new loans in explaining how it works and having to go higher up the bank's chain of command.
     
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