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Tax shield refers to reducing the taxable income of individuals or corporations achieved by claiming allowable deductible expenses such as mortgage interests, insurance premiums, depreciation costs, maintenance costs, and the like. It is termed as such because it technically shields a portion of a taxpayer’s income from taxation.
While tax shields vary depending on the prevailing tax laws and codes in a particular city, state or country, it generally benefits taxpayers whether they are big corporations or small businesses, property investors or owner-occupiers, entrepreneurs or employees.
Citizens of Australia, particularly property and homeowners, enjoy several tax shield benefits. The tax deductibles differ, though, depending on the ownership structures. The tax shield that property investors want differs from that of the owner-occupiers.
Are you a homeowner in Australia? Are you aware of the many ways by which you can benefit tax shields from your property? Here are just some of those tax shield benefits:
Tax Shield in Working from Home
Are you one of the more than 50% employed Australians who work digitally from home? If yes, you could be entitled to a particular tax shield for working from home.
Suppose you are solely working in a dedicated home office. In that case, you can have the following as tax-deductible expenses: mortgage interest payments, home insurance premium, office maintenance expenses, office equipment depreciation, telecommunication costs like phone and Internet connectivity, and utility expenses, including gas and electricity.
Suppose you are solely working from home but do not have a dedicated home office. In that case, you can still avail yourself of certain deductions like the depreciation of office equipment and telecommunication costs.
If you have a dedicated home office but do not work solely from home, you can still deduct some of the things mentioned above, except for mortgage payments and home insurance.
However, the catch is that while residences are generally exempt from Capital Gains Tax (CGT) when sold, those having home-based businesses may potentially not receive the full CGT exemption. You find it tricky? It is and can be confusing to determine which expenses are tax-deductible and which are not. It is best then to seek the professional advice of Depreciation.com so you can make an informed decision when it comes to the tax shield that you can avail of.
Tax shield in Negatively Geared Homes
Negative gearing is based on the value of the interest being paid on the mortgage and other expenses. Specific tax shields can come from negatively geared properties. The losses that you incur in your property can be used as your tax shield to reduce your taxable income.
The interest incurred on the money you borrowed for your property is your most enormous tax shield.
However, the deduction would only be available to the extent that the borrowed money is used for income-producing purposes. Meaning, if a loan was used to purchase a home and a rental property, only the interest that is attributable to renting-out can be tax-deductible.
Property investors benefit from this the most. However, if you are an owner-occupier, you can benefit from this by renting-out a space or room in your house.
Tax Shield in Renting-out
You can claim a tax deduction from renting out the extra room or space in your house. It is similar to any residential rental property, but the difference is how much you can claim. In your case, you have to apportion the expenses on a floor-area basis based on the area solely occupied by the renter.
Be aware that you can only claim expenses when the room is occupied. Once you use the space for personal purposes, you can no longer avail yourself of these deductions.
Tenancy costs are also tax-deductible, so as any cost incurred concerning preparing the lease with your tenant. Landlord insurance premiums and legal expenses required for evicting a tenant can also be claimed as tax-deductible expenses.
There are thin lines as regards these tax-deductible expenses, so better seek the professional service of Depreciation.com.
Tax shield in Depreciating Assets
You can claim a tax deduction from your depreciating assets such as ovens, cooktops, curtains, heaters, air conditioners, hot-water systems, and clothes dryers. The value will be based on the purchase cost of the item.
Repairs and maintenance costs, particularly costs associated with the restoration of your property due to wear and tear, are items that you can also claim as tax-deductible expenses. It includes repainting, replacing damaged windows, fixing a leaking faucet, or changing broken floors. But, as long as they are not initial repairs.
Be aware that restoration work is different from home improvement, which is considered capital in nature and will be included in the property’s cost base. For capital works expenses, deductions are generally spread over 40 years, as per the tax office. With a rate of 2.5% to 4%, conclusions apply to capital works such as building or extension, alterations, and structural improvements.
If you find these confusing, Depreciation.com can give you the best guidance and advice on this regard.
Whether you are a property investor or an owner-occupier or an investor, you must keep records such as receipts and proofs of purchase to substantiate your tax claims. You also have to make it a habit to list small expenses that you cannot get any receipt. If you are a home-based worker, make sure that you determine items you solely use for your business like phone accounts.
Many tax-related details are involved in determining the tax-deductible expenses that you can claim and from which you can better benefit. Some are confusing. You can always visit the Australian Taxation Office for information like the current rules on work-from-home tax-deductible expenses, general depreciation rules, depreciation rates for different assets, etc.
The best move, however, is to seek the professional services of Depreciation.com to avoid making misinformed decisions and blunders. It has the expertise that will surely enable you to benefit from every tax shield you deserve fully.
