Do you own a rental or investment property? If the answer is yes and you are thinking of buying one, read on for the do’s and don’ts, and other helpful information to help you with your tax obligations.
What expenses can you claim?
Did you know that in Australia, there are over 2 million people who claim some $46 billion in rental property deductions in their tax returns?
The lion’s share of the available tax deductions is generally the interest portion of a mortgage connected with the property.
However, other costs can be claimed on an immediate basis provided that they have been incurred by the relevant taxpayer, and they have not been recouped from elsewhere, such as a payment from the tenant.
Items that can be claimed include:
- advertising for tenants;
- bank charges;
- body corporate fees and charges/strata levies;
- cleaning costs;
- council rates;
- depreciation (including certain capital works);
- electricity and gas;
- gardening and lawn mowing services;
- in-house audio/video service charges;
- insurance (including building contents and public liability);
- land tax;
- letting fees;
- pest control services;
- property agent’s fees and commission;
- quantity surveyors’ fees;
- secretarial and bookkeeping fees;
- security patrol fees;
- servicing costs (eg costs of servicing a water heater);
- stationery and postage costs;
- tax-related expenses;
- phone calls and rental costs;
- water rates.
What expenses can’t you claim?
You cannot claim expenses which are:
- of a capital nature or of a private nature;
- related to the acquisition and disposal of the relevant property;
- body corporate payments to a special purpose fund to pay a particular capital expenditure;
- expenses which are not actually incurred by the taxpayer – eg water and electricity charges paid by the tenants;
- expenses that are not related to the rental of a property – eg expenses connected to a holiday home that is rented out for part of the year.
A few tips…
- Keep good records and receipts!
An absence of receipts will make life difficult if an ATO audit calls for proof of the expense claimed.
- Your property must either be rented or “genuinely available” for rental in the income year for which a deduction is claimed.
If you use the property for private purposes, you cannot claim expenses.
- You must demonstrate a clear intention to rent out the property.
If no attempt is made to advertise the property, or the rent is set at an unrealistically high non-commercial level such that it could not on any reasonable basis be rented out, the ATO is likely to take the view that there was no intention to rent out the property, and the rental claims will be disallowed.
- Rental expenses, in some situations, need to be apportioned.
This usually arises in the context of holiday homes, where either you or your family or friends, can stay in the property free of charge for part of the year.
To the extent that the expenses relate to that part of the year during which the property is not rented or available for rent, you are not entitled to a deduction for costs incurred during those relevant periods.
- If your property is rented to family or friends for less than arms-length market rental, the ATO may treat the arrangement as being of a private nature, and could only allow you to claim sufficient deductions to offset the rent, but not so as to make a tax loss.
- You are no longer able to claim any deductions for the cost of travel relating to inspecting, maintaining, or collecting rent for a residential rental property.
You can only claim travel deductions if you are carrying on a business of property investing or are an excluded entity (ie a corporate tax entity, public unit trust etc).
- Plant and equipment depreciation deductions will be limited.
If residential investment properties were purchased after 9 May 2017, plant and equipment depreciation deductions will be limited only to outlays actually incurred by the investor.
- All these various rules can give rise to some complex outcomes. Where investment property is involved, it can be worthwhile obtaining the professional advice of a competent tax agent who can reliably advise on what can and cannot be claimed as a deduction.
Read our complete September 2018 Taxwise Individual Newsletter here