Rental Property Deductions - On the ATO's Radar
The ATO has recently announced that investment properties will be a major focus for the 2022 tax year. Do you know what you can and can't claim? Here are some quick tips.
Maximising your deductions and minimising how much tax you pay is the name of the game when tax season comes around. If you own a property that you receive income from then there are a number of expenses that you can claim to deduce how much of the rental income will be taxable. Getting this right and it could be the difference between a successful investment and an investment gone wrong. Before we get into what expenses we can claim, here are some things you need to think about when you own an investment property.
You can no longer claim expenses if the land is vacant. Any expenses incurred will be treated as a capital expenditure and the deduction will be held over until the land is sold sometime in the future. Land is considered vacant if:
Does not contain a substantial or permanent structure
If it does contain a substantial or permanent structure but cannot or hasn’t been made available for rent.
For example, you could purchase a residential property and then start renovating straight after settlement which made the property unable to rent. In this case, all expenses incurred would be considered capital and not instantly deductible.
What is Rental Income?
Rental income is the full amount of rent you receive when renting out your investment property. In addition to the receipt of money, rental income may include the value of goods and services if they are received in lieu of rent. The market value of the goods or services will need to be included as rental income. Rental Bond will also be considered rental income when you become entitled to it. There are other associated payments such as reimbursement of water rates or strata fees, that are considered rental income and must be included on your tax return.
Apportioning based on Ownership Interest
Before working out your assessable rental income and what deductions you can claim you need to determine what interest you have in the property. In most cases, this will be fairly simple and will either be 100% if you own the property by yourself or 50% if the property is owned equally as a couple. This is called being joint tenants and no particular percentage is assigned and the legal interest in the property is considered equal. There are other circumstances where determining ownership interest might be more complex such as if the property is owned as Tenants in common, where each owner has a prescribed interest such as 20% or if the property is owned via a partnership. The simplest way to ensure that you get your ownership interest correct for tax purposes is to view the property title.
What expenses can I claim?
If you own a property and you have determined that you have earnt taxable income from that property, you are able to claim expenses that you have incurred to earn that income. Here is a list of things you can claim:
Property Management Fees
There are expenses that are usually coordinated via a property manager (but not always as you can manage the investment yourself) that are immediately deductible these include:
Advertising for tenants
Body corporate fees
Strata Title fees and charges
Gardening and lawn mowing
If you are using a property Agent, the following costs are immediately deductible:
Fees and commissions
Bank charges and fees
Lease document expenses
Rates and Taxes
State and Federal rates and taxes relating to the property are immediately deductible including land rates, water rates, and Land Tax. Land Tax can be complex if you own multiple properties or multiple properties in different states.
The following insurance deductions are immediately deductible:
If you do make a claim and receive insurance proceeds from any of these insurances, the proceeds will need to be included as associated rental income.
There are certain administrative expenses that are deductible provided they are incurred with respect to earning the rental income. In some cases, accurate apportionment will be required. These are:
Stationery, phone, and internet usage
Postage of documents relating to property management
Expenses relating to the repair of an investment property may be deductible. To be immediately deductible, the repairs need to relate to wear and tear or damage and not be considered an improvement. For example, a repair will usually relate to the replacement of something that is worn and would bring something back to its original condition such as a new tap or fixing a hole in the wall. If an expense is determined to be an improvement such as a new kitchen, the expense will be considered capital and the deduction can be claimed via depreciation (see below).
This is usually the biggest expense when it comes to an investment property and the ability to claim this deduction and create a tax loss is one of the drivers for property investment. Only the interest portion of your repayments is tax deductible, the capital portion is not. If the loan for the investment property is combined with loans for your main residence, you will also need to apportion how much interest relates to the investment property. This can prove difficult, especially if the loan has a redraw facility that is being used.
In addition to the immediately deductible expenses above, there are deductions that you can claim over a number of years.
If you require a loan for the purchase of the property, you can claim the cost of acquiring that loan over 5 years (or if less than 5 years, the life of the loan. This includes:
Loan Application fee
Lenders legal expenses
Title search fees
Lenders mortgage insurance
Stamp duty on mortgage
Mortgage registration fees
This can be a very complex area. When you have purchased an investment, you have purchased a building and various fittings. Depreciation expense is the decline in value of the building and fittings over a period of time. The simplest way to determine your annual deduction for depreciation is to engage the services of a quantity surveyor who can produce a report for you to give to your Accountant at tax time.
What expenses can’t be claimed?
Generally, expenses that are considered private or of a capital nature, are not deductible against rental income. These are:
Expenses relating to the property purchase such as Property Purchase price, Stamp Duty, agents’ fees, Legal costs
Expenses relating to the sale of the property such as Sales Price and agents’ fees
The above lists and scenarios are not exhaustive, and your situation may not be this simple. When it comes to property investment and tax implications, it is important that you get the right advice and guidance. Your situation may not be as simple as it seems. A good Accountant should be your first port of call. You can speak to one of our Tax Specialists by calling 02 4353 3889.