Income and Expenses
Rental properties owners are allowed a range of tax claims for expenses related to the production of rental income.
Deductible expenses in whole or in part include:
- Advertising Bank charges Borrowing expenses Cleaning Commission
- Council and Water Rates
- Depreciation Gardening Insurance Interest
- Land tax
- Lease expenses
- Legal expenses for
collection of rent, arrears;
ejectment;
investigating credit worthiness;
lease preparation.
- Power supplied (gas/electricity) Preparation, registration, stamping of lease documents
- Repairs
- Replacement of crockery, linen etc. Safe deposit box fees
- Secretarial, bookkeeping fees
- Services expenses
- Tax advice cost
- Telephone, postage and stationery
- Interest on loan
Note Travel No Longer Claimable in most cases.
Interest paid on a loan used to purchase the rental property or for repairs is deductible and is claimed in the year in which it is incurred.
An investment is negatively-geared where the interest paid on the loan used to purchase the property exceeds the net income from the property.
PAYG Tax Office Withholding Variation.
Where the overall taxpayer's tax- able income is reduced due to a net rent loss, the Tax Office may approve an application for the variation of tax installment deductions from salary or wages for a taxpayer. It does not follow that the investment or related deductions have Tax Office approval.
Repairs versus improvements
A deduction is allowed for repairs to the rented property, e.g. repainting, fixing leaks, mending broken parts, electrical repairs, replacing broken fences or windows. Repairs carried out soon after purchase may be disallowed as they are"initial repairs". You need to ensure that repairs are carried out when the property is still income- producing, otherwise the deduction may be lost. Capital improvements to the property are not deductible.
Lease documentation
The cost of preparing, registering and stamping the lease is deductible as are costs associated with the assignment or surrender of the lease.
Insurance
Deductions are allowable for premiums on policies covering damageto premises or contents, fire burglary, storm damage, plate glass, public risk, etc.
Commissions, management fees
A deduction is allowable for com- missions and management fees paid to estate agents for the collection of rent. Letting fees may also be deductible. However, no deduction is allowable for an initial letting because it is considered a capital expense except for the letting of holiday flats on short-term leases.
Rates, land tax
Deductions are allowed for council and water rates (including excess water rates) and Land tax. Payments made on the purchase of the property as an adjustment of rates and taxes paid by the vendor are also deductible. Stamp duty on the purchase is not deductible, but may be taken into account in calculating the property's cost base for capital gains tax purposes.
Ejectment, legal costs
Legal expenses incurred by a lessor in ejecting a rent-defaulting tenant are usually deductible. Costs relating to fair rent hearings would be deductible as would legal costs of investigating the credit-worthiness of a prospective tenant.
Travel
No deductions are available for the cost of travel expenses except in limited cases such as commercial properties.
Other incidentals
Deductions are also allowed for other expenses such as advertising for tenants, bank charges, cleaning, gardening, postage, stationery, telephone, secretarial fees, safe deposit box fees.
Vacancy
The absence of rental income does not automatically prevent the tax- payer from deducting expenditure incurred during that period.
However it would be necessary to show that every effort was made to obtain tenants during that time. Temporary work transfer
Renting out a private residence during the period of a temporary transfer in the place of his employment, relevant losses and outgoings on the property are deductible for that period.
Note: a vacancy tax applies for Non Resident owners of vacant property.
Apportionment
Expenses need to be apportioned if only part of the property is let, the property is let for only part of the year, or the property is let for a mixture of commercial and non- commercial purposes.
In the absence of a true partnership agreement between joint tenants, they each remain assessable on half the income and entitled to claim half the losses.
Non-commercial transactions
It is normally necessary to show that a lease has a commercial flavour the rental is considered assessable and outgoings deductible. It would appear that a transaction is more likely to be accepted if:
(1)formal lease prepared;
(2)the rent is not nominal;
(3)rent is physically paid over;
(4)the lessor has had experience with other rental properties; and
(5)there is no moral or social obligation to subsidise the tenant.
If transaction has both a business and private elements, apportionment of the outgoings may be appropriate, or even the limitation of the deduction to the amount of income from the property.
Borrowing Expenses
Expenditure incurred in borrowing money or in the discharge of a mort- gage is normally capital expenditure. However, sec. 67 specifically allows a deduction for borrowing expenses and sec. 67A for certain mortgage discharge expenses.
Expenses are deductible over the period of the loan or 5 years, whichever is the shorter period, be- ginning with the year in which they were incurred. If borrowing expenses incurred in any year are $100 or less, they are wholly deductible in that year.
Expenses in connection with the discharge of a mortgage are deductible to the extent that the loan money or the property was used for assessable income production. This includes expenses incurred to discharge the mortgage.
Capital Works Building Allowance (DIV 10) Residential:
Where construction of a rental property was commenced after 21 August 1984, a capital works deduction may be available. Deductions are based on the original cost of the construction. Where the construction commenced between 22 August 1984 and 15 September 1987 the deduction is 4% per annum. Where construction commenced after 15 September 1987 the deduction is 2.5% per annum. Note from 13 May 1997 the amount claimed under this section reduces the Capital Gains Tax cost base.
Note: from 9 May 2017 you are only able to depreciate new plant and equipment assets and items you add to your property, you will not be able to claim depreciation on existing plant and equipment assets.
DEPRECIATION
There is NO depreciation deduction for anydepreciable asset used in residential rental premises if it was “previously used” by another taxpayer orused by the current taxpayer for a non-taxable purpose.
For Property let furnished, you may claim depreciation of plant, equipment and articles installed; for example, depreciation may be claimed on furniture and fit tings, blinds, floor coverings, refrigerators, washing machines and stoves, television and radio sets, etc. An allowance for replacements is given for small depreciable items where it is difficult to estimate their effective life, for example, crockery, cutlery, bedding, linen etc.
Low-cost assets are depreciating assets that cost less than $1,000.Low-value assets are depreciating assets that are not low-cost assets but which, on 1 July 2011, had been written off to less than $1,000 under the diminishing value method.You can have only one low-value pool. Once you choose to allocate a low-cost asset to a low-value pool, you must allocate to the pool all other low-cost assets you hold in that year and in future years.
An immediate 100% depreciation deduction is available for units of depreciable property acquired on or after 1 July 1991 where the effective life is less than three years or the cost ofthe unit is no more than $300. It is not necessary to pro rate for part of a year. However, the deduction is reduced where the unit is used only partly to produce assessable income.
The Commissioner accepts that even where a group of identical items is purchased at one time, each individual item which meets the above criteria may be written off in the year of purchase provided the item is regarded as a whole, can be separately identified and has a separate function.See last pages for detailed Depreciation schedule.
Vacancy Tax
While it is not quite a “tax”, this Bill will require any foreign persons to give the Commissioner a“vacancy fee return” each year to advise of the number of days a residential property was occupied ina 12-month period. If the amount is less than 183 days, an annual $5,500 fee will be payable.
A residential property will be occupied only if:
The property owner or the owner’s relatives genuinely occupy the dwelling as a residence;
The dwelling is occupied under leases covering a period of 30 days or more; or
The dwelling is made genuinely available as a residence, for example as a rental property for 30days or more.
NSW Land Tax
Land tax is a tax levied on the owners of land in NSW as at midnight on 31 December of each year. In general, your principal place of residence or land used for primary production (a farm) is exempt from land tax. You may be liable for land tax if you own or part-own:
•vacant land, including vacant rural land
•land where a house, residential unit or flat has been built
•a holiday home
•investment properties
•company title units
•residential, commercial or industrial units, including car spaces
•commercial properties, including factories, shops and warehouses
•land leased from state or local government
Rates and thresholds
The Valuer General has determined the following land tax threshold
•2018 land tax is $692,000. Premium land tax threshold $3,846,000.
Rates and thresholds
Land tax is calculated on the combined value of all the taxable land you own above the land tax threshold. The rate of tax is $100 plus 1.6 per cent of the land value between the threshold and the premium rate threshold and 2% thereafter.
If land is owned by a trustee of a special trust the land tax threshold does not apply and land tax will be charged at a flat rate of 1.6% of the taxable land value up to the premium threshold of $3,846,000 and then 2% thereafter.
If the combined value of your land does not exceed the threshold, no land tax is payable.
Land Tax Surcharge
If you are a foreign person who owns residential land in NSW, you must pay a surcharge of 0.75 per cent for the 2017 land tax year and of two per cent from the 2018 land tax year onwards.
Capital gain from a CGTevent in respect of the property
When a CGT event occurs in respect of rental property acquired after 19 September 1985 and the capital proceeds exceed its cost base, a capital gain will arise. Capital losses may be offset against the gain and, where the asset has been owned by a person for at least 12 months; a CGT discount may be available. The net amount of capital gain is included in the assessable income.
•Keep records of every circumstance or event that may be relevant to working out capital gains or losses. Records must be kept for at least five years. If the CGT event relates to a disposal of property, then the records must be kept from the date of acquisition up to the date of sale and then for five years after the relevant.
•Consider delaying CGT events until the next income year in order to delay the derivation of assessable income.
•Keep records of other matters which may be relevant to calculating capital gains and losses, such as capital allowance deductions.
•If a capital gain has been crystallised, consider realising capital losses in the same year to offset the capital gains.
•Where CGT assets are owned by an individual, trust or complying superannuation fund, consider holding them for at least 12 months to qualify for the CGT discount.
•Depreciating assets sold with the property, as they are subject to separate balancing adjustment calculations on revenue account.
Principal Place of Residence CGT Exemption (No exemption for Temporary or Non Residents).
Basically if you make a capital gain when selling your home it is exempt from capital gains tax. PPR stands forprincipal place of residence.
CGT does not apply to your home if purchased before 20 September, 1985.
The PPR exemption can apply to a forfeited deposit or damages received from a defaulting purchaser providingthe house is put back on the market and eventually sold.
A “Spec” builder who lives in the “spec” home technically qualifies for the PPR exemption but is taxable on theprofit as normal business income anyway and this overrides the CGT exemption.
If the home is owned by a trust or company the PPR exemption cannot apply. If you move into a house as soon as practical after you purchase it the house is deemed to be your PPR from thetime you purchased it. Further, if at the time of purchasing your new house you have not yet sold your old housethey can both be your PPR for up to 6 months. Providing during the last 12 months you have lived in your oldresidence for at least 3 continuous months and it was not used to produce income during the period in that 12months that it was not your PPR.
If you sub divide the land your home is on and sell the new block separately from your home the PPR exemptiondoes not apply. If you build another house on the block the PPR exemption can apply for up to 6 months if yousell off the old home in that time.
You can only have one PPR at a time. Providing you have at sometime lived in the place you can choose which house you want to be consideredyour PPR but only from the time you first lived there and only up to six years after you moveout if it becomes income producing during your absence. The time frame is unlimited if it is not incomeproducing while you are not living there. Note if you move back in and then out again you are entitled to another 6 years PPR exemption even if it is income producing.
For PPR the ATO considers the following:
-Electricity and Phone connected in your name.
-Registered on the electoral role to that address.
-The presence of personal effects in the house.
-The address given for mail deliveries.
-Where your family lives.
-The length of time you have lived there.
-Your reasons for occupying the dwelling.
If you earn income from your PPR while you are living there than your PPR exemption only applies to the percentage of the Capital Gain that represents the percentage of the house used for private use. If the home was partly used to produce income while you were living in it then the same percentage PPR exemption applies during the 6 year period as the percentage the house was used for private while you were living there.
You can elect to have vacant land or a property you are renovating classed as your PPR for a period of up to 4years before you move into it providing you do not have another PPR. You must move in as soon as practical after the building is finished and live there for at least 3 months beforeselling or have died.
If your house is accidentally destroyed and you sell the land rather than rebuild, your PPR exemption cancontinue to apply to the land until sold providing you do not claim any other place as your PPR.
Families are discriminated against in those spouses and their children under 18 can only have one PPR betweenthem no matter where they live. Spouses can elect to claim their spouse’s PPR as theirs even if they never livedthere and even if their name is not on the deed. If both spouses want their separate homes to be their PPR theyonly get half the exemption on each place.
If you acquired your PPR after 20th September, 1985 and used it as your PPR until sometime after 20th August,1996, when it became income producing you must use the market value of the property at the time it becomesincome producing, as your cost base. Therefore any assessable capital gain will only arise on an increase in thevalue of the property after it ceased to be your PPR. It is not optional.
Changes for Non-Residents Principal Place of Residence CGT Exemption
The new measure introduced in the 2017 budget will disallow a main residence CGT exemption for foreign and temporary residents of Australia. It is common for Australians working overseas to keep their home in Australia for when they eventually move back from assignment or as an investment, often renting the property out in the meantime for additional income and taking advantage of the 6 year rule mentioned above. Now, where these taxpayers cease to be Australian residents, they will attract CGT on the sale of their Australian real property on the gains made from the date they became a non-resident.