Below is a general guide in relation to your rental property. This information should be used as a guide to help you compile your documentation for your income tax return. It is important to keep all documentation regarding ALL Rental Property income and expenses.
Income received by way of rent from residential, commercial or industrial property is assessable income when it is received and includes:
- Advance rent
- Late rent
- Current rent
- Bond money only if you derived it because a tenant defaults to pay the rent or due to damage to the property which require repairs
- Insurance payments for loss of rent
- Reimbursement of deductible expenses.
- If you received a letting or booking fee, you must include this as part of your rental income.
Associated payments include all amounts you receive, or become entitled to, as part of the normal, repetitive and recurrent activities through which you intend to generate profit from the use of your rental property.
Rental income and expenses must be attributed to each co-owner according to their legal interest in the property, despite any agreement between co-owners, either oral or in writing, stating otherwise.
Please advise us if more than one person is invested in the property and at what percentage. Interest on money borrowed by only one of the co-owners which is exclusively used to acquire that person’s interest in the rental property does not need to be divided between all of the co-owners.
You can claim a deduction for certain expenses you incur for the period your property is rented or is available for rent.
There are three categories of rental expenses, those for which you:
- cannot claim deductions
- can claim an immediate deduction in the income year you incur the expense
- can claim deductions over a number of income years.
Expenses for which you are not able to claim deductions include:
- acquisition and disposal costs of the property
- expenses not actually incurred by you, such as water or electricity charges borne by your tenants
- expenses that are not related to the rental of a property, such as expenses connected to your own use of a holiday home that you rent out for part of the year.
You can claim a deduction for these expenses only if you actually incur them and they are not paid by the tenant.
- advertising for tenants
- bank charges
- body corporate fees and charges
- council rates
- electricity and gas
- gardening and lawn mowing
- in-house audio and video service charges
- public liability
- interest on loans
- land tax
- lease document expenses
- stamp duty
- legal expenses* (excluding acquisition costs and borrowing costs)
- mortgage discharge expenses
- pest control
- property agents fees and commissions
- quantity surveyor’s fees
- repairs and maintenance
- secretarial and bookkeeping fees
- security patrol fees
- servicing costs, for example, servicing a water heater
- stationery and postage
- telephone calls and rental
- tax-related expenses
- rent collection
- inspection of property
- maintenance of property
- water charges
Expenses deductible over a number of income years
There are three types of expenses you may incur for your rental property that may be claimed over a number of income years:
These are expenses directly incurred in taking out a loan for the property. They include loan establishment fees, title search fees and costs for preparing and filing mortgage documents, including mortgage broker fees and stamp duty charged on the mortgage.
Borrowing expenses also include other costs that the lender requires you to incur as a condition of them lending you the money for the property, such as the costs of obtaining a valuation or lender’s mortgage insurance if you borrow more than a certain percentage of the purchase price of the property.
The following are not borrowing expenses:
- insurance policy premiums on a policy that provides for your loan on the property to be paid out in the event that you die or become disabled or unemployed
- interest expenses.
If your total borrowing expenses are more than $100, the deduction is spread over five years or the term of the loan, whichever is less. If the total deductible borrowing expenses are $100 or less, they are fully deductible in the income year they are incurred.
If you repay the loan early and in less than five years, you can claim a deduction for the balance of the borrowing expenses in the year of repayment. If you obtained the loan part way through the income year, the deduction for the first year will be apportioned according to the number of days in the year that you had the loan.
You can claim a deduction for the decline in value of certain items, known as depreciating assets, that you acquired as part of the purchase of your property or that you subsequently purchased for your property.
A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. Examples of depreciating assets are freestanding furniture, stoves, washing machines, carpets and blinds.
To work out the decline in value of a depreciating asset, you need to know its effective life. Generally, the effective life of a depreciating asset is how long (in whole years) you can use it for a taxable purpose.
You can work out your deduction for the decline in value of a depreciating asset using either the:
- prime cost method – depreciating asset decreases uniformly over its effective life
- diminishing cost method – decline in value each year is a constant proportion of the remaining value and produces a progressively smaller decline over time.
Capital works deductions
You can deduct certain kinds of construction expenditure. In the case of residential rental properties, the deductions would generally be spread over a period of 25 or 40 years.
Your total capital works deductions cannot exceed the construction expenditure. No deduction is available until the construction is complete.
Deductions based on construction expenditure apply to capital works such as:
- a building or an extension, for example, adding a room, garage, patio or pergola
- alterations, such as removing or adding an internal wall, or
- structural improvements to the property, for example, adding a gazebo, carport, sealed driveway, retaining wall or fence.
You can only claim deductions for the period during the year that the property is rented or is available for rent. If you can claim capital works deductions, the construction expenditure on which those deductions are based cannot be taken into account in working out any other types of deductions you claim, such as deductions for decline in value of depreciating assets.
A deduction is allowed for expenditure incurred in the construction of a building if you contract a builder to construct the building on your land. s If you are an owner/builder, the value of your contributions to the works, for example, your labour and expertise, and any notional profit element do not form part of the construction expenditure.
Construction expenditure that can be claimed
Some costs that you may include in construction expenditure are:
- preliminary expenses such as architects’ fees, engineering fees and the cost of foundation excavations
- payments to carpenters, bricklayers and other tradespeople for construction of the building
- payments for the construction of retaining walls, fences and in-ground swimming pools.
Construction expenditure that cannot be claimed
- Some costs that are not included in construction expenditure are:
- the cost of the land on which the rental property is built
- expenditure on clearing the land prior to construction
- earthworks that are permanent, can be economically maintained and are not integral to the installation or construction of a structure
- expenditure on landscaping.
Estimating construction costs
Where a new owner is unable to determine precisely the construction expenditure associated with a building, an estimate provided by an appropriately qualified person may be used. Appropriately qualified people include:
- a clerk of works, such as a project organiser for major building projects a supervising architect who approves payments at stages of projects
- a builder who is experienced in estimating construction costs of similar building projects
- a quantity surveyor.
You can claim expenditure such as interest on loans, local council, water and sewage rates, land taxes and emergency services levy on land on which you have purchased to build a rental property or incurred during renovations to a property you intend to rent out. However, you cannot claim deductions from the time your intention changes, for example if you decide to use the property for private purposes.
There may be situations where not all your expenses are deductible and you need to work out the deductible portion. To do this you subtract any non-deductible expenses from the total amount you have for each category of expense; what remains is your deductible expense.
Property available for part-year rental
If you use your property for both private and assessable income-producing purposes, you cannot claim a deduction for the portion of any expenditure that relates to your private use. Examples of properties you may use for both private and income-producing purposes are holiday homes and time-share units. In cases such as these you cannot claim a deduction for any expenditure incurred for those periods when the home or unit was used by you, your relatives or your friends for private purposes.
In some circumstances, it may be easy to decide which expenditure is private in nature. For example, council rates paid for a full year would need to be apportioned on a time basis according to private use and assessable income producing use where a property is used for both purposes during the year.
In other circumstances, where you are not able to specifically identify the direct cost, your expenses will need to be apportioned on a reasonable basis.
Only part of your property is used to earn rent
If only part of your property is used to earn rent, you can claim only that part of the expenses that relates to the rental income. As a general guide, apportionment should be made on a floor-area basis, that is, by reference to the floor area of that part of the residence solely occupied by the tenant, together with a reasonable figure for tenant access to the general living areas, including garage and outdoor areas if applicable.
If you let a property, or part of a property, at less than normal commercial rates, this may limit the amount of deductions you can claim.