Investment Property Tax

August 12, 2013

As property investment accountants, Gotsis Accounting understand the intricacies involved in the area of investment property tax. As many of our clients are property investors we can advise you accordingly, if you are seeking to invest or are already invested in personal and/or commercial properties.

In 2008, more than 1.4 million people claimed over $25 billion in rental deductions in their tax returns (Australian Taxation Office, 12 June 2009). With such a large volume the ATO is continuing to focus on the area of Rental Property Deductions to make sure that you get your claim correct.

There are four (4) expense items in the rental statement that the ATO will continue to pay attention to.

1) Interest: Only interest on that part of the investment loan that relates to the investment property is deductible and only for that part of the year that the property was rented or available to be rented.
2) Repairs and maintenances: Expenditure that relates to renovations or improvements is not an income deduction but it may be a depreciable expenditure.
3) Borrowing expenses: Some promoters and providers of properties and finance may charge fees for their service which may be deducted over five years or the term of the loan, whichever is shorter.
4) Capital Works Deduction: To be able to claim a deduction for costs of constructing a building, you must have an appropriate depreciation report from the Developer or Quantity Surveyor.  The deduction is 2.5% or 4% of the construction cost, depending on when the construction started and how the building is used.  With so many people claiming deductions the Tax Office is continuing its focus in this area to ensure you get your claim right.

Rental Expenses
As a property owner, you are allowed to claim a range of expenses in relation to the production of rental income.  Expenses which are deductible, in whole or in part, include: advertising for tenants, water and council rates (including excess water rates), land tax, borrowing expenses, insurance (premiums on policies such as damage to the premises or its contents, fire, storm damage, burglary etc), bank charges, interest, cleaning, gardening, commission and management fees (paid to real estate agents for rent collection and letting of holiday units on short-term leases may also be deductible), depreciation, legal expenses (evicting a tenant, fair rent hearings, credit check of a prospective tenant), gas/electricity, rates, leasing expenses (preparation, registration and stamping to assign or surrender a lease), repairs, replacement items, travel, telephone, stationery and postage, safety deposit box fees and service fees such as bookkeeping, secretarial and tax.

Interest and Borrowing Expenses

If you pay interest on a loan which is used to purchase a rental property or to pay for repairs, then the interest is deductible and can be claimed in the year in which you incur this expense. If the interest paid is greater than the net income received from the property, then your investment is negatively geared.

Interest loan expenses which can be claimed include:

  • purchase of a rental property or the land to build a rental property
  • purchase of a depreciable asset for the rental property e.g. a TV
  • renovations on a rental property such as an outdoor deck
  • maintenance repairs on the rental property
  • repairs as a result of damage to the rental property

Expenses incurred in discharging a mortgage or borrowing money are generally deductible as a borrowing expense if the loan money or the property was used for assessable income production.

Borrowing costs are deductible over the period of the loan or five years, whichever is the shorter period, starting in the year in which the expense was incurred.  If your borrowing costs are $100 or less in any year, they can be deducted immediately in the year in which they were incurred.

Borrowing costs that are deductible include:

  • stamp duty charged on the mortgage loan establishment fees, lender’s mortgage insurance and the cost of a valuation if required for loan approval
  • fees charged by your lender for title searches, preparation and filing of mortgage documents and mortgage broker fees

Repairs & Maintenance
A deduction is allowed for repairs and maintenance to your rental property e.g. mending broken fences or gutters, repainting, maintenance plumbing, electrical repairs etc. Capital improvements to the property are not deductible. To make sure that you do not lose any deduction available, repairs must be carried out when the property is producing an income.

“Initial repairs” that are carried out shortly after you buy your investment property may not be allowed. For example, major renovation costs and costs to repair damage, defects or deterioration upon purchasing a property cannot be claimed as an immediate deduction and must generally must be claimed as a capital works deduction over 25 or 40 years, or otherwise included in the cost base of an asset for capital gains tax purposes.

Depreciation
If your rent your property fully furnished, you can claim depreciation on equipment, plant and items installed by you, such as TV, blinds, carpet, washing machines, furniture and fittings. If the cost of the item is no more than $300, you can claim a depreciation deduction of 100%.  If the item is only partly used to produce assessable income, then the deduction that can be claimed needs to be apportioned.

Capital Works Deduction
If construction of a residential property began on or after 18 July 1985 and before 16 September 1987, the construction costs can be deducted at a rate of 4%. However, the rate is reduced to 2.5% per annum if construction started after 15 September 1987.

Apportionment
Expenses that you are claiming must be apportioned if the property is rented for only part of the year, or if only part of the property is let.

Travel

You can claim deductions on travel expenses where you are collecting rent, undertaking repairs on the property or preparing the property for incoming renters, as well as for property inspections.

Temporary Absence from Sole or Principal Residence
A dwelling may be exempt from Capital Gains Tax as long as it is considered to be the sole or principal residence of the taxpayer and if it temporarily ceases to be occupied as the sole or principal residence of the taxpayer. For this to happen, the property must have initially been the taxpayer’s sole or principal residence. The period of any principal residence exemption will depend on whether the dwelling is used to produce income during the taxpayer’s temporary absence. If income is derived, the maximum absence is 6 years. If the owner sells the property prior to the end of the 6 year period of absence, there is no requirement to return to the principal residence to gain the CGT exemption.

GST on Sale of Commercial Property
You are required to be registered for GST if you are carrying on an enterprise and your turnover is at least $75,000.  To decide if your turnover is at least $75,000, you must examine your current and/or projected turnover. In working out your turnover, you do not include amounts received for capital asset disposals. A capital asset is generally an asset purchased for the purpose of earning revenue, rather than for sale in the ordinary course of business.  Examples of capital assets include things like motor vehicles, office equipment and land and buildings.

Entities that are not registered for GST are not required to register for GST merely because the sale proceeds of a capital asset is more than $75,000.

For example, you may be carrying on an enterprise of leasing if you lease out a commercial building for a number of years.  If your annual leasing income is less than $75,000 and you do not make any other taxable supplies, you will not be required to register for GST.   If you eventually decide to sell your rental property, you are not required to register for GST and charge GST on the sale even if the sale proceeds are more than $75,000.