In­vest­ment prop­erty own­ers will end up in the sin bin if they don't play by the rules

Money Magazine Australia - - CONTENTS - STORY MARK CHAP­MAN

Mark Chap­man What you can claim on tax

With steadily ris­ing prices in many Aus­tralian cities, par­tic­u­larly Syd­ney and Mel­bourne, it might seem as if there’s never been a bet­ter time to buy into res­i­den­tial in­vest­ment prop­erty. With the gen­er­ous tax regime that ap­plies to prop­erty in­vest­ment still largely in­tact, de­spite prom­ises of change from the La­bor party, many peo­ple are tak­ing ad­van­tage of the com­bi­na­tion of ris­ing prices and tax breaks to gen­er­ate healthy re­turns.

Gen­er­ous it might be but the Aus­tralian Tax Of­fice goes to great lengths to po­lice the tax sys­tem for prop­erty own­ers and ev­ery year thou­sands of Aus­tralians find them­selves au­dited by the tax­man for ques­tion­able claims or dodgy de­duc­tions. Tax law is complex so whether you have al­ready dipped your toe into the prop­erty game or are con­sid­er­ing mak­ing a fu­ture in­vest­ment, it pays to un­der­stand the ba­sics.


The rent you earn on your in­vest­ment prop­erty is as­sess­able in­come and must be de­clared on your tax re­turn each year.


The ex­penses you in­cur in run­ning your in­vest­ment prop­erty are (mostly) tax de­ductible, ei­ther im­me­di­ately or over time.

The big­gest ex­pense you are likely to in­cur is the in­ter­est on a mort­gage taken out to fi­nance the pur­chase of the prop­erty. That in­ter­est is gen­er­ally tax de­ductible straight away. You can also po­ten­tially look to claim the fol­low­ing ex­penses where you in­cur them: Re­pairs to the prop­erty. Ad­ver­tis­ing for ten­ants (in­clud­ing costs passed on by let­ting agents).

Clean­ing at the end of a ten­ancy (in­clud­ing rub­bish re­moval).

Es­tate and let­ting agent fees (in­clud­ing man­age­ment fees).

Gardening and lawn mow­ing (in­clud­ing felling or prun­ing trees). Sec­re­tar­ial and book­keep­ing fees. Bank charges on the ac­count used to re­ceive rent and pay ex­penses.

Coun­cil rates and land tax. Insurance, whether for the build­ing, con­tents or pub­lic li­a­bil­ity.

Credit checks.

Pest con­trol.

Strata ti­tle/own­ers’ cor­po­ra­tion fees.

Bank or so­lic­i­tor fees for keep­ing ti­tle doc­u­ments safe.

Tax­a­tion ad­vice re­lat­ing to the prop­erty. Le­gal ex­penses to eject a ten­ant for non-pay­ment of rent.

Hir­ing a debt col­lec­tor to col­lect rent ar­rears. Get­ting new keys cut.

Ser­vic­ing items such as hot-wa­ter heaters, smoke alarms, air-con­di­tion­ing sys­tems and garage door mech­a­nisms.

Wa­ter sup­ply charges (to the ex­tent that they aren’t paid by the ten­ant).

Quan­tity sur­veyor for as­sess­ing de­pre­ci­a­tion claims.

Se­cu­rity pa­trols and se­cu­rity sys­tem mon­i­tor­ing and main­te­nance.

You can also claim lenders mort­gage insurance (insurance paid by you but which pro­tects the lender from your de­fault) over the term of the loan or five years (whichever is the shorter).

You can only claim ex­penses for the pe­riod the prop­erty was ac­tu­ally avail­able for rent so you may need to ap­por­tion costs ac­cord­ingly.

Two types of ex­penses that used to be tax de­ductible can no longer be claimed (since July 1, 2017). Th­ese are:

Travel costs in­curred in vis­it­ing your res­i­den­tial in­vest­ment prop­erty.

De­pre­ci­a­tion on items of cap­i­tal equip­ment which were al­ready part of an ex­ist­ing prop­erty where it was pur­chased af­ter May 9, 2017 (such as air-con­di­tion­ing sys­tems, fur­ni­ture, car­pets or kitchen equip­ment).

Where can it all go wrong?

Each year, the ATO high­lights those ar­eas it will be de­vot­ing sig­nif­i­cant com­pli­ance re­sources to polic­ing, and while some of those fo­cus ar­eas change year to year res­i­den­tial in­vest­ment prop­er­ties are on the list ev­ery year. So what are the main pit­falls that can land you in trou­ble with the tax­man?

The ATO pays close at­ten­tion to ex­ces­sive in­ter­est ex­pense claims, such as where prop­erty own­ers have tried to claim bor­row­ing costs on the fam­ily home as well as their rental prop­erty.

It also looks closely at the in­cor­rect split of rental in­come and ex­penses be­tween own­ers. If you own a prop­erty as a joint ten­ant (for ex­am­ple with your spouse), you should each de­clare 50% of the rental in­come and claim 50% of the de­duc­tions. Some tax­pay­ers try to di­vert de­duc­tions to­wards the owner with the higher tax­able in­come; that isn’t per­mit­ted.

The ATO looks closely for ev­i­dence that in­vest­ment prop­er­ties are not gen­uinely avail­able for rent. Rental prop­erty own­ers should only claim for the pe­ri­ods the prop­erty is rented out or is gen­uinely avail­able for rent. Pe­ri­ods of per­sonal use can’t be claimed. This is par­tic­u­larly im­por­tant for hol­i­day homes, where the ATO reg­u­larly finds ev­i­dence of a home­owner claim­ing de­duc­tions on the grounds that it is be­ing rented out when in re­al­ity the only peo­ple us­ing it are the own­ers, their fam­ily and friends, of­ten rent free.

Re­cently the ATO is­sued a list of four ques­tions in­vest­ment prop­erty own­ers should ask them­selves. Con­sider your an­swers to th­ese to de­ter­mine whether you have any­thing to be con­cerned about:

How do you ad­ver­tise your rental prop­erty? If your prop­erty is ad­ver­tised on a widely seen on­line site, that’s a good in­di­ca­tion that it is gen­uinely avail­able for rent. If your only form of mar­ket­ing is a tatty card in your front win­dow, you might need to be con­cerned.

What lo­ca­tion and con­di­tion is your rental prop­erty in? If it is in good re­pair, ten­ants will want to rent it. If it’s a hovel, chances are ten­ants will give your prop­erty a wide berth, par­tic­u­larly if you are charg­ing rent that’s on a par with much more de­sir­able rentals in the same area.

Do you have rea­son­able con­di­tions for rent­ing the prop­erty and charge mar­ket rate? If you set con­di­tions that will de­ter a rea­son­able po­ten­tial ten­ant, such as rent sig­nif­i­cantly above mar­ket rates or clauses such as “no chil­dren”, your prop­erty may not be re­garded as gen­uinely avail­able for rent.

Do you ac­cept in­ter­ested ten­ants un­less you have a good rea­son not to? If you’re un­rea­son­ably fussy, the ATO might con­clude that you don’t re­ally want to rent to any­body and that your prop­erty isn’t ac­tu­ally avail­able for rent.

The ATO keeps a close eye on in­cor­rect claims for newly pur­chased rental prop­er­ties. The costs to re­pair dam­age and de­fects ex­ist­ing at the time of pur­chase or the costs of ren­o­va­tion can­not be claimed im­me­di­ately. Th­ese costs are de­ductible in­stead over a num­ber of years or are added to the cost base of the prop­erty for CGT pur­poses. Ex­pect to see the ATO checking such claims, typ­i­cally made within the first 12 months of own­er­ship, and push­ing back against those that don’t stack up.

If the prop­erty is rented out to friends or fam­ily at a dis­counted rate, this will be re­garded as a non-com­mer­cial rental. The in­come will still be tax­able but you’ll only be able to claim de­duc­tions up to the amount of rent you’ve re­ceived. You won’t be able to make a loss.

The ATO has ac­cess to nu­mer­ous sources of third party data in­clud­ing pop­u­lar prop­erty rental list­ing sites, so it is rel­a­tively easy for it to es­tab­lish whether a claim that a prop­erty was “avail­able for rent” is cor­rect.

The key tip is to en­sure that you keep good records. The golden rule is that if you can’t sub­stan­ti­ate it, you can’t claim it, so it’s es­sen­tial to keep in­voices, re­ceipts and bank statements for all prop­erty ex­pen­di­ture, as well as proof that your prop­erty was avail­able for rent, such as rental list­ings.

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