For many Australians looking to build a sustainable source of income outside of their main wage, property has always been a popular investment choice.
Whilst the decision is unique to individual circumstances, purchase a rental property or building an investment property portfolio has ben seen as one of the many supplementary income-generating approaches, considered as part of a diversified investment strategy. Similarly, compared to other methods, rental properties have also been favoured given they hold generous tax concessions.
As such, for those with a rental property, we've formed a tax checklist of what you need to know and be aware of - ensuring you maintain your compliance obligations.
What is deemed a Capital Improvement vs. Repairs & Maintenance when claiming a Tax Deduction?
A commonly-asked question associated with owning a rental property we receive pertains to the differentiation between 'capital improvement/expenditure' versus 'repairs and maintenance', and which activities are eligible to receive an immediate tax deduction.
As a rule, an easy way to determine if the change to the property is deemed a 'repair' vs. a 'capital improvement' is to ascertain whether the work completed restores the change to its original condition or did it improve upon its original state?
Where the change is a "like for like" to a return to the same condition, it is generally deemed a 'repair'. However, if the change is an improvement on what was already existing, it is determined to be a 'capital improvement/expenditure'. There should also be consideration if part of an asset was affected by the change or the whole asset was replaced.
As such, the 'repair' will be eligible for a tax deduction, whereas a 'capital improvement' is written off of the life of the asset.
It is also important to note, 'repairs' made to the property during the period it is leased are deductible immediately. However, repair incurred within the first 12 months of owning the property may be considered not to be rental deduction based on the state of the property at purchase. However, 'capital expenditure' can be depreciated and claimed over the effective life of the asset while the property is rented.
What Records Should I keep and maintain?
It is important to keep property records to claim a tax deduction or to capitalise as part of the property's cost base. Accurate record-keeping should cover information on both the rental income you receive and the deductible expenses you pay.
Deductible expenses which should be recorded may include:
- Body Corporate fees
- Cleaning
- Council Rates
- Electricity
- Gardening
- Insurance
- Interest
- Land Tax
- Repairs and maintenance
- Water Rates
If you have rented out all or part of the property during a financial year, you will need to maintain adequate records. An example of being able to substantiate rental income is with an Annual Statement that a rental agent would be able to provide. They may also pay some expenses of the rental property throughout the year.
As a landlord, you must keep these records for five years from the date of your Tax Return is lodged. You must also keep records of ownership for the property and all the costs of purchase/acquisition and future sale for five years after the sale as well.
Apportioning Private Use & Interest
For many investment property owners, the ownership of a residential property outside of the family home can provide the benefit of having a place to getaway and relax, especially if located in a holiday destination area.
However, it is important to note that where a rental property is utilised for private use, this can have impacts on your tax deductions come the end of the financial year. Importantly, where the dwelling is used privately (where normally rented), you must apportion your rental expenses accordingly - accounting for days where the property is not readily available to rent.
We recommend investors keep a running record of the number of days the property is used personally, allowing to determine how to apportion expenses claimed. Whilst these are sometimes outlined on rental statements provided by property managers and real estate agencies, keeping your own records is equally important.
Similarly, apportioning is relevant where a loan is taken out and used partly for the rental property and partly for a private matter. As the Interest associated with the purchase of a rental property is tax deductible, it is important to highlight that you cannot claim the interest as a deduction for the period of time the rental property is used for private purposes or any portion of the loan which is used for private purposes.
Private purposes can include using part of the loan to purchase a new car or to conduct renovations to your main residence, etc.
We recommend investors keep a record of what they've used the loan for - allowing for a percentage calculation to be made to determine an apportioned interest rate tax deduction.
ATO Data-Matching Rental Property Owners
In recent years, resulting from significant “tax gaps” between the amount of tax collected and what should have been collected, the Australian Tax Office has taken an active approach in ensuring investment property owners report their rental income correctly and maintain compliance in-line with their tax obligations.
The resulting strategy now means that the ATO have established data-matching programs to collect property management data for the 2018/2019 to 2022/2023 Financial Years, with an additional extension to 30 June 2023.
Under the program, the ATO will collect information surrounding property owner identification details, addresses, email addresses, contact numbers, bank account details, and business contact names and ABNs (if applicable).
Other information gathered surrounding rental property details will include addresses, dates that properties were first available for rent, periods and dates of leases, rental bonds details, rent amounts and periods, dwelling types, number of bedrooms, rental income categories and amounts, rental expense categories, rental expense amounts and net rent amounts. The program will also obtain details of the Property Managers involved.
It is important to note that the program includes information from sharing economy platforms (AirBNB), rental bond authorities, and property managers.
For More Information
For more information on what you can claim as tax deductions for your rental property, please contact the Archer Gowland Redshaw office on (07) 3002 2699 | info@agredshaw.com.au.
