Hien Hoang: 0448 012 728 and Brian Spurrell: 0412 011 946

The ATO has advised that income and tax deductions from rental properties are one of four key areas that it is focusing on this tax time. The other three areas are record keeping, work related expenses and capital gains from crypto assets, property and shares.

In this month’s column our focus will be on ensuring you are keeping correct records if you are generating income from a residential rental property because the ATO has found that nine out of ten tax returns have contained at least one error, even though most of those property owners were assisted by a registered tax agent.

Even if you use the services of a tax agent, the accuracy of your rental statement can only be as valid as the records you have maintained and have supported with appropriate documentary evidence.

Traps to Avoid

1) Reporting income and deductions in proportions to minimize tax.
If you own a property with someone else check your purchase contract which will determine whether you are joint tenants which means both income and deductions must be shared equally. Alternatively if you are tenants in common you must share both income and expenses in proportion to your respective percentages of ownership.

2) Claiming deductions when the property is not genuinely available for rent.
You can only claim deductions in proportion to the number of weeks your property is available to rent by advertising the property at a competitive rental and reasonable rental conditions.

Owners of holiday houses which are occupied by family or friends cannot normally claim deductions for the weeks they occupy the property unless a discounted rental is paid in which case deductions can only be claimed up to the amount of the rental received.

3) Confusing claims for repairs and improvements.
The cost of repairs resulting from wear and tear or other damage that happened while renting out the property can be claimed in the year the cost was incurred, but if the damage resulted in the replacement of a depreciable item such as a hot water service, refrigerator etc. at a cost in excess of $300, the cost must be depreciated over the ATO defined years of useful life.
Initial repairs of damage that existed at the time the property was purchased such as replacing broken light fittings or damaged floor boards are not immediately deductible and are treated as a capital cost forming part of the cost base and written off over 40 years at a rate of 2.5%.
Expenditure on renovations or extensions to the building are classified as improvements being of a capital nature and the expenditure added to the property’s cost base and written off at 2.5% per year.

4) Claiming purchase costs
You can’t claim deductions for the costs incurred in buying your property such as conveyancing fees and stamp duty. Instead they are included in the property’s cost base and taken into account in working out the capital gain/loss when the property is sold.

5) Claiming construction costs
You cannot write off the total purchase cost of your rental property which includes the land value as well as the cost of the building. You can however claim the construction cost of the building at the rate of 2.5% per year.

This is by far the most difficult deductible cost to quantify, particularly if the property was previously owned and is often overlooked by taxpayers who prepare their own tax return. If the previous owner also rented out the property and claimed capital works deductions at 2.5% check if there are records available to enable you to continue claiming over the remaining years. If not, it is strongly advised that you engage the services of a recognized Depreciation Quantity Surveyor such as BMT who will prepare a report based on estimated construction costs and other previously incurred capital costs.

6) Claiming borrowing expenses and interest on your loan
If your borrowing expenses such as loan establishment fees, title search fees and costs of preparing and filing mortgage documents are over $100 the deduction is spread over 5 years. If $100 or less you claim the full amount in the year incurred.

You can claim interest as a deduction if the loan is for your rental property. If you use some of the money for personal use, be sure not to claim interest on that part of the loan. Loan principal and interest payments must be segregated into deductible and non-deductible components before apportioning the deductible interest on the basis of percentage ownership and then adjusted to reflect the number of days the property was rented or genuinely available for rent. Being usually the largest deduction and often complicated by variations in deductibility be sure to get this right and fully documented.

Excellent Reference:
Tax Time 2022 Toolkit for Investors ATO NAT 75780-06.2022
You could also check our website for related articles on rental properties, work related expenses and capital gains on crypto assets, property and shares.

The content of this article is not intended to be relied upon as professional advice and should not be used as such. If you have any questions you should consult a registered tax agent.
Brian Spurrell BA, B Com, Dip Ed, FCPA, Registered Tax Agent.
Director, Personalised Taxation & Accounting Services Pty Ltd
PO Box 143 Warrandyte 3113 Ph: 0412 011 946
Web: www.ptasaccountants .com.au