Feature: Rental Properties

By Cathy Lau of Top Figures Accounting Services

Tax law is complicated for most people and is constantly changing. As an investor, it is important to know what you can legitimately claim so that you don't over pay the taxman and also the ineligible expenses to avoid any hassle or even penalties if claimed incorrectly.

We will look at most common expenses and show you what and when you can deduct certain items and what you cannot deduct.

Expenses that you cannot deduct

Expenses for which you are not able to claim deductions include: -

• Acquisition and disposal costs of the property.
  You cannot claim a deduction for the costs of acquiring or disposing of your rental property. Examples of such expenses include the purchase cost of the property, legal and conveyancing costs, advertising expenses and stamp duty of the transfer of the property (but not stamp duty on a lease of property). However these costs may form part of the cost base of the property for Capital Gain Tax purposes.


• Renovations and repairs immediately after purchase.
  Expenditure for repairs you make to the property may be deductible. However, the repairs must relate directly to wear and tear or other damage that occurred as a result of your renting out the property. Repairs to make the property suitable for rental (i.e. before the moving in of your first tenant), is not considered as incurred from the use of the property to generate assessable rental income and therefore is not deductible. However you may be entitled to Capital Works deduction.


• Expenses not actually incurred by you, such as water or electricity charges borne by your tenants


• Expenses that are not relate 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.


• Pre-purchase expenses
  Pre-purchase expenses relate to costs incurred while investigating new avenues of investment, or specific properties such as fees for seminars focusing on the expansion of your property portfolio; property sourcing fees (cost of reports on properties prior to purchase); or cost of travel to inspect properties prior to purchase. Expenses that you can deduct over a number of years There are certain types of deductions that you cannot deduct the full amount in your next tax return, but are allowed to be deducted in a number of consecutive years.


• Borrowing 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. Borrowing expense include loan application fees, lenders legal fees, title search fees, lenders mortgage insurance, stamp duty on mortgages, and mortgage registration fees.


• Depreciation on plant and equipment
  You can deduct an amount equal to the decline in value for an income year of a depreciating asset that you held for any time during the year. However, your deduction is reduced to the extent your use of the asset is for other than a taxable purpose. For your rental property, the taxable purpose is for the purpose of producing assessable rental income. The ATO allows the use of either Prime Cost (straight line) or diminishing value method. Depending on your circumstances, the choice of depreciating method can produce different tax result. You should include the cost of installation to the value of your eligible depreciating asset when calculating depreciation. Full deduction can be claimed for items costing less than $300.


• Capital Works Deduction
  You may be able to deduct costs associated with constructing a building or extension. This is normally spread over 40 years at 2.5% depending on the type of construction and the date construction commenced. Examples of eligible constructions include:
  • A building or extension, such as adding a room, garage, or pergola
  • Alterations such as removing or adding an internal wall, or
  • Structural improvements to the property It is important to note that you can only claim capital works deduction for periods when a property is rented or is available for rent.

Expenses that you can deduct immediately

Now you know what you cannot deduct and what you can deduct only over a number of years. Now it's time to take a look what you can claim as an immediate deduction in the income year you incur the expenses. The list of such expenses is extensive. However can be separated into a number of categories:

• Property management and ongoing maintenance expenses
  • advertising costs (looking for tenants)
  • body corporate fees or strata management fees
  • costs of maintaining a safe, clean and pleasant environment (such as gardening, cleaning, pest control, security)
  
  
• Rates and taxes including water rates, council rates, land tax and utilities


• Property agency costs.If you use a property agent to manage your rental property, you can claim the following costs:
  • Agent fees and commissions
  • Postage and petty expense
  • Statement fees
  • Bank charges


• Administrative expenses such as stationery, postage, telephone costs, and legal expenses (e.g. debt collection and other legal dispute with tenants)


• Insurance such as landlord insurance, building and contents insurance, and public liability insurance


• Interest on loan including loan account fees


• Repair and maintenance


• Travel expenses when you have to travel to inspect or maintain the property or to collect rents.

For more information, please contact our office:

Top Figures Accounting Services
Mobile : 0410 042 688
Email: Cathy@topfigures.com.au
www.topfigures.com.au