In this year’s federal government budget a number of new rules were announced, as well as changes made to existing ones, that will impact property investors come tax time.
As an owner of a rental property, the last thing you want to do is make a mistake when it comes to tax time. Reason being, it could see you issued with a please explain letter or perhaps something much worse from the Australian Taxation Office (ATO).
Here is a brief overview of what you can and can’t claim as a property investor and what could happen to you if you do get it wrong.
What You Can Claim as A Property Investor
There are certain items or expenses as a property investor you can claim immediately, other expenses that you can claim down the track and certain expenses you cannot claim at all. Here’s what you need to know.
Immediately deductible expenses
Below is a list of property related expenses that you can claim an immediate deduction for on your rental property:
- advertising for tenants
- body corporate (strata) fees/charges
- council rates
- water rates
- land tax
- cleaning
- gardening and lawn mowing
- pest control
- insurance
- interest
- property management fees and commission
- repairs and maintenance
- certain legal expenses
Apportioned deductible expenses
Some expenses associated with owning a rental property can only be claimed over a period of time. There are 3 main types of these expenses which include:
- Borrowing – This includes items such as: loan establishment fee’s, title searches, the cost of preparing and filing mortgage documents, mortgage broker fee’s, valuation fees associated with loan approval, stamp duty charged on the mortgage, lenders mortgage insurance. Surprisingly, borrowing expenses do not include interest which can be deducted immediately. Where total borrowing expenses exceed $100, the deduction is spread over 5 years or the term of the loan – whichever is less.
- Depreciation – These expenses relate to assets that have a limited life and are known to depreciate in value over time. They can be acquired as part of the purchase of the property or after the purchase. Examples include items such as washing machines, dishwashers, clothes dryers etc..
- Capital works – You can claim capital works expenses for construction items as deductions for a rental property, subject to certain conditions and where the works were carried out after 17 July 1985. Deductions for construction expenditure apply to capital works items such as:
a) building changes or adding an extension – such as adding a room, creating another storey or a garage
b) cosmetic changes– such as adding or removing internal walls
c) structural improvements – such as adding a pergola, swimming pool or erecting a fence or retaining wall.
Deferred deductible expenses
When you buy and/or sell an investment property there are certain costs incurred, which are called capital expenses.
As a property investor, you can include these expenses when calculating the ‘cost base’ of your property. In other words, what it cost you to purchase and improve the property over time.
These expenses help to reduce the amount of capital gains tax (CGT) you may be liable to pay when it comes time to sell your property.
Examples of typical capital expenses include:
- conveyance costs
- title searches
- buyers agent/advocate fee’s
- valuation fees
- stamp duty paid
What You Cannot Claim as A Property Investor
In this year’s federal budget some changes were made to tax rules for property investors, effective for the 2018 financial year.
Here is an overview of the two main changes:
- Travel costs incurred inspecting a rental property to collect rent or for maintenance are no longer claimable
- Depreciation of plant and equipment purchased by a previous property owner is no longer permissible
In addition to these, as a property investor you also cannot claim the following as expenses:
- Insurance premiums where, under the policy, a loan is to be paid out in the event that you die, become disabled or unemployed
- Any expenses you have not personally paid yourself
- Costs incurred after you start using an investment property for private purposes
- Borrowing or interest expenses on a portion of a loan used for private purposes (for example, loan increase to purchase a new car)
- Interest on a loan you use to buy a new home but you don’t use the home to produce income
Penalties for Property Investors
According to the ATO, there are some common actions and penalties you will face if you are found to have incorrectly claimed expenses relating to your rental property, such as:
- Have your tax return reviewed and amended
- Pay back money owed to the ATO
- Pay a fine for making incorrect statements
Unless you’re a tax expert yourself, keeping on top of all the relevant tax rules can be cumbersome and time consuming. Not to mention risky.
My best advice to property investors is to hand it over to a tax expert who specialises in the area of rental properties. That way you can be rest assured you will be in good hands and quite possibly claiming even more than you realised you could.
A nice added bonus is that the cost of the advice itself is tax deductible. Which is a win-win situation in my view.
Don’t know a good tax accountant? That’s ok. I know a few really good ones. Get in touch and I will happily provide you with their details.
You should note that the information in this article is general and of a summary nature only. Tax law is a very specialised area and I recommend you consult a registered tax advisor or accountant in relation to what applies to your own individual situation and circumstances.
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Shelley Horton is the founder of Sydney based exclusive buyers agency Albion Avenue. With a 20 year career honing her skills in every aspect of the property industry Shelley knows what makes a property worth buying and how to get the best deal.
