Landlords should take care not to get caught out by the taxman

The end of another financial year is almost upon us and that means its tax time again! We all know that this time of year means we need to go through the process of working out our taxable income and calculating our tax bill. Here are some handy end-of-financial-year tips on maximising your tax benefits, and tax traps to avoid if you own an investment property. We recommend you keep all your rental statements, invoices and receipts to substantiate your rental income and tax deductions.

It’s important to remember that expenses can only be claimed for the period that the property was rented or available for rent (i.e. listed for rent with an agent).

Rental income

Rent is liable to tax when it’s paid or credited to your account. If you lease a property make sure you charge market rent. Otherwise the Tax Office could reduce or disallow all your rental deductions.

What’s tax deductible?

Under Australian tax law you can claim as a tax deduction expenses you incur in deriving your rental income. This means there must be a relevant connection between the rent you receive and your rental deductions. The following types of expenses you’re likely to incur normally have that relevant connection.

  • Advertising and marketing costs to find a suitable tenant.
  • Agent’s commission to collect the rent on your behalf.
  • Capital works deductions (or building write-off deductions).
  • Depreciation of approved items that you can write off.
  • Insurance (including building and landlord’s insurance policies) for buildings that you lease.
  • Bank charges and interest on borrowings to purchase an investment property.
  • Body corporate or strata fees.
  • Land taxes.
  • Repairs and maintenance to your investment property.
  • Capital expenses such as replacing ovens, dishwashers and floor coverings.
  • Pest control.
  • Security costs.
  • Travel costs to inspect your investment property.
  • Water and sewerage charges.
  • Council rates.
  • Stationery, postage, telephone calls and internet access related to the property.

Common tax traps to avoid

Australia’s tax system operates on a self-assessment basis, and the Australian Taxation Office will ordinarily accept what you disclose in your tax return as true and correct. However, the Tax Office conducts routine tax audits and data-matching programs to keep you honest and to check that you’re not cooking the books. So it’s important that you comply with Australia’s complex tax laws. Stiff financial and criminal penalties may apply if you get it wrong or deliberately cheat the system (Not guilty, Your Honour!). The common mistakes associated with investment properties are listed here:

Rental income

  • Not declaring all the rental income you receive, and more particularly not declaring rental income on holiday homes you lease during the financial year.

Tax deductions

  • Overstating your rental expenses and claiming tax deductions for investment properties that are not genuinely available for rent.
  • Claiming a tax deduction for expenses relating to the private use of a property such as a holiday home and your main residence.
  • Incorrectly depreciating items that are not tax deductible.
  • Incorrectly claiming borrowing costs. These expenses are deductible over the period of the loan or five years.
  • Incorrectly claiming interest deductions in respect to loans that are partly investment-related and partly private. For example, you might lease a shop and reside at the back of the premises.
  • Incorrectly claiming travel expenses to inspect an investment property when the trip is also partly for private purposes. For example, if you reside in Hobart and you own an investment property in sunny Queensland, you might inspect it just when your footy team happens to be playing there.
  • Incorrectly claiming capital work deductions that exceed the construction expenditure.
  • Claiming initial repairs as repairs and maintenance costs rather than including these costs as part of the property’s cost base. Initial repairs are repairs you make to a newly acquired investment property (for example, if you paint a property you recently purchased before leasing it).

Capital gains tax

  • Not declaring capital gains you make on sale of investment properties, holiday homes and vacant land you own.
  • Incorrectly calculating the amount of capital gain or capital loss you make on sale.
  • Incorrectly claiming a main residence exemption that’s not your fair dinkum place of residence.

Tax Office publications

For more information about rental property expenses you can claim, visit www.ato.gov.au/rental. This year, there is also a special section which has been prepared by the Australian Taxation Office to assist landlords who own properties affected by the recent natural disasters.

To help you comply with Australia’s tax laws, the Tax Office has published numerous fact sheets and booklets, and they’re all free of charge (who said you can’t get blood from a stone?).

  • Deductions for prepaid expenses (NAT 4170)
  • Guide to depreciating assets (NAT 1996)
  • Personal investor’s guide to capital gains tax (NAT 4152)
  • Rental properties (NAT 1729)
  • Rental properties – avoiding common mistakes
  • Rental expenses – claiming capital works deductions (NAT 72840)
  • Rental properties – claiming legal expenses (NAT 71956)
  • Rental properties– claiming repairs and maintenance (NAT 72841)
  • Rental property deductions – know what you can claim
    • Tax pack for individuals
    • Tax Pack Supplement for individuals with investments

Source: Prince, J. 16 June 2011, Property Observer, http://www.propertyobserver.com.au/tools/don-t-get-caught-out-by-the-taxman/2011051950329 & EBM Insurance, http://www.ebminsurance.com.au/newsletters-rentcoverreport/0611-story1.php

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