What is deductible & What’s not …
for Property Investors?
|With the end of the financial year within site, most property investors should be planning for maximising their property investment deductions.
Below is a list of items which you can claim as a deduction against rental income for this year. Further below is a list of items which are not deductible, usually questioned by ATO or deductible over a number of years. I trust this will help you compile your information and make it easier to prepare your income tax return and improve your decisions in relation to managing your rental properties.
Clients of Property Tax Specialists receive a comprehensive checklist and templates to reduce time and guide in this process.
DEDUCTIBLE – immediately
ü Property management & maintenance expenses
o Advertising for tenants – directly by you or where the agent charged you
o Body corporate fees or Strata Title fees and charges
– Special levies for capital works on a building can only be depreciated at 2.5%
o Gardening/Lawn Mowing
o Pest control
o Security patrol fees
ü Rates & Taxes
o Water rates, charges & usage
o Council rates
o Land tax – first time owners have to lodge an initial land tax return with the Office of State Revenue in each state – YOU have to initiate this. They will not chase you up but they will charge additional interest for late lodgement
ü Property Agent
o Fees/commissions – including GST
o Postage & petties,
o Statement fees and
o Bank charges/fees
o Lease document expenses
o Letting fees
ü Administration expenses including
o Stationery used to maintain your rental records etc
o Postage on documents relating to property management
o Telephone calls relating to property management – ATO prefers to see a diary
o Legal expenses relating to debt collection or tenant problems
o Electricity & gas – where not covered by tenant
o Public liability
ü On acquisition – from the solicitor’s settlement letter
o Balance of council rates
o Balance of water rates
o Balance of body corporate fees
ü Repairs & Maintenance – relating to wear & tear or damage as a result of renting out the property. The idea is that an expense is considered a repair when the functionality is being restored. Generally repairs include
ATO is particularly vigilant to catch people who are claiming expenses described as repairs when they are considered to be improvements.
Example – fixing broken glass on a window is considered a repair. Replacing the whole window frame is an improvement which can be depreciated at 2.5%
Repairs made immediately after purchase of the investment property or maintenance to make the property suitable for rental are considered to be of a capital nature – part of the cost of the property and can be depreciated. They are not deductible as ATO considers the lower price of the property reflects its state of disrepair.
ü Interest & loan a/c fees on loans to finance investment properties.
o For the interest to be deductible the loan must have been applied to acquire an income producing asset e.g. rental property
o Where loans used for both investment property and private assets the interest has to be apportioned based on how much of the principal was used for which purpose.
– This usually happens when people are using a Line of Credit facility
ü Travel expenses to –
o Inspect property
o Maintain property
o Collect rents
A full deduction can only be claimed if the sole purpose of the trip relates to the property.
o Where the inspection is combined with a holiday, expenses must be apportioned, Where you visit an investment property during 1 of 10 days you are in the holiday location ATO says you are only allowed the cost of travel from your accommodation to the rental property and return
ü Cost of preparing a Quantity Surveyor’s report showing depreciation expenses and Special Building Write-off
ü Seminars – cost of attending property investment seminars – only to the extent that they relate to operating or maximising the return on currently owned properties
o Where money is spent on relevant seminars before any property is acquired, there will be no deduction available
Deductible – OVER a NUMBER of YEARS
Ø Borrowing Expenses – deductible over the period of the loan where the loan is less than five years. Otherwise deductible over five years. Expenses deductible include:
o Loan Application fee
o Lenders legal fees
o Title search fees
o Lenders mortgage insurance
o Stamp duty on mortgage
o Mortgage registration fees
Ø Depreciation on Plant & Equipment– ATO calls it Decline in Value of depreciating assets
Ø Depreciation on the building construction – ATO calls it Capital Works deduction
Ø Cost of installing any plant & equipment such Hot Water Systems – are considered part of the cost of system – to be depreciated
Ø Set of assets e.g. dining table and 6 chairs – is to be depreciated in accordance with their effective life
o Each item cannot be separately deducted for being under $300
The following items are either not deductible or considered to be of a capital or private nature by ATO
- On Purchase
- Purchase price
- Stamp duty on purchase
- Legal/conveyancing fees
- Pest & Property inspection
- Sourcing Fee
- Renovations immediately after purchase
- Repairs immediately after purchase
On Sale of a property
- Agent fees
Pre-Purchase expenses including (especially if property was not purchased)
- Attending seminars to acquire more property
- Cost of reports on property prior to purchase
- Travel to inspect property prior to purchase
Where the property was not available for rent, then all the expenses described above are not deductible
- Particularly relevant where the property is used as your personal holiday accommodation.
- Listing with agent and his documentation helps prove its availability for rental
Cost of improvements or renovations can only be depreciated over 40 years at 2.5% p.a. Individual tax rates 2011/12
To help you estimate the tax savings from any expenses spent on the property below are the individual tax rates and thresholds which applied from 1 July 2011 to 30 June 2012.
|2011/12 Rates – Resident Individuals|
|income from||Income to||Taxable amount||Rate on taxable amount||Tax Payable on column C||% on excess (marginal rate)|
|2011/12 Rates – NON Resident Individuals|
|Income from||Income to||Taxable amount||Rate on taxable amount||Tax on column C||% on excess (marginal rate)|
When you incur a rental expense, the tax savings is not the total amount but the amount multiplied by your marginal tax rate as shown above.