Rental property taxation requirements can often be overwhelming for property owners. Important taxation principles include:
- Determining rental income that is assessable for tax purposes
- Determining expenses that constitute allowable deductions
- Being clear about which records, documents and supporting evidence needs to be kept
- Understanding important information about selling a property
Not all expenses relating to rental properties are allowable deductions. Expenses must also be apportioned where only part is tax deductible. The ‘timing’ for claiming the deduction also needs to be determined. Some expenses can be claimed in the actual year they occur. Others need to be claimed over a number of years (for example decline in value of depreciating assets and also capital works expenses).
Property owners also need to understand:
- Capital Gains (how gains and losses are treated when a property is sold).
- Goods and Services Taxes (GST) – the impact of being registered or not registered for GST.
- Negative Gearing (how to treat net rental losses arising from negatively geared property).
- Pay As You Go Instalments (PAYG) – having to pay instalments towards the expected tax liability for an income year may be required (with instalments usually payable at the end of each quarter).
- General Value Shifting Regime (losses on sale of a property may be reduced under Value Shifting Rules in specific circumstances).
Some of the areas that the Australian Taxation Office have identified that rental property owners commonly make mistakes in include:
- Claiming the purchase cost of the land component as part of the cost of constructing the rental property.
- Claiming construction costs as a decline in value of depreciating assets deduction instead of a capital works deduction.
- Claiming initial repairs or capital improvements as immediate deductions.
- Claiming the interest on the private portion of the loan (e.g. where the loan facility was used for both investing [purchasing or renovating the property], and also for private purposes such as purchase of a boat.
- Claiming a deduction for conveyancing costs.
- Claiming a deduction for the cost of travel when the main purpose of the trip is to have a holiday and the inspection of the property is incidental to that. Expenses may need to be apportioned in such a case to exclude private expenses.
- Claiming deductions for any expenses relating to private use of the property.
- Claiming deductions for a property that is not genuinely available for rent.
- Claiming deductible borrowing expenses over $100 in the first year they are incurred instead of over five years or over the term of the loan (whichever is less).
- With co-owners (e.g. husband and wife), failing to split income and expenses in line with their respective legal interest in the property.