Australia has one of the most friendly real estate tax rules in the world, offering property owners a variety of tax breaks that may often mean the difference between negative gearing and positive cash flow.
In addition, if you own a rental property, you may be eligible for several other tax breaks that may help you grow your money. However, tax deductions differ from situation to situation, which might leave landlords perplexed about what they can claim.’
We scoured the official website of the Australian Taxation Office (ATO) to help you determine which costs can be deducted from your yearly tax bills.
How are Rental Expenses Classified?
According to the ATO, landlords may only claim deductions for tenanted rental properties or “genuinely offered for rent” throughout the tax year. Furthermore, property owners can only claim a deduction for the amount of the expenditure to create revenue, and they must provide documentation to justify these expenses.
The ATO classified rental expenditures into three categories:
- Rental expenses that may be claimed immediately.
- Rental expenses that can be claimed over several years.
- Rental expenses that cannot be claimed.
You will be able to claim the following costs in the same year in which they were incurred:
- Advertising for tenants
- Body corporate fees and charges
- Borrowing expenses (expenses incurred from directly obtaining a loan for the acquisition of your rental property – claimed over a five-year period at a rate of 20% per year)
- Council rates
- Water charges
- Land tax
- Cleaning
- Lawn mowing and gardening
- Pest Control
- Insurance (building, contents, public liability)
- Interest expenses
- Pre-paid expenses
- Property agents’ fees and commissions
- Income protection insurance
- Repairs and maintenance
- Some legal expenses
- Accounting and tax agents’ fees
Which Expenses Are Not Deductible?
- Expenses incurred as a result of a capital or private transaction.
- Expenses incurred due to the purchase and disposition of the relevant property.
- Expenses incurred due to corporate body contributions to a special purpose fund to pay for specific capital expenditure.
- Expenses incurred by the taxpayer but not really incurred, such as water and energy expenses paid by the tenants.
- Expenses that are not tied to the rental of a property, such as those associated with a vacation house that is rented out for a portion of the year
What to Consider When Claiming Deductions
1. A taxpayer who claims a deduction for an investment property must ensure that they have receipts to support the deductions claimed. If an audit requires proof of spending, the lack of such receipts will make things especially challenging. Normally, this will necessitate complete substantiation, which means that there must be a receipt that meets the Act’s standards. Although there may be some leeway on this front in some circumstances, it should not be counted on.
2. The property must be rented or available for rent. If it is not, no expenses may be claimed.
3. The entire expense must be employed to generate income. If it is not, it may be regarded as a private expense and hence cannot be claimed as a deduction.
4. If the property is rented to relatives or friends for less than arms-length market rent, the ATO may regard the arrangement as private, and the taxpayer may only be able to claim enough deductions to balance the rent, but not enough to produce a tax loss.
5. You can no longer deduct travel expenditures incurred when inspecting, maintaining, or collecting rent on a residential property.
Conclusion
We hope that you have gained a better understanding of how tax deductions work in the Australian property market. But remember, the information herein is only a very basic introduction. We strongly recommend you consult an accountant or the ATO if you are unsure about the tax benefits you can claim.
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