Unfortunately for those who own rental properties, the Australian Taxation Office (ATO) is increasing audit activity on returns which include a rental property schedule. This follows a sample of tax returns for the 2018 financial year which were audited, where nine out of ten tax returns contained an error in the rental property schedule. So what’s on the ATO’s radar?
From 9 May 2017, landlords can no longer claim the depreciation on plant and equipment assets that were bought as part of a second-hand residential property. This includes kitchen appliances, carpets, blinds, and hot-water systems. Investors who purchase a brand new property can continue to claim depreciation for plant and equipment assets.
When a property is held jointly between a couple, family members, or others, taxpayers should ensure that all income and expenses are attributed to the taxpayers as per their legal interest in the property. For example, where a husband and wife both own 50% of a property, the husband cannot claim all the income, while the wife claims all the deductions.
A reminder that taxpayers must continue to declare all income derived from their property, not just the rent. Other sources of income include;
- Back payments of rent during the COVID-19 period;
- Payouts from insurance claims;
- Bond monies retained for repairs; and
- Income from accommodation rental platforms, such as Airbnb and Stayz.
Expenses and Deductions
As of 1 July 2017, travel expenses for residential landlords are not deductible. This includes travel for inspection, maintaining, or collecting rent on a residential rental property. Exceptions apply if the taxpayer is using the property in carrying on a business, or if you are an excluded entity (such as a company).
If you have used a loan to buy a rental property, as well as for other purposes (such as to buy a personal asset, or to cover living expenses), the interest on that loan must be apportioned. Only the interest relating to the property can be claimed as a deduction.
Legal expenses are deductible in situations where there is an eviction
, and court action for loss of rental income or damages. Other legal costs such as the costs of selling/buying the property or defending the title to the property, are generally considered capital in nature and subsequently added to the cost base of the property. These capital costs are not included as deductions in the tax return.
Where taxpayers are claiming deductions on their holiday homes, they must disclose the weeks where the property was actually available for rent. Any expenses incurred during the period of time where taxpayers use the property for their personal use, cannot be claimed. Expenses are also not deductible in full if the property is rented out at “mates’ rates”.
Capital Gains on your rental property
When selling your investment property, a capital gains event will occur on the date the taxpayer enters into a contract to sell the property and not the settlement date. You will make either a capital gain or loss on the difference between the cost base of the property, and the proceeds received at the sale.
Depending on whether the property was once your main residence, whether you bought your property prior to 20 September 1985, or held the property for longer than 12 months, there may be exceptions and discounts you need to apply on your tax return.
As with other areas of your tax return, it is important you retain documentation to substantiate the figures in the rental property schedule in case the ATO audits your tax return.
If you would like to discuss how to correctly declare income and expenses for a rental property, please contact Pilot Partners Chartered Accountants on email@example.com or (07) 3023 1300.