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Are you considering purchasing a rental property or do you already own one?
Rental income is an area that the ATO are constantly reviewing to ensure taxpayers are recording the correct income and expenses against your rental property so it pays to be especially careful.
Rental and other rental-related income is the full amount that you receive when you rent out your property. This can be paid direct to you or your agent. You must include your share of the full amount of rent you earn in your tax return.
Rental-related income includes:
You can claim a deduction for expenses only if you actually incur them and they are not paid by the tenant.
Expenses for which you may be entitled to a deduction include:
If you take out a loan to purchase a rental property you can claim a deduction for the interest charged on that loan. However, the property must be rented, or available for rental, in the income year for which you claim a deduction.
If you start to use the property for private purposes you can no longer claim a deduction for the interest you incur.
While the property is rented, or available for rent, you may also claim interest charged on loans taken out:
Some legal expenses incurred in producing your rental income are deductible. An example of this is the cost of evicting a non-paying tenant. However; most legal expenses are of a capital nature and are therefore not deductible.
Repairs and Maintenance
Expenditure for repairs you make to the property may be deductible. However, the repairs must relate directly to wear and tear or other damage that occurred as a result of your renting out the property. Repairs generally involve a replacement or renewal of a worn out or broken part.
The following expenses are capital and are not deductible:
There may be situations where not all your expenses are deductible and you need to work out the deductible portion.
You will need to apportion your expenses if any of the following apply:
You can claim a tax deduction for the decline in value of depreciation assets. The deduction for decline in value is calculated using either the prime cost or diminishing value method. Both methods are based on the effective life of the asset.
The diminishing value method assumes that the decline in value each year is a constant proportion of the remaining value and produces a progressively smaller decline over time.
The prime cost method assumes that the value of a depreciating asset decreases uniformly over its effective life.
You can also claim a deduction for certain kinds of construction expenditure which is referred to as a capital works deduction. Your total capital works deductions cannot exceed the construction expenditure.
In the case of residential rental properties the deductions would generally be spread over a period of 25 or 40 years.
You should keep records of both income and expenses relating to your rental property. The records must include:
You may make a capital gain or loss when you sell a rental property that you acquired after 19 September 1985.
You will make a capital gain from the sale of your rental property to the extent that the capital proceeds you receive are more than the cost base of the property. You will make a capital loss to the extent that the property’s reduced cost base exceeds those capital proceeds.
To ensure you are correctly recording your rental property income and expenses you should consult a taxation specialist.
Please contact Altitude Advisory for more information.
Luke Talbot-Male, Adventures Beyond
Phillip Cross, Royce Cross Agencies