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 Investing? The A to Z of tax-deductible items against rental income
(Note: we are providing a guide only. To be absolutely sure, consult your accountant as tax laws may change.)
A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z
ACCOUNTANT'S FEES These fees are for advice or tax preparation.
ADVERTISING All advertising costs associated with securing a tenant for your property-whether you pay your agent to place the ad or do it yourself.
AGENT'S FEES AND COMMISSION All fees (e.g. inspection, leasing, letting fees, property managment costs), monthly commission charges and sundry costs.
BANK CHARGES It makes sense to open a bank account solely for transactions relating to your investment property. The cost of operating this account, charges and periodic loan costs (such as loan service fees) are all allowable.
BODY CORPORATE FEES If your investment property is strata-titled, it will incur deductible body corporate fees. These are shown on statements from the body corporate manager.
BORROWING COSTS The costs of taking out a mortgage (i.e. valuation costs, loan establishment fees, etc) are deductible over five years, if the loan is for five years or more. If the loan is for LESS THAN five years, you may deduct the costs over the term of the loan.
CLEANING You may deduct the cost of cleaning a rental property between tenants. This includes cost of detergents etc. But if you clean it yourself, you may only claim for materials, not for your time.
COMPUTER COSTS If you use a computer to keep your property records, you may claim the costs incurred. These include depreciation, software and stationery. However, you must apportion any private usage. Do this by keeping a log of the time you use the computer for both rental and private use, and claim accordingly. Current wisdom is that a one-month record will be a representative enough sample. Software purchased solely for property maintenance records may be claimed in total.
DEPRECIATION (Note: We recommend that you see and use a quantity surveyor to be absolutely sure.) Generally, you may claim depreciation on items you own or buy for your investment: furniture, fixtures, window treatments, floor coverings, stoves, hot-water systems etc. Rates vary from 7.5% to 30%, depending on the item. Obtain a current year booklet from your accountant or the ATO and refer to it.
There are two ways to claim depreciation: prime cost, and diminishing value.
- Prime cost calculates depreciation as a percentage of the cost of the asset.
- Diminishing value is based on the cost of the asset in the first year, and then as a percentage of the depreciated cost for the following years. This method gives a higher claim in the earlier years, and takes advantage of the fact that, in inflationary times, a dollar today is worth more than a dollar tomorrow.
Normally, the cost of carpets, stoves, hot water systems and other depreciable items are not apportioned when you purchase a rental property. In this situation, the benefits of having a quantity surveyor prepare a depreciation report far outweigh the costs. (See QUANTITY SURVEYOR)
Depreciation allowance on property: You are allowed 2.5% of the building content of your property, for the term you hold your property as an investment. If you sell the property to another investor, the deductibility flows on to the new owner.
ELECTRICITY Costs between tenants are deductible.
GARDENING AND GROUNDS MAINTENANCE Costs such as lawn-mowing, rubbish removal and tree-lopping may be claimed, unless they are the responsibility of the body corporate.
INSPECTION VISITS You may claim the cost of travelling to your rental property if the specific purpose of the trip is to inspect your property or organise repairs. Note: if you live some distance from your investment property, say, in the country, you may claim the cost of a trip to the city, including accommodation, but not if the main purpose of the trip is for a holiday.
INSURANCE You may claim landlords protection insurance, mortgage insurance, public indemnity insurance, the cost of insuring the property and any relevant contents that you own.
INTEREST ON LOANS Interest on loans obtained to help acquire a rental property, to make additions to such a property or to carry out major renovations are all deductible. (See also PREPAYMENT OF INTEREST)
LAND TAX If you own sufficient property to be liable for land tax, then this is an allowable deduction.
LEGAL FEES You may claim legal fees for drawing up a lease, issuing demands on a tenant and attending to the discharge of a loan.
However, legal fees on the purchase or sale of a property are of a capital nature, and cannot be claimed.
LETTING FEES If your agent charges you a letting fee for finding a new tenant, say, equivalent to one week's rent, this will be shown on your agent's statements and you may claim it as a deduction. Take care to ensure that your agent has not netted-off the cost. You need to declare all assessable income and claim all allowable deductions. So, although a set-off would result in the same net effect, a return prepared on this basis would understand both your income and your deductions.
MANAGEMENT FEES If you have a property manager, they arrange rentals, pays common costs and charge a commission for their work. They similar to an agent's commission, and are deductible.
MANAGEMENT LEVIES You may deduct strata levies for home units, villas etc, except for levies used for capital improvements, alterations or additions.
MORTGAGE DISCHARGE If you pay out the loan on your rental property, the costs of discharging your mortgage are deductible. This includes your solicitor's costs and any charges your lender levies.
MILEAGE If you use a car in connection with your rental property to collect rent, inspect the property, attend to repairs, bank rental income, travel to your accountant for advice and other such matters, then you may claim a deduction for mileage.
But you can't just think of a number and double it. You need to record the actual kilometres travelled so there is no dispute. The maximum claim under this method is 5,000 km. It's unlikely you'd travel more than this to attend to the needs of your properties. So a set rate per kilometre is the appropriate basis for a claim against rental income.
For the year ended 30 June 2001, the rates per kilometre for a non-rotary engine were:
- Up to 1,600cc = 48.9 cents
- 1,601cc to 2,600cc= 58.5 cents
- Over 2,600cc = 59.5 cents
Motor vehicle expenses incurred while inspecting the property prior to purchase or attending to improvements before the property is rented are NOT deductible.
If you know you travel more than 5,000 km, you'd need to calculate the method which gives you the biggest deduction:
- One-third of running expenses; or
PAYMENT OF INTEREST IN ADVANCE You may pay interest up to 13 months in advance. That is, if you purchased a property and settled it on 29 June, by paying 12 months' interest in advance, you have one day's rent and 366 days' interest expense, thereby significantly lowering this year's tax.
PEST CONTROL You may deduct costs of this nature.
PRINTING, STATIONERY, POSTAL AND TELEPHONE COSTS If you incur these expenses in maintaining the records of your rental property, they are deductible. Keep receipts and/or record them in a notebook.
PURCHASE COSTS These costs (e.g. stamp duty on transfer, settlement agent's fees, etc) are added on to the purchase price of your property. You may claim them in full when you sell the property.
QUANTITY SURVEYOR The benefits of having a quanitity surveyor prepare a depreciation report can far outweigh the costs. Often, items such as common property in a strata-title environment could be overlooked if you attempt to apportion the costs yourself. But it would be extremely difficult for the tax office to challenge values based on a report prepared by an independent surveyor.
RATES Council and water rates are allowable. But if you pay a discounted amount for making the payment on time, you may only claim for this, not the full amount.
REPAIRS AND MAINTENANCE These expenses are deductible, but sometimes people get confused about the difference between repairs and improvements.
Repairs are costs incurred in restoring an asset to the condition it was in at the time the asset was first used by its owner to earn income.
An improvement takes the asset beyond that condition.
If you get both done at the same time, take care to ensure that the relevant costs are segregated.
SAFE DEPOSIT BOXES If the sole purpose is to keep your rental property records in a safe place, you may claim this fee.
SECRETARIAL AND BOOKKEEPING EXPENSES These are claimable, but if you pay bookeeping fees to a spouse, make sure that the amount paid is what you would pay an unrelated person for doing the work. It's not worth acting outside the taxation laws.
SUNDRY There may be other isolated items that you may deduct. Seek a qualified accountant's advice.
TAX ADVICE COSTS If you get advice on the taxation implications of purchasing a rental property, these are claimable against that property's income.
TRAVEL If you own a rental property interstate AND have a holiday there, you would find it difficult to convince a tax auditor that the travel costs relate to the inspection of your property.
ZZZ The penalties can be so great if you're caught out in a dishonest claim. You'll lose no sleep if you act inside the taxation laws. |
