|
2.
Interest |
|
|
3.
Repairs |
|
|
5.
Depreciation |
|
|
9.
Vacancy |
|
|
11.
Travel |
Properties owners are allowed a range of tax claims for
expenses related to the production of rental income. Deductible expenses in
whole or in part include:
Advertising, Bank charges, Borrowing expenses, Cleaning, Commission, Council
and Water Rates, Depreciation, Gardening, Insurance, Interest, Land tax, Lease
expenses, Legal expenses (for collection of rent, arrears or ejectment; investigating credit, worthiness, lease
preparation), Power supplied (gas/electricity), Preparation, registration,
stamping of lease documents, Repairs, Replacement of cockery,
linen etc.Safe deposit box fees, Secretarial,
bookkeeping fees, Services expenses, Tax advice cost, Telephone, postage and
stationery and Travel.
Interest paid on a loan used to purchase the rental property
or for repairs is deductible and is claimed in the year in which it is
incurred.
An investment is negatively-geared where the interest paid on the loan used to
purchase the property exceeds the net income from the property.
Expenditure incurred in borrowing money or in the discharge of a mortgage is
normally capital expenditure. However, sec. 67 specifically allows a deduction
for borrowing expenses and sec. 67A for certain mortgage discharge expenses.
Borrowing expenses are deductible over the period of the loan or five years,
whichever is the shorter period, beginning with the year in which they were
incurred. If borrowing expenses incurred in any year are $100 or less, they are
wholly deductible in that year.
Expenses in connection with the discharge of a mortgage are deductible to the
extent that the loan money or the property was used for assessable income
production. The Commissioner considers that deductible expenses incurred in the
discharge of a mortgage would include penalty interest for early repayment of
the loan.
A deduction is allowed for repairs to the rented property,
e.g. repainting, fixing leaks, mending broken parts, electrical repairs,
replacing broken fences or windows. Repairs carried out soon after purchase may
be disallowed as they are "initial repairs". You need to ensure that
repairs are carried out when the property is still income-producing,
otherwise the deduction may be lost. Capital improvements to the property are
not deductible.
Where the overall taxpayer's taxable income is reduced due
to a net rent loss, the Tax Office may approve an application for the variation
of tax instalment deductions from salary or wages for
a taxpayer. It does not follow that the investment or related deductions have
Tax Office approval.
If
property is let furnished or equipped, the lessor may
claim depreciation of plant, equipment and articles installed by the lessor; for example in the case of furnished residential
premises, depreciation may be claimed on furniture and fittings, blinds, floor
coverings, refrigerators, washing machines and stoves, television and radio
sets, etc
An allowance for replacements is given in the case of small depreciable items
where it is difficult or impossible to estimate their effective life, for
example, crockery, cutlery, bedding, linen, etc.
An immediate 100% depreciation deduction is available for units of depreciable
property acquired on or after 1 July 1991 where the effective life is less than
three years or the cost of the unit is no more than $300 It is not necessary to
pro rate for part of a year. However, the deduction is reduced where the unit
is used only partly to produce assessable income.
The Commissioner accepts that even where a group of identical items is
purchased at one time, each individual item which meets the above criteria may
be written off in the year of purchase provided the item is regarded as a
whole, can be separately identified and has a separate function.
Property Depreciation
|
||
|
Property Item |
Prime Cost $ |
Dimishing $ |
|
Blinds,
Venetian |
13 |
20 |
|
Carpets |
17 |
25 |
|
Chain
saw |
40 |
60 |
|
Crockery,
cutlery, glassware |
Replacement
|
Replacement |
|
Curtains
and drapes |
20 |
30 |
|
Electric
bed |
13 |
20 |
|
Electric
clock |
13 |
20 |
|
Electric
heater |
17 |
25 |
|
Furniture
and fittings |
13 |
20 |
|
Garbage
units compacting |
20 |
30 |
|
Gas
coppers |
13 |
20 |
|
Hot
water services |
13 |
20 |
|
Lawn
mowers Motor |
20
|
30 |
|
Lawn
mowers Self propelled |
27 |
40 |
|
Linen |
Replacement |
Replacement |
|
Linoleum |
17
|
25 |
|
Microwave
ovens |
20 |
30 |
|
Radios |
17 |
25 |
|
Refrigerators |
13
|
20 |
|
Solahart |
13 |
20 |
|
Stoves |
13
|
20 |
|
Television
sets |
17 |
25 |
|
Vacuum
cleaners |
17 |
25 |
|
Washing
Machine |
20
|
30 |
Residential: If construction commenced on or after 18 July
1985 and before 16 September 1987 the costs are deductible at the rate of 4% . Where construction commenced after 15 September 1987,
the costs are deductible at the rate of 2 1/2% per annum, except where the
construction is pursuant to a "qualifying previous commitment", in
which case the 4% rate continues to apply. Note from 13 May 1997 the amount
claimed under this section reduces the Capital Gains Tax cost base.
Lease
documentation
The cost of preparing, registering and stamping the
lease is deductible as are costs associated with the assignment or surrender of
the lease.
Insurance
Deductions are allowable for premiums on policies covering damage to premises
or contents, fire burglary, storm damage, plate glass, public risk,etc.
Commissions, management fees
A deduction is allowable for commissions and
management fees paid to estate agents for the collection of rent. Letting fees
may also be deductible. However, no deduction is allowable for an initial
letting because it is considered a capital expense except for the letting of
holiday flats on short-term leases.
Rates, land tax
Deductions are allowed for council and water rates (including excess water
rates). Land tax on the property is also deductible. Payments made on the
purchase of the property as an adjustment of rates and taxes paid by the vendor
are also deductible. Stamp duty on the purchase is not deductible, but may be
taken into account in calculating the property's cost base for capital gains
tax purposes.
Ejectment, legal costs
Legal expenses incurred by a lessor in ejecting a
rent-defaulting tenant are usually deductible. Costs relating to fair rent
hearings would be deductible as would legal costs of investigating the
credit-worthiness of a prospective tenant.
Other incidentals
Deductions are also allowed for other expenses such as advertising for tenants,
bank charges, cleaning, gardening, postage, stationery, telephone, secretarial
fees, safe deposit box fees.
The
absence of rental income does not automatically prevent the taxpayer from
deducting expenditure incurred during that period. However it would be
necessary to show that every effort was made to obtain tenants during that
time.
Apportionment
Expenses need to be apportioned if only part of the property is let, the
property is let for only part of the year, or the property is let for a mixture
of commercial and non-commercial purposes.
In the absence of a true partnership agreement between joint tenants, they each
remain assessable on half the income and entitled to claim half the losses.
Non-commercial transactions
It is normally necessary to show that a lease has a
commercial flavor the rental is considered assessable and outgoings deductible.
A transaction is more likely to be accepted if:
(1) formal lease prepared;
(2) the rent is not nominal;
(3) rent is physically paid over;
(4) the lessor has had experience with other rental
properties; and
(5) there is no moral or social obligation to subsidise
the tenant.
If transaction has both a business and private elements, apportionment of the
outgoings may be appropriate, or even the limitation of the deduction to the
amount of income from the property.
Deductions are available for the cost of travel expenses
for:* collecting rents
* repairs of the property
* preparing the property for incoming tenants
* inspecting the property
Travel costs to inspect a rent-producing property prior to purchase would not
be deductible.
A
dwelling may be considered to be the sole or principal residence (exempt from
Capital Gains Tax) of a taxpayer if it temporarily ceases to be occupied as the
sole or principal residence of the taxpayer.
For a dwelling to cease to be a sole or principal residence, it must have
initially been the taxpayer's sole or principal residence. The period of any
principal residence exemption will depend on whether the dwelling is used to
produce income during the taxpayer's temporary absence. Maximum
absence - 6 years if income derived.
If the owner sells the property prior to the end of the 6 year period of
absence, there is no requirement to return to the principal residence to gain
the CGT exemption.