PROPERTY TAXES

Income and Expenses

Rental 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;

ejectment;

investigating credit worthiness;

lease preparation.

·        Power supplied (gas/electricity) Preparation, registration, stamping of lease documents

·        Repairs

·        Replacement of crockery, linen etc. Safe deposit box fees

·        Secretarial, bookkeeping fees

·        Services expenses

·        Tax advice cost

·        Telephone, postage and stationery

·        Travel

·        Interest on loan

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.

 

 

PAYG Tax Office Withholding Variation.

Where the overall taxpayer's tax- able income is reduced due to a net rent loss, the Tax Office may approve an application for the variation of tax installment deductions from salary or wages for a taxpayer. It does not follow that the investment or related deductions have Tax Office approval.

Repairs versus improvements

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.

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 com- missions and management fees paid to estate agents for the col- lection 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) and Land tax. 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.

Travel

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.

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.

Vacancy

The absence of rental income does not automatically prevent the tax- payer 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. Temporary work transfer

Renting out a private residence during the period of a temporary transfer in the place of his employment, relevant losses and outgoings on the property are deductible for that period.


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 flavour the rental is considered assessable and outgoings deductible. It would appear that 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.

Borrowing Expenses

Expenditure incurred in borrowing money or in the discharge of a mort- gage is normally capital expenditure. However, sec. 67 specifically allows a deduction for borrowing expenses and sec. 67A for certain mortgage discharge expenses.

Expenses are deductible over the period of the loan or 5 years, whichever is the shorter period, be- ginning 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 dis- charge of a mortgage are deductible to the extent that the loan money or the property was used for assessable income production. This includes expenses incurred to discharge the mortgage.

Capital Works Building Allowance (DIV 10) Residential:

Where construction of a rental property was commenced after 21 August 1984, a capital works deduction may be available. Deductions are based on the original cost of the construction. Where the construction commenced between 22 August 1984 and 15 September 1987 the deduction is 4% per annum. Where construction commenced after 15 September 1987 the deduction is 2.5% per annum. Note from 13 May 1997 the amount claimed under this section reduces the Capital Gains Tax cost base.

DEPRECIATION

For Property let furnished, you may claim depreciation of plant, equipment and articles installed; for example, depreciation may be claimed on furniture and fit tings, blinds, floor coverings, refrigerators, washing machines and stoves, television and radio sets, etc. An allowance for replacements is given for small depreciable items where it is difficult to estimate their effective life, for example, crockery, cutlery, bedding, linen etc.

Low-cost assets are depreciating assets that cost less than $1,000. Low-value assets are depreciating assets that are not low-cost assets but which, on 1 July 2011, had been written off to less than $1,000 under the diminishing value method. You can have only one low-value pool. Once you choose to allocate a low-cost asset to a low-value pool, you must allocate to the pool all other low-cost assets you hold in that year and in future years.

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.

See last pages for detailed Depreciation schedule.

NSW Land Tax

Land tax is a tax levied on the owners of land in NSW as at midnight on 31 December of each year. In general, your principal place of residence or land used for primary production (a farm) is exempt from land tax. You may be liable for land tax if you own or part-own:

•                   vacant land, including vacant rural land

•                   land where a house, residential unit or flat has been built

•                   a holiday home

•                   investment properties

•                   company title units

•                   residential, commercial or industrial units, including car spaces

•                   commercial properties, including factories, shops and warehouses

•                   land leased from state or local government

Rates and thresholds

The Valuer General has determined the following land tax threshold

•                   2012 land tax is $396,000. Premium land tax threshold $2,421,000.

•                   2011 land tax is $387,000. Premium land tax threshold $2,366,000.

•                   2010 land tax is $376,000. Premium land tax threshold $2,299,000.

Rates and thresholds

Land tax is calculated on the combined value of all the taxable land you own above the land tax threshold. The rate of tax is $100 plus 1.6 per cent of the land value between the threshold and the premium rate threshold and 2% thereafter.

If land is owned by a trustee of a special trust the land tax threshold does not apply and land tax will be charged at a flat rate of 1.6% of the taxable land value up to the premium threshold of $2,299,000 and then 2% thereafter.

If the combined value of your land does not exceed the threshold, no land tax is payable.


 

Capital gain from a CGT event in respect of the property

When a CGT event occurs in respect of rental property acquired after 19 September 1985 and the capital proceeds exceed its cost base, a capital gain will arise. Capital losses may be offset against the gain and, where the asset has been owned by a person for at least 12 months; a CGT discount may be available. The net amount of capital gain is included in the assessable income.

•                   Keep records of every circumstance or event that may be relevant to working out capital gains or losses. Records must be kept for at least five years. If the CGT event relates to a disposal of property, then the records must be kept from the date of acquisition up to the date of sale and then for five years after the relevant.

•                   Consider delaying CGT events until the next income year in order to delay the derivation of assessable income.

•                   Keep records of other matters which may be relevant to calculating capital gains and losses, such as capital allowance deductions.

•                   If a capital gain has been crystallised, consider realising capital losses in the same year to offset the capital gains.

•                   Where CGT assets are owned by an individual, trust or complying superannuation fund, consider holding them for at least 12 months to qualify for the CGT discount.

•                   Depreciating assets sold with the property, as they are subject to separate balancing adjustment calculations on revenue account. 

Principal Place of Residence CGT Exemption

Basically if you make a capital gain when selling your home it is exempt from capital gains tax. PPR stands for principal place of residence.

CGT does not apply to your home if purchased before 20 September, 1985.

The PPR exemption can apply to a forfeited deposit or damages received from a defaulting purchaser providing the house is put back on the market and eventually sold.

A “Spec” builder who lives in the “spec” home technically qualifies for the PPR exemption but is taxable on the profit as normal business income anyway and this overrides the CGT exemption.

If the home is owned by a trust or company the PPR exemption cannot apply. If you move into a house as soon as practical after you purchase it the house is deemed to be your PPR from the time you purchased it. Further, if at the time of purchasing your new house you have not yet sold your old house they can both be your PPR for up to 6 months. Providing during the last 12 months you have lived in your old residence for at least 3 continuous months and it was not used to produce income during the period in that 12 months that it was not your PPR.

If you sub divide the land your home is on and sell the new block separately from your home the PPR exemption does not apply. If you build another house on the block the PPR exemption can apply for up to 6 months if you sell off the old home in that time.

You can only have one PPR at a time. Providing you have at some time lived in the place you can choose which house you want to be considered your PPR but only from the time you first lived there and only up to six years after you move out if it becomes income producing during your absence. The time frame is unlimited if it is not income producing while you are not living there. Note if you move back in and then out again you are entitled to another 6 years PPR exemption even if it is income producing.

For PPR the ATO considers the following:

-         Electricity and Phone connected in your name.

-         Registered on the electoral role to that address.

-         The presence of personal effects in the house.

-         The address given for mail deliveries.

-         Where your family lives.

-         The length of time you have lived there.

-         Your reasons for occupying the dwelling.

If you earn income from your PPR while you are living there than your PPR exemption only applies to the percentage of the Capital Gain that represents the percentage of the house used for private use. If the home was partly used to produce income while you were living in it then the same percentage PPR exemption applies during the 6 year period as the percentage the house was used for private while you were living there.

You can elect to have vacant land or a property you are renovating classed as your PPR for a period of up to 4 years before you move into it providing you do not have another PPR. You must move in as soon as practical after the building is finished and live there for at least 3 months before selling or have died.

If your house is accidentally destroyed and you sell the land rather than rebuild, your PPR exemption can continue to apply to the land until sold providing you do not claim any other place as your PPR.

Families are discriminated against in those spouses and their children under 18 can only have one PPR between them no matter where they live. Spouses can elect to claim their spouse’s PPR as theirs even if they never lived there and even if their name is not on the deed. If both spouses want their separate homes to be their PPR they only get half the exemption on each place.

If you acquired your PPR after 20th September, 1985 and used it as your PPR until sometime after 20th August, 1996, when it became income producing you must use the market value of the property at the time it becomes income producing, as your cost base. Therefore any assessable capital gain will only arise on an increase in the value of the property after it ceased to be your PPR. It is not optional.

GST and rental properties

Transaction

GST treatment

Sale of residential premises:

Newly built

Substantially renovated/built to replace

Not new

 

Taxable if sold by entity required to be registered

Taxable if sold by entity required to be registered

Input taxed regardless of whether or not entity registered

Sale of residential land

Taxable if sold by an entity required to be registered

Rental of residential premises

Input taxed regardless of GST registration status

Rental of display home

Input taxed regardless of GST registration status

Expenses connected with rental of residential property (insurance, repairs, agency, commission)

No input tax entitlement regardless of GST registration status


 

Property Depreciation Schedule

ASSET

YEARS

ASSET

YEARS

Air conditioning assets

Fire control assets:

(excluding ducting, pipes and vents):

Alarms:

Air handling units

20

Heat

6

Chillers:

Smoke

6

Absorption

25

Detection and alarm systems:

Centrifugal

20

Alarm bells

12

Volumetrics (incl reciprocating, rotary, screw, scroll):

Detectors (incl addressable manual call points, heat,

Air cooled

15

multi type and smoke)

20

Water cooled

20

Fire indicator panels

12

Condensing sets

15

Emergency warning and intercommunication systems

Cooling towers

15

(EWIS):

Damper motors (incl variable air volume box controller)

10

Master emergency control panels

12

Fan coil units (connected to condensing set)

15

Speakers

12

Mini split systems up to 20KW (incl ceiling, floor

Strobe lights

12

and high wall split system)

10

Warden intercom phone

12

Packaged air conditioning units

15

Extinguishers

15

Pumps

20

Hoses and nozzles

10

Room units

10

Pumps (incl diesel and electric)

25

Ceiling fans

5

Stair pressurisation assets:

Clocks, electric

10

A C variable speed drives

10

Digital video display (DVD) players

5

Pressurisation and extraction fans

25

Door closers

10

Sensors

10

Door stops, freestanding

10

Kitchen assets:

Escalators (machinery and moving parts)

20

Cook tops

12

Evaporative coolers:

Crockery

5

Fixed (excluding ducting and vents)

20

Cutlery

5

Portable

10

Dishwashers

10

Floor coverings (removable without damage):

Freezers

12

Carpet

10

Garbage disposal units

10

Floating timber

15

Microwave ovens

10

Linoleum

10

Ovens

12

Vinyl

10

Range hoods

12

Furniture, freestanding

13 1/3

Refrigerators

12

Garbage bins

10

Stoves

12

Garbage compacting systems (excluding chutes)

6 2/3

Water filters, electrical

15

Generators

20

Laundry assets:

Gym assets:

Clothes dryers

10

Cardiovascular

5

Ironing boards, freestanding

7

Resistance

10

Irons

5

Hand dryers, electrical

10

Washing machines

10

Heaters:

Outdoor assets:

Fixed:

Automatic garage doors:

Electric

15

Controls

5

Gas:

Motors

10

Ducted central heating unit

20

Barbecue assets:

Other

15

Fixed barbecue assets:

Freestanding

15

Sliding trays and cookers

10

Hot water systems (excluding piping):

Freestanding barbecues

5

Electric

12

Floor carpet (incl artificial grass and matting)

5

Gas

12

Furniture, freestanding

5

Solar

15

Gardening watering installations:

Intercom system assets

10

Control panels

5

Lifts (incl hydraulic and traction lifts)

30

Pumps

5

Lights:

Timing devices

5

Fittings (excluding hardwired)

5

Garden lights, solar

8

Freestanding

5

Garden sheds, freestanding

15

Shades, removable

5

Gates, electrical:

Linen

5

Controls

5

Master antenna television (MATV) assets:

Motors

10

Amplifiers

10

Operable pergola louvres:

Modulators

10

Controls

15

Power sources

10

Motors

15

Mirrors, freestanding

15

Sauna heating assets

15

Radios

10

Sewage treatment assets:

Rugs

7

Controls

8

Solar power generating system assets

20

Motors

8

Stereo systems (incorporating amplifiers, cassette

Spas:

players, compact disc players, radios and speakers)

7

Fixed spa assets:

Surround sound systems (incorporating audio video

Chlorinators

12

receivers and speakers)

10

Filtration assets (incl pumps)

12

Telecommunications assets:

Heaters (electric or gas)

15

Cordless phones

4

Freestanding spas (incorporating blowers, controls,

PABX computerised assets

10

filters, heaters and pumps)

17

Telephone hand sets

10

Television antennas, freestanding

5

Swimming pool assets:

Television sets

10

Chlorinators

12

Vacuum cleaners:

Cleaning assets

7

Ducted:

Filtration assets (incl pumps)

12

Hoses

10

Heaters:

Motors

10

Electric

15

Wands

10

Gas

15

Portable

10

Solar

20

Ventilation fans

20

Tennis court assets:

Video cassette recorder systems (VCR)

5

Cleaners

3

Water pumps

20

Drag brooms

3

Window blinds, internal

10

Nets

5

Window curtains

6

Rollers

3

Window shutters, automatic:

Umpire chairs

15

Controls

10

Security and monitoring assets:

Motors

10

Access control systems:

Bathroom assets:

Code pads

5

Accessories, freestanding (incl shower caddies,

Door controllers

5

soap holders, toilet brushes)

5

Exhaust fans (incl light/heating)

10

Readers:

Heated towel rails, electric

10

Proximity

7

Shower curtains (excluding curtain rods and screens)

2

Swipe card

3

Spa bath pumps

20

Closed circuit television systems:

Security systems:

 

Cameras

4

Code pads

5

Monitors

4

Control panels

5

Detectors (incl passive infra red, photo sensors

 

Recorders:

and vibration)

5

Digital

4

Global System for Mobiles (GSM) Units

5

Time lapse

2

Noise makers (incl bells and sirens)

5

Switching units (incl multiplexes)

5