The first point made by the ATO is to ensure that all rental income is included, such as income from short-term rental arrangements, renting part of a home, and other rental-related income like insurance payouts and rental bond money that has been retained.
The ATO receives rental income data from a range of sources including sharing economy platforms, rental bond authorities, property management software providers, and state and territory revenue and land title authorities.
Advisers should also check to ensure that all expenses are accounted for correctly, for example as either deductible upfront, over time, and/or as being included in the cost base of a property. It is necessary to ensure that deductions are only claimed to the extent that the property is used for income producing purposes. This can also be an issue with respect to apportioning interest expenses on a loan used partly to acquire the property and partly for private purposes.
The ATO provides some comments on the tax calculations that need to be performed when selling a rental property. The cost base will typically include the cost of the property when purchased and any costs associated with acquiring or selling it. This can include things like stamp duty, legal fees, valuations, and real estate sales fees. Capital works deductions sometimes need to be subtracted from the cost base.
Beyond the comments made by the ATO in the guide it is important to ensure that appropriate adjustments are made when clients sell depreciating assets with a rental property. These are separate assets from the property, and it is necessary to perform separate calculations in relation to these assets.
Not all expenses are the same – some can be claimed straight away, such as rental management fees, council rates, repairs, interest on loans and insurance premiums. Other expenses such as borrowing expenses and capital works need to be claimed over a number of years. Capital works can include replacing a roof, or a new kitchen renovation. Depreciating assets such as a new dishwasher or new oven costing over $300 are also claimed over their effective life.
Refinancing or redrawing on a rental property loan for private expenses such as holidays or a new car, means that the amount of interest relating to the loan for the private expense can’t be claimed as a deduction.
SELLING A RENTAL PROPERTY
When selling a rental property, capital gains tax (CGT) needs to be considered and any capital gains or capital losses need to be reported.
When calculating a capital gain or capital loss, it’s important to get the cost base calculation right. Cost base is usually the cost of the property when purchased and any costs associated with acquiring or selling it. These can be things like stamp duty, legal fees, valuations, and real estate sales fees. Any capital works claimed as deductions may also need to be subtracted from the cost base.
Records of all income and expenses relating to rental properties, including purchase and sale records, must be kept. This ensures all eligible deductions are captured when preparing tax returns and capital gains tax can be calculated correctly when the property is sold.