Income and deductions must be in line with a rental property owner’s ownership interest, which should generally mirror the legal documents.
RENTAL INCOME
When preparing your tax return, make sure all rental income is included, including income from short-term rental arrangements, renting part of a home, and other rental-related income like insurance payouts and rental bond money retained.
Rental income must be reported:
- in the year the tenant pays - not when your agent transfers it to you
- as the gross amount received (before property manager fees and other expenses your property manager pays on your behalf are taken out).
Make sure you are declaring your gross income. Some rental property owners are declaring their net rental income after the property manager has paid their expenses and then they have claimed deductions like rates and repairs all over again.
RENTAL EXPENSES
There are 3 categories of rental expenses:
Expenses where you cannot claim deductions – for example, personal expenses, including expenses arising from your personal use of the property and expenses of a capital nature, such as second hand depreciating assets.
Expenses where you can claim an immediate deduction in the income year you incur the expense – for example, interest on loans, council rates, repairs and maintenance and depreciating assets costing $300 or less.
Expenses where you can claim deductions over a number of income years – for example, capital works, borrowing expenses and the decline in value of depreciating assets (if specific criteria are met).
INTEREST EXPENSES
The ATO is particularly focused on interest expenses and ensuring rental property owners understand how to correctly apportion loan interest expenses where part of the loan was used for private purposes (or the loan was re-financed with some private purpose).
You can only claim interest on a loan used to purchase a rental property to earn rental income. If you’ve used any part of your original or refinanced investment property loan to cover private expenses, like buying a new car or renovating the home you live in, you can only claim an interest deduction for the portion relating to producing your rental income.
REPAIRS, MAINTENANCE, AND IMPROVEMENTS
Initial repairs to rectify damage, defects or deterioration that existed at the time of purchasing a property to get tenants in can't be claimed as an immediate deduction but may be claimed over a number of years as capital works deductions.
If you have owned your rental property for a number of years and perform general repairs and maintenance, these repairs are immediately deductible.
You can claim an immediate deduction for general repairs like replacing a broken light globe or window. But if you rip out an old bathroom and put in a new and improved one, this is a capital improvement and is deductible over time as capital works.
For more information, refer to the Rental properties repairs, maintenance and capital expenditure fact sheet on the ATO website.
SHORT TERM RENTALS INCLUDING HOLIDAY HOMES
The ATO know that many people who own a short-term rental property, like a holiday home, rent it out for most of the year and use it occasionally themselves. You will need to apportion your deduction for rental expenses when the property (or part of it) is not being used to produce rental income, such as when you:
- use it personally or reserve it for friends or family
- when you place unreasonable conditions that restrict the likelihood of the property being rented (for example, excessive rates, requiring prospective tenants to give references for short holiday stays, or conditions like ‘no children’ in a family friendly destination).
You need to make sure you have the records to demonstrate you incurred expenses for your rental property and the extent they relate to producing rental income. If you’ve charged a mates rate, you can only claim for expenses up to the amount of income you’ve received.
This is an area the ATO are paying close attention to this year. If you’ve made genuine mistakes, the ATO encourage you or your registered tax agent to fix any errors or omissions in your tax return as soon as you can.
DATA MATCHING
The ATO has sophisticated data matching capabilities which include rental property-related data and has recently implemented new residential investment property loans (RIPL) and landlord insurance (LI) data matching programs.
The RIPL and LI programs are part of a broader suite of data-matching programs that includes property management, rental bond and property transaction data, allowing the ATO to address several taxation risks in the investment property market.
Around 87% of taxpayers who own rental properties use a registered tax agent to lodge their return. It is important taxpayers provide their registered tax agent with the right information to prepare their return correctly. Taxpayers are responsible for what they include in their tax return, even when using a registered tax agent.
For more information on rental properties, refer to Residential Rental Properties on the ATO website.