The Australian Taxation Office (ATO) has its sights set on investment properties this end of financial year (EOFY) and will be cracking down on tax returns with incorrect claims for rental properties.
With almost a third of all home loans in Australia investment properties, it's worth knowing that owning an investment property can allow for a large number of expenses to be deducted come tax-time.
Knowing what can be claimed on an investment property can save investors thousands of dollars every year on their tax returns, so it pays to know what you can claim (and what you can't).
All information in this article is sourced from the Australian Taxation Office's website - make sure you check with the ATO or with a qualified tax professional for information relevant to your personal situation.
According to the ATO, rental income is considered assessable income and is therefore taxable. The current marginal tax rates are as follows:
|Taxable Income||Tax rate|
|0 – $18,200||Nil|
|$18,201 – $37,000||19c for each $1 over $18,200|
|$37,001 – $90,000||$3,572 plus 32.5c for each $1 over $37,000|
|$90,001 – $180,000||$20,797 plus 37c for each $1 over $90,000|
|$180,001 and over||$54,097 plus 45c for each $1 over $180,000|
Source: Individual Income Tax Rates, Australian Taxation Office 2020
Therefore, a $100,000 income (before-tax) and a $25,000 per-year rental income would result in a total taxable income of $125,000, and would be charged at the 37% rate.
We'll start off with what you can't claim on an investment property before moving onto the good stuff.
The things that can't be claimed on an investment property can essentially be boiled down to:
Any expenses relating to your personal use of the property: you can only claim expenses on parts of the house used for investment purposes, so tough luck if you live in it.
Any expenses paid for by the tenants: bills you pay for might be deductible, but anything the tenant themselves pay for (like utility bills) are not.
Borrowing costs where you've borrowed against the equity in the property for personal use
Costs related to the purchase or sale of the property
In addition to these things, the principal amount borrowed is not tax deductible, but as we'll explain below, the interest on an investment loan can be.
The ATO says you can generally claim an immediate deduction against your current year's income for all expenses that are related to the management and maintenance of the property.
Consider consulting an accountant to find out what you might be able to claim on your property. Just remember that golden rule: these are only deductible if used for investment purposes. So moving furniture in that you intend to use when living in the house probably doesn't count.
Check the ATO for a comprehensive list of what borrowing expenses you can and can't claim.
Using advertising platforms to find tenants for your rental property is a tax deductible expense.
While you can't deduct the principal (aka the initial amount borrowed per the terms of your loan), any interest accrued on your regular repayments can be claimed as an investment expense. Interest-only loans are a popular option among investors since they temporarily allow them to deduct their full repayments for a period before the loan reverts to both principal and interest repayments.
However, you can't claim repayments made on interest charged if you have refinanced part of the mortgage for a private purpose.
Council rates can only be claimed while the property has a tenant in it, so if your rental property was only tenanted for 250 days of the year, you can only claim council rates for those 250 days.
If the dwelling on your investment property is rented out, you can claim land tax as a deduction. Some state governments have offered land tax discounts for landlords who provided rent relief for their tenants impacted by COVID.
If your investment property is on a strata title (apartments and townhouses) you can claim the cost of body corporate fees as a tax deduction.
General wear and tear (known as depreciation) on your investment property is a claimable tax deduction. According to the ATO, a depreciating asset is "an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is in use."
Examples of assets that deductions for decline in value can be applied to include:
Repairs can be claimed as a tax deduction in the same income year if the repairs are a result of wear and tear, like fixing a broken appliance or repairing storm or flood damage.
Professional pest control costs are tax deductible and you or your tenant can claim this expense depending on who paid for it.
If you have insurance on your investment property you can claim the costs of insurance in your tax return. Landlord insurance typically covers tenant-related risks such as damage to the contents and building, or loss of rental income.
If you have to hire legal professionals for something related to the tenant, such as eviction or unpaid lease, you can claim this as a tax deduction.
Two tax breaks that were a hot topic in the 2019 federal election - negative gearing and capital gains tax - have remained unchanged, after major overhauls were promised by the losing party. Properly taking advantage of these two things can help add to your savings pile, which could have grown quite large already following all of the above deductions.
Negative gearing is when you deduct losses made on your investment property in a financial year from your total taxable income. You make a loss on an investment property when the pre-tax costs of owning and paying for the property (maintenance + loan repayments, for example) are greater than the rental income you receive from it.
This isn't actually a money-making strategy, as you're simply shifting that loss somewhere else to lower your taxable income, but it's useful for minimising short-term losses until you eventually sell the property for a profit. Selling for a profit also attracts the capital gains tax (CGT), which can also be lowered if you're a savvy investor.
Any capital asset sold, like property or shares, comes with either a capital loss (selling for less than the purchase price) or a capital gain (selling for more than the purchase price). The capital gains tax is applied to profits made on investments, where the capital gain made is added to your assessable income.
CGT can take a big chunk out of profits made on house sales, as many properties can make profits of hundreds of thousands of dollars. But if you've held the property for more than 12 months, then the capital gains tax is reduced by 50%. That means you'd only add half of the profit made to your assessable income.
The ATO has started cracking down a number of rorts, including those pertaining to investment properties. Making misleading or fraudulent claims on your investment property can lead to big fines, so it's important to get it right.
If you can't prove it, don't claim it. Keep all relevant receipts, invoices and bank statements as well as proof of rental listings and advertisements. The ATO states rental income and expense records need to be kept for five years, and you can't make a claim on your tax return without some kind of proof. So make sure you keep either physical or digital records and have them on hand when completing your tax return.
If in doubt, consult the ATO or a qualified accountant or adviser for help maximising your tax return on your property portfolio.
You cannot claim borrowing costs where you've borrowed against the equity in the property for personal use.
You can only claim a deposit on the interest portion charged on your investment loan.