The moment you decide to rent your residential property out is also the exact moment when you should start keeping records. Whatever you spend and earn must be keenly noted down in order to make sure that you pay the right taxes. Australia is very strict when it comes to properly paying taxes and submitting the necessary documents, so it would be best to start preparing what you need from the very start.
Rental income tax is different from stamp tax and surcharges upon purchase. Read our guide on Australia Stamp Duty and Surcharge for Foreign Buyers for more information.
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What kind of records should you keep?
You must keep all documentation at least 5 years from the date that you lodged your tax return. All documents related to your earnings, such as receipts of payments, must be kept. Of course, all records pertaining to your costs of managing the property must be well documented as well. Examples of your expenses are:
- Cost of hiring a property manager
- Cost of home improvement
- Maintenance costs
- Repair costs
What income should you declare?
Any income your tenant has paid for the property must be declared. If your tenant has already paid this amount to your property manager, it is already taxable to you, even if you have not received the money from your property manager.
The following are the types of income you need to declare:
Rental bond money
This is only considered income when your tenant has not paid his rental for the month and has deferred the bond money, or if you can legally acquire it if there has been some form of damage to your property caused by the tenant.
If again there are some damage to your property and you file a claim for which your receive payments for.
Reimbursed payment for damages
If your tenant paid you for the cost of fixing damages in your home, and you include the cost of repair in your deductible, then the reimbursed amount paid to you must also be included in your income.
The purchase of a depreciating asset, such as an energy saving device, entitles you to government rebates. This must be declared as income when you actually receive it.
Lump sum payment
If instead of paying monthly rent your tenant pays for his or her entire stay, this full amount must be declared even if this payment includes payment for another taxable year. It simply means you would not need to declare this income for the coming taxable year.
What expenses can you claim?
Not all money you shell out can be deducted against your income. Only expenditures directly related to the rental property can be included.
There are two types of tax deductible expenses, and these are those that you can claim deduction in full immediately, and those that you can claim deduction over several years. Always keep in mind that you can only request deductions for when you have actually rented out. If you rent your home for only part of the year, you are only allowed to deduct expenses for the time the home is being rented out.
Expenses You Can Deduct Immediately
Management costs and maintenance costs are immediately deductible in the year that you spend it. This type of costs allows you to deduct from your income, starting from when you have made your property available for rent. If you’re still constructing the apartment rental, you can also apply for deductions. The following are some of what you can have deducted:
- Advertising costs when looking for tenants;
- Labor and materials costs (corporate costs);
- Levy and annual taxes;
- Land tax;
- Landscape costs;
- Pest management;
- Building and contents insurance;
- Loan interest;
- Interest on your home loan;
- When you purchase a depreciating asset (such as an air conditioner for the property);
- Pre-paid expenses, even if you have prepaid for months extending beyond the taxable year if it’s less than a thousand dollars, or even if it’s more than a thousand dollars but it’s for 12 months.
- Property management expenses (fees that you pay your property manager);
- Maintenance costs and repair costs
- Examples of expenses on repairs that you can claim deduction:
- Damaged windows from a storm or some form of accident;
- Repairing washing machine that failed
- Maintenance costs include fixing deteriorating property or to prevent it from happening. Examples of expenses on maintenance:
- Painting job;
- Cleaning or oiling;
- Plumbing maintenance.
- Examples of expenses on repairs that you can claim deduction:
- Legal costs
- If in case you enter into a legal concern with a non-paying tenant or loss of rental income, the expenses you incur can be deducted for the taxable year.
If in any case you include improvement of a feature in your rental while you are also having this part of the home repaired, you would have to separate the cost of repairs from the cost of improvements. You can have the services and goods itemized in order to separate the costs.
Expenses You Can Deduct Over the Years
The building and its contents are subject to depreciation. Now, not all items are considered separate, such as a fixed part of the house. You can get a quantity surveyor upon purchase of the property so that they can create a report for you. This report can also include a schedule of depreciation in the next years. Download this guide from the Australian Taxation Office for calculating depreciating assets. However, keep in mind that you can only claim assets that are brand new. You can only claim deductible for second-hand assets if you have purchased and installed them before the first of July 2017.
Capital Works expenses
Improvements in your home rental, and even construction on top of an empty land, are considered capital works expenses that can be deducted over the course of several years.
Improvements are categorized as follows:
- Building extension – adding a bedroom, adding a garage, putting up a pergola;
- Alterations – removing an internal wall or adding one;
- Structural improvements – such as changing the wall material or sealing the driveway;
- Replacing equipment – such as washing machine and refrigerator.
Loan interest is not a borrowing expense that you can claim over the next years; instead it can be claimed immediately within the same taxable year that you pay for it. The following are considered borrowing expenses:
- Stamp duty for the mortgage;
- Loan establishment charges;
- Expenses included in filing mortgage documents;
- Loan valuation fee;
- Payments to your mortgage broker;
- Mortgage insurance.
You can have your entire borrowing expense deducted in one taxable year if it’s less than $100. It it’s more, then it can be spread over five years.
What are the expenses you can’t claim?
Not all expenses directed towards the property are deductible. For instance, the expenses you incurred when purchasing the property cannot be counted as deductible against your income tax. Such expenses can be counted against your capital gains tax for when you sell the property. Examples of such expenses are buyer’s agent fees and solicitor’s fees for when your loan documents are getting prepared.
Furthermore, you can't claim deductible for rental expenses that you or your property manager did not pay for. For instance, you can't request deductible for water, electricity and gas bills paid for by the tenant.
What Does Negatively Geared Property Mean?
But what happens when the income you make is less than your expenses for the year? This is called negative gearing, where the net tax calculation of the property results in a loss. In such a case, you will be allowed to file a claim for rental expenses deduction against your income. If this still results in the negative, the excess can be deducted for the following tax year.
For more information on negative gearing, read our article on What Negatively Gearing Means and How it Works.
Taxation in Australia can be complicated, and if you miss something, you might incur some penalty, more so if you are not always in Australia to manage and keep records of everything. In order to prevent this from happening, it would be best to hire a registered tax agent. Your tax agent can discuss earnings and expenses with your property manager in order to set everything straight.
If you’re looking for a tax agent to help you, send us a message and we’ll connect you with a reputable one who works in your property’s area.