Many Australians view property investments as a great opportunity to achieve financial freedom. This is because the country implements one of the world’s friendliest real estate tax laws, which grant a myriad of tax benefits to investors.
Property owners can minimise their annual tax bills with a range of deductions that often spell the difference between negative gearing and positive cashflow. But tax deductions vary from property to property, which sometimes leave landlords confused on what they can claim.
Your Property Investment went through the Australian Taxation Office’s (ATO) official website to help investors identify what expenses can be deducted from their tax bills.
Types of rental expenses
The ATO stressed that investors can only claim deductions on a rental property during periods when it was tenanted or “genuinely available for rent.” Additionally, investors can only claim a deduction for the portion an expense that was used to generate income and they must present records to prove these expenses.
Rental expenses are grouped into three categories: rental expenses you can claim now, rental expenses you can claim over several years, and rental expenses you can’t claim. Here’s a list of what’s included in the first two categories:
Rental expenses investors can claim now
1. Advertising costs
To find tenants, property owners need to spend on advertisements. This can be done using online platforms, print media, or signs. Any expenses landlords incurred from these can be claimed against their income.
2. Body corporate fees and charges
Owners of properties on a strata title, such as apartments and townhouses, can claim the cost of body corporate fees. However, other charges, including fees paid for the maintenance of common areas, cannot be claimed separately.
3. Council rates
Property owners can only claim council rates during periods when their properties are tenanted. This means if a property was rented for only 120 days during the year, then landlords can only claim rates for that period.
4. Land tax
Owners can use land tax as a deduction if they have a rented dwelling on their investment properties. State governments have also offered land tax discounts to landlords who will provide rent relief to their tenants financially impacted by the pandemic. It is important to note that land tax deductions vary greatly between states.
5. Insurance
Insurance typically covers tenant-related risks, including loss of rental income, and damage to the contents and building. Landlords can claim the cost of insuring a rental property.
6. Interest expenses
Property owners can claim the interest costs for an investment property and any bank fees for servicing that loan on their personal tax return. However, investors cannot claim repayments on the principal sum or interest on the entire size of the loan if they have refinanced a part of the loan for private purposes, regardless of whether equity in an investment property was used as security in that loan.
7. Pre-paid expenses
Investors can claim expenses for services that extend beyond the current income year, provided they cost less than $1,000. Expenses that cost $1,000 or more are tax-deductible only if the service period is 12 months or less.
8. Property agent's fees and commission
Fees and commission paid to agents who collect rent, find tenants, and manage and maintain the rental property are tax-deductible.
9. Utilities
The ATO allows landlords to claim deductions for basic utilities such as water, electricity, gas, and internet for the portion of these expenses that relate to the investment property.
10. Cleaning
A property might need cleaning after a tenant moves out. Cleaning costs are tax-deductible.
11. Gardening maintenance
Fees paid for the upkeep and replacement of plants and structures are claimable.
12. Pest control
The cost of hiring a professional pest controller is tax-deductible. This can be claimed either by the landlord or tenant, depending on who paid for the service.
13. Repairs and maintenance
Property owners can claim repairs in the same income year if these are a direct result of wear and tear. These include replacing a few broken roof tiles after a storm or repairing a broken appliance.
14. Legal expenses
Landlords can claim the cost hiring legal professionals if this is related to rental activities such as evicting a tenant or going to court over unpaid lease. The cost of preparing all relevant legal documents is also tax-deductible.
Rental expenses investors claim over several years
1. Borrowing expenses
Expenses incurred in taking out a loan for the purchase of the rental property are claimable. These include loan establishment fees, lender's mortgage insurance or LMI, title search fees, mortgage documentation costs, broker fees, valuation expenses required for loan approval, and stamp duty.
If the total borrowing expenses exceed $100, the deduction is spread over five years or the term of the loan, whichever is shorter. If the overall costs are $100 or less, investors can claim a full deduction in the income year these were incurred.
2. Depreciating assets
The ATO defines a depreciating asset as “an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used.” Landlords can claim this depreciation over several years, usually in line with each asset’s “effective life.” However, they can only claim depreciation on assets that meet certain criteria.
In a video, the agency explained that landlords can claim deductions on both brand-new and second-hand depreciating assets in residential rental properties if the property was bought before 7:30pm on 9 May 2017 and the asset was installed before 1 July 2017. Otherwise, they can only claim depreciation on an asset’s purchase price if the asset was brand-new, or if no one had previously claimed depreciation on the asset, because the property was either newly constructed or recently renovated.
3. Capital works
Property owners can claim capital works deductions for the costs of structural improvements done on a rental property. These include major renovations and building extensions. Deductions are generally be spread over a period of 25 or 40 years.
However, total capital works deductions cannot exceed the construction costs, and claims cannot be made until the construction has been completed. Deductions can also be claimed for the period that the property is rented or genuinely available for rent.
If the property is destroyed resulting in a total loss of the asset, landlords can deduct an amount in the income year in which the capital works were damaged. They also can claim all construction expenses that have not yet been deducted. Any costs covered by insurance is not tax-deductible.
It must be noted that the information provided above is of a general nature and should not be treated as professional advice. It is still best to discuss your circumstances with your accountant before taking any action.
