Rental Properties in the Spotlight
In 2022 the ATO will focus on ensuring that all rental income received is included in taxable income. This includes long and short-term rental, rental bonds, back payments of rent and insurance payouts. Back payments and insurance payouts are in the spotlight as they are more common as a result of COVID.
For those with a rental property outside of Australia, and are Australian residents, for tax purposes the rental income must be included in your Australian Tax return. You can claim expenses related to the property, although there are some special rules that need to be considered when it comes to interest deductions. An example is if you have borrowed money from an overseas lender, you might be subject to withholding tax obligations.
Co-owned properties
Rental income and expenses need to be recognised in line with the legal ownership of the property. This means that if you hold a 25% legal interest in a property then you should recognise 25% of the rental income and rental expenses in your tax returns even if you pay most or all of the rental property expenses (the ATO would treat this as a private arrangement between the owners).
The significant exception is where the parties have separately borrowed money to acquire their interest in the property, then they would claim their own interest deductions.
Tips to be aware of:
- The property must be genuinely available for rent. Advertisements or listings with agents are excellent evidence of this. In addition, you cannot impose unreasonable rental conditions (such as inflated rent or longer-term leases) to avoid obtaining a tenant but being able claim deductions.
- Initial Repairs and Improvements when you first acquire the property and prior to a tenant occupying the property are not immediately deductible. These are usually claimable over a period of time as capital works deductions.
- Significant repairs between tenants may also not be immediately deductible if the property is not available for rent at the time. They are likely to be deductible over a longer period.
- Ongoing repairs that relate to wear and tear or damage rectification can usually be claimed as a deduction straight away. Replacement of items (hot-water services, stove and similar) will be claimable over a period of time where their cost is greater than $300.00.
- Renovations and Replacements of components such as roofs or bathrooms will be classified as building costs and claimable at 2.5% per year.
- Interest is claimable on the portion of any money borrowed to acquire a property. Be careful to keep the loan separate to any other loans to ensure it relates only to the property and the interest can be claimed in full. If you use some of the borrowed funds for other purposes, you are unlikely to be able to claim the portion of interest that relates to those extra funds.
- Claim the right proportion of he expenses. If only part of the property is used for rental, then only a part of the expenses can be claimed as a deduction.
- Strata and Body Corporate Fees are only deductible immediately if they relate to the Administration Fund and general-purpose Capital Works Fund contributions. Special Levies must be reviewed separately and are only deductible when the work that they relate to is completed and paid for by the body corporate.
- Borrowing Costs include loan establishment fees, lenders insurance, and other mortgage related expenses are not immediately deductible at the time you pay them or incur them. These are deductible over a period of 5 years from the date they were incurred.
- Record Keeping: Remember you must have records of all expenses paid. The best way is to keep all records in relation to any property you own. This will ensure that if a property is rented for only a portion of the period you own it, we can minimise any income tax or capital gains tax payable. If you don’t like paper, you can scan or photograph them and keep them on your computer.
Remember it is better to have too much information available to the tax office to substantiate your claims than not enough. If there is anything you would like to clarify regarding rental properties and tax send as an email or give us a call.