When determining what you can and can’t claim, it is recommended that you consider the following general tips.
These are guidelines only, and you should discuss them with us to determine how they apply to your particular circumstances.
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Be able to justify your claim
Make sure you have receipts to justify the deductions you are claiming, and can justify the connection between the expense and deriving the rental income (eg. it wasn’t also for a private purpose).
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Low cost depreciable assets of $300 or less
You generally get an immediate deduction for depreciable assets costing $300 or less. However, if you purchased other items during the same tax year and together they form part of a set, or are substantially identical and the combined cost is more than $300, each item must be separately depreciated.
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Depreciable assets of between $300 and $1,000
Subject to certain conditions, these assets can be ‘pooled’ and the total cost depreciated at 37.5 percent, which may be more favourable than separately depreciating them.
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Allocating total purchase price
If you purchase property with depreciable assets (eg. dishwasher, clothes dryer, etc.), you must allocate the total purchase price between the property and other items on a reasonable basis. If the sale contract does allocate the purchase price, the ATO may challenge it if the amounts allocated appear unreasonable.
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Part of the building
Items such as built-in wardrobes, swimming pools, electric cabling and security screens are treated as being part of the building and are not depreciable assets. Expenditure on ‘capital works’ (eg. the building and surrounding structures, driveways, etc.) is generally deductible over 40 years at 2.5 percent. There are restrictions on claiming it on capital works already constructed when you purchased the property.
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Improvements
The cost of repairs to the property that amount to an improvement, and don’t merely restore it back to its original condition, is generally considered capital and not deductible.
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Repairing existing wear/damage
The cost of renovations or repairs to fix damage or wear in existence at the time you purchased the property are generally considered capital and not deductible.
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Renovate and sell
If your intention was to renovate and sell at a profit, rather than a long-term income producing investment, you may be taxed on the entire profit as a ‘profit-making scheme’. This falls outside the capital gains tax (CGT) rules so you will not be eligible for the 50 percent CGT concession.
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Body Corporate fees
These fees are generally deductible. However, if a component is for a special-purpose sinking fund rather than general running of the complex, it may be considered capital and not deductible.
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Travel to inspect property
You can claim a deduction for the cost of travel to inspect the rental property. If there was also a private purpose to the trip (eg. a holiday or to visit family or friends) then you can only deduct a portion of the travel cost and potentially none if the property inspection was merely incidental to the private purpose for the trip.
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Below market rent
If the property is rented to family or friends for below market rent, the ATO may treat this as a ‘private’ arrangement and only allow you to claim sufficient deductions to offset the rent, but not to make a tax loss.
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Mortgage with redraw facility
If the mortgage to purchase the property has a redraw facility, think carefully before re-drawing to fund something private such as buying a car or a holiday. The interest expense must be apportioned between the ‘deductible’ and the ‘private’ portion of the total borrowings, and the calculations can be complicated.
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Selling the property
Make sure you declare in your tax return any capital gain when you sell the property. If you owned it for more than 12 months and it wasn’t a ‘profit making scheme’ as mentioned above, you are only taxed on 50 percent of the capital gain after first offsetting it against any capital losses. If you lived in the property at some stage as your main residence, it is recommended that you speak to us about whether you qualify for the main residence CGT exemption (the rules can be complex).
