Investment Property Tax Returns: TAX TIME FAQ’S
By Anand Shukla : June 2013 : Published BI
For years now properties have been considered a major form of investment and a great tool to build wealth. Property portfolios and estates have passed from one generation to another. It takes years of investments of savings to build up wealth through property. Since we need to sacrifice a portion of our income to secure ourselves in the longer run, the government provides us with certain tax incentives and promote investment in property. However it needs to be noted that there are rules governing such tax incentives and they need to be applied, used and claimed properly at the appropriate sections and headings on a tax return. If you hire a tax accountant specialising in Investment property tax return, they should be able to maximise the deductions you would be eligible to claim.
Before I proceed I need to mention that the conversation with Joe below is a general understanding of the TAX laws governing Investment Properties and this should not be used as a guide for your tax returns. Actual application of the laws may vary and depend on various circumstances; hence it is highly critical you consult the ATO or your recognised Tax Adviser regarding the application of the laws given your personal circumstances
As this practice specialises in Investment property tax returns, I get people asking me a variety of questions in relation to claiming of deductions through an investment property and also questions in relation to declaring income on an Investment property tax return. I have compiled below a few conversation style FAQ’s that relate to declaring figures on an investment property tax return.
It was just like any other day when Joe walked into my office enquiring about taxation effects of owning and maintaining an investment property. Below was our conversation.
Joe: What is rental Income?
Put simply, the rent you receive from your tenants is rental income. However one of the other instances where income is considered as rental income is where the tenant defaulted on rent and you forfeited the bond money in lieu of the rent. The bond in this scenario becomes rental income. Also if your tenant reimbursed you for repairs conducted that were deductible, the reimbursed money should be added to your income. There are a few other instances as well where money received is considered as a rental income, but we can talk about them later.
Joe: I think that was my understanding about rental income but what is a rental deduction?
Certain expenses towards your investment property that were incurred during the period the property was tenanted/rented or available for rent are considered to be rental expenses or rental deductions.
Joe: I think I knew that as well, I think all expenses incurred will be tax deductible. Isn’t it?
No, I used the word “Certain Expenses” which means there are rules governing claiming of expenses as a deduction and that could mean they vary depending on various circumstances and application of the law.
Joe: Oh, I incurred a conveyancing fee of $770 when I purchased my property can I claim this as an expense?
No, conveyancing costs incurred when purchasing a property is an acquisition cost and will be added to the cost base of the property for Capital Gains Tax purposes and hence is non-deductible.
Joe: I did not know that, how about Stamp Duty? I paid of $7500 when I purchased my first investment property. Where can I claim this?
The effect of this transaction is similar to conveyancing fee. This expense is an acquisition cost and hence is added to the cost base for CGT purposes.
Joe: I will stop asking questions, you tell me what can I claim?
There are ample expenses that you may be eligible to claim given certain circumstances prevail. These expenses include and not limited to; advertising for tenants, bank charges, council fees, body corporate charges, utilities, repairs, land tax, real estate agent’s fees, pest control, insurance and so on. There are few other expenses that are deducible but specific rules apply.
Joe: You mentioned all those expenses but did not mention Interest on the loan I availed for my investment property. I lose a lot of money as bank interest. Can I claim this?
Joe, I mentioned that there are a few other expenses that are deductible, one of these is Interest on loans. The banks offer various products; and loans could be flexible with redraw and cash out facilities. The interest on loan needs to be apportioned in such scenarios. Also depending on whether the whole property is let out or if there was any private use of the property in the financial year, the deductibility of interest will vary. Specific rules need to be applied so that interest is apportioned and claimed properly. To arrive at what amount of interest (if any) is deductible we need to dig deeper into your personal circumstances. By the way several taxation rulings talk about the deductibility of Interest on loans for investment property and some of these are TR2000/2; TR98/22; TR95/25; TR93/7 and TD1999/42.
Joe: OMG! That was a bountiful that was all I wanted to know. Is there anything else you think may be relevant? Or maybe I may have missed out?
Yes, you did not ask me about decline in value deductions. This is generally a deduction claimed on depreciating assets. Depending on various rules and when the property was constructed you may be eligible to claim a decline in value deduction. There are specific rules that will guide you in self assessing the deduction or else you could also avail the help of a quantity surveyor who could help you prepare a depreciation schedule for the depreciating assets from your Investment property.
Joe: Oh I never thought I could have claimed that too! It’s good to know though. This meeting has been great and thanks for your time.
My pleasure Joe, remember all that I told you is only general information and none of that is specific advice, you should choose, ascertain and decide what is best for you.
Joe: I understand; Oh and I just realised I own the property with my partner and we are on the loan too, who claims all the deductions and who declares the income.
You need to find out if you are set up as “Joint tenants” or “Tenants in Common”. Joint tenants will declare all incomes in half and claim half of all deductions too. If you are set up as “Tenants in Common” it will work as per your agreement.
Joe: I think we are set up as “Tenants in Common”. I’d better find out with my wife and the solicitor.
That would be good.
Joe: Can I get your business card so that I have your contact details handy.
Sure thing, here you go. By the way you can find me online by searching A One Accountants too.
Joe: Thanks and bye now.