Unlocking Tax Benefits: ATO Regulations on Rental Expenses

Renting out a property can be a rewarding venture, providing both a steady stream of income and potential tax benefits for property owners in Australia. However, understanding the intricacies of rental expenses is crucial for maximising returns and ensuring compliance with the Australian Taxation Office (ATO) regulations.

In this guide, we will explore the various types of rental expenses and deductions that landlords can claim, as outlined by the ATO. By delving into the specifics, we aim to provide property owners with a clear understanding of what expenses they can deduct, how to record them accurately, and ultimately optimise their tax returns.

Understanding Rental Income

rental income

When you rent out your property, rental and other rental-related income refer to the complete sum of rent and associated payments that you receive or are entitled to. This includes payments made directly to you or through your agent. It’s important to note that you must include your share of the entire rent amount in your tax return. Additionally, your rental income also includes income generated from renting out part or all of your home through the sharing economy or from renting your holiday home. 

Rent and associated payments can sometimes take the form of goods and services instead of monetary transactions. In such cases, it is necessary to determine the monetary value of these non-cash payments.

For instance, if a tenant provides you with property or goods as rent instead of money, you should include the market value of the property or goods as rental income in your tax return. This ensures that the value of these non-monetary payments is accurately accounted for and reflected in your tax obligations.

rental income

Managing rental income involves more than just collecting rent payments. As a landlord, there are various additional sources of income that need to be considered and included in your overall rental income. 

  • Including rental bond money in your income is crucial when you are entitled to retain it. There are specific situations where you may retain the rental bond, such as when a tenant defaults on rent or when repairs or maintenance are required due to damage to your rental property.
  • In certain cases, when you receive an insurance payout, it may be necessary to consider including it as part of your income. This is particularly relevant when the insurance payment is received to compensate for lost rent. In such situations, the insurance payout should be treated as income and accounted for accordingly. 
  • If you receive a letting or booking fee, it must be included as part of your rental income.
  • Associated payments encompass all amounts that you receive or are entitled to, resulting from the regular and repetitive activities that aim to generate profit through the use of your rental property.
  • If you have received a reimbursement or recoupment for deductible expenses, it may be necessary to include a portion of that amount as taxable income. For example, if you received:
    • If a tenant pays you an amount to cover the expenses of repairing damage to your rental property, and you are eligible to claim a deduction for the repair costs, it is important to include the entire amount received as part of your taxable income.
    • If you have received a government rebate for purchasing a depreciable asset, such as a solar hot-water system, it is necessary to include a portion of that rebate as taxable income.

ATO Guidelines on Rental Expenses

Rental expenses are the costs incurred by property owners in relation to their rental properties. These expenses arise from various aspects of property management, such as property maintenance, repairs, insurance, and other necessary expenditures. Understanding and properly documenting rental expenses is essential for landlords to accurately assess their financial position, determine taxable income, and claim eligible deductions.

ato guidelines

When your property is rented out or genuinely available for rent, there are specific expenses that you can claim as deductions. These deductions cover costs incurred during this rental period. However, it’s important to note that expenses of a capital nature or private nature are generally not eligible for deduction.

There are certain exceptions, such as the ability to claim decline in value deductions or capital works deductions for specific capital expenditures, or including certain capital costs in the cost base of the property for Capital Gains Tax (CGT) purposes. Understanding the distinction between deductible and non-deductible expenses is vital to ensure accurate reporting and compliance with tax regulations.

Types of Rental Expenses

Rental expenses can be broadly classified into three main categories.

Cannot claim deductions

Expenses that are not eligible for deduction include:

  • Costs incurred for the acquisition and disposal of the property
  • Expenses that are not directly incurred by you, such as water or electricity charges paid by your tenants
  • Expenses associated with a property that was not genuinely available for rent
  • Expenses unrelated to the rental of a property, including costs for personal use of a holiday home that is rented out for only part of the year
  • Expenses for maintaining a non-income producing property used as collateral for an investment loan
  • Expenses related to holding vacant land
  • The cost of certain second-hand depreciating assets.

Other expenses you cannot claim deductions for include expenses:

  • Travel expenses incurred for property inspections before purchasing
  • Costs associated with relocating assets between rental properties prior to renting
  • Expenses for rental seminars aimed at assisting you in finding investment properties

Can claim an immediate deduction in the income year you incur the expense

deduction income

Expenses that may qualify for an immediate deduction in the same income year they are incurred include:

  • Advertising costs for attracting tenants
  • Bank charges
  • Body corporate fees and charges
  • Cleaning expenses
  • Local council rates
  • Electricity and gas bills
  • Annual power guarantee fees
  • Gardening and lawn mowing services
  • In-house audio and video service charges
  • Insurance costs (building, contents, public liability, loss of rent)
  • Interest on loans
  • Land tax payments
  • Lease document expenses (preparation, registration, stamp duty)
  • Legal expenses (excluding acquisition costs and borrowing costs)
  • Mortgage discharge expenses
  • Pest control services
  • Property agent’s fees and commissions (including prior to the property being available to rent)
  • Quantity surveyor’s fees
  • Costs incurred in relocating tenants into temporary accommodation if the property is unfit to occupy for a period of time
  • Repairs and maintenance costs
  • Cost of a defective building works report in connection to repairs and maintenance conducted
  • Secretarial and bookkeeping fees
  • Security patrol fees
  • Servicing costs (e.g., water heater servicing)
  • Stationery and postage expenses
  • Telephone calls and rental charges
  • Tax-related expenses
  • Travel and car expenses to the extent that they are deductible
  • Water charges

To be eligible for deduction, these expenses must be incurred by you and not covered by the tenant.

Can claim deductions over a number of income years

expenses

You may come across three types of expenses for your rental property that can be claimed over multiple income years:

  1. Borrowing expenses

    The following are expenses directly associated with taking out a loan for the property. They include:
  • Loan establishment fees
  • Title search fees charged by your lender
  • Costs for preparing and filing mortgage documents
  • Mortgage broker fees
  • Stamp duty charged on the mortgage
  • Fees for a valuation required for loan approval
  • Lender’s mortgage insurance billed to the borrower

On the other hand, the following expenses are not considered borrowing expenses:

  • Insurance policy premiums for a policy that covers the loan repayment in the event of your death, disability, or unemployment
  • Interest expenses
  • Stamp duty charged on the transfer of the property
  • Stamp duty incurred for acquiring a leasehold interest in the property (e.g., an ACT 99-year Crown lease)
  1. Amounts for decline in value of depreciating assets (allowed only in certain circumstances)

    When acquiring a rental property, the tax treatment considers the purchase as comprising both the building itself and individual items of ‘plant’. ‘Plant’ refers to depreciable assets like air conditioners, stoves, and other similar items. Consequently, it becomes necessary to allocate the purchase price between the ‘building’ and the various depreciable assets.

You are eligible to claim a deduction equivalent to the decline in value of a depreciating asset you owned at any point during the income year. However, the deduction is reduced if you use the asset for non-taxable purposes. Starting from 1 July 2017, the deduction is further reduced if you installed or utilized the asset in your residential rental property to generate rental income, and the asset was a second-hand depreciating asset (unless specific exceptions apply).

depreciating assets

Certain items within a rental property are considered integral to the rental activity and are not treated as individual assets in their own regard. If your depreciating asset is not categorized as plant and is permanently affixed to the building or forms an integral part of the structure, your expenses will typically be classified as construction expenditure for capital works. In such cases, you may be eligible for a capital works deduction for those items.

  1. Capital works deductions

    Certain types of construction expenditure are eligible for deduction. In the context of residential rental properties, these deductions are typically spread over a period of 25 or 40 years and are known as capital works deductions. It is important to note that the total capital works deductions cannot exceed the actual construction expenditure. Additionally, no deduction is available until the construction is fully completed.

    Deductions related to construction expenditure are applicable to capital works, which include:
  • Construction of a building or an extension, such as adding a room, garage, patio, or pergola.
  • Alterations to the property, such as the removal or addition of an internal wall.
  • Structural improvements to the property, such as the addition of a gazebo, carport, sealed driveway, retaining wall, or fence.

Deductions for your rental property are only applicable for the period when it is rented out or genuinely available for rent.

In the unfortunate event that your rental property is destroyed, such as by fire or a natural disaster, resulting in a complete loss of the asset, you can claim a deduction in the income year when the capital works are destroyed. This deduction applies to the remaining construction expenditure that hasn’t been deducted yet. However, it’s important to note that this deduction should be reduced by any insurance proceeds and salvage receipts you receive.

Keep your rental property records

rental property records

To ensure proper documentation of rental expenses, it is necessary to maintain records in English or in a form that can be easily translated into English. These records should contain the following information:

  • Name of the supplier – Identify the name of the individual or business from whom the expense was incurred.
  • Amount of the expense – Clearly state the monetary value of the expense incurred.
  • Nature of the goods or services – Describe the specific goods or services for which the expense was made.
  • Date the expense was incurred – Note the date when the expense was initially accrued.
  • Date of the document – Specify the date on which the document recording the expense was generated.

When a document does not provide the payment date for an expense, it is important to rely on independent evidence, such as a bank statement, to establish the date when the expense was incurred.

Maintain records of your rental income and expenses for a duration of five years from 31 October or, if you lodge your tax return at a later date, for five years from the date of lodgment. In the event of a dispute with the tax authority concerning your rental property, retain the relevant records until the resolution of the dispute.

Please refrain from submitting these records with your tax return. Instead, keep them on hand in case ATO asks to see them.

Bottomline

Understanding rental expenses and deductions is essential for property owners in Australia to optimise their returns and comply with ATO regulations. By accurately recording expenses, categorising them correctly, and staying informed about deductible items, landlords can make the most of their rental investments. 

If you have any further questions or need assistance with your financial matters, feel free to contact BloomWealth, your trusted partner in property investment and taxation.

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