What’s deductible & What’s not for Property Investors?

Below is a list of items which you can claim as a deduction against rental income for this year. Further below is a list of items which are not deductible, usually questioned by ATO or deductible over a number of years. I trust this will help you compile your information and make it easier to prepare your income tax return and improve your decisions in relation to managing your rental properties.

DEDUCTIBLE - immediately

• Property management & maintenance expenses
• Advertising for tenants – directly by you or where the agent charged you
• Body corporate fees or Strata Title fees and charges
• Cleaning
• Gardening/Lawn Mowing
• Pest control
• Security patrol fees
• Rates & Taxes
  • Water rates, charges & usage
  • Council rates
  • Land tax – first time owners have to lodge an initial land tax return with the Office of State Revenue in each state – YOU have to initiate this. They will not chase you up but they will penalise you for late lodgement
• Property Agent
  • Fees/commissions – including GST
  • Postage & petties,
  • Statement fees and
  • Bank charges/fees
  • Lease document expenses
  • Letting fees
• Administration expenses including
  • Stationery used to maintain your rental records etc
  • Postage on documents relating to property management
  • Telephone calls relating to property management
  • Legal expenses relating to debt collection or tenant problems
  • Electricity & gas – where not covered by tenant
• Insurance
  • Landlords
  • Building
  • Contents
  • Public liability

• On acquisition – from the solicitor’s settlement letter
  • Balance of council rates
  • Balance of water rates
  • Balance of body corporate fees

• Repairs & Maintenance – relating to wear & tear or damage as a result of renting out the property. The idea is that an expense is considered a repair when the functionality is being restored. Generally repairs include
  • Plumbing
  • Electrical
  • Handyman
  • Etc.

ATO is particularly vigilant to catch people who are claiming expenses described as repairs when they are considered to be improvements – see example below

• Interest & loan a/c fees on loans to finance investment properties.

For the interest to be to be deductible the loan must have been applied to acquire an income producing asset e.g rental property

• Travel expenses to –
  • Inspect property
  • Maintain property
  • Collect rents

A full deduction can only be claimed if the sole purpose of the trip relates to the property.

• Where the inspection is combined with a holiday, expenses must be apportioned,

• Cost of preparing a Quantity Surveyor’s report showing depreciation expenses and Special Building Writeoff
• Seminars – cost of attending property investment seminars – only to the extent that they relate to operating or maximising the return on currently owned properties

Deductible – OVER a NUMBER of YEARS

• Borrowing Expenses – deductible over the period of the loan where the loan is less than five years. Otherwise deductible over five years.
  Expenses deductible include:

• Loan Application fee
• Lenders legal fees
• Title search fees
• Lenders mortgage insurance
• Stamp duty on mortgage
• Mortgage registration fees

Depreciation on Plant & Equipment– ATO calls it Decline in Value of depreciating assets

Depreciation on the building construction – ATO calls it Capital Works deduction

Cost of installing any plant & equipment such Hot Water Systems – are considered part of the cost of system – to be depreciated

Set of assets e.g. dining table and 6 chairs – is to be depreciated in accordance with their effective life

Each item can not be separately deducted for being under $300

NOT Deductible

• The following items are either not deductible or considered to be of a capital or private nature by ATO
• On Purchase
• Purchase price
• Stamp duty on purchase
• Legal/conveyancing fees
• Pest & Property inspection
• Sourcing Fee
• Renovations immediately after purchase
• Repairs immediately after purchase
• On Sale of a property
• Legal/conveyancing
• AdvertisingAgent fees
• Pre-Purchase expenses including (especially if property was not purchased)
• Attending seminars to acquire more property
• Cost of reports on property prior to purchase
• Travel to inspect property prior to purchase
• Where the property was not available for rent, then all the expenses described above are not deductible
• Particularly relevant where the property is used as your personal holiday accommodation.
• Cost of improvements or renovations can only be depreciated over 40 years at 2.5% p.a.

Individual tax rates

As announced in the recent Federal Budget, new individual tax rates and thresholds apply from 1 July 2011 to 30 June 2012.

2011/2012 Income Tax Thresholds

When you incur a rental expense, the tax savings is not the total amount but the amount multiplied by your marginal tax rate as shown above.

For assistance to maximise your opportunities for the incoming financial year (while reducing the negatives) contact us today.