Guide to property

Overvi ew

Your home is generally exempt from tax. If you have an investment property, build or renovate for profit, or use a property in the running of a business, there may be implications for income tax, capital gains tax and goods and services tax (GST).

Your home

In most cases there are no tax implications for the home that you live in, and no tax implications when you sell it. This situation may change if you rent out part of your home or use it for work, or it's on more than 2 hectares of land. If you're saving for your first home, you may be eligible for government contributions to help you build your savings quickly.

Inheriting a dwelling

There are usually no capital gains tax implications at the time you inherit a dwelling. Capital gains tax may apply when you subsequently sell or otherwise dispose of the dwelling.

Residential rental properties

If you rent out property to others, you must declare the income in your tax return, and you can claim tax deductions for many of the related expenses. You may have to pay capital gains tax when you sell the property.

Vacant land

Vacant land is generally a capital asset that is subject to capital gains tax. However, if you purchase the land for resale to earn a profit, or use the land in a business-like way, it is considered trading stock. In this case you treat proceeds from the land as ordinary income, and you may need to register for GST.

Subdividing

If you subdivide land - including if you subdivide land adjacent to your home - the subdivided land will generally be subject to capital gains tax. However, if you purchase land to subdivide and resell for a profit, or use the subdivided land in a business-like way, the proceeds may be treated as ordinary income and you may need to register for GST.

Property development, building and renovating

If you build new residential premises for sale, you'll be liable for GST on the sale and entitled to claim GST credits for related purchases. If you renovate a property and sell it for a profit, there could be implications for income tax, capital gains tax and GST.

Property used in running a business

If your property is used to run a business - whether it's commercial premises like a shop or office, or even your own home - there will be income tax implications while you own it and capital gains tax implications when you sell. You may also be liable for GST, and entitled to claim GST credits, when you buy, sell, lease or rent commercial premises.

Property - home

Contents: Guide to property

Overview

Your home

Saving for your first home

Buying and selling your home

Main residence exemption from capital gains tax

Your home: keeping cost records

Transfer of property after marriage or relationship breakdown

Selling or giving property for less than market value

Renting out part or all of your home

Building or renovating your home

Home office

Inheriting a dwelling

Residential rental properties

Obtaining and owning a rental property

Keep records from the start

Obtaining your property

Co-ownership of rental property

Pay as you go instalments and withholding

Income you must declare

Expenses you can claim

Apportionment of rental expenses

Expenses you can deduct in the income year incurred

Expenses deductible over a number of income years

Selling a rental property

Holiday apartments in commercial residential properties

Vacant land

Subdividing

Capital gains tax

Goods and services tax

Property development, building and renovating

Renovating for profit

Building and construction - residential premises

Property used in running a business

Buying commercial premises

Selling commercial premises

Capital gains

Goods and services tax (GST)

Margin scheme

Selling a business as a going concern

Leasing and renting commercial premises

Running your business from home

Working farms

Commercial residential premises and GST

Buying and selling commercial residential premises

Leasing commercial accommodation

Retirement villages

Property - home

Your home

The information in this section applies to dwellings owned or rented out by individuals. It's not relevant for dwellings owned or rented by companies or trusts.

Saving for your first home

If you open a first home saver account, the government will add money to your account and tax your account earnings at a low 15% to help you save for your first home.

Buying and selling your home

Generally, there are no tax implications for the home that you live in, provided you don't use it to produce income and it's on 2 hectares of land or less. You should keep all the records relating to your home so that if your situation changes in the future - for example, you start to rent it out - you don't pay more tax than necessary.

If you have a second property - such as a holiday house or hobby farm - that second property is subject to capital gains tax.

Renting out part or all of your home

You must include rental income in your annual income tax return, and you're entitled to claim income tax deductions for expenses associated with renting. Because you are using your home to produce income, you will have to pay capital gains tax on part of any capital gain when you sell it.

Building or renovating your home

Generally, there are no tax implications if you build or renovate your own home for private purposes.

Home office

If you carry out work at home, but your principal place of business is elsewhere, you may be able to claim a deduction for some of the expenses relating to the area you use at home.

Renting your home from someone else

If you rent the home that you live in from someone else, there are no tax implications provided you don't use it to produce assessable income.

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Saving for your first home

First home saver accounts offer a tax-effective way of saving for your first home through a combination of government contributions and low taxes.

If you open a first home saver account, the government will add money to your account and tax your account earnings at a low 15% to help you save for your first home.

They're a special purpose account that is more like a term deposit than a normal, everyday account because you have to keep the money there for a minimum period of time. Once that time has passed and you make the decision to buy or build your first home, you have to withdraw all the money at once and close the account. You need to use the money you save as a deposit or to meet other costs you incur in buying or building your first home.

To open one of these accounts, you need to meet eligibility conditions. You must:

be aged at least 18 and under 65 years
have a tax file number you can quote in your application
not have previously owned a home in Australia that has been your main residence
not have previously had a first home saver account.

	For more information, refer to Guide to first home saver accounts.
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Buying and selling your home

The information in this section applies to dwellings owned by individuals. It's not relevant for dwellings owned by companies or trusts.

Generally, you don't pay capital gains tax if you sell the home that you live in. This is called the 'main residence exemption'. You also don't pay income tax and you can't claim income tax deductions for costs associated with buying or selling your home.

Similarly, you're not liable for goods and services tax (GST) when you sell your home and you can't claim GST credits.

Main residence exemption from capital gains tax

Your home is likely to be exempt from capital gains tax if:

it's been your family home for the whole time you've owned it
it's not on more than 2 hectares of land
you have not used it to run a business or rented any part of it out.

If your home doesn't meet all of these conditions, you may still be entitled to a partial exemption.

If you have a second property - such as a holiday house or hobby farm - that second property is subject to capital gains tax.

Your home: keeping cost records

Keep copies of documents relating to the purchase and sale of your property, and records of your costs of ownership (such as mortgage interest) and any capital improvements. If your home ceases to be fully exempt from capital gains tax at some time in the future - for example, because you rent it out for a time - you'll need these records to ensure you don't pay more tax than necessary.

Transfer of property after marriage or relationship breakdown

If property is transferred between former spouses as a result of the breakdown of their marriage or relationship, there is an automatic 'rollover' in certain cases. This means the capital gain or capital loss is disregarded at the time of the transfer. The person who receives the property will make the capital gain or capital loss when they subsequently dispose of the asset.

Selling or giving property for less than market value

If you sell or give away a property for less than its market value - for example, to a relative or friend - and you're not entitled to the main residence exemption, you are taken to have received the market value of the property at the time. This means you may have to pay capital gains tax even if you received nothing for the property.

State government stamp duty and land tax

Some states charge stamp duty when you buy a property. Some states also levy land tax on land that exceeds a certain value, though the property you live in is usually exempt from land tax. Stamp duty and land tax vary between states.

For information about stamp duty and land tax in your state or territory, visit:

Property - home

Main residence exemption from capital gains tax

When you sell or otherwise dispose of a dwelling that was your 'main residence' (your home), any capital gain is generally exempt from capital gains tax. This is called the 'main residence exemption'.

The exemption applies to your property if it's a dwelling and it's your main residence.
If you have two properties that could be regarded as your main residence you must choose one for the exemption.
Depending on your circumstances, you may be entitled to a full exemption or partial exemption.
If there is a delay in moving in to your home after you acquire it, this could affect the point from which your home is exempted from capital gains tax.

You can work out the proportion of your capital gain that is exempt from capital gains tax using the Property exemption tool.

Dwelling

A dwelling is anything that is used wholly or mainly for residential accommodation, such as:

a home or cottage
an apartment or flat
a strata title unit
a unit in a retirement village
a caravan, houseboat or other mobile home.

Main residence

Generally, a dwelling is considered to be your main residence if:

you and your family live in it
your personal belongings are in it
it is the address your mail is delivered to
it is your address on the electoral roll, and
services are connected (for example, telephone, gas or electricity).

More than one property

Usually you are only entitled to the main residence exemption on one property for any particular period.

If for a period you have two homes that could be regarded as your main residence you must choose one of the homes for this exemption and CGT will apply to the other property. (You don't have to make the choice until you sell one of the homes.)

If you make this choice, you cannot treat any other dwelling as your main residence for that period (except for a limited time if you are moving from one home to another - see Moving from one main residence to another).

Full exemption

You are likely to be eligible for a full main residence exemption if the dwelling:

has been the family home for you, your partner and other dependants for the whole period you have owned it (ownership period)
has not been used to produce assessable income - that is, you have not run a business from it or rented it out, and
is on land that is not more than 2 hectares in area.

Partial exemption

You may be eligible for a partial main residence exemption if:

the dwelling was your main residence for only part of the period you owned it
your partner or dependants have separate homes
you have used part of the property (either the dwelling or the land) to produce assessable income, or
the land is more than 2 hectares.

Example: Home becomes a rental property after 20 August 1996

Erin purchased a home on 0.9 hectares of land in July 2000 for $280,000. The home was her main residence until she moved into a new home on 1 August 2003.

On 2 August 2003, she started to rent out the old home. At that time, the market value of the old home was $450,000.

Erin wants the new home to be treated as her main residence from the date she moved into it.

On 14 April 2010, Erin sold the old home for $496,000. Erin is taken to have acquired the old home for $450,000 on 2 August 2003 and calculates her capital gain to be $46,000.

Because Erin is taken to have acquired the new home on 2 August 2003, and has held it for more than 12 months, she can use the discount method to calculate her capital gain. As Erin has no capital losses she includes a capital gain of $23,000 on her 2011 tax return.

For more information, refer to:

Moving from one main residence to another

A dwelling is considered to be your main residence from the time you acquired your 'ownership interest' in it, provided you moved in as soon as practicable after that time. If you purchased the dwelling, you acquired your ownership interest on the date of settlement of the purchase contract.

If there is a delay in moving in because of illness or other unforseen circumstances and you move into the dwelling as soon as the cause of the delay is removed, the exemption may still be available from the time you acquired your ownership interest in the dwelling.

If you could not move in because your new dwelling was being rented to someone, you are not considered to have moved in as soon as practicable after you acquired your ownership interest.

If you acquire a new home before you dispose of your old one, you can generally treat both dwellings as your main residence for up to six months if:

you lived in your old home and it was your main residence for a continuous period of at least three months in the 12 months before you disposed of it
you did not use it to produce assessable income (such as rent) in any part of that last 12 months when it was not your main residence, and
the new dwelling becomes your main residence.

The overlap period ends at the earlier of six months and when settlement occurs on the contract to sell your old home.

For more information, refer to Moving into a dwelling.

Main residence you don't occupy

In some cases you can choose to have a dwelling treated as your main residence for CGT purposes even though you no longer live in it. You only need to make this choice for the income year the CGT event happens to the dwelling - for example, the year you enter into a contract to sell it.

For more information, refer to Treating a dwelling as your main residence after you move out.

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Your home: keeping cost records

Even though your family home is usually exempt from capital gains tax, you should try to keep all records relating to it, just as you would for other items of real estate.

If the property ceases to be fully exempt at some time in the future, you may need to know its full cost so that you do not pay more capital gains tax than necessary. If you do not have sufficient records, reconstructing them later could be difficult.

Records you need to keep are:

a copy of the purchase contract and all receipts for expenses relating to the purchase of the property - for example, stamp duty and legal, survey and valuation fees
all records relating to the sale or disposal of the property and all relevant expenses - for example, the sale contract and records of legal fees and stamp duty
records of your costs of owning the property
records of capital expenditure on improvements and maintaining title or right to it during your period of ownership.

For more information, refer to:

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Transfer of property after marriage or relationship breakdown

As a general rule, capital gains tax applies to all changes of ownership of assets. However, if an asset - such as property - is transferred between former spouses as a result of the breakdown of their marriage or relationship, there is an automatic 'rollover' in certain cases. You cannot choose whether or not it applies.

This rollover means the person who transfers the property disregards a capital gain or capital loss that would otherwise arise. In effect, the person who receives the property will make the capital gain or capital loss when they subsequently dispose of the property. The 'cost base' of the property is transferred to the person who receives the property.

	For more information, refer to Marriage or relationship breakdown and transferring of assets.
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Selling or giving property for less than market value

The information in this section applies to property owned by individuals for private purposes. It's not relevant for dwellings owned by companies or trusts or held as part of a business.

You may give a property to family or friends, or sell it for less than market value.

If you're entitled to the main residence exemption from capital gains tax, it will still apply.

However, if you're not entitled to the main residence exemption - or you're entitled to only a partial exemption - the situation will change. Even if you receive nothing for your property, you are taken to have received the market value of the property at the time.

This means you would have to pay capital gains tax on any capital gain for the part of the property that was not exempt.

Property affected in this sort of transfer includes rental properties, houses, units, apartments, flats, holiday houses, vacant blocks of land and hobby farms.

You may also be taken to have received the market value if:

what you actually received (your capital proceeds) was more or less than the market value of the property, and
you and the new owner were not dealing with each other at arm's length.

You should obtain a valuation from a professional valuer, or work out the market value yourself using reasonably objective and supportable data. This can include the price paid for very similar property that was sold at the same time in the same location.

	For more information, refer to Transferring real estate to family or friends.
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Renting out part or all of your home

If you rent out part or all of your home, the rent money you receive is generally regarded as assessable income. This means:

You must declare your rental income in your annual income tax return, and you are entitled to claim income tax deductions for a portion of the associated costs, such as part of the interest on your home loan.
You may not be entitled to the full main residence exemption from capital gains tax. You will have to pay capital gains tax on part of any capital gain made when you sell your home.

Good and services tax (GST) doesn't apply to residential rental, so you're not liable for GST on the rent you charge and can't claim GST credits for associated costs.

Income and expenses

If you rent out part or all of your home at normal commercial rates, the tax implications for income and expenses are the same as for any residential rental property: you must include the rental income in your income tax return, and you are entitled to claim income tax deductions for associated expenses, such as the interest on your home loan.

If only part of your home is used to earn rent, you are only entitled to claim deductions for the part of your expenses that relate to the rental income. As a general guide, you should apportion expenses on a floor-area basis - that is, according to the floor area of the part of the residence solely occupied by the tenant, together with a reasonable figure for tenant access to the general living areas.

If you rent out part or all of your home at less than normal commercial rates - for example, renting to a relative - this may limit or negate the amount of deductions you can claim.

Payments from a family member for board or lodging are considered to be domestic arrangements and are not assessable income. In these situations you also can't claim income tax deductions.

For more information about situations involving non-commercial rental and renting to related parties, refer to Taxation Ruling IT 2167 - Income tax: rental properties - non-economic rental, holiday home, share of residence, etc. cases, family trust cases.

Capital gains

You can generally ignore a capital gain or loss you make when you sell your home or main residence. This is called the main residence exemption.

However, you generally can't obtain the full main residence exemption if you have used any part of your home to produce income - for example, by renting out part or all of your home.

To work out the capital gain that is not exempt, you apply the same apportioning process you would for claiming a deduction for interest on your home loan. In most cases, you can use the:

proportion of the floor area of your home that is set aside to produce income, and
period you use it for this purpose.

You can work out the proportion of your capital gain that is exempt from capital gains tax using the Property exemption tool.

Home first used to produce income

If you first use your home to produce income after 20 August 1996, the period before you first used your home to produce income is not taken into account in working out the amount of any capital gain or capital loss. Instead, you use the market value of your home at the time you first used it to produce income. It's a good idea to get a valuation of your home at the time you first use it to produce income so that when you come to sell it you don't pay more capital gains tax than necessary.

Example

Thomas purchased a home on 1 July 1999 and sold it on 30 June 2010. The home was his main residence for the entire eleven years.

Throughout the period Thomas owned the home, a tenant rented one bedroom, which represented 20% of the home. Both Thomas and the tenant used the living room, bathroom, laundry and kitchen, which represented 30% of the home. Only Thomas used the remainder of the home. Therefore, Thomas would be entitled to a 35% deduction for interest if he had incurred it on money borrowed to acquire his home.

Thomas made a capital gain of $120,000 when he sold the home. Of this total gain, the following proportion is not exempt:

Capital gain x Percentage of floor area = Taxable income
$120,000 x 35% = $42,000

Note: The 'home first used to produce income' rule does not apply because Thomas used the home to produce income from the date he purchased it.

For more information, refer to Using your home to produce income.

Main residence you don't occupy

For more information, refer to Treating a dwelling as your main residence after you move out.

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Building or renovating your home

Generally, there are no direct tax implications (income tax or capital gains tax) if you build or renovate your own home for private purposes.

If the dwelling is your main residence and you use the improvements (renovations) as part of your home, they are exempt. This includes improvements on land adjacent to the dwelling if the total land, including the land on which the home stands, is two hectares or less - for example, installing a swimming pool.

Similarly, you are not liable for GST if you are constructing or selling your family home. This is because you are not considered to be carrying on an enterprise if your property transactions are for private purposes.

Buying to renovate for profit

You are likely to be entering into a profit-making activity if you acquire a property with the intention of renovating and selling it at a profit, and go about it in a business-like way. This could have implications for the way the profits are taxed (as income or capital) and for GST obligations.

For more information, see the section on Property development, building and renovating.

For more information, refer to Major capital improvements to a dwelling.

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Home office

If you work at home you may be able to claim a deduction for some of the expenses relating to the area you use.

In general, there are three ways that a person carries out work at home:

Home work area: a room is set aside primarily or exclusively for work activities but the home is not the principal place of business.
Work is done at home but not in a specific work area: the work is done in a living area or garage but the home is not the principal place of business and there is not a room set aside primarily or exclusively for work activities.
Home is the principal place of business: a business is run from home and a room is set aside exclusively for business activities. If this is your situation, please see the separate section on Running your business from home.

You have a work area

Where your home is not your principal place of business, you may still have an area, such as a study or a spare room, set aside primarily or exclusively for work activities - for example, you may have an office elsewhere, but work at home after hours.

Deductions

You can claim deductions for:

the cost of using a room's utilities, such as gas and electricity
work-related phone costs
the decline in value of office plant and equipment - for example, desks, chairs and computers
the decline in value of curtains, carpets and light fittings.

You cannot claim a deduction for the cost of owning or renting the home, such as rent, mortgage interest, insurance and rates.

Capital gains tax implications

If you own the home and are entitled to the main residence exemption from capital gains tax, this will not be affected.

You don't have a work area

This means that your principal place of business is not at home, nor do you have an area or room primarily or exclusively set aside, but you conduct some work activities at home - for example, you might work for a few hours in the lounge room.

Deductions

You can claim deductions for:

the cost of using a room's utilities, such as gas and electricity
work-related phone costs
the decline in value of office plant and equipment - for example, desks, chairs and computers.

You cannot claim a deduction for the decline in value of curtains, carpets and light fittings; nor the cost of owning or renting the house - such as, rent, mortgage interest, insurance and rates.

Capital gains tax implications

If you own the home and are entitled to the main residence exemption from capital gains tax, this will not be affected.

	For more information, refer to Home-based work essentials.
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Inheriting a dwelling

If you inherit a dwelling, there are usually no capital gains tax implications at the time you inherit it. Capital gains tax may apply when you subsequently sell or otherwise dispose of the dwelling. This section has information about:

Disregarding capital gain or loss on death

Capital gains tax does not apply when a property is inherited if, when the former owner dies, the property passes:

to the deceased's legal personal representative - such as the executor of the estate
to a beneficiary - that is, a person entitled to the deceased's property, such as next of kin or a person named in the deceased's will
from the deceased's legal personal representative to a beneficiary.

This exception doesn't apply if the property passes from the deceased to a tax-advantaged entity (such as a charity) or foreign resident.

For more information, refer to Deceased estate and capital gains tax.

Selling a home you inherited

If you inherit a dwelling and subsequently sell or otherwise dispose of it, capital gains tax may apply to the subsequent disposal. It depends on a number of things, such as when the former owner died, when they (and you) acquired the dwelling, and what they (and you) did with it. Check the scenario that applies to your circumstances:

the deceased died before 20 September 1985
the deceased died on or after 20 September 1985 and

These rules do not apply to:

land or a structure you sell separately from the dwelling - they are subject to capital gains tax
a share of a property you acquire on the death of a joint tenant - different rules apply in this situation.

Deceased died before 20 September 1985

As you acquired the dwelling before 20 September 1985, any capital gain you make is exempt. However, major capital improvements you make to the dwelling on or after 20 September 1985 may be taxable.

Deceased died on or after 20 September 1985 and acquired the dwelling before 20 September 1985

In this situation, the dwelling need not have been the main residence (home) of the deceased.

You disregard a capital gain or capital loss you make when you dispose of the dwelling if either of the following conditions applies:

Condition 1 (disposal within two years)
You disposed of the dwelling within two years of the person's death. This exemption applies whether or not you used the dwelling as your main residence or to produce income during the two-year period.
Condition 2 (main residence)
From the deceased's death until you disposed of the dwelling, it was not used to produce income and was the main residence of one or more of:

a person who was the spouse of the deceased immediately before the deceased's death (but not a spouse who was permanently separated from the deceased)
an individual who had a right to occupy the home under the deceased's will
you, as a beneficiary, if you disposed of the dwelling as a beneficiary.

The dwelling can be the main residence of one of the above people (even though they may have stopped living in it) if they choose to treat it as their main residence under the continuing main residence rule.

A dwelling is treated as your main residence from when you acquired it until it actually became your main residence, provided you moved into the dwelling when it was first practicable to do so after acquiring it.

Deceased acquired the dwelling on or after 20 September 1985

If the dwelling passed to you on or before 20 August 1996, you disregard any capital gain or capital loss when you dispose of it if:

condition 2 (main residence) above is met, and
the deceased used the dwelling as their main residence from the date they acquired it until their death, and did not use it to produce income.

If the dwelling passed to you after 20 August 1996, you disregard any capital gain or capital loss when you dispose of it if:

either condition 1 (disposal within two years) or condition 2 (main residence) above is met, and
just before the deceased died it was their main residence and was not being used to produce income.

A dwelling can still be regarded as the deceased's main residence, even though they ceased living in it, if they or their trustee chose to treat it as the deceased's main residence under the continuing main residence rule.

Even if not all of the above conditions apply to you, your circumstances may still allow for a partial exemption. For more information, refer to Inheriting a dwelling.

Continuing main residence status

If the deceased was not living in the home at the date of their death, they or their trustee may have chosen to treat it as their main residence. This may happen if, for example, the person moved to a nursing home. You may need to contact the trustee or the deceased's tax adviser to find out whether this choice was made. If it was, the dwelling can still be regarded as the deceased's main residence:

for an indefinite period - if the dwelling was not used to produce income after the deceased stopped living in it
for a maximum of six years after they ceased living in it - if it was used to produce income after they ceased living in it.

For more information, refer to Treating a dwelling as your main residence after you move out.

Death during construction

If an individual entered into a contract to construct, repair or renovate a home on land they already owned, and they die before certain conditions are met, the trustee may choose that the home and land be treated as the deceased's main residence for up to four years before the home became (or was to become) their main residence.

This choice can be made if the deceased dies:

before the home is finished
before it was practicable for the home to be their main residence, or
before they had lived in the home for three months.

If the trustee makes this choice, no other dwelling can be treated as the deceased's main residence during that time.

Joint ownership: when one owner dies

If two or more people acquire a property asset together, it can be either as tenants in common or as joint tenants.

Tenants in common: If a tenant in common dies, their interest in the property is an asset of their deceased estate. This means it can be transferred only to a beneficiary of the estate or be sold (or otherwise dealt with) by the legal personal representative of the estate.
Joint tenants: If one of the joint tenants dies, their interest in the property passes to the surviving joint tenant(s). It is not an asset of the deceased estate.

For capital gains tax purposes, if you are a joint tenant you are treated as if you are a tenant in common owning equal shares in the asset.

However, if you are a joint tenant and another joint tenant dies, on that date their interest in the asset is taken to pass in equal shares to you and any other surviving joint tenants, as if their interest is an asset of their deceased estate and you are beneficiaries.

This means if the dwelling was the deceased's main residence, you may be entitled to the main residence exemption for the interest you acquired from them.

	For more information, refer to Joint tenancy.
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Residential rental properties

Obtaining and owning a rental property

When you obtain a rental property, it's important to start keeping records straight away. To work out your tax correctly you'll need records of who owns the property (you may co-own it with other people), the date and costs of buying it, and the ongoing rental income and expenses.

Income you must declare

You must include your rental-related income in your annual income tax return. If you lease residential accommodation, you are not liable for GST on the rent you charge

Expenses you can claim

You can claim tax deductions for many of the expenses associated with the property. Some can be claimed immediately and some are claimed over a number of years.

When you have work done to your property, take note of whether the work is a repair or an improvement. Repair costs are deductible in the year they occur, but the cost of improvements (capital costs) become part of the cost base, which is used to work out your capital gain or capital loss when you sell the property.

Selling a rental property

You may make a capital gain or capital loss when you sell (or otherwise cease to own) a rental property. You pay capital gains tax on your capital gains. If the property is new residential property, you may also be liable for GST on the sale.

Holiday apartments in commercial residential properties

If you have a holiday apartment or unit that is part of commercial residential premises, it is treated like other residential rental properties. You're not liable for GST on related income and can't claim GST credits for related purchases.

Non-rental investment properties

If you have an investment property that is not rented or available for rent - such as a holiday home, hobby farm, or another dwelling you choose not to rent:

the property is subject to capital gains tax in the same way as a rental property
you generally can't claim income tax deductions for the costs of owning the property because it doesn't generate rental income
you may be able to include your costs of ownership in the property's cost base, which would reduce any capital gains tax liability when you sell it.

Property - home

Obtaining and owning a rental property

Keep records from the start

When you obtain a rental property, it's important to start keeping records straight away. You'll want proof of your expenses from the beginning so you can claim everything you're entitled to. You'll also need records of the date and costs of buying the property when you go to work out any capital gain (or capital loss) when you dispose of it.

Obtaining your property

Generally, you can only declare the income you earn from the property and claim your related expenses if your name is on the title deed. You can claim a tax deduction for expenses you incur in taking out a loan for the property, but not for other expenses associated with acquiring the property.

Co-ownership of rental property

The way that rental income and expenses are divided between co-owners varies depending on whether the co-owners are joint tenants or tenants in common, and whether they are a partnership carrying on a rental property business.

Pay as you go instalments and withholding

If you make a net profit from your rental property we may ask you to make pay as you go (PAYG) instalments towards your expected tax liability.

If the rental expenses you claim in your income tax return would result in a tax refund, you can reduce your rate of PAYG withholding to better match your year-end tax liability.

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Keep records from the start

While you own the property you need to keep track of any income and expenses related to it. You also need to keep track of any significant changes - for example, if you carry out repairs or improvements or subdivide and sell some or all of the property.

Remember to keep your building costs separate to the decline in value of any depreciating assets. This is so you can claim your deductions correctly and work out your capital gain accurately when you sell the property. You can set up an asset register to help you track the decline in value of your depreciating assets.

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Obtaining your property

You can obtain a property by:

buying it
inheriting it
receiving it as a prize
receiving it as a gift
way of transfer as a result of a breakdown in your marriage.

Generally, you can only declare the income you earn from the property and claim your related expenses if your name is on the title deed.

The date you enter into the contract is your date of purchase for capital gains tax purposes, not the settlement date.

Claiming the costs of acquiring your property

You can claim a deduction for expenses you incur in taking out a loan for the property.

You can't claim a deduction for other costs of acquiring (or disposing) of your rental property. Expenses of this kind include the purchase cost of the property, conveyancing costs, advertising expenses and stamp duty on the transfer of the property (but you can claim stamp duty on a lease of property).

However, these costs may be included in the capital gains tax cost base (cost of ownership), which would reduce any capital gains tax when you sell the property.

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Co-ownership of rental property

The way that rental income and expenses are divided between co-owners varies depending on:

whether the co-owners are joint tenants or tenants in common
whether they are a partnership carrying on a rental property business.

Co-owners of an investment property - not in business

A person who simply co-owns an investment property or several investment properties is usually regarded as an investor who is not carrying on a rental property business, either alone or with the other co-owners. This is because of the limited scope of the rental property activities and the limited degree to which a co-owner actively participates in rental property activities.

In this case the co-owners must divide the income and expenses for the rental property in line with their legal interest in the property. If they own the property as:

joint tenants - they each hold an equal interest in the property
tenants in common - they may hold unequal interests in the property; for example, one may hold a 20% interest and the other an 80% interest.

Rental income and expenses must be attributed to each co-owner according to their legal interest in the property, despite any agreement between co-owners, either oral or in writing, stating otherwise.

Partners carrying on a rental property business

Most rental activities are a form of investment and do not amount to carrying on a business. However, where you are carrying on a rental property business in partnership with others, you must divide the net rental income or loss according to the partnership agreement. If you do not have a partnership agreement, you should divide your net rental income or loss between the partners equally.

For more information, refer to:

Property - home

Pay as you go instalments and withholding

PAYG instalments

If you make a profit from renting your property, you'll need to know about the pay as you go (PAYG) instalments system.

This is a system for paying instalments towards your expected tax liability for an income year. You will generally be required to pay PAYG instalments if you earn $2,000 or more of business or investment income - such as rental income - and the debt on your income tax assessment is more than $500.

If you're required to pay PAYG instalments we will notify you.

For more information, refer to PAYG instalment essentials.

PAYG withholding

If your property is negatively geared and the rental expenses you claim in your income tax return would result in a tax refund, you can reduce your rate of PAYG withholding to better match your year-end tax liability.

PAYG withholding is the system through which income tax deductions are withheld from salary and wages.

If you believe your circumstances warrant a reduction to your rate or amount of withholding, you can apply to us for a variation.

	For more information, refer to PAYG withholding - varying your PAYG withholding.
	Property - home

Income you must declare

Rental and other rental-related income is the full amount of rent and associated payments that you receive, or become entitled to, when you rent out your property - whether it is paid to you or your agent.

You must include your share of the full amount of rent you earn in your tax return.

You may also need to include rental-related income, including:

rental bond money you become entitled to retain - for instance, because a tenant defaulted on the rent, or because of damage to your rental property requiring repairs or maintenance
insurance payouts in some circumstances - for example, if you received an insurance payment to compensate you for lost rent
letting and booking fees you receive
associated payments you receive, or become entitled to, as part of the normal, repetitive and recurrent activities through which you intend to generate profit from the use of your rental property (these payments may be in the form of goods and services, in which case you'll need to work out their monetary value)
reimbursement or recoupment for deductible expenditure - for example, if you receive an amount from a tenant to cover the cost of repairing damage to some part of your rental property and you can claim a deduction for the cost of the repairs, you need to include the whole amount in your income.

Goods and services tax

GST doesn't apply to rent from residential premises. If you lease residential accommodation, you are not liable for GST on the rent you charge

For more information, refer to Rental income.

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Expenses you can claim

You can claim a deduction for certain expenses you incur for the period your property is rented or is available for rent.

Apportionment of rental expenses

You can claim only part of the expenses if the property is available for rent for only part of the year, or only part of it is used to earn rent, or you charge non-commercial rental rates.

Expenses you can deduct in the income year incurred

Generally you can claim an immediate deduction for expenses related to the management and maintenance of the property, including interest on loans.

If your property is negatively geared - that is, you borrowed money to buy the property and your net rental income after other expenses is less than the interest on the loan - you may be able to claim the full amount of rental expenses against your other income, such as salary and wages.

Expenses deductible over a number of income years

Some expenses are claimed over a number of years, such as the decline in value of carpet, furniture and appliances, and certain construction expenditure.

You can't claim:

acquisition and disposal costs of the property - instead, these are usually included in the property's cost base for capital gains tax purposes
expenses not actually incurred by you, such as water or electricity charges borne by your tenants
expenses that are not related to the rental of a property, such as expenses connected to your own use of a holiday home that you rent out for part of the year
GST credits for anything you purchase to lease the premises - GST doesn't apply to residential rental properties.

Property - home

Apportionment of rental expenses

There may be situations where not all your expenses are deductible and you need to work out the deductible portion. To do this you subtract any non-deductible expenses from the total amount you have for each category of expense; what remains is your deductible expense.

You will need to apportion your expenses if any of the following apply to you:

your property is available for rent for only part of the year
only part of your property is used to earn rent
you rent your property at non-commercial rates.

If you prepay an expense, such as insurance or interest, that covers a period of more than 12 months, you may need to spread your deduction over two or more years.

Property available for part-year rental

If you use your property for both private and assessable income-producing purposes, you cannot claim a deduction for the portion of any expenditure that relates to your private use.

Examples of properties you may use for both private and income-producing purposes are holiday homes and time-share units. In cases such as these you cannot claim a deduction for any expenditure incurred for those periods when the home or unit was used by you, your relatives or your friends for private purposes.

Only part of your property is used to earn rent

If only part of your property is used to earn rent, you can claim only that part of the expenses that relates to the rental income.

As a general guide, apportionment should be made on a floor-area basis - that is, by reference to the floor area of the part of the residence solely occupied by the tenant, together with a reasonable figure for tenant access to the general living areas, including garage and outdoor areas if applicable.

Example

Michael's private residence includes a self-contained flat. The floor area of the flat is one-third of the area of the residence.

Michael rented out the flat for six months in the year at $100 per week. During the rest of the year, his niece, Fiona, lived in the flat rent free.

The annual mortgage interest, building insurance, rates and taxes for the whole property amounted to $9,000. Using the floor-area basis for apportioning these expenses, one-third - that is, $3,000 - applies to the flat. However, as Michael used the flat to produce assessable income for only half of the year, he can claim a deduction for only $1,500 - half of $3,000.

Assuming there were no other expenses, Michael would calculate the net rent from his property as:

Gross rent
Less expenses
Net rent

$2,600
$1,500
$1,100

(26 weeks x $100)
($3,000 x 50%)

Non-commercial rental

If you let a property, or part of a property, at less than normal commercial rates - for example, renting to a family member - this may limit the amount of deductions you can claim.

For more information about the apportionment of expenses, refer to Taxation ruling IT 2167 - Income tax: rental properties - non-economic rental, holiday home, share of residence, etc. cases, family trust cases.

Pre-paid expenses

If you prepay a rental property expense - such as insurance or interest on money borrowed - that covers a period of 12 months or less and the period ends on or before 30 June, you can claim an immediate deduction for that income year.

A prepayment that does not meet these criteria and is $1,000 or more may have to be spread over two or more years. This is also the case if you carry on your rental activity as a small business entity and have not chosen to deduct certain prepaid business expenses immediately.

	For more information, refer to Deductions for prepaid expenses.
	Property - home

Expenses you can deduct in the income year incurred

Generally you can claim an immediate deduction for expenses related to the management and maintenance of the property, including interest on loans. You can claim a deduction for these expenses only if you actually incur them and they are not paid by the tenant.

To claim deductions for expenses, your property must include a dwelling that is rented or available for rent - for example, advertised for rent. If you are building a rental dwelling, you can claim deductions for the land while you are building.

Deductible expenses

Expenses for which you may be entitled to an immediate deduction in the income year you incur the expense include:

advertising for tenants
body corporate fees and charges
cleaning
council rates
gardening and lawn mowing
insurance (building, contents, public liability)
interest expenses
land tax
pest control
property agent's fees and commission
repairs and maintenance
travel undertaken to inspect the property or to collect the rent
water charges.

For more information and examples of deductible expenses, refer to:

Negative gearing

A rental property is negatively geared if it is purchased with the assistance of borrowed funds and the net rental income, after deducting other expenses, is less than the interest on the borrowings.

The overall tax result of a negatively geared property is a net rental loss. In this case, you may be able to claim a deduction for the full amount of rental expenses against your rental and other income - such as salary, wages or business income - when you complete your tax return for the relevant income year. Where the other income is not sufficient to absorb the loss it is carried forward to the next tax year.

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Expenses deductible over a number of income years

There are three types of expenses you may incur for your rental property that may be claimed over a number of income years:

borrowing expenses
amounts for decline in value of depreciating assets, such as carpet, furniture and appliances
capital works deductions - essentially, certain construction expenditure.

Borrowing expenses

You can claim a deduction for borrowing expenses associated with purchasing your property. These are expenses you incur in taking out a loan for the property, such as loan establishment fees, title search fees and costs for preparing and filing mortgage documents. Interest on the loan is not a borrowing expense.

If your total borrowing expenses are more than $100, the deduction is spread over five years or the term of the loan, whichever is less. If the total deductible borrowing expenses are $100 or less, you can claim a full deduction in the income year they are incurred.

For more information, refer to Rental properties - claiming borrowing expenses.

Deduction for decline in value of depreciating assets

You can deduct an amount equal to the decline in value for an income year of a depreciating asset that you held for any time during the year. Your deduction is reduced to the extent your use of the asset is for other than a taxable purpose. If you own a rental property, the taxable purpose will generally be for the purpose of producing assessable income.

To work out the decline in value of a depreciating asset, you need to know its effective life. Generally, the effective life of a depreciating asset is how long (in whole years) you can use it for a taxable purpose. For most depreciating assets you can choose to work out the effective life yourself or use an effective life determined by us.

You work out your deduction for the decline in value of a depreciating asset using either the:

prime cost method - this means the value of the depreciating asset decreases uniformly over its effective life
diminishing cost method - this means the decline in value each year is a constant proportion of the remaining value and produces a progressively smaller decline over time.

To choose the best method for you and work out your deduction, use our Decline in value calculator.

If the asset cost $300 or less you can claim an immediate deduction for the cost of the asset (to the extent that you use it for a taxable purpose). You can't do this if the asset is one of a set of assets that cost more than $300 - for example, if you buy four dining chairs each costing $250, you can't treat them as separate assets to claim an immediate deduction.

To save on paperwork, depreciating assets valued at less than $1000 can be grouped in a low-value asset pool and depreciated together.

For more information, including a list of deductible rental property assets and their effective life, refer to Rental properties

Capital works deductions

You can deduct certain kinds of construction expenditure. In the case of residential rental properties, the deductions would generally be spread over a period of 25 or 40 years. These are referred to as capital works deductions.

Your total capital works deductions cannot exceed the construction expenditure. No deduction is available until the construction is complete.

Deductions based on construction expenditure apply to capital works such as:

a building or an extension - for example, adding a room, garage, patio or pergola
alterations - such as removing or adding an internal wall
structural improvements to the property - for example, adding a gazebo, carport, sealed driveway, retaining wall or fence.

You can only claim deductions for the period during the year that the property is rented or is available for rent.

If you can claim capital works deductions, the construction expenditure on which those deductions are based cannot be taken into account in working out any other types of deductions you claim, such as deductions for decline in value of depreciating assets.

The amount of the deduction you can claim depends on the type of construction and the date construction started.

Capital works expenses you incur form part of the cost base of your property for capital gains tax purposes. If you claim a capital works deduction, you will need to take this into account when you work out your capital gain or loss.

	For more information, refer to Rental properties - claiming capital works deductions.
	Property - home

Selling a rental property

You may make a capital gain or capital loss when you sell (or otherwise cease to own) a rental property. You pay capital gains tax on your capital gains.

A capital gain, or capital loss, is the difference between what it cost you to obtain, maintain and improve the property (the cost base), and what you receive when you dispose of it. Amounts that you have claimed as a tax deduction, or that you can claim, are excluded from the property's cost base.

If you acquired the property before capital gains tax came into effect on 20 September 1985, there won't be a capital gain or capital loss. However, you may make a capital gain or capital loss from some capital improvements made since 20 September 1985, even if you acquired the property before that date.

If you're a co-owner of an investment property, you will make a capital gain or capital loss in accordance with your interest in the property (see Joint ownership).

If the property was your main residence for part of the time you owned it, or it was your main residence and you rented out a part of it, you may be entitled to a partial main residence exemption from capital gains tax.

Individuals who have a capital gain can generally discount it by 50% if they've owned the property for at least 12 months.

Your capital gain or capital loss may be disregarded if a rollover applies - for example, if your property was destroyed or compulsorily acquired, or you transferred it to your former spouse under a court order following the breakdown of your marriage.

Example

Vilka and Tom jointly buy a flat in 1999 for $200,000 and live in it until 2006, when they buy a new house and move in. They keep the flat and rent it out. At the time they start renting out the flat, its market value is $305,000. For capital gains tax purposes, Vilka and Tom are taken to have acquired the flat for this amount.

In 2010, Vilka and Tom sell the flat for $500,000. They pay fees totalling $15,000 to their real estate agent and solicitor for services associated with the sale.

Vilka and Tom work out their capital gains tax obligation as follows.

They can ignore the period prior to 2006, during which the flat was their main residence and exempt from capital gains tax.
The 'cost base' of the flat for capital gains tax purposes is its acquisition value (its value at the time they began renting it out), plus certain other costs such as the costs associated with selling it.	Cost: $305,000 + $15,000 = $320,000
Their capital gain during the time the flat was rented out is its sale price less the cost base.	Capital gain: $500,000 - $320,000 = $180,000
They are entitled to discount the capital gain by 50% because they owned the flat for at least 12 months.	Discounted capital gain: $180,000 x 50% = $90,000
They are joint owners so they have equal shares of the capital gain.	Share of capital gain for each owner: $90,000 / 2 = $45,000

In their individual income tax returns for 2010-11, Vilka and Tom each declare $45,000 in capital gains income.

Note:

As shown in this example, it's important to value a property when its purpose changes. To work out their capital gain, Vilka and Tom needed to know the market value of the flat when they began renting it out.
During the time they rented out the flat, Vilka and Tom incurred various costs of ownership such as mortgage interest, body corporate fees and repainting. They were entitled to income tax deductions for these costs because the were incurred to earn rental income. These deductible costs are not relevant to calculating the capital gain and cannot be added to the cost base for the flat.

For more information, refer to Introduction to capital gains tax.

Goods and services tax (GST)

The sale of residential premises is generally input taxed. This means you are not liable for GST on the income, and can't claim GST credits for anything you purchase or import to make the sale. However, if the property is new residential premises, you may be liable for GST on the sale of the property. You may also be entitled to GST credits on construction and sale costs. See the section on Building and construction - residential premises.

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Holiday apartments in commercial residential properties

Leasing

If you lease your apartment or unit to either a guest, or a management company (that will use it as part of commercial residential premises), you make an 'input taxed supply' of residential premises. This means you:

are not liable for GST on the income
cannot claim GST credits for anything you purchase or import to lease the premises.

As with any rental property, you must declare the income you receive in your annual income tax return, and you can claim tax deductions for many of the associated expenses.

Example

Aiko owns a strata titled apartment. When she leases her apartment to Mink Management Services (MMS) the supply is input taxed.

MMS will group Aiko's apartment with other apartments in a complex and let them out in the same manner as a hotel, motel, inn or hostel would.

Even though Aiko's apartment is located within commercial residential premises, her apartment does not, by itself, have the characteristics of commercial residential premises. It is residential.

This means Aiko:

is not liable for GST on the income
cannot claim GST credits for anything she purchases or imports to lease the premises.

Selling

If you sell your apartment or unit it is considered residential premises and is input taxed, regardless of whether it is located within commercial residential premises. This means you:

are not liable for GST on the income
cannot claim GST credits for anything you purchase or import to make the sale.

If you make a capital gain when you sell your apartment or unit, you may need to pay capital gains tax, just as you would when selling any rental property.

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Vacant land

The tax treatment of vacant land depends on whether it is a capital asset or trading stock.

If you've acquired vacant land (as an individual for private purposes or as an investment), it's usually considered a capital asset that is subject to the same capital gains tax rules as other properties. When you sell it, you'll need to work out your capital gain or capital loss and pay tax on any capital gain.

However, if you use your land in a business activity that deals in land, it is considered trading stock. Any proceeds from sale are then treated as ordinary income, and the business enterprise may be required to register for GST. This could happen even for a one-off transaction.

Determining the tax treatment of land

Land is treated as a capital asset unless it is treated as trading stock.

Land is treated as trading stock for income tax purposes if:

it is held for the purpose of resale, and
a business activity that involves dealing in land has begun.

Business activities that involve dealing in land would include, for example:

acquiring land to develop or subdivide and sell
acquiring land for the purpose of building a dwelling or commercial property and selling the developed property.

It is not necessary that the acquisition of land be repetitive. A single acquisition of land for the purpose of development, subdivision and sale by a business begun for that purpose would lead to the land being treated as trading stock.

The business activity is taken to have begun when a taxpayer embarks on a definite and continuous cycle of operations designed to lead to the sale of the land.

Land as a capital asset

Vacant land that is a capital asset is subject to the same capital gains tax rules as other properties. When you sell it, you'll need to work out your capital gain or capital loss and pay tax on any capital gain.

Keep records of the date and cost of obtaining the land, and your ongoing expenses, such as council rates and loan interest. These expenses can be added to the capital cost of the land for the purposes of working out your capital gain or capital loss when you sell it.

Income tax deductions

For land treated as a capital asset, you generally can't claim income tax deductions for expenses associated with owning it - such as interest on an investment loan - because the land doesn't generate income. You can add these expenses to the capital cost of the land for the purposes of working out any capital gain or capital loss when you sell it.

However, if you buy vacant land with the intention of building a rental dwelling on it, you can claim tax deductions for expenses such as loan interest and council rates. To be entitled to these deductions you must build the dwelling in a reasonable period of time and make it available for rent as soon as the dwelling is completed.

For more information, refer to Taxation Ruling TR2004/4 - Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities.

Land as trading stock

For vacant land that is trading stock, capital gains tax does not apply. Proceeds from the land are treated as ordinary income (not a capital gain) and associated costs are deductible.

Goods and services tax

If you are dealing with property, including one-off transactions, you may be considered to be conducting an enterprise and need to register for GST.

Once you are registered for GST, you will need to include GST in the price of goods you sell and you will be able to claim credits for the GST included in the price of most of your business purchases - subject to normal GST rules. You will also need to report these transactions by completing an activity statement.

For further information refer to:

Property - home

Subdividing

The profit from selling subdivided land may be a capital gain or ordinary income, depending on the circumstances.

If you subdivide a block of land - such as the land on which you live - and sell the newly created block, any profit is generally treated as a capital gain, subject to capital gains tax.

However, the tax treatment of a subdivision is different if both the following apply:

your intention or purpose in entering into the transaction was to make a profit or gain
you entered into the transaction, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

In this case any profit is treated as ordinary income (not a capital gain), and you will probably have GST obligations and entitlements.

You don't need to be in business for this tax treatment to apply - it's enough that there is a profit motive and the transaction has the character of a business operation or commercial transaction. It could apply even for a one-off transaction, such as:

a subdivision by a non-business taxpayer
a transaction by a business taxpayer that is outside the ordinary course of their business.

	For more information, refer to Taxation Ruling TR 92/3 - Income tax: whether profits on isolated transactions are income.
	Property - home

Capital gains tax

If you subdivide a block of land, each block that results is registered with a separate title. For capital gains tax purposes, the original land parcel is divided into two or more separate assets.

Subdividing the land does not result in a CGT event if you retain ownership of the subdivided blocks. This means you do not make a capital gain or a capital loss at the time of the subdivision. You make a capital gain or capital loss when you sell the subdivided blocks.

For the purposes of working out your capital gain or capital loss, the date you acquired the subdivided blocks is the date you acquired the original parcel of land and the cost base of the original land is divided between the subdivided blocks on a reasonable basis.

For more information, refer to Subdividing and amalgamating land.

When your home is affected

If you subdivide land surrounding or adjacent to your home (main residence), your eligibility for the capital gains tax main residence exemption will be affected.

Land is adjacent to your home if it is close to, near, adjoining or neighbouring it.

If you sell any land separately from your home, the land is not exempt from capital gains tax. It is only exempt when sold with the home that is your main residence.

Example: Dwelling purchased on or after 20 September 1985 and land subdivided after that date.

Kym bought a house on a 0.2 hectare block of land in June 2008 for $350,000. The house was valued at $120,000 and the land at $230,000. Kym lived in the house as her main residence. She incurred $12,000 in stamp duty and legal fees purchasing the property.

Kym found the block was too big for her to maintain. In January 2009, she subdivided the land into two blocks of equal size. She incurred $10,000 in survey, legal and subdivision application fees and $1,000 to connect water and drainage to the rear block. In March 2009, she sold the rear block for $130,000.

As Kym sold the rear block of land separately, the main residence exemption does not apply to that land. She contacted several local real estate agents who advised her that the value of the front block was $15,000 higher than the rear block. Kym apportioned the $230,000 original cost base into $107,500 for the rear block (46.7%) and $122,500 for the front block (53.3%). Kym incurred $3,000 legal fees on the sale.

The cost base of the rear block is calculated as follows:

Cost of the land	$107,500
46.7% of the $12,000 stamp duty and legal fees on the purchase	$5,604
46.7% of the $10,000 cost of survey, legal and application fees	$4,670
Cost of connecting water and drainage	$1,000
Legal fees on sale	$3,000
Total	$121,774

The capital gain on the sale of the rear block is $8,226. She calculates this by subtracting the cost base ($121,774) from the sale price ($130,000). As Kym had owned the land for less than 12 months, she uses the 'other' method to calculate her capital gain.

Kym will get the full exemption for her house and the front block if they are used as her main residence for the full period she owns them.

	For more information, refer to Is the dwelling your main residence?
	Property - home

Goods and services tax

Many people are actually carrying on an enterprise when making property transactions but do not register for GST when they are required to do so. Even with a one-off transaction you may still be required to register for GST because your one-off property transaction may be an 'enterprise'.

If you are engaging in an enterprise you may be required to register for GST and have entitlements and obligations.

For more information, refer to:

If you are unsure whether your subdivision transaction is a profit-making activity, a business, a commercial transaction or none of these, you can write to the ATO and request a private ruling to determine your tax position.

Property - home

Property development, building and renovating

Renovating for profit

You are likely to be entering into a profit-making activity if you acquire a property with the intention of renovating and selling it at a profit, and go about it in a business-like way. This could have implications for the way the profit is treated for tax purposes (income or capital), and for GST.

Building and construction - residential premises

If you build new residential premises for sale:

you can claim GST credits for the construction and any purchases you make related to the sale of the premises (subject to the normal rules on GST credits)
you are liable for GST on the sale.

GST does not apply to the sale of residential premises that have been sold before.

Building or renovating your home

Generally, there are no income tax, capital gains tax or GST implications if you build or renovate your own home, provided it is your main residence and you undertake the work for private purposes.

For more information, see the section Your home.

Taxable payments reporting - building and construction industry

From 1 July 2012, businesses in the building and construction industry need to report to the ATO each year the total payments they make to each contractor for building and construction services. These payments are reported to the ATO on the Taxable payments annual report.

The report is due by 21 July after the end of each financial year.

For more information, see Taxable payments reporting - building and construction industry.

Property - home

Renovating for profit

You are likely to be entering into a profit-making activity if you acquire a property with the intention of renovating and selling it at a profit, and go about it in a business-like way. This will affect your tax obligations and entitlements. If you renovate one or more properties you need to work out if you:

are a personal property investor
have entered into a profit-making activity of property renovations
are in the business of renovating properties.

Some of the questions you need to ask are:

Are your property-renovating activities regular and repetitive?
What are their size and scale?
Are they planned, organised and carried on in a business-like manner?
Are they carried on for the purpose of making a profit?
Do you rely on the income received to meet you and your dependants' regular expenses?
Are they of a similar kind and carried on in a similar manner, to the activities of other property renovating businesses?

Example: Personal investor

Doug is a sales representative. He obtains an investment loan and purchases a property that he intends to rent out. He would not consider selling the property unless the price appreciated markedly. The property requires renovation before it would attract desirable tenants. Doug renovates the property after work and on weekends. Over the period of the renovation, the real estate market booms and Doug decides to sell the property.

Doug would not be considered to be in the business of property renovation because:

his intention when he bought the property was to gain rental income rather than make a profit from buying, renovating and selling it
Doug didn't rely on the income to meet regular expenses as he has income from his job
his renovation activities where not carried on in a business-like manner, and
Doug did not buy the property with a view to selling it at a profit, and did not carry out a one-off profit-making activity.

Therefore, Doug is regarded as a personal investor.

However, if Doug, because of his success with this renovation (either in his own right or with another or others) was to then undertake another renovation similar to the first with a view to achieving the same profit levels, he will be regarded as being in the business of property renovation.

Example: Renovation as a profit-making activity

Fred and Sally are married with two children. They renovated their home, substantially increasing its value. After watching many of the home improvement shows and seeing how other people have bought, renovated and sold properties for a significant profit, they decide to investigate the purchase of another property to renovate and make a profit.

They consider many properties, costing out the renovations, costs of buying and selling, and time frames to complete the renovations. Their research shows that they also could make a significant profit.

They sell their current home and purchase a new property which they move into while completing the renovations. They plan out the renovation in stages, including the costs and any contractors needed to complete the work. The renovation runs to schedule and when completed they list the property for sale. The property sells for a profit.

As the property renovation activities were planned, organised and carried on in a business-like manner; the purpose of buying the property was to renovate it and make a profit; and the renovations were carried on in a similar manner to other property renovation businesses, Fred and Sally have entered into a one-off profit-making activity.

	For more information, including how the difference affects your tax position, refer to Are you in the business of renovating properties?
	GST and property transactions Many people are actually carrying on an enterprise when making property transactions but do not register for GST when they are required to do so. (An enterprise is an activity or a series of activities, done in the form of a business or in the form of an adventure or concern in the nature of trade). Even with a one-off transaction you may still be required to register for GST because your one-off property transactions may be an 'enterprise'.
	For more information to determine whether an activity is in the form of a business, as part of an assessment of carrying on an enterprise. refer to Miscellaneous Tax Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number.
	Capital works deductions for rental properties If you own a residential rental property, you may be able to claim a tax deduction for construction expenditure on capital works, such as extensions or structural improvements. See the section on Residential rental properties - Expenses you can claim.
	Property - home

Building and construction - residential premises

Goods and services tax (GST)

Residential premises includes houses, units and flats that are occupied or can be occupied as residences. It does not include vacant land.

GST applies to new residential premises but not existing residential premises. Residential premises are new when any of the following apply:

they have not been sold as residential premises before
they have been created through substantial renovations
new buildings replace demolished buildings on the same land.

Building new residential premises

If you build new residential premises for sale:

you can claim GST credits for the construction and any purchases you make related to the sale of the premises (subject to the normal rules on GST credits)
you are liable for GST on the sale.

If GST applies, you generally pay GST of one-eleventh of the sale price. You may be eligible to use the margin scheme to work out the GST you must pay - this means your GST liability would be equal to one-eleventh of the margin for the sale of the property, rather than one-eleventh of the total selling price.

Residential premises are no longer new residential premises if they have been continuously rented for five years after first becoming new residential premises. In this case, they are input taxed. If GST credits were claimed at the outset, a change of creditable purpose may apply.

If you rent the new premises while you are planning to sell them, you will need to adjust part of the GST credits you claimed.

You must show you intend to sell the premises. Actively marketing the premises for sale is one way of showing this.

Commercial premises and commercial residential premises

If you sell or lease commercial premises or commercial residential premises, you are generally liable for GST on the income. See the section on Property used in running a business.

For more information, including the different GST treatments of different properties, refer to:

GST and property
Margin scheme - made easy (NAT 73740).

New residential premises 'off-the-plan'

An off-the-plan purchase occurs when you enter into a contract to purchase new residential premises before the construction is completed. At this stage you are purchasing a contractual right to have the premises built.

Generally, you pay a deposit and sign a contract with the developer. You pay the balance of the purchase price on settlement. On settlement, you are purchasing new residential premises and the purchase price will include GST.

However, if you sell the contractual right before settlement you are not selling new residential premises, and GST may apply if the sale of the contractual right forms part of your GST registered business.

The sale of an off-the-plan property may be an enterprise in its own right and may form part of your GST registration threshold.

For more information about selling new residential premises and adjusting for GST credits, refer to:

Property - home

Property used in running a business

If your property is used to run a business - whether it's commercial premises like a shop or office, or even your own home - it will generally have the following tax implications:

you must include any rental income in your tax return
you can claim income tax deductions for some property expenses
you'll be liable for capital gains tax on any capital gain when you sell.

You may also be liable for GST, and entitled to claim GST credits, when you buy, sell, lease or rent commercial premises.

Buying commercial premises

When you buy a commercial property - such as a shop, factory or office - you may be eligible to claim a credit for the GST included in the purchase price. While you own the property you can generally claim income tax deductions for ownership and maintenance expenses, such as loan interest.

Selling commercial premises

You're generally liable for capital gains tax when you sell a commercial property. You may be eligible for discounts or concessions that reduce the amount you have to pay.

Usually you will also be liable for GST on the sale, and can claim GST credits for related purchases. If you are selling your business as a going concern, the sale may be GST-free.

Leasing and renting commercial premises

If you lease premises to others, you include your rental-related income in your annual income tax return, and can claim tax deductions for many of the related expenses. You may be liable for GST on the rent you charge and be entitled to claim GST credits for related purchases.

If you rent a commercial property for your business premises, the rent you pay is tax deductible. You may be able to claim GST credits for the GST included in the rent you pay.

Running your business from home

If your home is your principal place of business, you can claim income tax deductions for a portion of the costs of owning, maintaining and using your home for this purpose. When you sell your home you will be liable for capital gains tax for a portion of any capital gain.

Working farms

Selling, leasing or subdividing a working farm is GST-free in some circumstances. For example, when you sell farmland it is GST-free if it was used for a farming business for at least five years immediately before the sale, and the buyer intends to use it for a farming business.

Commercial residential premises and GST

Commercial residential premises - such as hotels, motels, inns, hostels and boarding houses - are taxable under GST. This applies to leasing, buying and selling such premises.

Retirement villages

The term 'retirement village' is used to describe various types of accommodation provided to village residents. GST may apply differently depending on who is providing the accommodation, or what is being supplied.

Registering for GST

If you are dealing with property, including one-off transactions (for example, you buy, sell, lease or develop), you may be considered to be conducting an enterprise. If your turnover from these activities is more than the GST registration threshold you may be required to register for GST.

Property - home

Buying commercial premises

When you obtain a commercial property - such as a shop, factory or office - it's important to start keeping records straight away.

Commercial properties used in the running of a business are subject to capital gains tax. You'll need records of the date and cost of obtaining the premises so that you can work out your capital gain (or capital loss) when you sell it.

Income tax deductions

If your property is used to run a business or is available to rent for that purpose, you can claim tax deductions for expenses associated with owning it - for example, loan interest (if you borrowed money to the buy the property) and maintenance expenses. Keep records of your expenses from the beginning so you can claim everything you're entitled to.

For more information, refer to Claiming business deductions - home.

Goods and services tax (GST)

If you buy commercial premises, you may be eligible to claim the GST included in the purchase price of the premises.

You may also be able to claim GST on other expenses that relate to buying the property - for example, the GST included in solicitors' fees.

You cannot claim GST credits if:

the seller used the margin scheme to work out the GST included in the price
you purchase property from someone who is not registered or required to be registered for GST
you purchase the property as a GST-free supply, or
you are not registered for GST.

Property - home

Selling commercial premises

Capital gains

You may make a capital gain or capital loss when you sell (or otherwise cease to own) a commercial property. You pay capital gains tax on your capital gains.

You may be eligible for discounts or concessions on your capital gains tax liability.

Goods and services tax (GST)

If you sell commercial premises, such as shops, factories or offices, you are generally liable for GST on the income and you can claim GST credits on purchases you make that relate to selling the property.

Margin scheme

You may be able to use the margin scheme to work out the GST that applies to the sale. This means your GST liability is reduced. If you sell the property using the margin scheme any GST charged is not able to be claimed by the purchaser.

Selling a business as a going concern

If your commercial property is being leased when you sell it, you may be able to treat it as a GST-free supply of a going concern.

Property - home

Capital gains

You may make a capital gain or capital loss when you sell (or otherwise cease to own) a commercial property. You pay capital gains tax on your capital gains.

Discounts and concessions

If you own the property as an individual (including as a partner in a partnership), and you have owned it for at least 12 months, you may be eligible to discount your capital gain by 50%. This discount is also available to trusts, but not to companies.

If you are a small business entity and the property you sell is your business premises, you may be able to reduce the capital gain using one of four small business concessions:

15-year exemption: If your business has owned the premises for 15 years and you are aged 55 years or over and are retiring, or are permanently incapacitated, you won't have an assessable capital gain when you sell.
50% active asset reduction: You can reduce the capital gain on your premises by 50%.
Retirement exemption: Capital gains from the sale of your premises are exempt up to a lifetime limit of $500,000. If you are under 55 years of age, the exempt amount must be paid into a complying superannuation fund or a retirement savings account.
Rollover: You can defer your capital gain until another event happens that crystallises the gain. For example, if you sell your existing business premises and buy different premises for your business within a certain period, you can defer your capital gain until the new premises are sold.

There are a number of conditions you must meet to be eligible for the small business concessions.

For more information, refer to:

Property - home

Goods and services tax (GST)

If you sell commercial premises, such as shops, factories or offices, you are generally liable for GST on the income. This means:

you pay GST of one-eleventh of the sale price
you can claim GST credits on purchases you make that relate to selling the property (subject to the normal rules on GST credits), for example, the GST included in real estate agent's fees.

You may be able to use the margin scheme to work out the GST that applies to the sale. Using the margin scheme means your GST liability is equal to one-eleventh of the margin for the sale of property, rather than one-eleventh of the total selling price.

If your commercial property is being leased when you sell it, you may be able to treat it as a GST-free supply of a going concern.

Registering for GST

Property - home

Margin scheme

If GST applies to a sale of commercial property, you generally pay GST of one-eleventh of the sale price. You may be eligible to use the margin scheme to work out the GST you must pay - this means your GST liability would be equal to one-eleventh of the margin for the sale of the property, rather than one-eleventh of the total selling price. You can only apply the margin scheme if the sale is taxable.

The margin is generally the difference between the sale price and one of the following:

the amount you paid for the property
an appropriate property valuation.

Whether you can use the margin scheme depends on how and when you purchased your property.

If you have purchased property that was sold to you under the margin scheme you cannot claim GST credits on this purchase.

	For more information, refer to Margin scheme - made easy (NAT 73740).
	Property - home

Selling a business as a going concern

If you sell property that is part of a GST-free sale of a going concern:

you are not liable for GST on the sale
the seller and the purchaser may be able to claim GST on other expenses that relate to selling and buying the property, for example, the GST included in solicitors' fees.

For GST purposes, when you sell a business, you are supplying a going concern if you sell all of the things that are necessary for the continued operation of the business and you carry on (or will carry on) the business until the day of the sale.

A sale of a going concern is GST-free if, in general, all of the following apply:

the supply is for payment
the purchaser is registered (or required to be registered) for GST
the buyer and seller have agreed in writing that the sale is of a going concern
the supplier supplies all things necessary for the continued operation of the business
the supplier carries on the business until the day of supply.

Property that is part of a sale of a going concern can include any of the following:

the premises when it is sold together with the assets and operating structure of the business
a fully tenanted building where the property and all leases, agreements and covenants are included in the sale
the sale of a partially tenanted building where:

the vacant part of the building is either being actively marketed for lease or undergoing repairs or refurbishment, and
all leases, agreements and covenants are included in the sale.

	For more information, refer to Sale of a business as a going concern - checklist (NAT 10147).
	Property - home

Leasing and renting commercial premises

This section has information for:

the lessor, or owner of the premises
the renter, or tenant of the premises.

Leasing (owner)

Income tax

You must include your share of the full amount of rent you earn in your annual income tax return. (If the property is owned through another entity, such as a company, the rent is included in the company's tax return.)

You can claim a deduction for certain expenses you incur for the period your property is rented or is available for rent:

Generally you can claim an immediate deduction for expenses related to the management and maintenance of the property, including interest on loans.
Some expenses are claimed over a number of years, such as the decline in value of carpet, furniture and appliances, and certain construction expenditure.

You can't claim:

acquisition and disposal costs of the property - instead, these are usually included in the property's cost base for capital gains tax purposes
expenses not actually incurred by you, such as water or electricity charges borne by your tenants
expenses that are not related to the rental of a property.

The section on Residential rental properties provides more information on the income tax implications of owning a rental property.

Goods and services tax (GST)

As the lessor, you are liable for GST on the rent you charge if you:

lease a factory or shop to others, and
are registered, (or required to be registered) for GST.

You can claim GST credits on purchases you make that relate to renting out your property, subject to the normal rules on GST credits - for example, the GST included in the managing agent's fees.

Registering for GST

Renting (tenant)

If you rent a commercial property as your business premises, the rent you pay is tax deductible.

As the lessee (tenant), you may be able to claim GST credits for the GST included in rent you pay if:

you lease the property from another person to carry on your business, and
you and the lessor are registered (or required to be registered) for GST.

Property - home

Running your business from home

The information in this section applies where your home is also your principal place of business - that is, you run your business from home and a room is set aside exclusively for business activities. Common examples include:

a small business operator whose main office is in their home
a tradesperson or craftsperson who has their workshop at home
a doctor or dentist who has their surgery or consulting room at home.

This section has information about:

If you do only some business or work from home, either from a designated work area, or another part of your home, this section is not relevant to you. Instead, you should read the section Home office.

Deductions you can claim

Where your home is also your place of business, you can claim deductions if you carry out income-producing work at home and incur expenses in using your home for that purpose.

You can claim a deduction for the following:

The cost of using a room's utilities, such as gas and electricity - these must be apportioned. If the business portion is based on anything other than the floor area (for example, on actual electricity usage) you will need to clearly document your claim.
Business phone costs - If a telephone is used exclusively for business you can claim for the rental and calls, but not the installation costs. If the telephone is used for both business and private calls you can claim a deduction for business calls.
Decline in value of office plant and equipment (for example, desks, chairs, computers) - if the equipment (such as a computer) is also used for non-business purposes, your claim must be apportioned.
Decline in value of curtains, carpets and light fittings.
Cost of owning or renting the house (such as rent, mortgage interest, insurance, rates). You can claim the portion of these costs that relates to the room or workshop you use as a place of business. A common method of working out how much to claim is the floor area (as a proportion of the floor area in your whole home).

If your employer has an office in the city or town where you reside, your home office will not be a place of business, even if your work requires you to work outside normal business hours.

If your income includes personal services income, you may not be able to claim a deduction for occupancy expenses.

For more information, refer to:

Capital gains and the main residence exemption

Generally, you can ignore a capital gain or loss you make when you sell your home or main residence. This is called the 'main residence exemption'. However, you can't obtain the full main residence exemption if your home is your principal place of business, though you are probably entitled to a partial exemption.

To work out the capital gain that is not exempt you apply the same apportioning process you would for claiming a deduction for interest on your home loan. In most cases, you can use the:

proportion of the floor area of your home that is set aside to produce income, and
period you use it for this purpose.

If you first use your home as your place of business after 20 August 1996, the period before you first used your home to produce income is not taken into account in working out the amount of any capital gain or capital loss. Instead, you use the market value of your home at the time you first used it to produce income. It's a good idea to get a valuation of your home at the time you first use it as your place of business so that when you come to sell it you don't pay more capital gains tax than necessary.

For more information, refer to:

Property - home

Working farms

GST

When you sell farmland it is GST-free if both:

the land was used for a farming business for at least five years immediately before the sale
the buyer intends to use it for a farming business.

A lease by an Australian government agency or a long-term lease of farmland is also GST-free if the above conditions are met. A long-term lease is:

a lease for at least 50 years
likely to continue for at least 50 years because of renewals or extensions provided for in the lease.

A supply of subdivided land on which a farming business has been carried on for at least five years will be GST-free if:

it is permissible to use the land for residential purposes and
the supply is made to an associate of the supplier - such as a relative or a closely connected company or trust - for less than market value.

If you sell farmland and you do not meet the above conditions, the sale is taxable and you are liable for GST on the price.

For more information, refer to the sections on:

Capital gains

You may make a capital gain or capital loss when you sell (or otherwise cease to own) your working farm property. You pay capital gains tax on your capital gains.

You may be eligible for discounts or concessions on your capital gains tax liability.

	For more information, refer to the section on Selling commercial premises - capital gains.
	Property - home

Commercial residential premises and GST

Commercial residential premises are taxable under GST. This applies to leasing, buying and selling such premises. This differs from the treatment of other residential rental properties, which are generally input taxed for GST purposes.

Commercial residential premises include:

hotels, motels, inns
hostels, boarding houses
caravan parks, camping grounds
establishments that provide residential premises that are similar to hotels, motels, inns, hostels and boarding houses.

Buying and selling commercial residential premises

If you sell commercial residential premises, you are generally making a taxable supply and you are liable for GST of one-eleventh of the sale price.

Leasing commercial accommodation

As a general rule, if you are registered (or required to be registered) for GST, you are liable for GST on any commercial accommodation you lease to others.

For more information about what constitutes commercial residential premises, refer to GSTR 2011/D2: Goods and services tax: residential premises and commercial residential premises.

Retirement villages

Retirement villages are not commercial residential premises for GST purposes. GST may apply differently depending on who is providing the village accommodation, or what is being supplied.

Property - home

Buying and selling commercial residential premises

If you sell commercial residential premises such as hotels, motels, inns, hostels or boarding houses, you are generally making a taxable supply and you are liable for GST of one-eleventh of the sale price.

You may also sell commercial residential premises in either of the following ways:

under the margin scheme
as a going concern.

You can claim GST credits on purchases you make that relate to selling your property (subject to the normal rules on GST credits), for example, the GST included in real estate agents' fees.

If you purchase commercial residential premises, you can claim the GST included in the purchase price of the property as long as:

the seller did not use the margin scheme to work out the GST included in the price, or
the sale was not a GST-free sale of a going concern to you and the seller was registered or required to be registered for GST.

You may also be able to claim a GST credit on other expenses, such as solicitor's fees, that relate to buying the property.

Some characteristics of commercial residential premises include:

multiple occupancy
central management
providing accommodation to paying guests.

	For more information, refer to GST and property - Commercial residential premises.
	Property - home

Leasing commercial accommodation

Commercial accommodation is accommodation in commercial residential premises, such as hotels, motels, inns, hostels or boarding houses.

As a general rule, if you are registered (or required to be registered) for GST, you are liable for GST on any commercial accommodation you lease to others. The amount of GST you are liable for depends on whether you provide short-term, long-term, or predominantly long-term accommodation.

Short-term accommodation

You provide short-term accommodation when a guest stays for less than 28 continuous days. If you provide short-term accommodation, you are liable for GST of one-eleventh of the price you charge on the accommodation.

Long-term accommodation or predominantly long-term accommodation

You provide long-term accommodation when a guest stays for 28 or more continuous days. You provide predominantly long-term accommodation if at least 70% of the individuals you provide commercial accommodation to stay for 28 or more continuous days.

You can choose from a number of ways of working out GST, depending on whether you provide long-term accommodation or predominantly long-term accommodation.

	For more information, including how to work out GST, refer to GST and property - If you lease commercial accommodation.
	Property - home

Retirement villages

The term 'retirement village' is used to describe various types of accommodation provided to village residents. A village may:

be operated by charitable bodies, government, or commercial businesses
consist of different types of premises, such as independent living units, serviced apartments, care facilities or a combination of these
offer different occupancy arrangements, and
provide a wide range of facilities and services to residents.

Good and services tax

The term 'retirement village' has a particular meaning under GST law. The GST definition is only relevant for working out whether a supply is GST-free under specific GST concessional provisions.

GST may apply differently depending on who is making the supply, or what is being supplied.

For more information, refer to:

Property - home

Last Modified: Wednesday, 1 August 2012

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