Capital gains tax
You may make a capital gain or capital loss when you sell (or otherwise cease to own) a rental property that you acquired after 19 September 1985.
You can also make a capital gain or capital loss from capital improvements made after 19 September 1985 to a property you acquired before that date.
You will make a capital gain from the sale of your rental property to the extent that the capital proceeds you receive are more than the cost base of the property. You will make a capital loss to the extent that the property's reduced cost base exceeds those capital proceeds. If you are 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 Co-ownership of rental property).
The cost base and reduced cost base of a property includes the amount you paid for it together with certain incidental costs associated with acquiring, holding and disposing of it (for example legal fees, stamp duty and real estate agent's commissions). Certain amounts that you have deducted or which you are entitled to deduct are excluded from the property's cost base or reduced cost base. See, for example, Cost base adjustments for capital works deductions.
Your capital gain or loss may be disregarded if a rollover applies – for example, 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.
For more information, see the Guide to capital gains tax 2004–05.
Depreciating assets
If the sale of your rental property includes depreciating assets, a balancing adjustment event will happen to those assets (see What happens if you no longer hold or use a depreciating asset?).
You should apportion your capital proceeds between the property and the depreciating assets to determine the separate tax consequences for them.
General value shifting regime
A loss you make on the sale of a rental property may be reduced under the value shifting rules if, at the time of sale, a continuing right to use the property was held by an associate of yours (for example, a 10-year lease granted to your associate immediately before you enter into a contract of sale). The rules can only apply if the right was originally created on non-commercial terms such that at that time, the market value of the right was greater than what you received for creating it by more than $50,000.
For more information, see the publication General value shifting regime – who it affects.
Goods and services tax (GST)
If you are registered for GST and it was payable in relation to your rental income, do not include it in the amounts you show as income in your tax return.
Similarly, if you are registered for GST and entitled to claim input tax credits for rental expenses, you do not include the input tax credits in the amounts of expenses you claim. If you are not registered for GST or the rental income was from residential premises, you include any GST in the amounts of rental expenses you claim.
For further information, phone the Business Infoline on 13 28 66.
Keeping records
General
You should keep records of both income and expenses relating to your rental property.
Records of rental expenses must be in English, or be readily convertible to English, and include the following details:
- the name of the supplier
- the amount of the expense
- the nature of the goods or services
- the date the expense was incurred, and
- the date of the document.
If the document does not show the payment date, you can use independent evidence to show the date the expense was incurred, such as a bank statement.
You must keep records of your rental income and expenses for five years from 31 October or, if you lodge later, for five years from the date you lodge your tax return. If at the end of this period you are in a dispute with the Tax Office that relates to your rental property, you must keep the relevant records until the dispute is resolved.
Do not send these records in with your tax return. Keep them in case we ask to see them.
Record keeping for capital gains tax
You must keep records relating to your ownership and all the costs of acquiring and disposing of property for five years from the date you dispose of it. However, you may need to keep these records for a longer period if the property contributed to a net capital loss you made for that income year.
You must keep records which set out in English (or be readily accessible or convertible to English):
- the date you acquired the asset
- the date you disposed of the asset and anything received in exchange
- the parties involved, and
- any amount that would form part of the cost base of the asset and whether you have claimed an income tax deduction for an item of expenditure.
For more information about cost base and record keeping requirements for capital gains tax purposes, see the Guide to capital gains tax 2004–05.
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 taxation result of a negatively geared property is that a net rental loss arises. 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.
If, by negatively gearing a rental property, the rental expenses you claim in your tax return would result in a tax refund, you may reduce your rate of withholding to better match your year-end tax liability.
If you believe your circumstances warrant a reduction to your rate or amount of withholding, you can apply to the Tax Office for a variation using the PAYG withholding variation application.
Pay as you go (PAYG) instalments
If you make a profit from renting your property, you will need to know about the 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 are required to pay PAYG instalments the Tax Office will notify you. You will usually be required to pay the instalments at the end of each quarter. There are usually two options if you pay quarterly instalments:
- pay using an instalment amount or an instalment rate calculated by us (as shown on your activity statement), or
- pay an instalment amount or using an instalment rate you work out yourself.
Depending on your circumstances, you may be eligible to pay your instalments annually. We will notify you if you are eligible to pay an annual PAYG instalment.
For further information, see PAYG instalments.
If you receive payments that are subject to withholding – for example, salary or wages – you can contribute towards your expected tax liability for an income year by increasing your rate or amount of withholding. That way you can avoid having a tax debt on assessment, which means that you may not be required to pay PAYG instalments. To do this, you will need to arrange an upwards variation by entering into an agreement with your payer to increase the rate or amount of withholding. You and your payer will need to complete a PAYG withholding variation application.