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  • Rental expenses you can't claim

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    Borrowing expenses you can't claim

    You can't claim any of the following as borrowing expenses:

    • the amount you borrow for the property
    • loan balances for the property
    • repayments of principal against the loan balance
    • stamp duty charged by your state/territory government on the transfer (purchase) of the property title (capital expense)
    • legal expenses including solicitors' and conveyancers' fees for the purchase of the property (capital expense)
    • stamp duty you incur when you acquire a leasehold interest in property such as an Australian Capital Territory 99-year crown lease (you may be able to claim this as a lease document expense)
    • insurance premiums where, under the policy, your loan will be paid out in the event that you die, become disabled or unemployed (this is a private expense)
    • borrowing expenses on any portion of the loan you use for private purposes (for example, money you use to invest in a super fund).

    You may be able to include capital expenses in the 'cost base' of your property. This can help you reduce the amount of capital gains tax (CGT) you pay when you sell your property. Expenses you incur when purchasing and selling your rental property are capital expenses.

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    Example

    On 3 July 2012, Peter took out a 25-year loan of $300,000 to purchase a rental property. Peter's deductible borrowing expenses were:

    • $800 stamp duty on the mortgage
    • $500 loan establishment fees
    • $300 valuation fees required for loan.

    Peter also paid $12,000 stamp duty on the transfer of the property title. He cannot claim a tax deduction for this expense but it will form part of the cost base of the property for CGT purposes when he sells the property.

    As Peter's borrowing expenses are more than $100, he must claim them over five years from the date he took out his loan for the property. He works out his borrowing expenses' deductions as follows:

    • For the first year, 2012–13, Peter performs the following steps
      • Step 1: works out the number of days between 3 July 2012 and 30 June 2013 (363)
      • Step 2: works out the number of days in the five-year period from 3 July 2012 to 2 July 2017 (1,826)
      • Step 3: divides Step 1 result by Step 2 result (equals 0.19879)
      • Step 4: multiplies Step 3 result by the borrowing expenses of $1,600 (equals $318). He claims $318 as a deduction on his 2012–13 tax return.
       
    • For each of the following years, 2013–14 to 2016–17, Peter performs the following steps
      • Step 1: works out the remaining borrowing expenses, by reducing the original borrowing expenses of $1,600 by deductions already claimed in previous years
      • Step 2: works out the number of days in the financial year (remembering any leap years)
      • Step 3: works out the number of days remaining in the five years (this includes the number of days in the year for which he is preparing the tax return)
      • Step 4: divides Step 2 result by Step 3 result
      • Step 5: multiplies Step 4 result by Step 1 result (equals the amount he claims as a deduction on his tax return).
       
    • By the end of the 2016–17 income year, Peter has claimed deductions totalling $1,598.
    • In the final year, 2017–18, Peter performs the following steps  
      • Step 1: works out the remaining borrowing expenses, which equals $2 ($1,600 minus $1,598)
      • Step 2: works out the number of days between 1 July 2017 and 2 July 2017 (equals two)
      • Step 3: works out the number of days remaining in the five years, which equals two (1,826 minus 1,824)
      • Step 4: divides Step 2 result by Step 3 result (equals one)
      • Step 5: multiplies Step 4 result by Step 1 result (equals $2). Thus, he claims a deduction of $2 on his 2017–18 tax return.
       
    End of example

    Depreciating assets you can't claim

    Existing residential rental property purchase

    You can't claim a deduction for the decline in value for assets in an existing residential rental property if you entered into a contract to purchase that property on or after 7.30pm (AEST) on 9 May 2017.

    Example 1

    In August 2017, Donna purchased a two-year old apartment and immediately rented it out. A year before Donna purchased the apartment, the previous owner installed new carpet and, upon purchasing the property, Donna installed a second-hand television.

    Donna can't claim deductions for the decline in value of the carpet and the television because they have both been previously used.

    End of example

    Home turned into a residential rental property

    If you turn your home into a residential rental property on or after 1 July 2017, you can't claim a deduction for the decline in value for depreciating assets that were in your home. You can only claim a deduction for the decline in value for any new depreciating assets that you purchase for your residential rental property.

    Example 2

    At the start of 2016, Kendrick purchased a home as his main place of residence. In August 2017, Kendrick moved out and rented out the property fully furnished, which included the furniture and fittings he had been using while living there.

    As Kendrick's home was made available for rent on or after 1 July 2017, he is not able to claim a deduction for the decline in value for any remaining useful effective life of the used depreciating assets in it.

    Kendrick can claim a deduction for the decline in value for the new depreciating assets that he purchases for his rental property.

    End of example

    Exceptions – when you can claim

    You can claim a deduction for the decline in value of depreciating assets if any of the following apply:

    • You are carrying on a business of letting rental properties.
    • You purchased a second-hand depreciating asset for your residential rental property before 7.30pm (AEST) on 9 May 2017.
    • You used a depreciating asset that you acquired before 7.30pm (AEST) on 9 May 2017 and then, before 1 July 2017, you installed it at your residential rental property.
    • Your rental property is not used to provide residential accommodation; for example, it is let out for commercial purposes (such as a doctor's surgery).
    • The entity that owns the residential rental property is any of the following
      • a corporate tax entity
      • a superannuation plan (except a self-managed superannuation fund)
      • a public unit trust or managed investment trust
      • a partnership or unit trust if each of its members are a corporate tax entity, superannuation plan (other than a self-managed superannuation fund), public unit trust or managed investment trust.
       
    • The income generating activities at your rental property are unrelated to providing residential accommodation (for example, solar panels used in generating income from the sale of electricity).

    Other expenses you can't claim

    You can’t claim a deduction for:

    • expenses not actually paid by you, such as water or electricity charges paid by your tenants
    • acquisition and disposal costs, including the purchase cost, conveyancing and advertising costs and stamp duty on the title transfer outside the ACT
      • instead, these are usually included in the property's cost base, which would reduce any capital gains tax when you sell the property
      • unlike stamp duty on the transfer of freehold title, stamp duty on the transfer of a property under the ACT's leasehold system is generally deductible (see Expenses for which you can claim an immediate deduction, 'Lease document expenses')
       
    • GST credits for anything you purchase to lease the premises – GST doesn't apply to residential rental properties. However, when claiming the expense as a deduction, you claim the total amount you've paid (inclusive of GST, if applicable).
    Last modified: 14 Jun 2019QC 59315