Capital gains tax
If you acquired your rental property, or depreciating assets used in relation to your rental property, after 19 September 1985, capital gains tax may apply when you dispose of the property and the depreciating assets. If you are a co-owner of an investment property, the liability to capital gains tax will be attributed to each co-owner in accordance with your legal interest in the property (see Co-ownership of rental property).
You do not make a capital gain or capital loss if you dispose of a depreciating asset after 11.45am (by legal time in the ACT) on 21 September 1999 unless the asset was also used for purposes other than producing income - for example, if you used it partly for private purposes.
Note: An amount may still be included in assessable income or a deduction allowed in the income year in which the asset is disposed of under the rules dealing with depreciating assets (see What happens if you no longer hold or use a depreciating asset?).
If you disposed of a rental property and you have claimed capital works deductions for construction expenditure (see Capital works deductions), those deductions may be excluded from the cost base or reduced cost base of the property. See Cost base adjustments for capital works deductions.
For more information, see the publication Guide to capital gains tax.
General value shifting regime
If you have made a loss on the sale of a non-depreciating rental property (for example, land) where an associate of yours had a continuing right to use the property on non-commercial terms after its sale, value shifting rules may reduce the amount of loss you can claim. The rules will only apply if your associate's right to use the property reduced the market value of the property by more than $50,000.
For more information, please refer to the publication General value shifting regime in brief.
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, call the Business Infoline on 13 28 66.
Keeping records
You should keep records of both income and expenses relating to your rental property.
For capital gains tax purposes you must start keeping records if you purchase or inherit property, receive property as part of a divorce settlement or as a gift, or make improvements to property. 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.
You must keep records which set out in English:
- the date you acquired the asset
- the date you disposed of the asset and anything received in exchange
- the parties involved
- any amount that would form part of the cost base of the asset. For more information about cost base, see the publication Guide to capital gains tax.
Do not send these records in with your tax return. Keep them in case we ask to see them.
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.
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 Income Tax Withholding Variation (ITWV) 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 by 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 upon 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 bill 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 Withholding declaration - upwards variation.