Expenses for which you may be entitled to an immediate deduction in the income year you incur the expense include:
- advertising for tenants
- bank charges
- body corporate fees and charges
- council rates
- electricity and gas
- gardening and lawn mowing
- in-house audio/video service charges
- public liability
- interest on loans
- land tax
- lease document expenses
- stamp duty
- legal expenses (excluding acquisition costs and borrowing costs)
- mortgage discharge expenses
- pest control
- property agents fees and commissions
- quantity surveyor’s fees
- repairs and maintenance
- secretarial and bookkeeping fees
- security patrol fees
- servicing costs, for example, servicing a water heater
- stationery and postage
- telephone calls and rental
- tax-related expenses
- Travel and car expenses
- rent collection
- inspection of property
- maintenance of property
- water charges.
You can claim a deduction for these expenses only if you actually incur them and they are not paid by the tenant.
Strata title body corporates are constituted under the strata title legislation of the various states and territories. For taxation purposes they are treated as public companies but do not qualify as non-profit companies (see Taxation Determination TD 93/73).
Although the powers, authorities, duties and functions of the body corporate vary under the different Acts, generally they include:
- the ability to impose a levy on owners or proprietors of the strata title lot units to carry out necessary work, invest and borrow
- to control, manage and administer the common property, to properly maintain the common property, to obtain insurances on the building and common property, to keep records and books of account, and to levy proprietors and deposit these levies in nominated funds.
Common property is that part of a strata plan not comprised in any proprietor's lot, and includes stairways, lifts, passages, common garden areas, common laundries and other facilities intended for common use.
The ownership of the common property varies according to the relevant state strata title legislation. However, in all states, the income derived from the use of the common property constitutes assessable income of lot owners. Accordingly, expenses attributable to the derivation of the income from the common property, such as depreciation and capital works, may be able to be claimed as deductions by the lot owners in proportion to their lot entitlement.
You may be able to claim a deduction for body corporate fees and charges you incur for your rental property.
Body corporate fees and charges may be incurred to cover the cost of day-to-day administration and maintenance or they may be applied to a special purpose fund.
Payments you make to body corporate administration funds and general purpose sinking funds are considered to be payments for the provision of services by the body corporate and you can claim a deduction for these levies at the time you incur them. However, if the body corporate requires you to make payments to a special purpose fund to pay for particular capital expenditure, these levies are not deductible.
Similarly, if the body corporate levies a special contribution for major capital expenses to be paid out of the general purpose sinking fund, you will not be entitled to a deduction for this special contribution amount. This is because payments to cover the cost of capital improvements or repairs of a capital nature are not deductible; see Repairs and maintenance and Taxation Ruling TR 97/23. You may be able to claim a capital works deduction for the cost of capital improvements or repairs of a capital nature once the cost has been charged to either the special purpose fund or, if a special contribution has been levied, the general purpose sinking fund; see Capital works deductions.
A general purpose sinking fund is one established to cover a variety of unspecified expenses (some of which may be capital expenses) that are likely to be incurred by the body corporate in maintaining the common property (for example, painting of the common property, repairing or replacing fixtures and fittings of the common property). A special purpose fund is one that is established to cover a specified, generally significant, expense which is not covered by ongoing contributions to a general purpose sinking fund. Most special purpose funds are established to cover costs of capital improvement to the common property.
If the body corporate fees and charges you incur are for things like the maintenance of gardens, deductible repairs and building insurance, you cannot also claim deductions for these as part of other expenses. For example, you cannot claim a separate deduction for garden maintenance if that expense is already included in body corporate fees and charges.
If you take out a loan to purchase a rental property, you can claim the interest charged on that loan, or a portion of the interest, as a deduction. However, the property must be rented, or available for rental, in the income year for which you claim a deduction. If you start to use the property for private purposes, you cannot claim the interest expenses you incur after you start using the property for private purposes.
While the property is rented, or available for rent, you may also claim interest charged on loans taken out:
- to purchase depreciating assets
- for repairs
- for renovations.
Similarly, if you take out a loan to purchase land on which to build a rental property or to finance renovations to a property you intend to rent out, the interest on the loan will be deductible from the time you took the loan out. However, if your intention changes, for example, you decide to use the property for private purposes and you no longer use it to produce rent or other income, you cannot claim the interest after your intention changes.
Banks and other lending institutions offer a range of financial products which can be used to acquire a rental property. Many of these products permit flexible repayment and redraw facilities. As a consequence, a loan might be obtained to purchase both a rental property and, for example, a private car. In cases of this type, the interest on the loan must be apportioned into deductible and non-deductible parts according to the amounts borrowed for the rental property and for private purposes. A simple example of the necessary calculation for apportionment of interest is in example 10. If you have a loan account that has a fluctuating balance due to a variety of deposits and withdrawals and it is used for both private purposes and rental property purposes, you must keep accurate records to enable you to calculate the interest that applies to the rental property portion of the loan; that is, you must separate the interest that relates to the rental property from any interest that relates to the private use of the funds.
If you have difficulty calculating your deduction for interest, contact your recognised tax adviser or us.
Some rental property owners borrow money to buy a new home and then rent out their previous home. If there is an outstanding loan on the old home and the property is used to produce income, the interest outstanding on the loan, or part of the interest, will be deductible. However, an interest deduction cannot be claimed on the loan used to buy the new home because it is not used to produce income. This is the case whether or not the loan for the new home is secured against the former home.
The Hitchmans decide to use their bank’s ‘Mortgage breaker’ account to take out a loan of $209,000 from which $170,000 is to be used to buy a rental property and $39,000 is to be used to purchase a private car. They will need to work out each year how much of their interest payments is tax deductible. The following whole-year example illustrates an appropriate method that could be used to calculate the proportion of interest that is deductible. The example assumes an interest rate of 6.75% per annum on the loan and that the property is rented from 1 July:
Interest for year 1 = $209,000 × 6.75% = $14,108
Apportionment of interest payment related to rental property:
Total interest expense × (rental property loan ÷ total borrowings = deductible interest
$14,108 × ($170,000 ÷ $209,000) = $11,475End of example
More complicated investment loan interest payment arrangements also exist, such as 'linked' or 'split' loans which involve two or more loans or sub-accounts in which one is used for private purposes and the other for business purposes. Repayments are allocated to the private account and the unpaid interest on the business account is capitalised. This is designed to allow you to pay off your home loan faster while deferring payments on your rental property loan and maximises your potential interest deduction by creating interest on interest.
This can create a tax benefit because the deduction for interest actually incurred on the investment account is greater than the amount of interest that might reasonably be expected to have been allowable but for using the loan arrangement outlined above. In this case we may disallow some or all of your interest deductions. You should seek advice from your recognised tax adviser or contact us to discuss your situation. For more information see Taxation Determination TD 2012/1.
If you prepay interest it may not be deductible all at once; see Prepaid expenses.
If you are an Australian resident and you or any associate entities have certain international dealings, overseas interests or if you are a foreign resident, thin capitalisation rules may affect you if your debt deductions, such as interest, combined with those of your associate entities for 2014–15 are more than $2,000,000.
Companies, partnerships and trusts that have international dealings will need to complete the International Dealings Schedule (IDS). See the International dealings schedule 2015 (NAT 73345).
- Taxation Ruling TR 2004/4 Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities
- Taxation Ruling TR 2000/2 Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities
- Taxation Ruling TR 98/22 Income tax: the taxation consequences for taxpayers entering into certain linked or split loan facilities
- Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts, FC of T v. Smith
- Taxation Ruling TR 93/7W Income tax: whether penalty interest payments are deductible
- Taxation Determination TD 1999/42 Income tax: do the principles set out in Taxation Ruling TR 98/22 apply to line of credit facilities?
- Taxation Determination TD 2012/1 Income tax: can Part IVA of the Income Tax Assessment Act 1936 apply to deny a deduction for some, or all, of the interest expense incurred in respect of an 'investment loan interest payment arrangement' of the type described in this determination?
- Rental expenses to claim
If you need help to calculate your interest deduction, seek advice from your recognised tax adviser or contact us to discuss your situation.
Land tax liabilities may be deductible, depending on when the land tax liability arises. The timing of when you incur a liability to pay land tax will depend on the relevant state legislation. Your liability to pay land tax does not rely on the lodgment of a land tax return or on the taxing authority issuing a land tax assessment. In many states, the year in which the property is used for the relevant purposes determines when you are liable, even if an assessment does not issue until a later date.
When you receive land tax assessments in arrears, the amount of land tax is not deductible in the income year in which you pay the arrears. The land tax amounts are deductible in the respective income years to which the liability for the land tax relates.
If a land owner receives a land tax assessment for a year, then later in the same financial year either sells the property or starts to use it as their residence, there is no requirement to apportion the land tax deduction. We consider that the land tax liability was incurred for an income producing purpose because the liability for it was founded in the property's use for income-producing purposes.
In the event of the property being sold and there being an adjustment of the land tax, the recovered amount should be returned as assessable income by the vendor.
Your share of the costs of preparing and registering a lease and the cost of stamp duty on a lease are deductible to the extent that you have used, or will use, the property to produce income. This includes any such costs associated with an assignment or surrender of a lease.
For example, freehold title cannot be obtained for properties in the Australian Capital Territory (ACT). They are commonly acquired under a 99-year crown lease. Therefore, stamp duty, preparation and registration costs you incur on the lease of an ACT property are deductible to the extent that you use the property as a rental property.
Some legal expenses incurred in producing your rental income are deductible. These include the costs of:
- evicting a non-paying tenant
- taking court action for loss of rental income
- defending damages claims for injuries suffered by a third party on your rental property.
Most legal expenses, however, are of a capital nature and are therefore not deductible. These include costs of:
- purchasing or selling your property
- resisting land resumption
- defending your title to the property.
Non-deductible legal expenses which are capital in nature may, however, form part of the cost base of your property for capital gains tax purposes.
Example 11: Deductible legal expenses
In September 2014, the Hitchmans’ tenants moved out, owing four weeks rent. The Hitchmans retained the bond money and took the tenants to court to terminate the lease and recover the balance of the rent. The legal expenses they incurred doing this are fully deductible. The Hitchmans were seeking to recover assessable rental income, and they wished to continue earning income from the property. The Hitchmans must include the retained bond money and the recovered rent in their assessable income in the year of receipt.End of example
Mortgage discharge expenses are the costs involved in discharging a mortgage other than payments of principal and interest. These costs are deductible in the year they are incurred to the extent that you took out the mortgage as security for the repayment of money you borrowed to use to produce assessable income.
For example, if you used a property to produce rental income for half the time you held it and as a holiday home for the other half of the time, 50% of the costs of discharging the mortgage are deductible.
Mortgage discharge expenses may also include penalty interest payments. Penalty interest payments are amounts paid to a lender, such as a bank, to agree to accept early repayment of a loan, including a loan on a rental property. The amounts are commonly calculated by reference to the number of months that interest payments would have been made had the premature repayment not been made.
Penalty interest payments on a loan relating to a rental property are deductible if:
- the loan moneys borrowed are secured by a mortgage over the property and the payment effects the discharge of the mortgage, or
- payment is made in order to rid the taxpayer of a recurring obligation to pay interest on the loan.
You can claim the cost of fees such as regular management fees or commissions you pay to a property agent or real estate agent for managing, inspecting or collecting rent for a rental property on your behalf.
You are unable to claim the cost of:
- commissions or other costs paid to a real estate agent or other person for the sale or disposal of a rental property
- buyer's agent fees paid to any entity or person you engage to find you a suitable rental property to purchase.
These costs may form part of the cost base of your property for capital gains purposes.
Expenditure for repairs you make to the property may be deductible. However, generally the repairs must relate directly to wear and tear or other damage that occurred as a result of your renting out the property.
Repairs generally involve a replacement or renewal of a worn out or broken part, for example, replacing worn or damaged curtains, blinds or carpets between tenants. Maintenance generally involves keeping the property in a tenantable condition, for example repainting faded or damaged interior walls.
However, the following expenses are capital, or of a capital nature, and are not deductible:
- replacement of an entire structure or unit of property (such as a complete fence or building, a stove, kitchen cupboards or refrigerator)
- improvements, renovations, extensions and alterations
- initial repairs, for example, in remedying defects, damage or deterioration that existed at the date you acquired the property.
You may be able to claim capital works deductions for these expenses; for more information see Capital works deductions. Expenses of a capital nature may form part of the cost base of the property for capital gains tax purposes (but not generally to the extent that capital works deductions have been or can be claimed for them). For more information, see the Guide to capital gains tax 2015. See also Cost base adjustments for capital works deductions.
Example 12: Repairs prior to renting out the property
The Hitchmans needed to do some repairs to their newly acquired rental property before the first tenants moved in. They paid an interior decorator to repaint dirty walls, replace broken light fittings and repair doors on two bedrooms. They also discovered white ants in some of the floorboards. This required white ant treatment and replacement of some of the boards.
These expenses were incurred to make the property suitable for initial rental and did not arise from the Hitchmans’ use of the property to generate assessable rental income. The expenses are capital in nature and the Hitchmans are not able to claim a deduction for these expenses.End of example
Repairs to a rental property will generally be deductible if:
- the property continues to be rented on an ongoing basis, or
- the property remains available for rental but there is a short period when the property is unoccupied, for example, where unseasonable weather causes cancellations of bookings or advertising is unsuccessful in attracting tenants.
Expenditure for repairs you make to the property may also be deductible where the expenditure is incurred in a year of income that the property is held for income producing purposes, even though the property has previously been held by you for private purposes, and some or all of the damage is attributable to when the property was held for private purposes.
If you no longer rent the property, the cost of repairs may still be deductible provided:
- the need for the repairs is related to the period in which the property was used by you to produce income
- the property was income-producing during the income year in which you incurred the cost of repairs.
Example 13: Repairs when the property is no longer rented out
After the last tenants moved out in September 2014, the Hitchmans discovered that the stove did not work, kitchen tiles were cracked and the toilet window was broken. They also discovered a hole in a bedroom wall that had been covered with a poster. In October 2014 the Hitchmans paid for this damage to be repaired so they could sell the property.
As the tenants were no longer in the property, the Hitchmans were not using the property to produce assessable income. However, they could still claim a deduction for repairs to the property because the repairs related to the period when their tenants were living in the property and the repairs were completed before the end of the income year in which the property ceased to be used to produce income.End of example
Examples of repairs for which you can claim deductions are:
- replacing broken windows
- maintaining plumbing
- repairing electrical appliances.
Examples of improvements for which you cannot claim deductions are:
- insulating the house
- adding on another room.
Work undertaken to an investment property in dealing with asbestos may, in some cases, constitute a deductible repair as described above. This depends on the nature or extent of the remediation process.
Where the expenditure is not otherwise deductible as a repair, a deduction may be available as an expense involving an ‘environmental protection activity’.
If you travel to inspect or maintain your property or collect the rent, you may be able to claim the costs of travelling as a deduction. You are allowed a full deduction where the sole purpose of the trip relates to the rental property. However, in other circumstances you may not be able to claim a deduction or you may be entitled to only a partial deduction.
If you fly to inspect your rental property, stay overnight, and return home on the following day, all of the airfare and accommodation expenses would generally be allowed as a deduction provided the sole purpose of your trip was to inspect your rental property.
Example 14: Travel and vehicle expenses
Although their local rental property was managed by a property agent, Mr Hitchman decided to inspect the property three months after the tenants moved in. During the income year Mr Hitchman also made a number of visits to the property in order to carry out minor repairs. Mr Hitchman travelled 162 kilometres during the course of these visits. On the basis of a cents-per-kilometre rate of 74 cents for his 2.6 litre car* Mr Hitchman can claim the following deduction:
Distance travelled × rate per km = deductible amount
162km × 76 cents per km = $123.12
On his way to golf each Saturday, Mr Hitchman drove past the property to ‘keep an eye on things’. These motor vehicle expenses are not deductible as they are incidental to the private purpose of the journey.End of example
Apportionment of travel expenses
Where travel related to your rental property is combined with a holiday or other private activities, you may need to apportion the expenses.
If you travel to inspect your rental property and combine this with a holiday, you need to take into account the reasons for your trip. If the main purpose of your trip is to have a holiday and the inspection of the property is incidental to that main purpose, you cannot claim a deduction for the cost of the travel. However, you may be able to claim local expenses directly related to the property inspection and a proportion of accommodation expenses.
Example 15: Apportionment of travel expenses
The Hitchmans also owned another rental property in a resort town on the north coast of Queensland. They spent $1,000 on airfares and $1,500 on accommodation when they travelled from their home in Perth to the resort town, mainly for the purpose of holidaying, but also to inspect the property. They also spent $50 on taxi fares for the return trip from the hotel to the rental property. The Hitchmans spent one day on matters relating to the rental property and nine days swimming and sightseeing.
No deduction can be claimed for any part of the $1,000 airfares.
The Hitchmans can claim a deduction for the $50 taxi fare.
A deduction for 10% of the accommodation expenses (10% of $1,500 = $150) would be considered reasonable in the circumstances. The total travel expenses the Hitchmans can claim are therefore $200 ($50 taxi fare plus $150 accommodation). Accordingly, Mr and Mrs Hitchman can each claim a deduction of $100.End of example
Local government expenses
You can claim a deduction for local government rates and levies for the period your property is rented or is available for rent.
Where you fail to pay local government rates and charges for the property by the due dates and you become liable to pay interest charges under the relevant state law, you can claim the late interest charges as a tax deduction. It is not excluded by penalty provisions of the tax law. We consider the imposition of interest in these circumstances is not a pecuniary punishment for a breach of the Local Government Act but an administrative charge recognising the time value of money. The use of a time factor in the calculation is designed to compensate the local government for the full amount of rates not having been paid by the due date. The interest payment is accordingly deductible to the taxpayer in the year in which it is incurred.
If the local council in which your rental property is located imposes an annual emergency services levy, you can claim a deduction for that amount. An emergency service levy is a charge imposed by a local council on property owners to meet some of the costs for the provision of emergency services by the Country Fire Authority, the Metropolitan Fire Authority, the Police Force and other agencies. It is calculated based on the value of the land and charged annually. We consider it is an ongoing expense incurred in the course of earning your rental income and is therefore a deductible expense.