You can claim a deduction for certain expenses you incur for the period your property is rented or is genuinely available for rent. However, you cannot claim expenses of a capital nature or private nature (although you may be able to claim decline in value deductions or capital works deductions for certain capital expenditure or include certain capital costs in the cost base of the property for CGT purposes).
Types of rental expenses
There are three categories of rental expenses, those for which you:
- cannot claim deductions
- can claim an immediate deduction in the income year you incur the expense
- can claim deductions over a number of income years
Always check your supplier's ABN
From 1 July 2020, when you make a payment to a contractor (such as a tradesperson) for services connected with your rental property, check that they have an Australian business number (ABN). If they don't provide you with an ABN, you may have to withhold 47% from that payment and pay it to us. See Withholding from suppliers for details of when you are required to withhold.
For payments you made from 1 July 2020, if you didn’t withhold when you were required to, you may not claim the respective expenses as tax deductions.
For more information, see Removing tax deductibility of non-compliant payments.
Example 5 – Withholding from suppliers
Sergio and Marcia own a rental property and need to have a wall repaired.
Sergio obtains a quote from Derek’s Wall Repairs, a sole trader. Derek offers to do the job for $2500 with a tax invoice, or $1800 for cash. Sergio and Marcia opt to pay cash and not receive a tax invoice. They do not ask for Derek's ABN and Sergio does not withhold any amount from the $1800. He should have withheld 47% of that $1800 payment, that is, $846, and paid Derek $954.
Therefore the payment of $1800 is non-compliant and, as a result, Sergio and Marcia are not entitled to claim a deduction for the repair.End of example
Expenses for which you are not able to claim deductions include:
- acquisition and disposal costs of the property
- expenses not actually incurred by you, such as water or electricity usage charges borne by your tenants
- expenses associated with periods where your property (including your holiday home) was not genuinely available for rent.
- 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, or
- costs of maintaining a non-income producing property used as collateral for the investment loan
- expenses related to holding vacant land.
Other expenses for which you are not able to claim deductions include:
- travel expenses to inspect a property before you buy it
- expenses incurred in relocating assets between rental properties prior to renting
- expenses for rental seminars about helping you find a rental property to invest in.
You are not entitled to a deduction for travel expenses relating to your residential rental property incurred from 1 July 2017, unless you are:
- using the property in carrying on a business (including a business of letting rental properties), or
- an excluded entity. For the meaning of 'excluded entity', see Definitions.
Travel expenses include the costs of travel to inspect, maintain or collect rent for the property, and costs of meals and accommodation related to such travel.
If your travel expenses relating to your residential rental property also relate to another income producing activity, you will need to apportion the expenses on a fair and reasonable basis. For more information, see Apportionment of travel expenses.
From 1 July 2017, you may not claim a deduction for a decline in value of certain second-hand depreciating assets against your residential rental property income unless you are using the property in carrying on a business (including a business of letting rental properties), or you are an excluded entity. For more information, see Limit on deductions for decline in value of second-hand depreciating assets.
For more information, see:
Acquisition and disposal costs
You cannot claim a deduction for the costs of acquiring or disposing of your rental property, such as:
- purchase cost of the property
- fees on bank guarantees in lieu of deposits
- conveyancing costs
- advertising expenses
- fees of a buyer’s agent you engage to find you a suitable rental property to purchase, including where the agent recommends a property manager free of charge as an optional or supplementary service
- stamp duty on the transfer of the property (but not stamp duty on a lease of property; see Lease document expenses).
However, these costs may form part of the cost base of the property for CGT purposes. See also Capital gains tax
Example 6: Acquisition costs
The Hitchmans purchased a rental property for $170,000 in July 2020. They also paid surveyor’s fees of $350 and stamp duty of $750 on the transfer of the property. Neither of these expenses are deductible against the Hitchmans’ rental income. However, in addition to the $170,000 purchase price, the incidental costs of $350 and $750 (totalling $1,100) are included in the cost base and reduced cost base of the property.
This means that when the Hitchmans dispose of the property, the cost base or reduced cost base for the purposes of determining the amount of any capital gain or capital loss will be $171,100 ($170,000 + $1,100).End of example
For more information, see Guide to capital gains tax 2021.
Deductions for vacant land
Deductions that you can claim for holding vacant land, for expenses you incurred on or after 1 July 2019, are now limited. This applies to land you held before or from 1 July 2019.
Your land is considered vacant if, at the time you incurred the expense:
- the land did not contain a substantial and permanent structure, or
- the land contained a substantial and permanent structure that is residential premises, but the premises
- could not lawfully be occupied, or
- was not rented out or made available for rent.
You can still deduct vacant land holding costs if:
- the land is held by an 'excluded entity', that is a
- corporate tax entity
- superannuation plan (other than a self-managed superannuation fund)
- managed investment trust
- public unit trust
- unit trust or partnership of which all the members are corporate tax entities, superannuation plans, managed investment trust or public unit trust
- the land is used to carry on a business by
- your affiliate or an entity of which you are an affiliate
- your spouse or child under 18 years old
- an entity connected with you
- you, an affiliate (as listed above), spouse or child, or an entity connected with you, are carrying on a business of primary production and the land is leased or hired to another entity
- you make the land available at arm's length to a business for use in that business
- a substantial and permanent structure was on the land but an exceptional circumstance occurred that resulted in the land becoming vacant.
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
- annual power guarantee fees
- gardening and lawn mowing
- in-house audio and 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 agent's fees and commissions (including prior to the property being available to rent)
- quantity surveyor’s fees
- costs incurred in relocating tenants into temporary accommodation if the property is unfit to occupy for a period of time
- repairs and maintenance
- cost of a defective building works report in connection to repairs and maintenance conducted
- 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 to the extent that they are deductible
- water charges.
You can claim a deduction for these expenses only if you actually incur them and they are not paid by the tenant.
Expenses prior to property being genuinely available for rent
You can claim expenditure such as interest on loans, local council water and sewerage rates, land taxes and emergency services levies you incurred during renovations to a property you intend to rent out. However, you cannot claim deductions from the time your intention changes, for example, if you decide to use the property for private purposes.
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 genuinely available for rent for only part of the year
- your property is used for private purposes for part of the year
- only part of your property is used to earn rent
- you rent your property at non-commercial rates
- your investment loan is partially used for private purposes.
Rental expenses are deductible to the extent that they are incurred for the purpose of producing rental income.
Expenses may be deductible for periods when the property is not rented out, providing the property is genuinely available for rent – that is:
- the property is advertised in ways which give it broad exposure to potential tenants, and
- having regard to all the circumstances, tenants are reasonably likely to rent it.
The absence of these factors generally indicates the owner does not have a genuine intention to make income from the property and may have other purposes – such as using it or reserving it for private use.
Factors that may indicate a property is not genuinely available for rent include:
- it is advertised in ways that limit its exposure to potential tenants – for example, the property is only advertised
- at your workplace
- by word of mouth
- outside annual holiday periods when the likelihood of it being rented out is very low
- the location, condition of the property, or accessibility to the property, mean that it is unlikely tenants will seek to rent it
- you place unreasonable or stringent conditions on renting out the property that restrict the likelihood of the property being rented out such as
- setting the rent above the rate of comparable properties in the area
- placing a combination of restrictions on renting out the property – such as requiring prospective tenants to provide references for short holiday stays as well as having conditions like 'no children' and 'no pets'
- you refuse to rent out the property to interested people without adequate reasons.
Example 7 – Unreasonable rental conditions placed on property
Josh and Maria are retired and own a holiday home where they stay periodically. They advertise the property for short-term holiday rental through a real estate agent.
Josh and Maria have instructed the agent that they must personally approve tenants before they are permitted to stay and prospective tenants must provide references and have no children or pets.
At no time during the year do Josh and Maria agree to rent out the property even though they receive a number of inquiries.
The conditions placed on the renting of the property and Josh and Maria's refusal to rent it to prospective tenants indicate their intention is not to make income from the property, but to reserve it for their own use. Josh and Maria cannot claim any deductions for the property.
Josh and Maria need to keep records of their expenses. If they make a capital gain when they sell the property, their property expenses (such as property insurance, interest on the funds borrowed to purchase the property, repair costs, maintenance costs and council rates) are taken into account in working out any capital gain.End of example
Example 8 – Private use by owners during key periods with little or no demand for property at other times
Daniel and Kate have two school aged children and own a holiday house near the beach. The house is located in an area that is popular with summer holiday makers but is only accessible by four-wheel drive vehicle.
During the year Daniel and Kate advertise the property for rent through a local real estate agent. However, Daniel and Kate advise the agent that during each school holiday period the property is not to be rented out. They want to reserve the property for their own use.
While there would be demand for the property during the summer holiday period, there is no demand outside this period because of the small number of holiday makers and the location and limited access to the property.
The house is not rented out at all during the income year.
In Daniel and Kate’s circumstances, they cannot claim any deductions for the property. They did not have a genuine intention to make income from the property. It was essentially for private use.
If in the circumstances Daniel and Kate happened to rent out the property for a period, they can claim a deduction for a proportion of their expenses based on the period the property was actually rented out. For example, if the house was rented out for two weeks, they could claim a deduction for 2/52 of their expenses.
Daniel and Kate need to keep records of their expenses. If they make a capital gain when they sell the property, the proportion of expenses (such as interest, insurance, maintenance costs and council rates) they could not claim a deduction for are taken into account in working out their capital gain.End of example
Property available for part-year rental
If you use your property for both private purposes and to produce rental income, 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 rental 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 not genuinely available for rent – including when it was used by you, your relatives or your friends for private purposes.
In some circumstances it may be easy to decide which expenditure is private in nature. For example, council rates paid for a full year would need to be apportioned based on the total time the property was rented out and genuinely available for rent during the year as a proportion of the total year.
It may not be appropriate to apportion all your expenses on the same basis. For example, expenses that relate solely to the renting of your property are fully deductible and you would not apportion them based on the time the property was rented out. Such costs include:
- real estate agents commissions
- costs of advertising for tenants
- phone calls you make to a tradesperson to fix damage caused by a tenant
- the cost of removing rubbish left by tenants.
On the other hand, no part of certain expenses that relate solely to periods when the property is not rented out are deductible. This would include the cost of phone calls you make to a tradesperson to fix damage caused when you were using the property for private purposes.
Example 9: Apportionment of expenses where property is rented for part of the year
Dave owns a property in Tasmania. He rents out his property from 1 November 2020 to 30 March 2021, a total of 150 days. He lives alone in the house for the rest of the year. The council rates are $1,000 per year. He apportions the council rates on the basis of time rented.
Rental expense × portion of year = deductible amount
He can claim a deduction against his rental income of
$1,000 × (150 ÷ 365) = $411
If Dave has to make phone calls to tradespersons to fix damage caused by a tenant or has any other expenses which relate solely to the renting of his property, he would work out his deduction for these by reasonably estimating the cost of each of these expenses: it would not be appropriate for him to work out his deduction by claiming 150/365 of the total expense.End of example
Example 10 – Private use of property by owner
Gail and Craig jointly own a property which was brand new when they purchased it. They rent the property out at market rates and use it as a holiday home. They advertise the property for rent during the year through a real estate agent.
Gail and Craig use the property themselves for four weeks as a holiday home during the year.
During the year, Gail and Craig’s expenses for the property are $36,629. This includes $1,828 for the agent’s commission and the costs of advertising for tenants. It also includes interest on the funds borrowed to purchase the holiday home, property insurance, maintenance costs, council rates, the decline in value of depreciating assets and capital works deductions.
Gail and Craig receive $25,650 from renting out the property during the year.
No deductions can be claimed for the four weeks Gail and Craig used the property themselves.
Gail and Craig can claim the full $1,828 as a deduction for the agent’s commission and costs of advertising for tenants. Gail and Craig can claim deductions for their other expenses ($34,801) based on the proportion of the income year the property was rented out or was genuinely available for rent.
Income tax return
Gail and Craig’s rental income and deductions for the year are as follows:
As they are joint owners, Gail and Craig claim a rental loss of $4,151 each in their tax returns.
Gail and Craig need to keep records of their expenses. If they make a capital gain when they sell the property, the proportion of the expenses they could not claim a deduction for are taken into account in working out any capital gain.End of example
Example 11 – Holiday home rented out for part of the year
Akshay and Jesminda jointly own a holiday home. They rent it out between 20 December and 17 January because they can make a significant amount of money which helps offset the costs of owning the property for the year. They reserve the property for their own use for the rest of the year.
Akshay and Jesminda's expenses for the holiday home for the year were $32,300. This includes $1,100 for the agent’s commission and the costs of advertising for tenants. It also includes interest on the funds borrowed to purchase the property, property insurance, repair costs, maintenance costs and council rates.
Akshay and Jesminda received $3,000 per week from renting the property out during the four weeks over the Christmas – New Year period.
Overall the property expenses were more than the rent they received. Akshay and Jesminda can claim the full $1,100 as a deduction for the agent’s commission and the costs of advertising for tenants. However, for their other expenses, Akshay and Jesminda can only claim deductions for the proportion of the year they rented out the property (four weeks). They declared net rental income in their tax returns as follows:
Net rental income
As they are joint owners, Akshay and Jesminda declare net rental income of $4,250 each in their tax returns.
Akshay and Jesminda need to keep records of their expenses. If they make a capital gain when they sell the property, the proportion of the expenses they could not claim a deduction for are taken into account in working out their capital gain.End of example
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, apportion according to the floor-area that is that 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 12: Renting out part of a residential property
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. Michael apportions these expenses on the basis of the floor-area, so one-third (that is $3,000) applies to the flat. However, as Michael used the flat to produce rental 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 income and expenses from his property as:
Net rental income
End of example
Example 13: Renting out part of a residential property
John decided to rent out one room in his residence. The floor area of the room is 20% of the area of the residence. John also shared equal access to the general areas such as the kitchen, bathroom and laundry. The floor area of these rooms is 60% of the area of the residence.
John rented out the room and access to the general areas for 12 months in the year at $250 per week.
The annual mortgage interest, building insurance, rates and taxes for the whole property amounted to $12,000. Using the floor-area basis for apportioning these expenses, 20% (that is $2,400) applies to the room.
Assuming there were no other expenses, John would calculate the income and expenses from his property as:
General areas expenses
Net rental income
End of example
For more information about the apportionment of expenses, see:
- Taxation Ruling IT 2167 Income tax: rental properties – non-economic rental, holiday home, share of residence, etc. cases, family trust cases and
- Taxation Ruling TR 97/23 Income tax: deductions for repairs.
If you let a property, or part of a property, at less than normal commercial rates, there may be a limit on the deductions you can claim.
Example 14 – Private use by owner and rented to relatives or friends at a discounted rate
Kelly and Dean have a holiday home they own jointly from 1 July 2020. The home was three years old when they purchased it. During holiday periods, the market rent is $840 per week. They advertise the property for rent during the year through a real estate agent.
Kelly and Dean arrange with the agent for their friend Kimarny to stay at the property for three weeks at a nominal rent of $200 per week. They also use the property themselves for four weeks during the year.
During the year, Kelly and Dean's expenses for the property are $20,800 ($400 per week). This includes interest on the funds borrowed to purchase the holiday home, property insurance, the agent's commission, maintenance costs, council rates and capital works deductions.
Kelly and Dean receive $10,000 from renting out the property during the year. This includes the $600 they received from Kimarny.
No deductions can be claimed for the four weeks Kelly and Dean used the property themselves.
Kelly and Dean can claim deductions for their expenses based on the proportion of the income year it was rented out or was genuinely available for rent at the market rate: 45 ÷ 52 weeks × $20,800 = $18,000.
If Kimarny had rented the property for the market rate, Kelly and Dean would have been able to claim deductions for the three week period of $1,200 (3 ÷ 52 × $20,800 = $1,200).
However because the rent Kelly and Dean received from Kimarny was less than market rate and their expenses were more than the rent received during that period, they cannot claim all of the expenses. Kelly and Dean can only claim deductions equal to the amount of the rent during this period, that is, $600.
Income tax return
Kelly and Dean's rental income and deductions for the year are as follows:
As they are joint owners, Kelly and Dean claim a rental loss of $4,300 each in their tax returns.
Kelly and Dean need to keep records of their expenses. If they make a capital gain when they sell the property, the proportion of the expenses they could not claim a deduction for are taken into account in working out their capital gain.End of example
For more information about non-commercial rental arrangements, see Taxation Ruling IT 2167.
If you take out a loan to purchase a rental property, you can claim the interest charged on that loan as a deduction. However, to the extent that the loan is used or refinanced for a private purpose, you must apportion the interest expense to account for the private use.
Example 15: Investment loan used for partial private purpose
Rufus has owned his apartment for a number of years and is now looking to turn it into a rental when he upgrades to a larger residence.
Rufus still has a mortgage over the apartment and decides to refinance the mortgage into an investment loan. When the loan is refinanced, Rufus uses part of the new loan towards the purchase of his new residence which will be used for a private purpose.
Rufus must apportion his interest expenses and can only claim a deduction for interest expense to the extent that it relates to the producing of his rental income. He cannot claim a deduction for any portion of the expenses which relates to private purposes.End of example
Co-owner rents property
If you own a property:
- as tenant in common with another person,
- you do not live in the property, and
- you let your part of a property to your co-owner at a commercial rental rate
then the rent received is assessable income. Accordingly, you may deduct any losses or outgoings incurred in gaining the rental income, provided the losses or outgoings are not of a capital, domestic or private nature.
Work undertaken to an investment property in dealing with asbestos may, in some cases, be 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 ‘environmental protection activity’.
For more information, see Asbestos-affected properties.
Body corporate fees and charges
Strata title body corporates are constituted under the strata title legislation of the various states and territories.
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 work is completed and 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.
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 is income of lot owners. Accordingly, you can claim deductions for capital works and, in some cases, the decline in value of depreciating assets that form part of the common property in proportion to your lot entitlement. For more information, see Deduction for decline in value of depreciating assets.
For more information about strata title body corporates, see Taxation Ruling TR 2015/3.
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 genuinely available for rental, in the income year for which you claim a deduction.
You cannot claim a deduction for interest expenses you incur if:
- you start to use the property for private purposes, or
- you refinance an investment loan for private purposes or otherwise use the loan for a private purpose.
If the expenses were incurred partly for a private purpose, you must apportion the expense accordingly. For more information see Investment loan used for private purpose.
While the property is rented, or genuinely 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 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 16. 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.
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:
End 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 2020–21 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 2021 (NAT 73345).
For more information about the deductibility of interest, see:
- 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 2019/2 – Income tax: whether penalty interest is 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 declared as rental 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.
For more information, see Rental expenses to claim.
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 17: Deductible legal expenses
In September 2020, the Hitchmans’ tenants moved out, owing six 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 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 rental 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 your rental 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, expenses which are capital, or of a capital nature are not deductible as repairs or maintenance. The following are examples of expenses which are capital or of a capital nature:
- 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 some construction expenses as capital works deductions where the expenses are capital or of a capital nature. 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 Guide to capital gains tax 2021. See also Cost base adjustments for capital works deductions.
Example 18: 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 to be rented out and did not arise from the Hitchmans’ use of the property to generate 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 genuinely 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 19: Repairs when the property is no longer rented out
After the last tenants moved out in September 2020, 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 2020 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 rental 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.
For more information, see:
- Capital gains tax
- Rental expenses to claim
- Guide to capital gains tax 2021
- Taxation Ruling TR 2019/2.
Travel expenses relating to a residential rental property are generally not deductible.
You may be entitled to claim a deduction for travel expenses you incur relating to your rental property if:
- you are an excluded entity, or
- you are using the property in carrying on a business (including a business of letting rental properties), or
- the property is not a residential rental property.
Travel expenses include the costs of travel to inspect, maintain or collect rent for the property.
If you are entitled to claim a deduction for a travel expense relating to your rental property, claim as follows:
- 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 20: Travel and vehicle expenses
In 2020–21, Mr Hitchman owned a residential rental property in North Harbour and a commercial property in East Village.
Mr Hitchman visited the residential rental property a number of times after the tenants moved in to carry out inspections and maintenance work. Mr Hitchman cannot claim deductions for the cost of his travel to inspect and maintain the property.
Mr Hitchman also visited the commercial property a number of times after the tenants moved in, to carry out minor repairs. He travelled 162 kilometres during the course of these visits. The property is a commercial property, so Mr Hitchman can claim the following deduction:
- Distance travelled multiplied by rate per km = deductible amount
- 162km multiplied by 72 cents per km = $116
On his way to golf each Saturday, Mr Hitchman drove past the commercial 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
Where travel related to your commercial rental property or to your residential rental property used in carrying on a business of letting rental properties is combined with a holiday or other private activities, you may need to apportion the expenses.
If you travel to inspect the 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.
You may also need to apportion your travel expenses if they relate to your commercial rental property or residential rental property used in carrying on a business of letting rental properties, and residential rental property not used in carrying on a business of letting rental properties. For more information, see Law Companion Ruling LCR 2018/7 Residential premises deductions: travel expenditure relating to rental investment properties.
Example 21: Apportionment of travel expenses
Mr and Mrs Hinton own a residential rental property and a commercial rental property in a resort town on the north coast of Queensland. They spent $1,000 on airfares and $1,500 on accommodation (including meals) when they travelled from their home in Perth to the resort town, mainly for the purpose of holidaying, but also to inspect both properties. They also spent $50 on taxi fares for the return trip from the hotel to the commercial rental property, and $100 on taxi fares for a return trip from the hotel to the residential rental property. The Hintons spent one day on matters relating to the commercial rental property, another day on matters relating to the residential rental property, and eight days swimming and sightseeing.
No deduction can be claimed for any part of the $1,000 airfares.
No deduction can be claimed for any part of the $100 taxi fare as it is a travel expense related to residential rental property.
However, the Hintons can claim a deduction for the $50 taxi fare which was incurred in relation to the commercial rental property.
A deduction for 10% of the accommodation (including meals) expenses (10% of $1,500 = $150) would be considered reasonable in the circumstances given the Hintons spent one full day on matters relating to their commercial property. The total travel expenses the Hintons can claim are therefore $200 ($50 taxi fare plus $150 accommodation). Accordingly, Mr and Mrs Hinton can each claim a deduction of $100.End of example
For more information, see Rental properties and travel expenses.
Local government expenses
You can claim a deduction for local government rates and levies for the period your property is rented or is genuinely 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.