Other tax issues to consider for your rental property, such as capital gains tax, GST and PAYG instalments.
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.
In the case of the sale or other disposal of real estate, the time of the event is normally when you enter into the contract (generally the date on the contract), not when you settle. The fact that a contract may be subject to a condition such as finance approval, generally does not affect this date. If there is no contract, the event takes place when the change of ownership occurs.
You can also make a capital gain or capital loss from certain capital improvements made after 19 September 1985 when you sell or otherwise cease to own 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 loss in accordance with your interest in the property. For more information, 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 can deduct are excluded from the property’s cost base or reduced cost base. For more information, see Cost base adjustments for capital works deductions. Travel expenses you incur relating to your residential rental property are also excluded from the property's cost base or reduced cost base.
Your capital gain or capital loss may be disregarded if a rollover applies, for example, if 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.
If you were a resident of Norfolk Island on 23 October 2015, you can disregard any capital gain or capital loss made on a rental property located on Norfolk Island that you held at that time. CGT may however apply to rental properties located on the Australian mainland or elsewhere in the world. CGT may also apply to any rental properties purchased on or after 24 October 2015.
For more information, see Guide to capital gains tax 2023.
Keeping adequate records of all expenditure will help you correctly work out the amount of capital gain or capital loss you have made when a CGT event happens. You must keep records relating to your ownership and all the costs of acquiring and disposing of property. It will also help to make sure you do not pay more CGT than is necessary.
You must keep records of everything that affects your capital gains and capital losses. Penalties can apply if you do not keep the records for at least 5 years after the relevant CGT event. If you use the information from those records in a later tax return, you may have to keep records for longer. If you have applied a net capital loss, you should generally keep your records of the CGT event that resulted in the loss until the end of any period of review for the income year in which the capital loss is fully applied.
For more information, see TD 2007/2 Income tax: should a taxpayer who has incurred a tax loss or made a net capital loss for an income year retain records relevant to the ascertainment of that loss only for the record retention period prescribed under income tax law?
You must keep records in English (or be readily accessible or translatable into English) that include:
- the date you acquired the asset
- the date you disposed of the asset
- the date you received anything in exchange for the asset
- the parties involved
- any amount that would form part of the cost base of the asset
- 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 Guide to capital gains tax 2023.
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 concessions for them.
You can make a capital loss (or in some circumstances, capital gain) when you dispose of a depreciating asset to which the new rules about deductions for decline in value of second-hand depreciating assets apply.
For more information, see:
- Limit on deductions for decline in value of second-hand depreciating assets
- What happens if you no longer hold or use a depreciating asset.
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 Guide to the general value shifting regime.
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.
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 us for a variation.
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 $4,000 or more of business or investment income, such as rental income, and the debt on your income tax assessment is more than $1,000.
If you are required to pay PAYG instalments we will notify you. You will usually be required to pay the instalments at the end of each quarter. There are usually 2 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 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.
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 form (NAT 5367).
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