Rental expenses

Rental expenses you can and can't claim a deduction for and whether you can claim immediately or over several years.

Types of rental expenses

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).

There are 3 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

If you pay a contractor for services on your rental property, you need to check that they have an Australian business number (ABN). If they do not provide you with an ABN, you may have to withhold 47% of that payment and pay it to us. See Withholding from suppliers for details of when you are required to withhold.

If you do not withhold from payments to a contractor who has not provided you with an ABN, you may not be able to claim a deduction for those expenses.

For more information, see Removing tax deductibility of non-compliant payments.

Expenses for which you cannot claim deductions

Expenses for which you cannot claim deductions include:

• expenses not incurred by you, such as water or electricity usage charges borne by your tenants
• expenses where your property (including your holiday home) was not genuinely available for rent
• expenses that do not relate to the rental of a property, for example  
  • expenses you incur for your own use of a holiday home that you rent out for part of the year
  • costs of maintaining a non-income producing property used as collateral for the investment loan
   
• expenses that relate to holding vacant land
• the cost of certain second-hand depreciating assets
• acquisition and disposal costs of the property
• travel expenses to inspect a property before you buy it and, in certain circumstances, when you own the property
• 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.

Travel expenses

Travel expenses include the costs of:

• travel to inspect, maintain or collect rent for the property
• meals and accommodation that relate to that travel.

You cannot claim a deduction for travel expenses that relate to your residential rental property, 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.

If your travel expenses also relate to another income producing activity, you will need to apportion the expenses. For more information, see Apportionment of travel expenses.

Certain second-hand depreciating assets

You cannot 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:

• Travel and car expenses
• Rental expenses to claim
• Rental properties and travel expenses.

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.

For more information, see Guide to capital gains tax 2023.

Deductions for vacant land

Deductions for expenses you incur for holding vacant land are now limited. This applies to land you held both before and 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
• 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  
  • you
  • 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 can claim an immediate deduction

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
• cleaning
• local council rates
• electricity and gas  
  • annual power guarantee fees
   
• gardening and lawn mowing
• in-house audio and video service charges
• insurance  
  • building
  • contents
  • public liability
  • loss of rent
   
• interest on loans
• land tax
• lease document expenses for  
  • preparation
  • registration
  • 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.

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.

Is the property genuinely available for rent?

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.

 

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. This includes 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 could be apportioned according to the proportion of the year that:

• the property was rented out, and
• genuinely available for rent during the 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.

 

 

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 basis 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.

 

For more information on the apportionment of expenses, see:

• IT 2167 Income tax: rental properties – non-economic rental, holiday home, share of residence, etc. cases, family trust cases, and
• TR 97/23 Income tax: deductions for repairs.

Non-commercial rental

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.

For more information on non-commercial rental arrangements, see IT 2167 Income Tax: rental properties – non-economic rental, holiday home, share of residence, etc. cases, family trust cases.

Investment loan used for private purposes

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.

For more information, see TR 2000/2 Income tax: deductibility of interest on moneys drawn down under line of credit and redraw facilities.

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.

Asbestos remediation

Work undertaken to an investment property in dealing with asbestos may, in some cases, be a deductible repair. 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’.

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 for a special purpose.

Regular payments you make to body corporate administration funds or general purpose sinking funds for ongoing administration and general maintenance are considered to be payments for the provision of services by the body corporate. You can claim a deduction for these regular payments at the time you incur them. However, if you are required by the body corporate to pay a special levy to fund a particular capital improvement, these levies are not deductible. This is the case whether that special levy is paid into a special purpose fund or as a special contribution to the general purpose sinking fund.

If the body corporate does raise a special levy to fund certain types of construction costs, you may be able to claim a capital works deduction. You can only claim a capital works deduction once the work is completed and the cost has been charged to either:

• the special purpose fund, or
• the general purpose sinking fund, if a special contribution has been levied.

If the body corporate fees and charges you incur are for things like:

• the maintenance of common gardens
• deductible repairs and building insurance

you cannot also claim a deduction for similar expenses. For example, you cannot claim a separate deduction for common garden maintenance if that expense is already included in body corporate fees and charges.

Common property

Common property is that part of a strata plan not comprised in any proprietor's lot. It 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.

You can claim deductions for the common property in proportion to your lot entitlement for:

• capital works
• the decline in value of depreciating assets (in some cases).

For more information, see Deduction for decline in value of depreciating assets.

For more information on strata title body corporates, see TR 2015/3 Income tax: matters relating to strata title bodies constituted under strata title legislation.

Interest on loans

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 because 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.

For more information on how to calculate interest for these types of products, see TR 2000/2 Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities.

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.

More complicated investment loan interest payment arrangements also exist, such as 'linked' or 'split' loans which involve 2 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 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?.

If you prepay interest it may not be deductible all at once, see Prepaid expenses.

Thin capitalisation

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, then thin capitalisation rules may affect you if your debt deductions, such as interest, combined with those of your associate entities for 2022–23 are more than $2,000,000.

Companies, partnerships and trusts that have international dealings will need to complete the International dealings schedule 2023.

For more information on the deductibility of interest, see:

• TR 2004/4 Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities
• TR 2000/2 Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities
• TR 98/22 Income tax: the taxation consequences for taxpayers entering into certain linked or split loan facilities
• 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
• TR 2019/2 Income tax: whether penalty interest is deductible
• TD 1999/42 Income tax: do the principles set out in Taxation Ruling TR 98/22 apply to line of credit facilities?
• 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 you can claim now – interest expenses.

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

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.

Lease document expenses

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.

Legal expenses

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 you can claim now.

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.

For more information, see Capital gains tax and Guide to capital gains tax 2023.

Mortgage discharge expenses

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 your 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.

For more information, see TR 2019/2 Income tax: whether penalty interest is deductible.

Property agents fees or commissions

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.

Repairs and maintenance

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.

Replacing an entire structure or unit of property that is a depreciating asset, for example a stove or refrigerator, may trigger a balancing adjustment event. You may also claim a decline in value for replacing a depreciating asset. For more information, see Guide to depreciating assets 2023.

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 2023.

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.

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:

• landscaping
• insulating the house
• adding on another room.

For more information, see:

• Capital gains tax
• Rental expenses you can claim now
• Guide to capital gains tax 2023
• Guide to depreciating assets 2023
• TR 97/23 Income tax: deductions for repairs

Travel and car expenses

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.

For the meaning of 'excluded entity' and 'residential rental property', see Definitions.

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.

For the appropriate rates, see:

• Individual tax return instructions
• Work-related car expenses.

Apportionment of travel expenses

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 LCR 2018/7 Residential premises deductions: travel expenditure relating to rental investment properties.

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 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.

Expenses deductible over several income years

There are 3 types of expenses you may incur for your rental property that may be claimed over several income years:

• borrowing expenses
• amounts for decline in value of depreciating assets (allowed only in certain circumstances)
• capital works deductions.

Each of these categories is discussed in detail below.

Borrowing expenses

These are expenses directly incurred in taking out a loan for the property. They include:

• loan establishment fees
• title search fees charged by your lender
• costs for preparing and filing mortgage documents
• mortgage broker fees
• stamp duty charged on the mortgage
• fees for a valuation required for loan approval
• lender's mortgage insurance billed to the borrower.

The following are not borrowing expenses:

• insurance policy premiums on a policy that provides for your loan on the property to be paid out in the event that you die or become disabled or unemployed
• interest expenses
• stamp duty charged on the transfer of the property
• stamp duty incurred to acquire a leasehold interest in property (such as an ACT 99-year Crown lease).

If your total borrowing expenses are more than $100, the deduction is spread over 5 years or the term of the loan, whichever is less. If the total deductible borrowing expenses are $100 or less, they are fully deductible in the income year they are incurred.

If you repay the loan early and in less than 5 years, you can claim a deduction for the balance of the borrowing expenses in the year the loan is repaid in full.

If you obtained the loan part way through the income year, the deduction for the first year will be apportioned according to the number of days in the year that you had the loan.

Deduction for decline in value of depreciating assets

You can deduct an amount equal to the decline in value in 2022–23 of a depreciating asset that you held at any time during the year. However, your deduction is reduced to the extent you use the asset for a purpose other than a taxable purpose. From 1 July 2017, your deduction is also reduced by the extent you installed or used the asset in your residential rental property to derive rental income and the asset was a second-hand depreciating asset (unless an exception applies).

For more information, see Limit on deductions for decline in value of second-hand depreciating assets.

When you purchase a rental property, you are generally treated for tax purposes as having bought a building, plus various separate items of 'plant'. Items of plant are depreciating assets, such as air conditioners, stoves and other items. The purchase price accordingly needs to be allocated between the 'building' and various depreciating assets. For more information on 'plant', see Definitions.

Some items found in a rental property are regarded as part of the setting for the rent-producing activity and are not treated as separate assets in their own right. If your depreciating asset is not plant, and it is fixed to, or otherwise part of, a building or structural improvement, your expenditure will generally be construction expenditure for capital works and only a capital works deduction may be available for those items.

For more information, see Capital works deductions.

Limit on deductions for decline in value of second-hand depreciating assets

There are different rules for the decline in value of certain second-hand depreciating assets purchased with your residential rental property after 1 July 2017. If you use these assets to produce rental income from your residential rental property, you cannot claim a deduction for their decline in value 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 the meaning of 'residential rental property' and 'excluded entity', see Definitions.

Second-hand depreciating assets are depreciating assets previously installed ready for use or used:

• by another entity (except as trading stock)
• in your private residence
• for a non-taxable purpose, unless that use was occasional (for example, staying at the property for one evening while carrying out maintenance activities would be considered an occasional use).

These rules apply to the depreciating assets that you:

• entered into a contract to acquire, or otherwise acquired, after 7:30 pm on 9 May 2017, or
• used or had installed ready for use for any private purpose in 2016–17 or earlier income years, for which you were not entitled to a deduction for a decline in value in 2016–17 (for example, depreciating assets in a property that was your home in 2016–17 that you turned into your residential rental property in 2017–18).

There are no changes to the rules about deductions for decline in value of new depreciating assets in your residential property. Similarly, there are no changes to the rules about deductions for decline in value of depreciating assets in your residential rental property that you installed or used for a taxable purpose other than the purpose of deriving rental income.

 

Assets in new residential rental properties

If you acquire a newly built residential property from a developer, or buy a residential property that has been substantially renovated, you can claim a deduction for a decline in value of a depreciating asset in the property (or its common area) if:

• no one was previously entitled to a deduction for the asset, and:
• either  
  • no one resided in the property before you acquired it, or
  • the asset was installed for use or used at this property and you acquired the property within 6 months of it being built or substantially renovated.
   

Substantial renovations of a building are renovations in which all, or substantially all, of a building is removed or is replaced. The renovations may, but do not necessarily have to, involve the removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases.

For more information, see GSTR 2003/3 Goods and services tax: when is a sale of real property a sale of new residential premises?

How do you work out your deduction?

You work out your deduction for the decline in value of a depreciating asset using either the diminishing value method or the prime cost method. Both methods are based on the effective life of the asset. You can work out your deductions using the Depreciation and capital allowances tool. You can use this tool during the year to progressively enter amounts.

Diminishing value method

The diminishing value method assumes that the decline in value each year is a constant proportion of the remaining value and produces a progressively smaller decline over time.

For depreciating assets you started to hold on or after 10 May 2006, you generally use the following formula for working out decline in value using the diminishing value method:

Base value (see note 1) × (days held (see note 2) ÷ 365) × (200% ÷ asset's effective life)

Note 1: For the income year in which an asset is first used or installed ready for use for any purpose, the base value is the asset’s cost. For a later income year, the base value is the asset’s opening adjustable value plus any amounts included in the asset’s second element of cost for that year.

Note 2: Days held can be 366 in a leap year.

This formula does not apply in some cases, such as if you dispose of and reacquire an asset just so the decline in value of the asset can be worked out using this formula.

For depreciating assets you started to hold prior to 10 May 2006, the formula for working out decline in value using the diminishing value method is:

Base value (see note 1) × (days held (see note 2) ÷ 365) × (150% ÷ asset's effective life)

An asset’s cost has 2 elements. The first element of cost is, generally, amounts you are taken to have paid to hold the asset, such as the purchase price. The second element of cost is, generally, the amount you are taken to have paid to bring the asset to its present condition, such as the cost of capital improvements to the asset. If more than one person holds a depreciating asset, each holder works out their deduction for the decline in value of the asset based on their interest in the asset and not on the cost of the asset itself.

The adjustable value of a depreciating asset is its cost (first and second elements) less its decline in value up to that time. Adjustable value is similar to the concept of undeducted cost used in the former depreciation provisions. The opening adjustable value of an asset for an income year is generally the same as its adjustable value at the end of the previous income year.

Prime cost method

The prime cost method assumes that the value of a depreciating asset decreases uniformly over its effective life. The formula for working out decline in value using the prime cost method is:

Asset's cost × (days held (see note 2) ÷ 365) × (100% ÷ asset's effective life)

The formula under the prime cost method may have to be adjusted if the cost, effective life or adjustable value of the asset is modified. For more information, see Guide to depreciating assets 2023.

Under the diminishing value method, the decline in value of an asset for a particular income year cannot amount to more than its base value for that income year.

Under the prime cost method, the general rule is that the decline in value of an asset for a particular income year cannot exceed its opening adjustable value for that year and any amount included in the second element of its cost for that year. For an income year in which the asset start time occurs, the decline in value of an asset cannot exceed its cost.

If you use a depreciating asset for other than a taxable purpose (for example, you use the same lawn mower at both your rental property and your private residence) you are allowed only a partial deduction for the asset’s decline in value, based on the percentage of the asset's total use that was for a taxable purpose.

If the asset is a second-hand depreciating asset you use to derive rental income from your residential property, you may not be able to claim a deduction for its decline in value. See Limit on deductions for decline in value of second-hand depreciating assets.

Effective life

Generally, the effective life of a depreciating asset is how long it can be used to produce income:

• having regard to the wear and tear you reasonably expect from your expected circumstances of use
• assuming that it will be maintained in reasonably good order and condition
• having regard to the period within which it is likely to be scrapped, sold for no more than scrap value or abandoned.

Effective life can be expressed in whole years. It is not rounded to the nearest whole year.

For most depreciating assets you can choose to work out the effective life yourself or to use an effective life determined by the Commissioner of Taxation.

The sort of information you could use to make an estimate of effective life of an asset is listed in Guide to depreciating assets 2023.

In making his determination, the Commissioner assumes the depreciating asset is new, and has regard to general industry circumstances of use.

The Commissioner issues yearly Taxation Rulings on how to determine the effective life of depreciating assets.

Because the Commissioner often reviews the determinations of effective life, the determined effective life may change from the beginning of, or during, an income year. You need to work out which Taxation Ruling, or which schedule accompanying the relevant Taxation Ruling to use for a particular asset’s determined effective life.

As a general rule, use the ruling or schedule that is in force at the time you:

• entered into a contract to acquire the depreciating asset
• otherwise acquired it, or
• started to construct it.

See Capital allowances: effective life – rulings, law and objections.

Immediate deduction for certain non-business depreciating assets costing $300 or less

The decline in value of certain depreciating assets costing $300 or less is their cost. This means you get an immediate deduction for the cost of the asset to the extent that you use it to produce assessable income, including rental income, during the income year in which the deduction is available.

The immediate deduction is available if all of the following tests are met in relation to the asset:

• it cost $300 or less
• you used it mainly for the purpose of producing assessable income that was not income from carrying on a business (for example, rental income where your rental activities did not amount to the carrying on of a business of letting rental properties)
• it was not part of a set of assets costing more than $300 that you started to hold in the income year
• it was not one of a number of identical, or substantially identical, assets that you started to hold in the income year that together cost more than $300.

If you hold an asset jointly with others and the cost of your interest in the asset is $300 or less, you can claim the immediate deduction even though the total cost of the asset was more than $300.

For more information, see Partners carrying on a business of letting rental properties.

 

The amount of an immediate deduction may also need to be reduced if the asset is used for purposes other than taxable purposes (see subsection 40-25(2) of the ITAA 1997). For more information, see Limit on deductions for decline in value of second-hand depreciating assets.

For more information about immediate deductions for depreciating assets costing $300 or less, see Guide to depreciating assets 2023.

If you are carrying on a business of letting rental properties, or you let commercial properties, you may be entitled to an immediate deduction for the full cost of an asset that you start to hold, and first use (or have installed ready for use) for a taxable purpose any time between 7:30 pm (AEDT) 6 October 2020 and 30 June 2023.

For more information, see Guide to depreciating assets 2023.

Low-value pooling

You can allocate low-cost assets and low-value assets relating to your rental activity to a low-value pool.

A low-cost asset is a depreciating asset that costs less than $1,000 as at the end of the income year in which you start to use it, or have it installed ready for use, for a taxable purpose.

A low-value asset is a depreciating asset that is not a low-cost asset but which on 1 July 2022 (or 1 July of the relevant income year) had an opening adjustable value of less than $1,000 under the diminishing value method.

If you hold an asset jointly and the cost of your interest in the asset or the opening adjustable value of your interest is less than $1,000, you can allocate your interest in the asset to your low-value pool.

Once you choose to create a low-value pool and allocate a low-cost asset to it, you must pool all other low-cost assets you start to hold from that time on. However, this does not apply to low-value assets. You can decide whether to allocate low-value assets to the pool on an asset-by-asset basis.

Once you have allocated an asset to the pool, it remains in the pool.

Once an asset is allocated to a low-value pool it is not necessary to work out its adjustable value or decline in value separately. Only one annual calculation for the decline in value for all of the depreciating assets in the pool is required.

You work out the deduction for the decline in value of depreciating assets in a low-value pool using a diminishing value rate of 37.5%.

For the income year you allocate a low-cost asset to the pool, you work out its decline in value at a rate of 18.75%, or half the pool rate. Halving the rate recognises that assets may be allocated to the pool throughout the income year and eliminates the need to make separate calculations for each asset based on the date it was allocated to the pool.

When you first allocate a depreciating asset to a low-value pool, you must make a reasonable estimate of the percentage that you will use the asset for a taxable purpose over its effective life (for a low-cost asset) or its remaining effective life (for a low-value asset). This percentage is known as the asset’s taxable use percentage.

From 1 July 2017, only include the taxable purpose of using the asset to produce rental income from residential rental property if you would be entitled to claim a deduction for the decline in value of that asset. See Limit on deductions for decline in value of second-hand depreciating assets. For the meaning of 'excluded entity' and 'residential rental property', see Definitions.

It is this taxable use percentage of the cost or opening adjustable value that is written off through the low-value pool.

For more information on low-value pooling, and on how to treat assets used only partly to produce assessable income, including rental income, and how to treat the disposal of assets from a low-value pool see Guide to depreciating assets 2023. You can work out your deductions for assets you allocate to a low-value pool using the Depreciation and capital allowances tool. You can use this tool for each income year to calculate decline in value deduction amounts.

If you are an individual who owns or jointly owns a rental property, you claim your low-value pool deduction for rental assets as a ’Low-value pool deduction’ in your tax return, and you do not take this deduction into account in the amount you show at 'Rent’ in your tax return.

What happens if you no longer hold or use a depreciating asset?

If you cease to hold or use a depreciating asset, a balancing adjustment event will occur. If there is a balancing adjustment event, you need to work out a balancing adjustment amount to include in your assessable income or to claim as a deduction.

A balancing adjustment event occurs for a depreciating asset if:

• you stop holding it, for example, if the asset is sold, lost or destroyed
• you stop using it and expect never to use it again
• you stop having it installed ready for use and you expect never to install it ready for use again
• you have not used it and decide never to use it
• a change occurs in the holding or interests in an asset which was or is to become a partnership asset.

You work out the balancing adjustment amount by comparing the asset’s termination value (such as the proceeds from the sale of the asset) and its adjustable value at the time of the balancing adjustment event. If the termination value is greater than the adjustable value, you include the excess in your assessable income. If you are an individual who owns or has co-ownership of a rental property, you show the assessable amount as Other income in your tax return and do not take it into account in the amount you show at Rent.

If the termination value is less than the adjustable value, you can deduct the difference.

For more information on balancing adjustments, see Guide to depreciating assets 2023.

If a balancing adjustment event happens to a depreciating asset that you used at some time other than for income-producing purposes (for example, privately) then a capital gain or capital loss might arise to the extent that you so used the asset.

From 1 July 2017, if a balancing adjustment event happens to a depreciating asset to which the rules about deductions for decline in value of second-hand depreciating assets in residential rental properties apply, then a capital gain or capital loss might arise.

You can work out balancing adjustments using the Depreciation and capital allowances tool (DCAT).

For more information on capital gains tax and depreciating assets, see Guide to depreciating assets 2023.

Purchase and valuation of depreciating assets

Where you pay an amount for a depreciating asset and something else, only that part that is reasonably attributable to the depreciating asset is treated as being paid for.

Where you purchase a rental property from an unrelated party, one objective means of establishing your cost of depreciating assets acquired with the property is to have their value, as agreed between the contracting parties, specified in the sale agreement. The values need to be reasonable. If the sale agreement for your property does not specify separate values for the depreciating assets, you will need to work out a reasonable cost for the assets to determine your claim for depreciation.

You can do this yourself or you may wish to use a qualified valuer. Any valuation methodology used to work out the cost of the depreciating assets must be able to demonstrate a reasonable basis for that value. For more information on valuing depreciating assets, see Market valuation for tax purposes.

Apportionment of values between various assets affects the cost base of the property which is subject to capital gains tax. Amounts allocated to the cost of depreciating assets on the purchase of the rental property are subtracted from the purchase price, in order to arrive at the CGT cost base of the rental property.

Working out your deductions for decline in value of depreciating assets

Following are 2 examples of how to work out decline in value deductions for new assets in newly built residential rental properties.

The Guide to depreciating assets 2023 has 2 worksheets:

• Worksheet 1: Depreciating assets
• Worksheet 2: Low-value pool.

Use these to work out your deductions for decline in value of depreciating assets. You can also work out your deductions using the depreciation and capital allowances tool (DCAT).

 

Capital works deductions

You can deduct certain kinds of construction expenditure. In the case of residential rental properties, the deductions would generally be spread over a period of 25 or 40 years. These are referred to as capital works deductions. Your total capital works deductions cannot exceed the construction expenditure. No deduction is available until the construction is complete.

Deductions based on construction expenditure apply to capital works such as:

• a building or an extension, for example, adding a room, garage, patio or pergola
• alterations, such as removing or adding an internal wall
• structural improvements to the property – for example, adding a gazebo, carport, sealed driveway, retaining wall or fence.

You can only claim deductions for the period during the year that the property is rented or is genuinely available for rent.

Where the rental property is destroyed, for example by fire or a natural disaster event, and results in a total loss of the asset, you can deduct an amount in the income year in which the capital works are destroyed for all of your construction expenditure that has not yet been deducted. However, you must reduce this deduction by any insurance and salvage receipts.

If however, using the same example above, during an income year the building is affected by fire and the building cannot be rented or made available for rent but it is expected to be made available for rent again, then the owners cannot claim a deduction for capital works for the number of days that the building is not available for rent.

If you claimed capital works deductions based on construction expenditure, you cannot take that expenditure into account in working out any other types of deductions you claim, such as deductions for decline in value of depreciating assets.

Amount of deduction

The amount of the deduction you can claim depends on the type of construction and the date construction started.

Table 1 below shows you the types of rental property construction that qualify. If the type of construction you own (or own jointly) does not appear next to the relevant ‘date construction started’ in the table, you cannot claim a deduction. If the type of construction qualifies, table 2 shows the rate of deduction available.

‘Certain buildings’ in Table 1 are:

• apartment buildings in which you own or lease at least 10 apartments, units or flats, or
• a hotel, motel or guest house that has at least 10 bedrooms.

Table 1: Types of rental property construction that qualify for deduction

Date construction started	Type of construction for which deduction can be claimed
Before 22 August 1979	None
22 August 1979 to 19 July 1982	Certain buildings intended to be used on completion to provide short-term accommodation to travellers
20 July 1982 to 17 July 1985	Certain buildings intended to be used on completion to provide short-term accommodation to travellers Building intended to be used on completion for non-residential purposes (for example, a shop or office)
18 July 1985 to 26 February 1992	Any building intended to be used on completion for residential purposes or to produce income
27 February 1992 to 18 August 1992	Certain buildings intended to be used on completion to provide short-term accommodation to travellers Any other building intended to be used on completion for residential purposes or to produce income Structural improvements intended to be used on completion for residential purposes or to produce income
19 August 1992 to 30 June 1997	Certain buildings intended to be used on completion to provide short-term accommodation to travellers Any other building intended to be used on completion for residential purposes or to produce income Structural improvements intended to be used on completion for residential purposes or to produce income Environment protection earthworks intended to be used on completion for residential purposes or to produce income.
After 30 June 1997	Any capital works used to produce income (even if, on completion, it was not intended that they be used for that purpose)

Table 2: Rate of deduction based on date construction started

Date construction started	Rate of deduction per income year
Before 22 August 1979	nil
22 August 1979 to 21 August 1984	2.5%
22 August 1984 to 15 September 1987	4%
After 15 September 1987	2.5%

Where construction of a building to provide short-term accommodation for travellers commenced after 26 February 1992, the rate of deduction was increased to 4%.

For apartment buildings, the 4% rate applies to apartments, units or flats only if you own or lease 10 or more of them in the building.

The deduction can be claimed for:

• 25 years from the date construction was completed in the case of a 4% deduction
• 40 years from the date construction was completed in the case of a 2.5% deduction.

If the construction was completed part of the way through the income year, you can claim a pro-rata deduction for that part.

Construction expenditure that can be claimed

Construction expenditure is the actual cost of constructing the building or extension. A deduction is allowed for expenditure incurred in the construction of a building if you contract a builder to construct the building on your land. This includes the component of your payments that represents the profit made by individual tradespeople, builders and architects. If you are an owner/builder, the value of your contributions to the works, for example, your labour and expertise, and any notional profit element do not form part of the construction expenditure.

If you purchase your property from a speculative builder, you cannot claim the component of your payment that represents the builder’s profit margin as a capital works deduction.

Some costs that you may include in construction expenditure are:

• preliminary expenses such as architects’ fees, engineering fees and the cost of foundation excavations
• payments to carpenters, bricklayers and other tradespeople for construction of the building
• payments for the construction of retaining walls, fences and in-ground swimming pools.

Construction expenditure that cannot be claimed

Some costs that are not included in construction expenditure are:

• the cost of the land on which the rental property is built
• expenditure on clearing the land prior to construction
• earthworks that are permanent, can be economically maintained and are not integral to the installation or construction of a structure
• expenditure on landscaping.

Changes in building ownership

Where ownership of the building changes, the right to claim any undeducted construction expenditure for capital works passes to the new owner. A new owner should confirm that the building was constructed during one of the appropriate periods outlined in table 1. To be able to claim the deduction, the new owner must continue to use the building to produce income.

If the previous owner was allowed capital works deductions, and the capital works started after 26 February 1992, they are required to give you, as the new owner, information that will enable you to calculate those deductions going forward. Where the property was not previously used to produce assessable income, the owner disposing of the property does not need to provide the purchaser with that information. In this situation the purchaser may obtain an estimate from a professional. For more information, see Estimating construction costs.

For more information on providing a notice or certificate, see Subsection 262A(4AJA) of Income Tax Assessment Act 1936.

Estimating construction costs

Where a new owner is unable to determine precisely the construction expenditure associated with a building, an estimate provided by an appropriately qualified person may be used. Appropriately qualified people include:

• a clerk of works, such as a project organiser for major building projects
• a supervising architect who approves payments at stages of projects
• a builder who is experienced in estimating construction costs of similar building projects
• a quantity surveyor.

Unless they are otherwise qualified, valuers, real estate agents, accountants and solicitors generally have neither the relevant qualifications nor the experience to make such an estimate.

The cost of obtaining an appropriately qualified person’s estimate of construction costs of a rental property is deductible in the income year it is incurred. You make your claim for the expense, or your share of the expense if you jointly incurred it, at Cost of managing tax affairs in your tax return.

For more information on construction expenditure and capital works deductions, see:

• TR 97/25 Income tax: property development: deduction for capital expenditure on construction of income producing capital works, including buildings and structural improvements
• Work out your capital works deductions.

Cost base adjustments for capital works deductions

In working out a capital gain or capital loss from a rental property, the cost base and reduced cost base of the property may need to be reduced to the extent that it includes construction expenditure for which you have claimed or can claim a capital works deduction.

Cost base

You must exclude from the cost base of a CGT asset (including a building, structure or other capital improvement to land that is treated as a separate asset for CGT purposes) the amount of capital works deductions you have claimed or can claim in respect of the asset if:

• you acquired the asset after 7:30 pm AEST on 13 May 1997, or
• you acquired the asset before that time and the expenditure that gave rise to the capital works deductions was incurred after 30 June 1999.

For information on when a building, structure or other capital improvement to land is treated as a CGT asset separate from the land, see chapter 1 and the section Major capital improvements to a dwelling acquired before 20 September 1985 in Guide to capital gains tax 2023.

Reduced cost base

The amount of the capital works deductions you have claimed or can claim for expenditure you incurred in respect of an asset is excluded from the reduced cost base.

For more information on whether you can claim certain capital works deductions, see:

• TD 2005/47 Income tax: what do the words ‘can deduct’ mean in the context of those provisions in Division 110 of the Income Tax Assessment Act 1997 which reduce the cost base or reduced cost base of a CGT asset by amounts you ‘have deducted or can deduct’, and is there a fixed point in time when this must be determined?
• PS LA 2006/1 (GA) Calculating cost base of CGT asset where there is insufficient information to determine any Division 43 capital works deduction.

Limited recourse debt arrangements

If expenditure on a depreciating asset (which includes construction expenditure) is financed or refinanced wholly or partly by limited recourse debt (including a notional loan under certain hire purchase or instalment sale agreements of goods), you must include excessive deductions for the capital allowances as assessable income. This will occur where the limited recourse debt arrangement terminates but has not been paid in full by the debtor. Because the debt has not been paid in full, the capital allowance deductions, including capital works deductions, allowed for the expenditure exceed the deductions that would be allowable if the unpaid amount of the debt was not counted as capital expenditure of the debtor. Special rules apply for working out whether the debt has been fully paid.

If you are not sure what constitutes a limited recourse debt or how to work out your adjustment to assessable income, contact your recognised tax adviser.

Prepaid expenses

If you prepay a rental property expense, such as insurance or interest on money borrowed, that covers a period of 12 months or less and the period ends on or before 30 June 2023, you can claim an immediate deduction. A prepayment that does not meet these criteria and is $1,000 or more may have to be spread over 2 or more years. This is also the case if you can but not choose to deduct certain prepaid business expenses immediately.

For more information, see Deductions for prepaid expenses 2023.

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