• 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 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.
    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.

    Example 6 – 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 their capital gain.

    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 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 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 might include phone calls you make to a tradesperson to fix damage caused by a tenant or 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 8: 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 2015 to 30 March 2016, a total of 151 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 x portion of year  =  deductible amount

    He can claim a deduction against his rental income of

    $1,000

    x

    151
    366

    =

    $413

    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 151/365 of the total expense.

    End of example

     

    Example 9 – Private use of property by owner

    Gail and Craig have a property which they jointly own. 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 during the year.

    During the year, Gail and Craig’s expenses for the property are $34,801. This includes interest on the funds borrowed to purchase the holiday home, property insurance, agent's commission, 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 deductions for their expenses 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:

    Rent received

     

    $25,650

    Rental deductions

    (48/52 x $34,801)

    $32,124

    Rental loss

     

    ($6,474)

    As they are joint owners, Gail and Craig claim a rental loss of $3,237 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 expenses they could not claim a deduction for are taken into account in working out their capital gain.

    End of example

     

    Example 10 – Holiday home rented out for part of the year

    Akshay and Jesminda have a holiday home they own jointly. 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 are $31,200. This includes interest on the funds borrowed to purchase the property, property insurance, the agent's commission, repair costs, maintenance costs and council rates.

    Akshay and Jesminda receive $3,000 per week from renting the property out during the four weeks over the Christmas-New Year period.

    Overall the property expenses are more than the rent they receive. However, Akshay and Jesminda can only claim deductions for the proportion of the year they rent out the property (four weeks). They declare net rental income in their tax returns:

    Rent received

     

    $12,000

    Rental deductions

    (4/52 weeks X $31,200)

    $2,400

    Net rental income

     

    $9,600

    As they are joint owners, Akshay and Jesminda declare net rental income of $4,800 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 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, apportionment should be made on a floor-area basis that is, by reference to the floor area of 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 11: 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. Using the floor-area basis for apportioning these expenses, 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:

    Rent

    $2,600

    (26 weeks x $100)

    Expenses

    $1,500

    ($9,000 x 1/3 x 50%)

    Net rental income

    $1,100

     

     

    End of example

     

    Example 12: 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 percent 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 percent 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, Michael would calculate the income and expenses from his property as:

    Rent

    $13,000

    (52 weeks x $250)

    Room Expenses

    General areas expenses

    $2,400

    $3,600

    ($12,000 x 20%)

    ($12,000 x 60% x 50%)

    Net rental income

    $7,000

     

     

    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.

    Non-commercial rental

    If you let a property, or part of a property, at less than normal commercial rates, this may limit the amount of deductions you can claim.

    Example 13 – Private use by owner and rented to relatives or friends at a discounted rate

    Kelly and Dean have a holiday home they own jointly. 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, the decline in value of depreciating assets 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 x $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 $1200 (3/52 x $20,800 = $1200).

    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:

    Rent received

     

    $10,000

    Rental deductions

    ($18,000 + $600)

    $18,600

    Rental loss

     

    ($8,600)

    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 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.

    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.

      Last modified: 26 May 2016QC 48221