Rental properties 2004

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Introduction

Rental properties 2003-04

  • what rental income is assessable for tax purposes
  • what expenses are allowable deductions
  • what records you need to keep, and
  • what you need to know when you sell your rental property.

When you own a rental property, you may also need to know about capital gains and goods and services taxes, negative gearing, pay as you go instalments and the effects of the general value shifting regime.

Many of the expenses associated with your rental property will be deductible. We explain:

  • How to apportion your expenses if only part of them are tax deductible.
  • What expenses are not deductible.
  • When you can claim those expenses that are deductible - some you can claim in the year they occur; others must be claimed over a number of years, including decline in value of depreciating assets and capital works expenses.

New this year

The guide has been expanded this year to include a comprehensive list of assets found in residential rental properties. The assets are identified according to whether they are depreciating assets and eligible for a decline in value deduction, or may be eligible for a capital works deduction. The Commissioner's determinations of effective life for more than 150 depreciating assets are also included. Some of the determinations are new and apply only to assets acquired on or after 1 July 2004.

We have also included a summary of the principles we used to categorise these items that you may use to assess any items in your residential rental property that are not shown on the list.

Is your rental property outside Australia?

If your property is located outside Australia special rules apply to the deductibility of your rental property expenses. Question 19 in TaxPack 2004 supplement contains further information on foreign source income. If you are unsure of your obligations, contact your recognised tax adviser or the Tax Office.

Note

The examples given in this publication featuring Mr and Mrs Hitchman are based on the assumption that the Hitchmans own their rental properties as joint tenants who are not carrying on a rental property business.

Rental income

Rental and other rental related income is the full amount of rent and associated payments that you receive, or become entitled to, when you rent out your property - whether it is paid to you or your agent. You must include the full amount of rent you earn in your tax return.

Associated payments may be in the form of goods and services. You will need to work out the monetary value of these.

Rental related income

You must include rental bond money as income if you become entitled to retain it - for instance, because a tenant defaulted on the rent, or because of damage to your rental property requiring repairs or maintenance.

If you derived an insurance payout there may be situations where the payout needs to be included as income - for example, if you received an insurance payment to compensate you for lost rent.

If you derive a letting or booking fee you must include this as part of your rental income.

Associated payments include all amounts you receive, or become entitled to, as part of the normal, and repetitive and recurrent activities through which you intend to generate profit from the use of your rental property.

If, in relation to your rental activity, you receive a reimbursement or recoupment for deductible expenditure you have incurred, you must include that amount as income - for example, if a tenant pays you an amount to cover the cost of repairing damage to some part of your rental property and you can claim a deduction for the repairs.

You can claim a deduction for certain rental expenses you incur for the period your property is rented out or available for rent. For more information, read the section Rental expenses.

You must include as rental income any assessable amounts relating to hire purchase and limited recourse debt arrangements involving your rental property. For more information about the latter, read the section Limited recourse debt arrangements and see the publication Guide to depreciating assets.

Co-ownership of rental property

The way that rental income and expenses are divided between co-owners varies depending on whether the co-owners are joint tenants or tenants in common or there is a partnership carrying on a rental property business.

Co-owners of an investment property - not in business

A person who simply co-owns an investment property or several investment properties is usually regarded as an investor who is not carrying on a rental property business, either alone or with the other co-owners. This is because of the limited scope of the rental property activities and the limited degree to which a co-owner actively participates in rental property activities.

Dividing income and expenses according to legal interest

Co-owners who are not carrying on a rental property business must divide the income and expenses for the rental property in line with their legal interest in the property. If they are:

  • joint tenants, they each hold an equal interest in the property
  • tenants in common, they may hold unequal interests in the property - for example, one may hold a 20% interest and the other an 80% interest.

Rental income and expenses must be attributed to each co-owner according to their legal interest in the property, despite any agreement between co-owners, either oral or in writing, stating otherwise.

Example

Joint tenants

Mr and Mrs Hitchman are joint tenants in an investment rental property. Their activity is insufficient for them to be characterised as carrying on a rental property business. In the relevant year, Mrs Hitchman telephones the Tax Office and asks if she can claim 80% of the rental loss. Mrs Hitchman says she is earning $67,000 a year, and Mr Hitchman is earning $31,000. Therefore, it would be better if she claimed most of the rental loss, as she would save more tax. Mrs Hitchman thought it was fair that she claimed a bigger loss because most of the expenses were paid out of her wages. Under a partnership agreement drawn up by the Hitchmans, Mrs Hitchman is supposed to claim 80% of any rental loss.
Mrs Hitchman was told that where two people are joint tenants in a rental property, the net rental loss must be shared in line with their legal interest in the property. Therefore, the Hitchmans must each include half of the total income and expenses in their tax returns.
Any agreement that the Hitchmans might draw up to divide the income and expenses in proportions other than equal shares has no effect for income tax purposes. Therefore, even if Mrs Hitchman paid most of the bills associated with the rental property, she would not be able to claim more of the rental property deductions than Mr Hitchman.

Example

Tenants in common

In the preceding example, if the Hitchmans held their property interest as tenants in common in equal shares, Mrs Hitchman would still be able to claim only 50% of the total property deductions.
However, if Mrs Hitchman's legal interest was 75% and Mr Hitchman's legal interest was 25%, Mrs Hitchman must include 75% of the income and expenses on her tax return and Mr Hitchman must include 25% of the income and expenses on his tax return.

Note

Interest on money borrowed by only one of the co-owners which is exclusively used to acquire that person's interest in the rental property does not need to be divided between all of the co-owners.

If you don't know whether you hold your legal interest as a joint tenant or a tenant in common, read the title deed for the rental property. If you are unsure whether your activities constitute a rental property business, read Partners carrying on a rental property business below.

Example

Co-owners who are not carrying on a rental property business

The Tobins own, as joint tenants, two units and a house from which they derive rental income. The Tobins occasionally inspect the properties and also interview prospective tenants. Mr Tobin performs most repairs and maintenance on the properties himself, although he generally relies on the tenants to let him know what is required. The Tobins do any cleaning or maintenance that is required when tenants move out. Arrangements have been made with the tenants for the weekly rent to be paid into an account at their local bank. Although the Tobins devote some of their time to rental income activities, their main sources of income are their respective full-time jobs.
The Tobins are not partners carrying on a rental property business - they are only co-owners of several rental properties. Therefore, they must each include half of the total income and expenses on their tax returns - that is, in line with their legal interest in the properties.

Partners carrying on a rental property business

Most rental activities are a form of investment and do not amount to carrying on a business. However, where you are carrying on a rental property business in partnership with others, you must divide the net rental income or loss according to the partnership agreement. You must do this whether or not the legal interests in the rental properties are different to the partners' entitlements to profits and losses under the partnership agreement. If you do not have a partnership agreement, you should divide your net rental income or loss between the partners equally. See Example: Is it a rental property business?

Example

Is it a rental property business?

The Hitchmans' neighbours, the D'Souzas, own a number of rental properties, either as joint tenants or tenants in common. They own eight houses and three apartment blocks - each block comprising six residential units - a total of 26 properties.
The D'Souzas actively manage all of the properties. They devote a significant amount of time - an average of 25 hours per week each - to these activities. They undertake all financial planning and decision making in relation to the properties. They interview all prospective tenants and conduct all of the rent collections. They carry out regular property inspections and attend to all of the everyday maintenance and repairs themselves or organise for them to be done on their behalf. Apart from income Mr D'Souza earns from shares, they have no other sources of income.
The D'Souzas are carrying on a rental property business. This is demonstrated by:
  • the significant size and scale of the rental property activities
  • the number of hours the D'Souzas spend on the activities
  • the D'Souzas' extensive personal involvement in the activities, and
  • the business-like manner in which the activities are planned, organised and carried on.
Mr and Mrs D'Souza have a written partnership agreement in which they agreed to carry on a rental property business. They have agreed that Mrs D'Souza is entitled to a 75% share of the partnership profits or losses and Mr D'Souza is entitled to a 25% share of the partnership profits or losses.
The D'Souzas are carrying on a rental property business. This means that the net profit or loss generated from their rental business is divided between them according to their partnership agreement - in proportions of 75% and 25%, even though their legal interests in the rental properties are equal - that is, they each own 50%.

For more information about dividing net rental income or losses between co-owners, see Taxation Ruling TR 93/32 - Rental property - division of net income or loss between co-owners.

For more information about whether a rental property business is being carried on, whether it is being carried on in partnership, and the distribution of partnership profits and losses, see:

Paragraph 13 of TR 97/11 lists eight indicators to determine whether a business is being carried on. Although this ruling refers to the business of primary production, these indicators apply equally to activities of a non-primary production nature.

Contact your recognised tax adviser or the Tax Office if you are unsure whether:

  • your rental property activities amount to a partnership carrying on a rental property business
  • you are carrying on a rental property activity as a joint tenant or a tenant in common, or
  • you are in both categories.

Rental expenses

You can claim a deduction for certain expenses you incur for the period your property is rented or is available for rent. However, you cannot claim expenses of a capital 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 capital gains tax purposes.

Types of rental expenses

There are three categories of rental expenses:

  • expenses you can't claim
  • expenses for which you are entitled to an immediate deduction in the year you incur the expense, and
  • expenses which are deductible over a number of income years.

Each of these categories is discussed in more detail below.

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
  • only part of your property is used to earn rent
  • you rent your property at non-commercial rates.
Part year rental

If you use your property for both private and income-producing purposes, 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 income-producing 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 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 on a time basis according to rental and private use where a property is used for both purposes during the year.

In other circumstances, where you are not able to specifically identify the direct cost, your expenses will need to be apportioned on a reasonable basis.

Example

Apportionment of expenses where property is rented for part of the year

Mr Hitchman's brother, Dave, owns a property in Tasmania. He rents out his property during the period 1 November 2003 to 30 March 2004 - 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.

Deductible expenses

x

portion of year

=

deductible amount

He can claim a deduction against his rental income of

$1,000

x

151

366

=

$412

If he had any other expenses, such as telephone expenses, these too may need to be apportioned on a reasonable basis - which may be different to the basis used in the above 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.

Example

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 of apportioning these expenses, one-third - that is $3,000 - applies to the flat. However, as Michael used the flat to produce 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 net rent from his property as:

Gross rent

$2,600

(26 weeks x $100)

Less expenses

$1,500

($3,000 x 50%)

Net rent

$1,100

For more information about the apportionment of expenses, see Taxation Ruling IT 2167 - Rental properties - non-economic rental, holiday home, share of residence, etc. cases, family trust cases and Taxation Ruling TR 97/23 - 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

Renting to a family member

Mr and Mrs Hitchman were charging their previous Queensland tenants the normal commercial rate of rent - $180 per week. They allowed their son, Tim, to live in the property at a nominal rent of $40 per week. Tim lived in the property for four weeks. When he moved out, the Hitchmans advertised for tenants.
Although Tim was paying rent to the Hitchmans, the arrangement was not based on normal commercial rates. As a result, the Hitchmans cannot claim a deduction for the total rental property expenses for the period Tim was living in the property. Generally, a deduction can be claimed for rental property expenses up to the amount of rental income received from this type of non-commercial arrangement.
Assuming that during the four weeks of Tim's residence the Hitchmans incurred rental expenses of more than $160, these deductions would be limited to $160 in total - that is, $40 x 4 weeks.
If Tim had been living in the house rent free, the Hitchmans would not have been able to claim any deductions for the time he was living in the property.

For more information about non-commercial rental arrangements, see Taxation Ruling IT 2167 previously referred to above.

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 2005, you can claim an immediate deduction. A prepayment that doesn't meet these criteria and is $1,000 or more may have to be spread over two or more years. This is also the case if you carry on your rental activity as a business and have not elected to be taxed under the simplified tax system for small businesses. For more information see the publication Deductions for prepaid expenses.

Expenses you can't claim

Expenses you are not able to claim include:

  • acquisition and disposal costs
  • expenses not actually incurred by you, such as water or electricity charges borne by your tenants, and
  • expenses that are not related to rental of a property, such as expenses connected to your own use of a holiday home that you rent out for part of the year.

Acquisition and disposal costs

You cannot claim a deduction for the costs of acquiring or disposing of your rental property. Examples of expenses of this kind include the purchase cost of the property, conveyancing costs, advertising expenses and stamp duty on the transfer of the property (but not stamp duty on a lease of property - read the section Lease document expenses). However, if you acquired the property after 19 September 1985, these costs may form part of the cost base of the property for capital gains tax purposes. See also Capital gains tax .

Example

Acquisition costs

The Hitchmans purchased a rental property for $170,000 in July 2003. They also paid surveyor's fees of $350 and stamp duty of $750 on the transfer of the property. None of these expenses is deductible against the Hitchmans' rental income. However, in addition to the $170,000 purchase price, the incidental costs of $350 and $750, totalling $1,100, are included in the cost base of the property.
This means that when the Hitchmans dispose of the property, $171,100 ($170,000 + $1,100) will be taken into account in determining the amount of any capital gain or capital loss.

For more information, see the publication Guide to capital gains tax.

Expenses you can claim immediately

Expenses for which you may be entitled to an immediate deduction in the year you incur the expense include:

  • advertising for tenants
  • bank charges
  • body corporate fees*
  • cleaning
  • council rates
  • electricity and gas
  • gardening and lawn mowing
  • in-house audio/video service charges
  • insurance
    • building
    • contents
    • public liability
  • interest on loans*
  • land tax
  • legal expenses*
  • lease costs*
    • preparation
    • registration
    • stamp duty
  • mortgage discharge expenses*
  • pest control
  • property agent's fees and commission
  • quantity surveyor's fees
  • repairs and maintenance*
  • secretarial and bookkeeping fees
  • security patrol fees
  • servicing costs - for example, servicing a water heater
  • stationery and postage
  • telephone calls and rental
  • tax-related expenses
  • travel and car expenses*
    • rent collection
    • inspection of property
    • maintenance of property
  • water charges.

You can claim a deduction for these expenses only if you actually incur them. Deductions marked with an asterisk (*) are examined in more detail below.

Body corporate fees and charges

You may be able to claim a deduction for body corporate fees and charges you incur for your rental property.

Body corporate fees and charges may be incurred to cover the cost of day-to-day administration and maintenance or they may be applied to a special purpose sinking fund.

If the fees and charges you incur include a contribution to a special purpose sinking fund you will only be able to claim a deduction for that portion of the fees and charges that relate to the cost of day-to-day administration and maintenance. This is because payments to a special purpose sinking fund are usually to cover the cost of capital improvements or capital repairs and are therefore not deductible. See Taxation Ruling TR 97/23 - Deductions for repairs. You may be able to claim a capital works deduction for the cost of capital improvements or capital repairs once the cost has been charged to the sinking fund - see Capital works deductions.

If the body corporate fees and charges you incur are for things like the maintenance of gardens, deductible repairs and building insurance, you cannot also claim deductions for these as part of other expenses. For example, you cannot claim a separate deduction for garden maintenance if that expense is already included in body corporate fees and charges.

Interest

If you take out a loan to purchase a rental property, you can claim the interest charged on that loan, or a portion of the interest, as a deduction. However, the property must be rented, or available for rental, in the income year for which you claim a deduction. If you start to use the property for private purposes, you cannot claim any interest expenses you incur after you start using the property for private purposes.

Similarly, if you take out a loan to purchase land on which to build a rental property or to finance renovations to a property you intend to rent out, the interest on the loan will be deductible from the time you took the loan out. However, if your intention changes - for example, you decide to use the property for private purposes and you no longer intend to use it to produce rent or other income - you cannot claim the interest after your intention changes.

While the property is rented, or available for rent, you may also claim interest charged on loans taken out:

  • to purchase depreciating assets
  • for renovations
  • for repairs.

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 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 is shown in the apportionment of interest example below.

If you have a loan account that has a fluctuating balance due to a variety of deposits and withdrawals and it is used for both private purposes and for rental property purposes, you must keep accurate records to enable you to calculate the interest that applies to the rental property portion of the loan; that is, you must separate the interest that relates to the rental property from any interest that relates to the private use of the funds.

If you have difficulty calculating your deduction for interest, contact your recognised tax adviser or the Tax Office.

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 so whether or not the loan for the new home is secured against the former home.

Example

Apportionment of interest

The Hitchmans decide to use their bank's 'Mortgage breaker' account to take out a loan of $209,000 from which $170,000 is to be used to buy a rental property and $39,000 is to be used to purchase a private car. The bank officer advises them that they will need to work out each year how much of their interest payments is tax deductible. The officer gives them the following whole year example based on a loan interest rate of 6.75% per annum, and assuming that the property is rented from 1 July.
Interest for year 1 = $209,000 x 6.75% = $14,108
Apportionment of interest payment related to rental property:

Total interest expense

x

rental property loan

total borrowings

=

Deductible interest

$14,108

x

$170,000

$209,000

=

$11,475

If you prepay interest it may not be deductible all at once. Read the section Prepaid expenses.

Note - Thin capitalisation

If you are an Australian resident and you (or any associate entities) have certain overseas interests, or you are a foreign resident, thin capitalisation rules may apply if your debt deductions, such as interest (combined with those of your associate entities), for 2003-04 are more than $250,000. See the publication Guide to thin capitalisation, complete the thin capitalisation schedule attached to the guide and, if required under the thin capitalisation rules, only claim a reduced amount.

For more information about the deductibility of interest, see the following taxation rulings and determination:

If you need help to calculate your interest deduction, contact your recognised tax adviser or the Tax Office.

Lease document expenses

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 - for instance, the cost of evicting a non-paying tenant.

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, and
  • defending your title to the property.

Non-deductible legal expenses may, however, form part of the cost base of your property for capital gains tax purposes. For more information see the publication Guide to capital gains tax. See also Capital gains tax.

Example

Deductible legal expenses

In September 2003, the Hitchmans' tenants moved out owing four weeks rent. The Hitchmans retained the bond money and took the tenants to court to terminate the lease and recover the balance of the rent. The legal expenses they incurred doing this are fully deductible. The Hitchmans were seeking to recover assessable rental income, and they wished to continue earning income from the property. The Hitchmans must include the retained bond money and the recovered rent in their assessable income in the year of receipt.

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 assessable income.

For example, if you used a property to produce rental income for half the time you held it and as a holiday home for the other half of the time, 50% of the costs of discharging the mortgage are deductible.

Mortgage discharge expenses may also include penalty interest payments. Penalty interest payments are amounts paid to a lender, such as a bank, to agree to accept early repayment of a loan - including a loan on a rental property. The amounts are commonly calculated by reference to the number of months that interest payments would have been made had the premature repayment not been made.

Penalty interest payments 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
  • if payment is made in order to rid the taxpayer of a recurring obligation to pay interest on the loan.

Repairs

Expenditure for repairs you make to the property may be deductible. However, 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 some guttering damaged in a storm or part of a fence that was damaged by a falling tree branch.

However, the following expenses are capital, or of a capital nature, and are not deductible:

  • replacement of an entire structure or unit of property (such as a complete fence or building, a stove, kitchen cupboards or refrigerator)
  • improvements, renovations, extensions and alterations
  • initial repairs - for example, in remedying defects, damage or deterioration that existed at the date you acquired the property.

You may be able to claim capital works deductions for these expenses - for more information, read the section Capital works deductions. Expenses of a capital nature may form part of the cost base of the property for capital gains tax purposes (see the publication Guide to capital gains tax) - but not generally to the extent that capital works deductions have been or can be claimed for them (see Cost base adjustments for capital works deductions).

Example

Repairs prior to renting out the property

The Hitchmans needed to do some repairs to their newly acquired rental property before the first tenants moved in. They paid an interior decorator to repaint dirty walls, replace broken light fittings and repair doors on two bedrooms. They also discovered white ants in some of the floor boards. This required white ant treatment and replacement of some of the boards.
These expenses were incurred to make the property suitable for rental and did not arise from the Hitchmans' use of the property to generate assessable rental income. The expenses are capital in nature and the Hitchmans are not able to claim a deduction for these expenses.

Repairs to a rental property will generally be deductible if:

  • the property continues to be rented on an ongoing basis
  • the property remains available for rental but there is a short period when the property is unoccupied - for example, where unseasonable weather causes cancellations of bookings or advertising is unsuccessful in attracting tenants.

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, and
  • the property was income-producing during the income year in which you incurred the cost of repairs.

Example

Repairs when the property is no longer rented out

After the last tenants moved out in September 2003, the Hitchmans discovered that the stove didn't work, kitchen tiles were cracked and the toilet window was broken. They also discovered a hole in a bedroom wall that had been covered with a poster. In October 2003 the Hitchmans paid for this damage to be repaired so they could sell the property.
As the tenants were no longer in the property, the Hitchmans were not using the property to produce assessable income. However, they could still claim a deduction for repairs to the property because the repairs related to the period when their tenants were living in the property and the repairs were completed before the end of the income year in which the property ceased to be used to produce income.

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 the publications Guide to capital gains tax and Taxation Ruling TR 97/23 - Deductions for repairs. See also Capital gains tax.

Travel expenses

If you travel to inspect or maintain your property or collect the rent, you may be able to claim the costs of travelling as a deduction. You are allowed a full deduction where the sole purpose of the trip relates to the rental property. However, in other circumstances you may not be able to claim a deduction or you may be entitled to only a partial deduction.

If you fly to inspect your rental property, stay overnight, and return home on the following day, all of the airfare and accommodation expenses would generally be allowed as a deduction.

Example

Travel and vehicle expenses

Although their local rental property was managed by a property agent, Mr Hitchman decided to inspect the property three months after the tenants moved in. During the income year Mr Hitchman also made a number of visits to the property in order to carry out minor repairs. Mr Hitchman travelled 162 kilometres during the course of these visits. On the basis of a cents per kilometre rate of 61 cents for his 2.6 litre car - see TaxPack 2004 or visit www.ato.gov.au for the appropriate rates - Mr Hitchman can claim the following deduction:
Distance travelled x rate per km = deductible amount
162 km x 61 cents per km = $98
On his way to golf each Saturday, Mr Hitchman drove past the property to 'keep an eye on things'. These motor vehicle expenses are not deductible as they are incidental to the private purpose of the journey.
Apportionment of travel expenses

Where travel related to your rental property is combined with a holiday or other private activities, you may need to apportion the expenses.

If you travel to inspect your rental property and combine this with a holiday, you need to take into account the reasons for your trip. If the main purpose of your trip is to have a holiday and the inspection of the property is incidental to that main purpose, you cannot claim a deduction for the cost of the travel. However, you may be able to claim local expenses directly related to the property inspection and a proportion of accommodation expenses.

Example

Apportioning travel expenses

The Hitchmans also owned another rental property in a resort town on the north coast of Queensland. They spent $1,000 on airfares and $1,500 on accommodation when they travelled from their home in Perth to the resort town, mainly for the purpose of holidaying, but also to inspect the property. They also spent $50 on taxi fares for the return trip from the hotel to the rental property. The Hitchmans spent one day on matters relating to the rental property and nine days swimming and sightseeing.
No deduction can be claimed for any part of the $1,000 airfares.
The Hitchmans can claim a deduction for the $50 taxi fare.
A deduction for 10% of the accommodation expenses (10% of $1,500 - that is, $150) would be considered reasonable in the circumstances. The total travel expenses the Hitchmans can claim are therefore $200 ($50 taxi fare and $150 accommodation). Accordingly, Mr and Mrs Hitchman can each claim a deduction of $100.

Expenses deductible over a number of income years

There are three types of expenses you may incur for your rental property that may be claimed over a number of income years:

  • borrowing expenses
  • amounts for decline in value of depreciating assets, and
  • capital works deductions.

Each of these categories is discussed in more 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 and costs for preparing and filing mortgage documents - including mortgage broker fees and stamp duty charged on the mortgage.

Borrowing expenses also include other costs that the lender requires you to incur as a condition of them lending you the money for the property - such as the costs of obtaining a valuation or lender's mortgage insurance if you borrow more than a certain percentage of the purchase price of the property.

If you take out an insurance policy that provides for your loan on the property to be paid out in the event that you die or become disabled or unemployed, the premiums are not borrowing costs. Interest expenses are not borrowing expenses.

If your total borrowing expenses are more than $100, the deduction is spread over five years or the term of the loan, whichever is less. If the total cost is $100 or less, it is fully deductible in the first year.

If you repay the loan early and in less than five years, you can claim a deduction for the balance of the borrowing expenses in the year of repayment.

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.

Example

Apportioning borrowing expenses

In order to secure a 20-year loan of $209,000 to purchase a rental property for $170,000 and a private motor vehicle for $39,000, the Hitchmans paid a total of $1,670 in establishment fees, valuation fees and stamp duty on the loan. As the Hitchmans' borrowing expenses are more than $100, they must be apportioned over five years, or the period of the loan, whichever is the lesser. Also, because the loan was to be used for both income producing and non-income producing purposes, only the income-producing portion of the borrowing expenses is deductible. As they obtained the loan on 17 July 2003, the borrowing expense deduction for the first year would be worked out as follows:

Borrowing expenses

x

number of relevant days in year

number of days in 5 years

=

maximum amount for the income year

maximum amount for the income year

x

rental property loan

total borrowings

=

deduction for year

Year 1 (leap year)

$1,670

x

350 days

1,827 days

=

$320

$320

x

$170,000

$209,000

=

$260

Their borrowing expense deductions for subsequent years would be worked out as follows:

Borrowing expenses remaining

x

number of relevant days in year

number of days in 5 years

=

maximum amount for the income year

maximum amount for the income year

x

rental property loan

total borrowings

=

deduction for year

Year 2

$1,350

x

365 days

1,477 days

=

$334

$334

x

$170,000

$209,000

=

$272

Year 3

$1,016

x

365 days

1,112 days

=

$334

$334

x

$170,000

$209,000

=

$272

Year 4

$682

x

365 days

747 days

=

$334

$334

x

$170,000

$209,000

=

$272

Year 5 (leap year)

$348

x

366 days

382 days

=

$334

$334

x

$170,000

$209,000

=

$272

Year 6

$14

x

16 days

16 days

=

$14

$14

x

$170,000

$209,000

=

$11

Deduction for decline in value of depreciating assets

You can deduct an amount in relation to a depreciating asset that you held for any period during an income year, equal to its decline in value over that period. However, your deduction is reduced to the extent you use the asset - or have it installed ready for use - for purposes other than that of producing assessable income, for example, a private purpose.

How do you work out your deduction?

You work out your deduction for the decline in value of a depreciating asset using either the prime cost or diminishing value method. Both methods are based on the effective life of the asset.

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. The formula for working out decline in value using this method is:

Base value*

x

Days held**

365

x

150%

Asset's effective life

*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.
**Can be 366 in a leap year.

An asset's cost has two elements. The first element of cost is amounts you are taken to have paid to hold the asset, such as the purchase price. The second element of cost is 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 you acquire an asset jointly, you work out your deduction for the decline in value of the asset based on your interest in the asset and not on the cost of the asset itself.

The adjustable value of a depreciating asset is its cost less its decline in value since you first used it or installed it ready for use for any purpose, including a private purpose. The term 'adjustable value' replaces the terms 'written down value' and 'undeducted cost'.

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

x

Days held

365

x

100%

Asset's effective life

*Can be 366 in a leap year.

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 the publication Guide to depreciating assets.

Under either method, the decline in value of an asset cannot amount to more than its base value in any income year.

If you use a depreciating asset for more than one 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 mower's decline in value, based on what percentage of the mower's total use occurred at your rental property.

Effective life

The effective life of a depreciating asset is how long it can be used by any entity for a taxable purpose, or for the purpose of producing exempt income:

  • having regard to the wear and tear you reasonably expect from your expected circumstances of use
  • assuming reasonable levels of maintenance, and
  • having regard to the period within which it is likely to be scrapped, sold for no more than scrap value, or abandoned.

Effective life is expressed in years, including fractions of years. It is not rounded to the nearest whole year.

For most depreciating assets, you can either make your own estimate of its effective life or adopt the effective life determined by the Commissioner. The sorts of information you could use to make your own estimate of effective life are listed in the Guide to depreciating assets.

Taxation Ruling TR 2000/18 - Effective life of depreciating assets lists the Commissioner's determination of effective life for various depreciating assets. TR 2000/18 came into force on 1 January 2001.

Because the Commissioner reviews the determinations of effective life, the determined effective life may change from the beginning of, or during, an income year. If you decide to use the effective life determined by the Commissioner you generally use the effective life that applies at the time you entered into a contract to acquire the depreciating asset.

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. However, a capital works deduction may be allowed for some of these items - see Capital works deductions.

For a complete list of items found in residential rental properties and whether they are depreciating assets or eligible for a capital works deduction - see Residential rental property assets.

Replacements

It was the longstanding practice to treat the initial purchase of certain assets as not depreciable but to allow an immediate deduction for the cost of their replacement. The practice principally related to low-cost items that had very long or indeterminate lives, were difficult to keep track of, and were subject to frequent replacement through loss or breakage - for example, crockery, bedding and linen.

However, the replacement basis for deductions is no longer available for assets you first use (or have installed ready for use) to produce income after 31 December 2000.

An immediate deduction is available for depreciating assets costing $300 or less which are used predominantly in deriving non-business income (including rental income) if certain conditions are met - see the next section, Immediate deduction for depreciating assets costing $300 or less. Also, assets costing less than $1,000 may be written off through a low-value pool - see Low-value pooling below.

Immediate deduction for depreciating assets costing $300 or less

You can claim an immediate deduction for a depreciating asset costing $300 or less if you use the asset predominantly to produce assessable income that is not from carrying on a business - for example, rental income where your rental activities do not amount to the carrying on of a business. If you own an asset jointly with others, your interest in the asset is treated as the relevant depreciating asset - this means you may be able to claim an immediate deduction for your share of the cost of an asset you acquire jointly if your share is $300 or less (see Partners carrying on a rental property business).

There are two additional tests that must be met before an immediate deduction can be claimed:

  • the asset must not be part of a set of assets that you start to hold in the same income year where the total cost of the set is more than $300, and
  • the total cost of the asset and any other identical, or substantially identical, assets that you start to hold in an income year must not be more than $300.

Example

Immediate deduction

In November 2003, Terry purchased a toaster for his rental property at a cost of $70. He can claim an immediate deduction as he uses the toaster to produce assessable income, but not from carrying on a business.

Example

No immediate deduction

Paula is buying a set of four identical dining room chairs costing $90 each for her rental property. She cannot claim an immediate deduction for any of these because they are identical and the total cost is more than $300.
For further information about immediate deductions for depreciating assets costing $300 or less, refer to the publication Guide to depreciating assets.
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 whose cost at the end of the year in which it is first used, or installed ready for use, for a taxable purpose is less than $1,000. A low-value asset is a depreciating asset that is not a low-cost asset but:

  • which has an opening adjustable value of less than $1,000, and
  • for which you have worked out any available deductions for decline in value under the diminishing value method.

If you acquire 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 in that income year and in later income years. However, this rule 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.

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

The deduction for low-cost assets you allocate to the pool during the income year is worked out 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 allocate an asset to the pool, you must make a reasonable estimate of how much of your use of it is for producing assessable income (the asset's 'taxable use percentage'). Only the taxable use percentage of the asset's cost or opening adjustable value is written off through the low-value pool.

For further information about low-value pooling, including how to treat assets used only partly to produce assessable income and how to treat the disposal of assets from a low-value pool, refer to the Guide to depreciating assets.

If you are an individual who owns or has co-ownership of a rental property, you claim your low-value pool deduction for rental assets at TaxPack question D6 (not question 20 of the TaxPack 2004 supplement).

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

If you cease to hold or to 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, or
  • a change occurs in the holding or interests in an asset which was or is to become a partnership asset.

The balancing adjustment amount is worked out 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, the excess is included in your assessable income. (If you are an individual who owns or has co-ownership of a rental property, you show such assessable amounts at TaxPack supplement question 22 Other income - not question 20.)

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

Refer to the Guide to depreciating assets for further information about balancing adjustments.

Purchase and valuation of second-hand assets

If you purchase a second-hand asset you can generally claim a deduction based on the cost of the asset to you.

Where you purchase a rental property, the most 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. If separate values for depreciating assets are not included in the sale agreement for your rental property when you purchase it, you may be required to demonstrate the basis of your valuation.

Generally, independent valuations that establish reasonable values for depreciating assets satisfy Tax Office requirements. In the absence of an independent valuation, you may need to demonstrate that your estimate provided a reasonable value. Considerations would include the market value of the asset compared to the total purchase price of the property.

Working out your deductions for decline in value of depreciating assets

An example of how to do this calculation is on the next page. The Guide to depreciating assets contains two worksheets (Worksheet 1 - depreciating assets and Worksheet 2 - low-value pool) that you can use to work out your deductions for decline in value of depreciating assets.

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, or
  • structural improvements to the property - for example, adding a gazebo, carport, sealed driveway, retaining wall or fence.

Landscaping is not a structural improvement.

Deductions can be claimed only for the period during the year that the property is rented or is available for rent.

If you can claim capital works deductions, the construction expenditure on which those deductions are based cannot be taken into account in working out any other types of deductions to be claimed, 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 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, no deduction can be claimed. If the type of construction qualifies, Table 2 shows the rate of deduction available.

Example

Working out decline in value deductions

In this example, the Hitchmans bought a property part way through the year - on 20 July 2003. In the purchase contract, depreciating assets sold with the property were assigned separate values that represented their arm's length values at the time. The amounts shown in the contract can be used by the Hitchmans to work out the cost of their individual interests in the assets. They can each claim deductions for decline in value for 347 days out of the 365 in the 2003-04 income year. (Note: When calculating decline in value deductions, the number of days in the year is not increased to reflect leap years.) If the Hitchmans use the assets wholly to produce rental income, the deduction for each asset using the diminishing value method is worked out as shown below:

Description

Cost of the interest in the asset

Base value

No. of days held divided by 365

150% divided by effective life (yrs)

Deduction for decline in value

Adjustable value at end of 2003-04 income year

Furniture

$2,000

$2,000

347

365

150%

13 1/3

$213

$1,787

Carpets

$1,200

$1,200

347

365

150%

10

$171

$1,029

Curtains

$1,000

$1,000

347

365

150%

6 2/3

$213

$787*

Totals

$4,200

$4,200

$597

$3,603

*As the adjustable value of the curtains at the end of the 2003-04 income year is less than $1,000, either or both of the Hitchmans can choose to transfer their interest in the curtains to their low-value pool for the following year (2004-05).

Example

Decline in value deductions - low-value pool

In the 2003-04 income year the Hitchmans' daughter Leonie, who owns a rental property in Adelaide, allocated some depreciating assets she acquired in that year to a low-value pool. The low-value pool already comprised various low-value assets. Leonie expects to use the assets solely to produce rental income.

Taxable use percentage of cost or opening adjustable value

Low-value pool rate

Deduction for decline in value in 2003-04

Low-value assets:

Various

$1,679

37.5%

$630

Low-cost assets:

Television set (purchased 11/11/2003)

Gas heater (purchased 28/2/2004)

$747

$303

Total low-cost assets

$1,050

18.75%

$197

Total deduction for decline in value for year ended 30 June 2004

$827

Closing pool value at 30 June 2004

Low-value assets:

1,679 - 630

= $1,049

Low-cost assets:

1,050 - 197

= $853

= $1,902

Table 1

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 (eg 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).

* 'Certain buildings' 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.
** For more information, contact the Tax Office on 13 24 78.

Table 2

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%

Note: 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%.

With regard to an apartment building, the 4% rate only applies to apartments, units or flats 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, and for 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 are an owner-builder or 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.

Some costs that may be included 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.

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.

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

Some construction expenditure may form part of the cost base of the property for capital gains tax purposes. For more information, see the publication Guide to capital gains tax.

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 on the previous page. To be able to claim the deduction, the new owner must continue to use the building to produce income.

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.

Example

Estimating capital works deductions

The Perth property acquired by the Hitchmans on 20 July 2003 was constructed in August 1991. At the time they acquired the property it also contained the following structural improvements.

Item

Construction date

Retaining wall

September 1991

Concrete driveway

January 1992

In-ground swimming pool

July 1992

Protective fencing around the pool

August 1992

Timber decking around the pool

September 1992

In a letter to the Hitchmans, a supervising architect estimated the construction cost of the rental property for capital works deduction purposes at $115,800. This includes the cost of the house, the in-ground swimming pool, the protective fencing and the timber decking. Although the retaining wall and the concrete driveway are structural improvements, they were constructed before 27 February 1992. Therefore, they do not form part of the construction cost for the purposes of the capital works deduction and were not included in the $115,800 estimate.
The Hitchmans can claim a capital works deduction of 2.5% per annum of the construction costs. As they did not acquire the property until 20 July 2003, they can claim the deduction for the 347 days from 20 July 2003 to 30 June 2004. The maximum deduction for 2003-04 would be worked out as follows:
Construction cost x rate x portion of year = deductible amount

$115,800

x

2.5%

x

347

365

=

$2,752

The cost of obtaining an appropriately qualified person's estimate of construction costs of a rental property is deductible in the year it is incurred. You make your claim for the expense, or your share of the expense if you jointly incurred it, at TaxPack question D10 Cost of managing tax affairs.

For more information about construction expenditure and capital works deductions, see Taxation Ruling TR 97/25 - Property development: deduction for capital expenditure on construction of income producing capital works, including buildings and structural improvements.

Cost base adjustments for capital works deductions

In working out a capital gain in respect of a rental property, capital works deductions you claimed, or were entitled to claim, may need to be excluded from the cost base and reduced 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 claimed or were entitled to claim in respect of the asset if:

  • you acquired the asset after 7.30pm (by legal time in the ACT) 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.
Reduced cost base

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

Example

Capital works deduction

Zoran acquired a rental property on 1 July 1997 for $200,000. Before disposing of the property on 30 June 2004, he had claimed $10,000 in capital works deductions.
At the time of disposal, the cost base of the property was $210,250. Zoran must reduce the cost base of the property by $10,000 to $200,250.
Limited recourse debt arrangements

If construction expenditure is financed in whole or in part by a limited recourse debt arrangement that ends after 27 February 1998 and part of the principal debt remains unpaid at the time it ends, an adjustment to assessable income is required. The adjustment is equal to the excess of the total amount of the capital works deductions allowed over the total amount that would have been deductible if based on actual outlays. If you are not sure how to work out your adjustment to assessable income, contact your recognised tax adviser or the Tax Office.

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 of the Guide to capital gains tax.

Worksheet

The following completed worksheet is an example of how to calculate your net rental income or loss. Some of the figures have been drawn from the examples in this publication, others have been included for illustrative purposes.

Example

Rental property worksheet

$

Income

Rental income

8,500

Other rental related income

800

Gross rent

9,300

Expenses

Advertising for tenants

48

Body corporate fees and charges

500

Borrowing expenses

260

Cleaning

100

Council rates

700

Deductions for decline in value

597

Gardening/lawn mowing*

350

Insurance*

495

Interest on loan(s)

11,475

Land tax

200

Legal expenses

150

Pest control

50

Property agent fees/commission

800

Repairs and maintenance

1,000

Capital works deductions

2,745

Stationery, telephone and postage

80

Travel expenses

436

Water charges

350

Sundry rental expenses

95

Total expenses

20,431

Net rental loss ($20,431 - $9,300)

11,131

* You can't claim for these items if the expenditure is already included in body corporate fees and charges.

Other tax considerations

Capital gains tax

If you acquired your rental property, or depreciating assets used in relation to your rental property, after 19 September 1985, capital gains tax may apply when you dispose of the property and the depreciating assets. If you are a co-owner of an investment property, the liability to capital gains tax will be attributed to each co-owner in accordance with your legal interest in the property (see Co-ownership of rental property).

You do not make a capital gain or capital loss if you dispose of a depreciating asset after 11.45am (by legal time in the ACT) on 21 September 1999 unless the asset was also used for purposes other than producing income - for example, if you used it partly for private purposes.

Note: An amount may still be included in assessable income or a deduction allowed in the income year in which the asset is disposed of under the rules dealing with depreciating assets (see What happens if you no longer hold or use a depreciating asset?).

If you disposed of a rental property and you have claimed capital works deductions for construction expenditure (see Capital works deductions), those deductions may be excluded from the cost base or reduced cost base of the property. See Cost base adjustments for capital works deductions.

For more information, see the publication Guide to capital gains tax.

General value shifting regime

If you have made a loss on the sale of a non-depreciating rental property (for example, land) where an associate of yours had a continuing right to use the property on non-commercial terms after its sale, value shifting rules may reduce the amount of loss you can claim. The rules will only apply if your associate's right to use the property reduced the market value of the property by more than $50,000.

For more information, please refer to the publication General value shifting regime in brief.

Goods and services tax (GST)

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.

For further information, call the Business Infoline on 13 28 66.

Keeping records

You should keep records of both income and expenses relating to your rental property.

For capital gains tax purposes you must start keeping records if you purchase or inherit property, receive property as part of a divorce settlement or as a gift, or make improvements to property. You must keep records relating to your ownership and all the costs of acquiring and disposing of property for five years from the date you dispose of it.

You must keep records which set out in English:

  • the date you acquired the asset
  • the date you disposed of the asset and anything received in exchange
  • the parties involved
  • any amount that would form part of the cost base of the asset. For more information about cost base, see the publication Guide to capital gains tax.

Do not send these records in with your tax return. Keep them in case we ask to see them.

Negative gearing

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.

Pay as you go (PAYG) instalments

If you make a profit from renting your property, you will need to know about the PAYG instalments system.

This system requires you to pay instalments during each income year to meet your expected tax liability for that year. You will generally be required to pay PAYG instalments if you earn $2,000 or more of business or investment income - such as rental income - and the debt on your income tax assessment is more than $500.

If you are required to pay PAYG instalments the Tax Office notifies you. You will usually be required to pay the instalments at the end of each quarter. There are two options if you pay by quarterly instalments:

  • pay the instalment amount calculated by us (as shown on your activity statement), or
  • pay the instalment amount you work out, based on your instalment rate multiplied by your investment and business income.

You may be able to pay an annual PAYG instalment if your notional tax is less than $8,000. Your notional tax is generally the equivalent of the tax you would have paid on your business and investment income, excluding any capital gain, based on your last income tax assessment.

For further information, see the publication Introduction to pay as you go income tax instalments.

Residential rental property assets

Items that are commonly found in residential rental properties are listed below.

The list, based on the principles in Draft Taxation Ruling TR 2004/D3 Plant in residential properties, sets out whether an item may be eligible for a capital works deduction or a deduction for decline in value and, if the latter, also includes the Commissioner's determination of its effective life. For information about the effective life you may use.

The list is provided to give clarity and certainty about the tax treatment of items in residential rental properties. It may be used to assist you to work out which type of deduction you may be able to claim for your items.

You may be able to claim the deduction indicated in the list for items relating to your residential rental property. If you have an item for your residential rental property that is not on the list, the principles set out below may help you determine the type of deduction that may be available for it. These principles are more fully discussed in the draft ruling.

The final ruling, when released, may contain changes reflecting the comments we receive on the draft ruling. We will publish the final ruling on our website as soon as it is released.

If you are unable to determine the type of deduction available for an item, or you consider that your circumstances are sufficiently different to warrant a different treatment, you may ask us for a private ruling.

Which deduction can you claim

You cannot claim a deduction for a depreciating asset's decline in value if you are allowed a capital works deduction for the asset.

Capital works deductions may be available for expenditure on the construction of buildings and structural improvements and extensions, alterations or improvements to either of those.

Capital works deductions are not available for expenditure on plant (see explanations in Plant below).

Decline in value deductions may be available if your plant is a depreciating asset.

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 more information about Deduction for decline in value of depreciating assets and Capital works deductions).

Definitions

We use the following common terms in the list to describe how or whether items are attached to premises:

Fixed - annexed or attached by any means, for example screws, nails, bolts, glue, adhesive, grout or cement, but not merely for temporary stability.

Freestanding - items designed to be portable or movable. Any attachment to the premises is only for the item's temporary stability.

Other than freestanding - items fixed to the premises that are not designed to be portable or movable. The test is not whether the item is removable, even if the attachment is slight, but whether the inherent design and function of the item is such that it is intended to remain in place for a substantial period of time.

Plant

The ordinary meaning of plant does not include the setting for income-earning activities. Residential rental properties will invariably be the setting for income-producing activities and so do not fall within the ordinary meaning of plant. Items that form part of the premises are also part of the setting, and therefore not eligible for deductions for their decline in value.

You should consider the following factors when determining whether an item is part of the premises or setting:

  • whether the item appears visually to retain a separate identity
  • the degree of permanence with which is it attached to the premises
  • the incompleteness of the structure without it, and
  • the extent to which it was intended to be permanent or whether it was likely to be replaced within a relatively short period.

No one of those factors is determinative and they must all be considered together.

Examples:

Wall and floor tiles are generally fixed to the premises, not freestanding, and intended to remain in place for a substantial period of time. They will generally form part of the premises. Expenditure on these items falls under capital works.

On the other hand, a freestanding item such as a bookcase may be attached to the structure only for temporary stability. It therefore does not form part of the premises and may qualify for a deduction for decline in value.

Kitchens are fixed to the premises, are intended to remain in place indefinitely and are necessary to complete the premises. Any separate visual identity they have is outweighed by the other factors. They are therefore part of the premises. Clothes hoists are also part of the premises for similar reasons.

Insulation batts, although generally not fixed, are intended to remain in place indefinitely, do not have a separate visual identity and add to the completeness of the structure. They are also part of the premises.

In addition to its ordinary meaning, 'plant' includes articles and machinery.

Articles

Plant includes items that are articles within the ordinary meaning of that word. A curtain, a desk and a bookcase would all be considered articles. A structure attached to land, such as a clothes hoist or pergola, would not be considered an article.

If an item forms part of the premises as described above, it is not an article. Therefore, items such as false ceiling panels and insulation batts are not articles while they are in place. However, a painting hung on a wall retains its character as an article.

Machinery

Plant also includes items that are machinery, whether or not they form part of the premises. In deciding whether something is machinery you must:

  • first identify the relevant unit or units based on functionality, and
  • then decide whether that unit comes within the ordinary meaning of machinery.

Identify the unit

Taxation Ruling TR 94/11- general investment allowance - what is a unit of property? provides guidelines to help you identify what is a unit. You need to consider whether a particular item is a unit, part of a larger unit, or whether its components are separate units. A unit will generally be an entity entire in itself; something that has an identifiable, separate function. However, it need not be self-contained or used in isolation and it may vary the performance of another unit. An item is not a unit simply because it is described as a system.

An item may be made up of several components. To determine what the relevant unit is, you need to consider the function of each component and of the larger composite item. A door handle, for example, is part of the door and not a separate unit. Similarly, a freestanding spa pool that is made up of the shell, skirt, heater, pump, filter and piping is one unit.

In other cases separate units may work in conjunction with each other to achieve a common objective. For example, a fire safety system may consist of several components including, for example, an indicator board, hydrants, piping, alarms, smoke detectors and sprinklers. All these components function together to form the system. However, each component also performs its own discrete function independent of the others. In this example each component is a separate unit.

Is the unit machinery?

Once you have identified a unit you must decide if it is machinery. The ordinary meanings of machinery and machine do not include anything that is only a reservoir or conduit, even if it is connected to something which is without doubt a machine. Devices that use minute amounts of energy in the form of electrical impulses in various processes, such as microprocessors and computers, come within the ordinary meaning of machine. Appliances for heating, such as stoves, cooktops, ovens and hot water services, are also included.

The components of a system that are separate units and also machinery will be plant, but any ducting, piping or wiring that may be connected to the machine or machines is generally not machinery. However, where the cost of wiring is negligible, such as in small domestic-size systems, the cost may be included in the cost of installation rather than being treated separately. The cost of wiring to connect a typical home security system, for example, may be treated as negligible.

Which can you use?

Effective life is discussed in general terms above.

For each of your depreciating assets, you may choose to use:

  • the effective life the Commissioner has determined for such assets, or
  • your own estimate of its effective life.

Generally, you may only use the Commissioner's determination that applied at the time you acquired (or entered into a contract to acquire) your depreciating asset.

The list that follows includes effective life determinations that came into force on 1 July 2004. You may generally only use these determinations for depreciating assets you acquire (or enter into a contract to acquire) on or after that date.

If the Commissioner has not determined the effective life of a depreciating asset at the time you acquired (or entered into a contract to acquire) it, you may make your own estimate of its effective life.

Working out the effective life yourself

Generally, the effective life of a depreciating asset is how long it can be used by any entity for a taxable purpose, or for the purpose of producing exempt income:

  • having regard to the wear and tear you reasonably expect from your expected circumstances of use
  • assuming reasonable levels of maintenance, and
  • having regard to the period within which it is likely to be scrapped, sold for no more than scrap value, or abandoned.

Effective life is expressed in years, including fractions of years. It is not rounded to the nearest whole year.

The sort of information you could use to make an estimate of effective life of an asset includes:

  • the physical life of the asset
  • engineering information
  • the manufacturer's specifications
  • your own past experience with similar assets
  • the past experience of other users of similar assets
  • the level of repairs and maintenance commonly adopted by users of the asset
  • retention periods, and
  • scrapping or abandonment practices.

You work out the effective life of a depreciating asset from the asset's start time - not from the time you first start claiming deductions.

Can I change an effective life I am using if the Commissioner has determined a new effective life?

No. You can only choose to recalculate a depreciating asset's effective life if the effective life you have been using is no longer accurate because of changed circumstances relating to the nature of the asset's use. A new determination of effective life by the Commissioner does not in itself change the nature of an asset's use and does not allow you to recalculate an asset's effective life.

Residential rental property items

Treatment as depreciating assets or capital works

In the following list, 'Own estimate' refers to the fact that there was no Commissioner's determination in effect, and you may make an estimate of the effective life in accordance with the principles set out above.

Table 1

Asset

Decline in value deduction

(div 40)

effective life (years)

Capital works deduction

(Div 43)

Assets acquired before 30 June 2004

Assets acquired from 1 July 2004

Assets, general:

air conditioning assets

See Table 3 below

cable trays

yes

ceiling fans

Own estimate

5

clocks, electric

13 1/3

10

cupboards, other than freestanding

yes

digital video display (DVD) players

Own estimate

5

door closers

Own estimate

10

door locks and latches (excluding electronic code pads)

yes

door stops, fixed

yes

door stops, freestanding

Own estimate

10

electrical assets (including conduits, distribution boards, power points, safety switches, switchboards, switches and wiring)

yes

escalators (machinery and moving parts)

See Table 2 below

facade, fixed

floor coverings, fixed (including cork, linoleum, parquetry, tiles and vinyl)

yes

floor coverings (removable without damage):

carpet

10

10

floating timber

Own estimate

15

linoleum

10

10

vinyl

10

10

furniture, freestanding

13 1/3

13 1/3

garbage bins

6 2/3

10

garbage chutes

yes

garbage compacting systems (excluding chutes)

6 2/3

6 2/3

generators

20

20

grease traps

yes

gym assets:

cardiovascular

Own estimate

5

resistance

Own estimate

10

hand dryers, electrical

10

10

hand rails

yes

heaters:

fixed:

ducts, pipes, vents and

wiring

yes

electric

10

15

fire places (including wood

heaters)

yes

gas:

ducted central heating unit

Own estimate

20

other

Own estimate

15

freestanding

10

15

hooks, robe

yes

hot water systems (excluding piping):

electric

20

12

gas

20

12

solar

20

15

hot water system piping

yes

insulation

yes

intercom system assets

Own estimate

10

lift wells

yes

lifts (including hydraulic and traction lifts)

See Table 2 below

lights:

fittings (excluding hardwired)

20

5

fittings, hardwired

yes

freestanding

Own estimate

5

shades, removable

Own estimate

5

linen

Own estimate

5

master antenna television (MATV) assets:

amplifiers

Own estimate

10

modulators

Own estimate

10

power sources

Own estimate

10

master antenna television (MATV) assets (excluding amplifiers, modulators and power sources)

yes

mirrors, fixed

yes

mirrors, freestanding

Own estimate

15

radios

10

10

ramps

yes

rugs

Own estimate

7

safes, fixed

yes

sanitary fixtures, fixed (including soap dispensers)

yes

satellite dishes

yes

screens

yes

shelving, other than freestanding

yes

shutters

signs, fixed

yes

skylights

yes

solar powered generating system assets

Own estimate

20

stereo systems (incorporating amplifiers, cassette players, compact disc players, radios and speakers)

Own estimate

7

surround sound systems (incorporating audio-video receivers and speakers)

Own estimate

10

telecommunications assets:

cordless phones

Own estimate

4

distribution frames

yes

PABX computerised assets

20

10

telephone hand sets

Own estimate

10

television antennas, fixed

yes

television antennas, freestanding

Own estimate

5

television sets

10

10

vacuum cleaners:

ducted:

hoses

Own estimate

10

motors

Own estimate

10

wands

Own estimate

10

portable

10

10

vacuum cleaners, ducted (excluding hoses, motors and wands)

yes

ventilation ducting and vents

yes

ventilation fans

Own estimate

20

video cassette recorder systems (VCR)

Own estimate

5

water pumps

20

20

water tanks

yes

window awnings, insect screens, louvres, pelmets and tracks

yes

window blinds, internal

20

10

window curtains

6 2/3

6

window shutters, automatic:

controls

Own estimate

10

motors

Own estimate

10

window shutters, automatic (excluding controls and motors)

yes

Bathroom assets:

accessories, fixed (including mirrors, rails, soap holders and toilet roll holders)

yes

accessories, freestanding (including shower caddies, soap holders, toilet brushes)

Own estimate

5

exhaust fans (including light/heating)

Own estimate

10

fixtures (including baths, bidets, tap ware, toilets, vanity units and wash basins)

yes

heated towel rails, electric

Own estimate

10

shower assets (including doors, rods, screens and trays)

yes

shower curtains (excluding curtain rods and screens)

Own estimate

2

spa baths (excluding pumps)

yes

spa bath pumps

20

20

Bedroom assets:

wardrobes, other than freestanding (incorporating doors, fixed fittings and mirrors)

yes

Fire control assets:

alarms:

heat

20

6

smoke

20

6

detection and alarm systems:

alarm bells

20

12

cabling and reticulation

yes

detectors (including

addressable manual call

points, heat, multi type and

smoke)

Own estimate

20

fire indicator panels

20

12

manual call points

(non-addressable)

yes

doors, fire and separation

yes

emergency warning and intercommunication systems (EWIS):

master emergency control

panels

20

12

speakers

20

12

strobe lights

20

12

warden intercom phone

20

12

extinguishers

13 1/3

15

hose cabinet and reels (excluding hoses and nozzles)

yes

hoses and nozzles

20

10

hydrant boosters (excluding pumps)

yes

hydrants

yes

lights, exit and emergency

yes

pumps (including diesel and electric)

20

25

sprinkler systems (excluding pumps)

yes

stair pressurisation assets:

A C variable speed drives

Own estimate

10

pressurisation and extraction

fans

Own estimate

25

sensors

Own estimate

10

water piping

yes

water tanks

yes

Kitchen assets:

cook tops

Own estimate

12

crockery

Own estimate

5

cutlery

Own estimate

5

dishwashers

Own estimate

10

fixtures (including bench tops, cupboards, sinks, tap ware and tiles)

yes

freezers

13 1/3

12

garbage disposal units

6 2/3

10

microwave ovens

6 2/3

10

ovens

Own estimate

12

range hoods

Own estimate

12

refrigerators

13 1/3

12

stoves

20

12

water filters, electrical

Own estimate

15

water filters, fixed (attached to plumbing)

yes

Laundry assets:

clothes dryers

Own estimate

10

fixtures (including tap ware, tiles and tubs)

yes

ironing boards, freestanding

Own estimate

7

ironing boards, other than freestanding

yes

irons

Own estimate

5

washing machines

6 2/3

10

Outdoor assets:

automatic garage doors:

controls

Own estimate

5

motors

Own estimate

10

automatic garage doors (excluding controls and motors)

yes

barbecues:

fixed:

yes

sliding trays and cookers

Own estimate

10

freestanding

Own estimate

5

boat sheds

yes

bollards, fixed

yes

car parks, sealed

yes

carports

yes

clotheslines

yes

driveways, sealed

yes

fencing

floor carpet (including artificial grass and matting)

Own estimate

5

furniture, freestanding

13 1/3

5

furniture, other than freestanding

yes

garage doors (excluding motors and controls)

yes

garden awnings and shade structures, fixed

yes

gardening watering installations:

control panels

Own estimate

5

pumps

20

5

timing devices

Own estimate

5

gardening watering installations (excluding control panels, pumps and timing devices)

yes

garden lights, fixed

yes

garden lights, solar

Own estimate

8

garden sheds, freestanding

Own estimate

15

garden sheds, other than freestanding

yes

gates, electrical:

controls

Own estimate

5

motors

Own estimate

10

gates (excluding electrical controls and motors)

yes

jetties (including boat sheds and pontoons)

yes

letter boxes

yes

operable pergola louvres:

controls

Own estimate

15

motors

Own estimate

15

operable pergola louvres (excluding controls and motors)

yes

paths

yes

retaining walls

yes

saunas (excluding heating assets)

yes

sauna heating assets

13 1/3

15

screens, fixed (including glass screens)

yes

septic tanks

yes

sewage treatment assets:

controls

Own estimate

8

motors

Own estimate

8

sewage treatment assets (excluding controls and motors)

yes

spas :

fixed:

yes

chlorinators

13 1/3

12

filtration (including pumps)

13 1/3

12

heaters (electric or gas)

13 1/3

15

freestanding (incorporating

blowers, controls, filters,

heaters and pumps)

20

17

swimming pool assets:

chlorinators

13 1/3

12

cleaning

13 1/3

7

filtration (including pumps)

13 1/3

12

heaters:

electric

13 1/3

15

gas

13 1/3

15

solar

13 1/3

20

swimming pools

yes

tennis court assets:

cleaners

Own estimate

3

drag brooms

Own estimate

3

nets

Own estimate

5

rollers

Own estimate

3

umpire chairs

Own estimate

15

tennis court assets, fixed (including fences, lights, posts and surfaces)

yes

Security and monitoring assets:

access control systems:

code pads

Own estimate

5

door controllers

Own estimate

5

readers:

proximity

Own estimate

7

swipe card

Own estimate

3

closed circuit television systems:

cameras

6 2/3

4

monitors

6 2/3

4

recorders:

digital

Own estimate

4

time lapse

Own estimate

2

switching units (including

multiplexes)

Own estimate

5

doors and screens

yes

security systems:

code pads

6 2/3

5

control panels

6 2/3

5

detectors (including glass, passive infra-red, and vibration)

6 2/3

5

global system for mobiles

(GSM) units

6 2/3

5

noise makers (including bells

and sirens)

6 2/3

5

Table 2

Asset

Decline in value deduction

(div 40)

effective life (years)

Capital works deduction

(Div 43)

Assets acquired before 1 January 2003

Assets acquired from 1 January 2003

Escalators (machinery and moving parts)

16 2/3

20

Lifts:

electric

16 2/3

30

hydraulic

20

30

Table 3

Asset

Decline in value deduction

(div 40)

effective life (years)

Capital works deduction

(Div 43)

Assets acquired before 1 July 2003

Assets acquired from 1 July 2003

Air conditioning:

air conditioning assets (excluding ducting, pipes and vents):

air handling units

20

chillers:

absorption

25

centrifugal

20

volumetrics (including

reciprocating, rotary, screw,

scroll):

air-cooled

15

water-cooled

20

condensing sets

15

cooling towers

15

damper motors (including variable air volume box controller)

10

fan coil units (connected to condensing set)

15

mini split systems up to 20kW (including ceiling, floor and high wall split system)

10

packaged air conditioning units

15

pumps

20

room units

10

air conditioning ducts, pipes and vents

yes

air conditioning plant:

central type (including ducting and vents)

13 1/3

structural alterations and additions associated with the installation of this plant which forms an integral part of it

100

room units

10

solar energy powered

13 1/3

More information

To get any publication referred to in this book:

  • visit our website at www.ato.gov.au
  • phone our Publications Distribution Service on 1300 720 092 for the cost of a local call
  • visit a Tax Office shopfront, or
  • phone us on 13 28 61.

Publications referred to in this book include:

Last Modified: Wednesday, 7 July 2004




Copyright

Commonwealth of Australia

This work is copyright. You may download, display, print and reproduce this material in unaltered form only (retaining this notice) for your personal, non-commercial use or use within your organisation. Apart from any use as permitted under the Copyright Act 1968, all other rights are reserved.

Requests for further authorisation should be directed to the Commonwealth Copyright Administration, Copyright Law Branch, Attorney-General's Department, Robert Garran Offices, National Circuit, BARTON ACT 2600 or posted at http://www.ag.gov.au/cca.



ATO references:
NO NAT 1729

Rental properties 2004
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