Tax Tips

The Australian Taxation Office is targeting Landlords in their crackdown on expenses being claimed when they should be capitalised, so here are a few tips:

Income…

…is rental paid – of course. But do you know that other money paid back to the Landlord is also income. That means that if the tenant pays for that broken window, you can claim the cost of repairing the window, but you also have to include as income the amount the tenant pays you to cover the cost of the repair.

Deductions

The main ones are:

• Cleaning, gardening and lawn mowing
• Insurance, property, landlord indemnity, mortgage
• Rates & taxes including land tax, water rates as well as council rates
• Repairs and maintenance to the property eg fencing, painting, windows etc
• Travel for two trips per year to inspect the property
• Strata fees if the property is part of a body corporate
• Commission and letting fees if you go through a property agent
• Interest on the mortgage or home loan for the money you borrowed to pay for this property
• Depreciation of furniture and fittings
• Building allowance (if built after September 1985)
• Borrowing costs, $100 immediate deduction, >$100 over 5 years or period of the loan (if less)
• Stamp duty on purchase in the Australian Capital Territory

Repairs and Maintenance

Trap: Purchasing a run-down property at a great price and doing it up

Major repairs done during the first twelve months can be viewed as a Capital Cost, ie the cost is added to the purchase of the property, and you recoup the cost when you sell.

What are the major repairs? To name a few:

• Repainting the whole house or building inside or outside
• Replacing the roof
• Replacing the floorboards throughout
• Refitting the bathroom amenities
• Refitting the kitchen  

Trick: Letting the property out as is and doing the repairs over a few years. To be claimable the property must be rented or be available for rent, ie advertised as being available for rent.

• Painting a room or two at a time after ten to twelve months have elapsed, so that it is reasonable to expect that some tenant damage has been done (eg dirty walls, marks on walls, ceilings etc)
• Repainting the outside after one or two years (eg before the next rent review is up)
• Repairs to the roof, one section at a time
• Replacing sections of walls or cupboards that have been damaged or broken
• Replacing sections of guttering, not the whole thing

Trap: If you do the work yourself, instead of hiring someone, you cannot claim a $ cost for your time as an expense (unless of course you include it as income as well).

Trap: Repairing with a different material – to be a repair it must be the same or similar material

• Iron roof replaced with an iron roof or some similar material
• Floorboards replaced with floorboards is a repair. Replaced with a cement floor is a capital cost and cannot be claimed as an expense
• Replacing the whole roof, putting up a new fence, landscaping the garden – these are all capital items and must be added to the purchase price when you sell the property
• Refitting the kitchen/bathroom will always be capital items except for the stove, waste disposal unit, dishwasher, moveable cupboards, lights, air conditioning unit etc. These are plant and can be depreciated  

Trick: All depreciable items costing less than $1,000 ie stove, clothes dryer, air conditioner etc can be put into what is called a low value pool and written off at 37.5% for a whole year, and 18.75% for the first part year.

Depreciation expense is then $3,199.00 x 18.75% = $600.00 for the first year, and $2,599.00 ($3,199 - $600) x 37.5% = $975.00 for the second year and so on.

Anything costing less than $300 is a deductible expense in the year it is purchased.

Capital Items

Trap: Major items are not deductible or depreciable at the time of the expense

Some of these are:

• Electrical wiring, plumbing and gas fittings
• New kitchen cupboards (built-in), security doors that are permanently fixed to the building
• New fence, garage, non-portable shed
• New room
• Floor and wall tiles, wash basin and toilet bowls
• New driveway and paths
• New swimming pool
• Retaining wall
• New pergola

Trick: These items can be deducted as a capital allowance write-off at 2.5% per year of the total cost of the improvements.

Capital allowance write-off

If a property has been built after September 1985 there is a capital allowance deduction available depending on when it was built and the purpose for which it was built.

Some examples are:

• Residential block of flats built in 1989 - 2.5% of total building cost per year
• Industrial building built in 1986 - 4.0% of total building cost per year
• Improvements to office block built in 1999 - 2.5% of total building cost per year
• Residential house available built in 1995 - 2.5% of total building cost per for rent year

Loan Expense

Trap: Repayments on the loan are not deductible. Interest is deductible.

Trick: The interest can be paid 12 months in advance under certain conditions

Trap: Redraw facilities on loans used to purchase properties

If the redraw is not related to the property and is not for any other income producing purpose (eg to buy another property or shares etc) the interest can only be claimed for the percentage which still relates to the original purchase.

Trap: Paying off the rental property and using it as security for a loan to build/buy a new home for yourself. The interest on this loan is not deductible as the money was used for a private purpose, your private residence .

Private Use

Trap: Renting out a family holiday house for 10 weeks over the holiday season. The expenses for this property must be apportioned between the weeks available for rent and the remainder ( Eg 10/52 x expense is deductible, the rest is not.)

Trap: Subletting your building is another trap. Only the proportion of expense calculated by the percentage of floor space sublet can be claimed as a deduction against rental income.

Capital Gains Tax issues: ownership

Trap: Joint owners are considered to be 50/50 and can only claim 50% of the expenses each, even if one partner’s contribution to the expenses was 80%.

Trick: The property title needs to state that the owners are tenants in common, not joint owners. Only under special circumstances can a partnership agreement alter the fact that joint owners can only claim 50% each.

Trap: Buying an investment property to rent for several years, then making major repairs before using as your private residence. These expenses cannot be claimed as a rental deduction. Remember, the property must be rented or available for rental to claim deductions, and you must be able to show that the repairs are required as a result of the tenancy.

Trap: Depreciation of items cannot be increased to maximise deductions while it is still let.

When you sell the same property after say, living in it for ten years and letting it for ten years, capital gain on sale is partly taxable.

• Purchase $200,000
• Rent for 10 years
• Live in for 10 years
• Sell for $500,000  

Capital gain is $500,000 less $200,000 = $300,000

50% (ie 10 years as rental/20 years total ownership) of $300,000 = $ 150,000

Less 50% capital gain discount $ 75,000

Taxable capital gain $ 75,000

Result: $ 300,000

Less tax on $75,000 @ say 48.5% (incl Medicare) $36,375

Gives you a net gain of $263,625

Travel

As a landlord, you are entitled to claim 2 trips per year to inspect your property.

Trick: If you combine a trip to inspect with private business, the cost of the trip needs to be apportioned in a reasonable manner. If you mainly go to look over the property and visit a friend while there, it could mainly be a rental expense.

Trap: But if you go to visit your friend and look over the property, then it is mainly personal and needs to be apportioned accordingly.

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Disclaimer

These are a few traps and tricks to make you aware that there are many areas to consider before you become a landlord.

Maxim Chartered Accountants have provided this as a general guide only and advise you to contact your accountant or tax advisor before you enter into a binding contract.