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Louise Symonds is a Certified Public Accountant
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You can claim a deduction for expenses you incur for the period your property is rented. You cannot claim expenses of a capital or private nature.

There may be situations where you need to apportion between deductible and non-deductible expenses. Examples include:

  • If the property is not available for rent for the full year, you may need to apportion some of the expenses on a time basis.
  • If only part of the 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.
  • If you combine travel to inspect or maintain your rental property with travel for private purposes, you may need to apportion your travel expenses.

Expenses that you may be able to claim include:

advertising for tenants body corporate fees
bank charges cleaning
electricity and gas gardening and lawn mowing
in-house audio/video service charges insurance
interest on loans land tax
legal expenses lease costs
pest control property agent’s fees and commission
quantity surveyor’s fees repairs and maintenance
secretarial and bookkeeping fees security patrol fees
servicing costs, eg water heater stationery and postage
telephone calls and rental tax-related expenses
travel and car expenses water charges

You can claim a deduction for these expenses only if you actually incurred them.

Borrowing expenses, decline in value of depreciating assets and capital works deductions may be deducted over a number of income years.

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
  • 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. 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.


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 major repairs and are therefore not deductible.

If the body corporate fees and charges you incur are for things like the maintenance of gardens, incidental 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.


Borrowing expenses

These are expenses directly incurred in taking out a loan for the property. They include loan establishment fees, title search fees, costs for preparing and filing mortgage documents, stamp duty charged on registration of a mortgage and valuation fees if the lender required a valuation be obtained as a condition of them lending you the money. Interest expenses are not borrowing expenses.

If the total cost of these items is over $100, the deduction is spread over 5 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.


Deduction for decline in value of depreciating assets

From 1 July 2001, the uniform capital allowance system (UCA) applies to most depreciating assets, including those acquired before that date. The UCA is a set of general rules that applies across a variety of depreciating assets and certain other capital expenditure.

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


Types of Depreciating Assets

 Asset
Effective life
11/6/92
Effective life
1/1/01
 Blind, Venetian 20 20
 Carpets 10

10

 Curtains and drapes 7 6 2/3
 Electric bed 15 13 1/3
 Electric clock 15 13 1/3
 Electric heater 10 10
 Furniture and fittings 15 13 1/3
 Garbage unit, compacting 7 6 2/3
 Hot water service 20 20
 Lawn mowers - motor 7 6 2/3
 Lawn mowers - self-propelled 5 5
 Linoleum & similar floor covering 10

10

 Microwave oven 7 6 2/3
 Radio 10 10
 Refrigerator 15 13 1/3
 Stove 20 20
 Television set 10 10
 Vacuum cleaner 7 6 2/3
 Washing machine 7 6 2/3

Some items found in a rental property are regarded as part of the setting for the rent producing activity and do not qualify as separate assets in their own right. However, a capital works deduction may be allowed for some of these items. Examples of items that are not treated as separate assets in their own right are:

  • built-in kitchen cupboards clothes hoists
  • door and window fittings driveways and paths
  • electrical wiring fencing and retaining walls
  • floor and wall tiles garages and non-portable sheds
  • in-ground swimming pools, saunas,spas plumbing and gas fittings
  • reticulation piping roller door shutters
  • roof top ventilators and skylights security doors and screens
  • sinks, tubs and baths, and wash basins and toilet bowls.


Replacements

It has been the longstanding practice to treat the initial purchase of certain assets as not depreciable but to allow claims for 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, linen.

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 - including rental income.


Low-value pooling

Under the UCA, you can allocate low-cost assets and low-value assets to a low-value pool. A low-cost asset is a depreciating asset whose cost as at the end of the year in which it is first used, or installed ready for use, for any purpose is less than $1000.

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 for the income year is worked out at a rate of 18.75%.


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 effective means of establishing your cost is to have the separate value of depreciating assets, calculated on an arm’s length basis, 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, then you may be required to demonstrate the basis of your valuation.


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 take out a loan to purchase land on which to build a rental property, the interest on the loan will be deductible from the time you took it out. However, if your intention changes and the property is not used to produce rent or other income, you cannot claim the interest after your intention changes.

You may also claim interest charged on loans taken out:

  • to purchase depreciating assets, or
  • for renovations, or
  • for repairs to the property required due to you using it to produce rental income.

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 divided into deductible and non-deductible parts according to the amounts borrowed for the rental property and for private purposes.

If a loan is taken out to purchase a rental property and you start to use the property for private purposes, you cannot claim any interest expenses you incur after that time.

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.


Legal expenses

Some legal expenses incurred in producing your rental income are deductible - such as 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
  • 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.


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 fallen 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)
  • improvements, renovations, extensions and alterations
  • initial repairs - for example, in remedying defects, damage or deterioration that existed at the date you acquired the property.

Repairs to a rental property will generally be deductible if:

  • the property continues to be rented on an ongoing basis; or
  • the property remains available for rental but there is a short period when the property is unoccupied.

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


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.

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

  • a building or an extension - for example, adding a room or garage;
  • alterations - such as removing or adding an internal wall; or
  • improvements to the property - for example, erecting a pergola, patio or carport.

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


Amount of deduction

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

 From 18/7/85 Any building intended to be used to produce income To 15/9/87 4%
From 15/9/87 2.5%
 From 27/2/92 Structural improvements 2.5%
 From 30/6/97 Any capital works used to produce income 2.5%

Note: For buildings used to provide short-term accommodation for travellers that commenced construction after 26/2/92, the rate of deduction was again increased to 4%.

Examples of structural improvements include sealed driveways, retaining walls and fences.


Construction expenditure that can be claimed

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 buildingpayments 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.


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 above. To be able to claim the deduction, they 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.


Prepaid expenses

If you prepay a rental property expense - such as insurance or interest on money borrowed your deduction may have to be spread over 2 or more years under the prepayment rule if the expense is $1000 or more.


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.


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.

 
 
 
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