Charting the best course through new tax rules for rental properties

Owning an investment property is a whole new tax ball game.   For starters, once you have an investment property you will need to register for an Australian business number.

If you want to claim input tax credits on the expenses you incur in running the investment, you will have to register for the GST as well.

If you earn more than $999 a year in investment income, you will be drawn into the pay-as-you-go tax net, meaning you will have to pay instalments similar to the old provisional tax system every quarter.

If you make PAYG instalments, you will need to lodge an instalment activity statement.

And if you were previously a salary and wage earner only, this can mean a big step up in paperwork.

On the good side, many costs incurred in running a rental property are deductible, as outlined in the table.

However, in some cases only a portion of the deductions can be claimed.  Some examples are:

• Where the property is not available for the full year, claims need to be apportioned on a time basis the period the property was available for let.
• Where only part of the property is let, deductions must be apportioned according to floor space the rooms exclusively for use of the tenant and a portion of the common living areas (including garage and outdoor space).
• Where the property is rented for a non-commercial rent for example, to a relative or friend deductions will be allowed only up to the amount of rent paid by the tenant.

Many fixtures and fittings in a rental property can be depreciated.  Such items include carpets, curtains, furniture, ovens and clothes dryers.

To be depreciable, the items must be installed and ready for use by the tenants.

The Australian Taxation Office's individual compliance assistant commissioner, Tony Goddard, says it is important to be able to identify expenditure correctly, in order to get claims right when it comes to tax time.

"It can be a complex area, and unless people have fairly good records it can be difficult," Goddard says.

He says common errors made on returns include claiming capital improvements as repairs, depreciating capital items as plant, and overstating interest deductions.

The ATO has a publication called Rental Properties, which outlines what can be claimed and when. Another useful publication is Guide to Depreciation, which details which items are depreciable and over what time-span.

Records relating to an investment property must be kept for five years from the date you lodge your income tax return.

Last but not least, when you sell an investment property you will have to pay capital gains tax.

If you hold the property in your own name, you will be eligible for the 50 per cent capital gains tax discount.

If you hold the property through a company it receives no discount and you will have to pay capital gains tax on the full profit made.

For capital gains tax purposes, all records need to be kept for five years from the date you sell the property.

Things you may be able to claim:

• advertising for tenants
• body corporate fees
• cleaning
• council rates
• insurance (building, contents, public liability)
• interest on loans
• land tax
• legal expense
• lease costs
• pest control
• property agents fees and commissions
• quantity surveyor's fees
• repairs and maintenance
• bookkeeping fees
• stationery and postage
• water charges

Things you cannot claim:

• Stamp duty on conveyance of property
• Expenses not incurred by you (such as electricity paid by tenants)
• Expenses related to your own usage of the property