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moreDuring these uncertain times of COVID-19, some clients have used the time to assess their finances and plans for the future.
Some have looked at adding to their rental property portfolio, some are purchasing their first rental property, and some have had a property in the past, and have decided now is the time to own a rental property again.
For those that have previously owned a residential rental property, there have been some changes to taxation law over the past few years in this area. Following is a summary of the changes:
- Claims for travelling to your rental property to carry out repairs & improvements, collect rent, inspections, preparing for the property for a new tenant have been restricted.
- Claims for depreciation of assets purchased at time of purchasing the residential property are no longer allowed.
- Claims for depreciation of second-hand assets purchased and installed at a later time are also no longer allowed.
There are exceptions to the above rules regarding depreciation, what is considered “second hand” what is considered “new residential premises” assets used for other taxable purposes (such as solar panels that derive income from electricity generation) and others nuances in the rules that require more explanation for the general overview given in this article.
If you need specific advice regarding your individual circumstances, please contact your local RSM office.
The following are answers to some questions that are frequently asked and common issues.
Receipts
Question: I don’t have a receipt or invoice for the payment, can I still claim it?
Answer: Keep receipts, invoices, records - one of the main reasons for your deduction being disallowed – not keeping adequate records. Go back to the seller of the goods or services and obtain a copy of records.
Repairs
Issue 1.
We purchased the property and shortly afterwards made some repairs the property.
Consequences: Initial repairs just after purchase are generally not classified as repairs for taxation purposes. If the repairs in question were needed at the time the property was acquired, the costs form part of acquiring the property and a deduction for repairing the property will not be immediately claimable.
Please contact us prior to proceeding, and we can help you structure the works required to give the best possible taxation outcome.
Issue 2.
We’ve replaced the kitchen and want to claim it as repairs and maintenance.
Consequences: Replacing an entire kitchen will be classified as an improvement, not repairs and maintenance.
Depreciation
Question: Is a quantity surveyors report still a good idea?
Answer: Yes, definitely. You can still claim Division 43 capital allowance deductions – deductions relating to costs of building the residential premises.
Declaring Income
Make sure you report your income earned through online platforms such as Airbnb. The ATO gets information directly from the online providers and will match the information declared in your personal tax return.
Rent must be declared by the legal owners of the property, not who registers for the platform.
Finance, Loans, Interest
Issue 1.
I’ve used private savings to pay a deposit on the purchase contract, and now want to get that reimbursed on/after settlement.
Consequences: The reimbursement of the deposit from the loan funds on/after settlement is classified as a private payment, and that part of the loan drawdown will be non-deductible.
Tip: Obtain short-term finance instead or draw down on another loan (making it a mixed loan.)
Issue 2.
The rental property was purchased in joint names, but the loan is in one name only.
Consequences: The deductible interest on the loan must be split in line with the legal ownership of the property.
Issue 3.
The bank required me to get Lenders Mortgage Insurance. Can I claim it in my tax return?
Answer: Yes, the insurance forms part of the borrowing costs of the loan, and the deduction is spread over 5 years.
Issue 4.
The rental property is in one name only, but the loan is in joint names (where one of the names is the property owner).
Consequences: The legal owner of the property can claim the full amount of the interest on the loan.
Question 5.
Do I claim my whole loan repayments when I am making Principal and Interest repayments?
Answer: Only the interest portion of the repayment is tax deductible. The principal portion of the repayment is not tax-deductible.
Issue 6.
I have made extra repayments on the loan, and now want to draw those funds out of the loan so I can start claiming the interest again.
Consequences: The deductibility of the interest on the redrawn loan funds depends on what those funds are used for. If the purpose is not tax-deductible (e.g. to go on a holiday), then the interest will not be tax-deductible.
Personal Use
Issue 1.
We stayed at the property during the year and used it like a holiday home.
Consequences: The time that you stayed at the property will be a private use, and that portion of expenses will not be tax-deductible.
The time that you “block out” availability of the property and make it not genuinely available for rent will have the same effect.
What's the best advice? The answers to these questions and issues mentioned above can change based on your individual circumstances. In many cases they can be avoided by you obtaining advice prior to the event occurring.
How can RSM help?
If you have any questions regarding rental properties or any of the topics discussed above, please get in contact with your local RSM office.