The ATO announced in June that they will be making returns with rental properties a focus area over the coming months as they receive more information to conduct data matching exercises; so what should you keep in mind when reporting your rental property income and expenses in your return?

Timing of income or expenses

• If you use a rental agent, it’s important to understand that the ATO deems the rent to be taxable to you when it is paid to the agent, even if the agent doesn’t remit the funds to you until the subsequent month. Therefore, you will normally notice a discrepancy between the cash received from your agent during a financial year and the annual statement they issue you.
• Expenses for your rental property will be deductible to the extent that they relate to the period your property is rented, or ‘genuinely available for rent’. Generally, ‘genuinely available for rent’ means you have begun advertising the property for rent, however if the ATO deems you are placing unreasonable restrictions on the prospective lessees (e.g. higher than market rent, requiring references for short term holiday stays), they may deem that you have not made the property ‘genuinely available’.

A notable exception to this rule is for some certain property repairs. If the repairs relate to damage that occurred whilst the property was tenanted (such as from a natural disaster, or by the tenants), then a deduction can be claimed even if the property is not available for rent at the time you incur the repair costs. If the property was damaged in a natural disaster or if there are substantial building defects and you are unable to rent it out, other costs may be deductible as well under the ‘exceptional circumstances rule’.

Repairs

• The distinction between repair costs (outright deductible) and improvements or replacements (deductible over the course of several years) is often a grey area. Some considerations to determine whether works are repairs or improvements are:
• how substantial the works are;
• whether the works replace part or all of a structure (e.g. a section of the gutters as opposed to all of the gutters);
• whether the repair or replacement is a ‘like for like’ from that which it’s replacing (for example, replacing a wooden fence with a steel fence would likely be considered an improvement rather than a repair);
• whether the works improves the income earning ability or expected life of the property.
• If you have received an insurance payout to cover the cost of the repairs, you must report this as income, even if the income is not received in the same financial year in which you incurred the costs.
• If you have undertaken substantial repairs or renovations to your property, you may benefit from obtaining a tax depreciation report from a quantity surveyor to maximise your deductions – keep in mind the fee for the preparation of their report can also be tax deductible!
• It’s worth noting that replacements of depreciable assets (such as appliances or furniture) will never be outright deductible unless the cost of the replacement is less than $300.

What you can’t claim 

• Even if you purchase or sell an investment property that is tenanted, costs that relate to the acquisition or disposal of the property (such as conveyancing fees, transfer duty, buyer’s agent fees, or advertising) will not be outright deductible, and will instead be a part of the property’s cost base when the capital gain is calculated.
• As of 1 July 2017, you generally can’t claim a deduction for the decline in value or furniture, appliances or other depreciating assets if they were included in the property purchase price, or if the furniture was previously used by you in your home.
• Unfortunately, you can’t claim a deduction for costs you incur to travel to your rental property to inspect, conduct repairs or maintenance, or collect rent.
• You cannot claim a deduction for expenses that relate to the portion of the year that you used a holiday rental personally. For example, if you use your beach house for 5 weeks of the year, approximately 10% of expenditure like your insurance, rates, depreciation or interest will be non-deductible.

So, what can you claim?

• rental agent fees, including advertising costs, letting fees, and ongoing management fees.
• interest and bank fees on loans where the funds were used for the property purchase. Note that loan establishment costs are not outright deductible but can be claimed over several years.
• rates, land taxes, utilities, and strata fees.
• garden maintenance or pest control.
• building, contents, public liability, and landlord’s insurance.
• certain legal expenses.
• secretarial, bookkeeping, and accounting fees.
• telephone, stationery and postage costs.
• security costs.

With so much to consider when completing your rental schedule, it’s worth discussing any queries or concerns with your Hall Chadwick QLD advisor to ensure your return is ‘safe as houses’!