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The checklist below is a tax deduction guide for property investors for expense claims against the income (or potential income) from the renting of property.

This guide provides an outline of what can be claimed on tax for an investment property which is earning income.

There are broadly two types of rental tax deduction:

deductions available under specific tax provisions – such as Capital Allowances; and
general deductions which require that there be a connection between the expense and the earning of rental income, adjusted to exclude any capital, private or non-deductible portions

· Arising from 2017 budget measures announcements, the Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 approved by parliament provides the following amendments:

· Travel expenses not deductible

· Travel expenditure incurred in earning income from residential premises is not deductible and cannot form part of the cost base of the property for CGT purposes.

· This applies from 1 July 2017 for the 2017-18 and following tax years.

Rental Property Depreciation deductions limited to "new”

Depreciation deductions to be no longer available for ‘previously used’ depreciating assets used in earning income from residential premises used for residential accommodation. This applies for assets acquired from 9 May 2017.

An asset is ‘previously used’ for an entity if:

the entity is not the first entity that used the asset or installed the asset ready for use (within the meaning of Division 40) other than as trading stock;
the asset is used or installed ready for use during any income year in premises that are, at that time, a residence of the entity; or
the asset is used or installed ready for use during any income year for a purpose that is not a taxable purpose, other than incidental or occasional use.

Exclusions

Exclusions are for corporate tax entities, superannuation plans (other than SMSFs), public unit trusts, managed investment trusts and unit trusts or partnerships of any of the above entities

CGT cost base

Undeducted depreciation is generally recognised for CGT purposes, which means on disposal a capital loss on depreciable assets may be recognised and used to offset against any capital gain.

Thus for the purchase of a ‘second hand property’, a depreciation schedule based on the valuation of depreciable assets which form part of the purchase price will no longer be of any benefit, because any allocation of value will be a subtraction from the value of the land and buildings component.

Any resulting capital gain or loss on subsequent disposal will be matched and cancelled by a corresponding loss or gain on the asset remaining value. There may however be some timing advantage if depreciable assets are sold or scrapped before the main property is sold.

Foreign owners vacancy fee

An annual vacancy fee applies to foreign owners of residential real estate where residential property is not occupied or genuinely available on the rental market for at least 6 months in a 12 month period.

The fee applies from 7:30PM (AEST) on 9 May 2017. The fee is that which was payable at the time of the foreign investment application. See Foreign Acquisitions and Takeovers Fees Imposition Amendment (Vacancy Fees) Bill 2017

The Australian Tax Office is administering the charge

Rental expense deductions

Deductibility of expenses broadly depends on whether there is a required connection between the expense, and a profit-making purpose, in this case rental. Situations where a rental property is used for part of the year for private purposes generally require that claimable expenses are apportioned to the period(s) for which the property was rented, or genuinely available for rent.

The circumstances of holiday houses in this regard are discussed here.

Keep in mind "incurred”

Allowable expenses can be claimed in the tax year in which they are paid or incurred. To comply with record-keeping requirements, you should keep a date-based record of expenses. If an expense is incurred before it is paid, the earlier time will be the relevant time for a tax deduction. In practice this means that an expense can be claimed before the money has left your pocket.

Paid

Your time and date of payment for tax purposes can be determined from

the transaction date of an electronic payment
the transaction date of a credit card payment
in other cases – as a practical matter – the date of the receipt.

Incurred

For tax purposes, some expenses can be claimed before actual payment is made, provided the expense has been legally "incurred”.

"Incurred” essentially means that the supplier has a legal right to be paid, usually crystallised by the issue and receipt of an invoice.

An example – annual local government rates notice, which is due by a fixed date. Even if unpaid on the fixed date, the expense is tax deductible in the year received because the debt to the council is fixed, and they have the right to collect payment. The expense is clearly "incurred”.
By contrast an insurance renewal will not usually become a fixed expense until the premium is paid, with the payment signifying an acceptance of the offer to renew. (see Tax Ruling TR 97/7)

Tip: In practice, rental expenses are often collated on a cash basis, which means expenses which have been legally incurred but not actually paid by the end of the financial year can be easily overlooked as a claim. Reviewing and comparing the expense schedules from the past two years can help you pick up anything missing from the current year’s expense line-up. See also the checklist below.

Prepayment of rental expenses

Pre-paying expenses can help to maximise tax deductions within a financial year, however there are limitations.

Generally a full deduction is available if the service period of the expense (e.g. insurance) is no more than 12 months or under $1,000 excluding GST.

Apportionment of expense claims

Expense claims are required to be adjusted (i.e. reduced) to the extent that any part relates to non-rental activities or income, and usually in direct proportion to the ownership interests of the co-owner investors.

To be claimable, expenses must relate to a period that the property was rented, or genuinely made available for rent. Expenses which occur before-hand, and afterwards (with some limited exceptions⁽²⁾) are not allowable.

⁽²⁾Repairs which relate to an earlier period of rental, for a property which is no longer rented, and which are completed before the end of the same financial year are allowable.

Where a property is not rented for its commercial value, or if the property is not available for rental for a period, expenses claimed need to be appropriately apportioned, with losses not generally allowable. Examples: