DEDUCTIONS - Eclipse Accounting · 2017-01-22 · Volume - 1 Rental Property Deductions TABLE OF...

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VOLUME ONE

IF PRINTING THIS EBOOK, USE THE ‘FIT TO PRINT’ SETTING

RENTAL PROPERTY DEDUCTIONS

FOR INVESTORSPROPERTY & TAX GUIDE

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01 Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

02 Bank charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

03 Borrowing expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

04 Capital works (Building Depreciation) . . . . . . . . . 3

05 Capital Allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

06 Council rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

07 Gardening and lawn mowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

08 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

09 Interest on borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

10 Land tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

11 Legal expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

12 Owner’s body corporation fees . . . . . . . . . . . . . . . . . . . . . . . . 10

13 Pest control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

14 Property agent fees or commissions . . . . . . . . . . . . . 11

15 Repairs and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Initial repair rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Repairs at the end of the tenancy . . . . . . . . . . . . . . . . . . 13

16 Stationery & Postage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

17 Tax-related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

18 Telephone expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

19 Travel expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

20 Water charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Expenses you cannot claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

About Us . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

This E-book summarises the most common expenses that may be claimed in your tax return so as to minimise your tax. Due to the fact that everyone’s situation is different, property owners should always seek their own tax advice from qualified and experienced tax agents.

Volume - 1 Rental Property Deductions

TABLE OF CONTENTS

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Eclipse Accounting Group Property & Tax Guide – volume oneINDEX

http://www.eclipseaccounting.com.au

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01 AdvertisingThis is a claimable expense if it is strictly advertising for tenants and your property is available for rent. These costs include advertising with local real estate agencies and posting advertisements in newspapers, local publications or online. However advertising for the sale of a property is a capital expense and can only be taken into consideration as part of the cost base of the property to reduce an assessable capital gain on disposal.

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02 Bank chargesThe bank charges on your loan account (usually in the form of monthly fees) are tax deductible as well as any bank charges on a separate bank account that you have specif ically set up for your investment property.

03 Borrowing expenses These are costs associated with the borrowing of money required to purchase the property and although not deductible upfront, they are deductible over the shorter of either the period of the loan or f ive years. These include mortgage insurance, title search fees, registration of mortgage, costs for preparing and f iling mortgage documents, mortgage broker fees, loan valuation fees, stamp duty on mortgage and loan establishment fees.

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04 Capital works [ building depreciation ]You can claim a tax deduction for construction expenditure of a property also known as “capital works”. The deduction is spread over 25 to 40 years depending on the type of construction and the year in which the construction was completed. The construction costs of a newly-built property are deductible over 40 years.

To maximise your tax deductions you should obtain a quantity surveyor’s report which will list the year of construction, the construction costs, and the deductible amount each year. Where a new owner is unable to determine the construction costs associated with the building, an estimate provided by a qualif ied person may be used.

You can only claim a deduction for the capital works on residential rental properties that were built after 17 July 1985.

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05 Capital AllowanceAs with Capital Works, you can obtain a quantity surveyor’s report which shows, in detail, the value of the deduction (“Capital Allowance”) to which you are entitled based on the assets you own in the investment property.

Depreciating assets produce a partial tax deduction as these assets decline in value over time, usually over more than one year. Depreciating assets commonly found in residential rental properties include: air conditioning units, carpets, curtains and blinds, dishwashers, furniture, heaters, hot water systems, refrigerators and freezers, stoves, cook tops and range hoods, swimming pool f iltration and cleaning systems, television sets and washing machines.

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06 Council ratesCouncil rates are imposed on land owners to help fund the cost of community infrastructure and services to the local municipality. Councils generally offer a one-off annual payment or a payment plan of quarterly instalments, and all payments are tax deductible in the income year they are paid.

07 Gardening and lawn mowingThis is deductible and includes rubbish removal, mower expenses, tree lopping, replacement of gardening tools, fertilisers, sprays and replacement plants.

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08 InsuranceInsurance can be purchased to protect your investment properties. Insurance cover is tax deductible and can protect you against circumstances including loss of rent, rent default, theft by a tenant, building contents damage and public liability claims.

Mortgage insurance is not immediately claimable but is claimed over 5 years or less as part of borrowing expenses.

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09 Interest on borrowingsInterest charges on a loan used to purchase an investment property are tax deductible. Principal or capital repayments are not tax deductible. Only the interest component directly related to your property is tax deductible. It is important to keep copies of all loan statements for each income year and for each property separately.

If you borrowed against an investment property loan for private purposes, you would need to apportion the interest and only claim interest directly relating to the investment property. It is strongly advisable to keep private borrowings totally separate from investment property debt.

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10 Land taxLand tax is a State tax levied on the unimproved value of land (excluding your home) owned at midnight on 31 December each year. All investment property owners should register their property for land tax, even if they believe the land value is below the relevant state threshold. Once registered, you will receive an assessment notice stating any land tax payable. You may be liable for land tax if you own or part-own vacant land, a holiday home, an investment property, a company title unit, or a retail, commercial or industrial unit.

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11 Legal expensesLegal expenses are generally incurred during the sale or purchase of an investment property. The legal costs for buying and selling a property are not tax deductible and are included in the cost base of the property for capital gains tax calculation.

Tax deductible legal expenses include the costs of evicting a nonpaying tenant and the costs of negotiating or terminating a lease.

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12 Owner’s body corporation feesBody corporate fees or strata levies are generally paid quarterly and cover the running costs of the building. They generally cover building repairs and maintenance, insurance, gardening, communal lighting and pest control. However, special levies paid for capital improvements may not be deductible in full. Check these with your tax advisor.

13 Pest controlIf you pay for your investment property to be sprayed or fumigated by a professional pest controller, then you will generally be entitled to a tax deduction.

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14 Property agent fees or commissionsA property agent charges fees for maintaining your investment property on your behalf. The property agent lists their monthly charges in the property agent’s summary.

The charges for the year-end rental statement, tenant reference-check fees, leasing fees and monthly rental statement fees are all tax deductible. You will receive net rental income after the property agent deducts their monthly fee.

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15 Repairs and maintenanceA repair is usually tax deductible. However, renovations, improvements, replacements and extensions are treated differently to repairs and maintenance. These are generally deductible over more than a year as capital works, structural improvements or capital allowance deductions.

‘Repairing’ is restoring the item to the condition it was in before it deteriorated without changing its essential character. If you ‘replace’ an item with similar parts or materials then it is also a repair even if you repair the entire item. If the item is ‘repaired’ with improved parts or materials, which will improve the function of the item or extend its life then it would be considered as an improvement and need to be treated as a new asset and claimed over the period of its useful life.

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Initial repair ruleRepairs undertaken within 12 months of the purchase of a property will generally not be allowed as a deduction. Any non-allowable deductions like this will increase the cost base of the property on disposal and therefore affect the capital gains calculations.

Repairs at the end of the tenancyAny painting or cleaning or other repairs to return the property to the condition it was in before it was rented will be allowable. This is allowable even if the property is reverted to private use as long as the expense is incurred in the same year of income as it was rented.

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16 Stationery & PostageKeep a record of all your stationery and postage expenses for the year. Don’t dispose of your records. This is an often-overlooked tax deduction by investment property owners.

17 Tax-related expensesThe cost of obtaining tax advice from a registered tax agent is tax deductible. Tax preparation fees and accounting charges are also tax deductible.

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18 Telephone expensesTelephone calls directly related to the running of your investment property are tax deductible.

19 Travel expensesInvestment-related travel and car expenses include airfares, car hire, taxis and accommodation are tax deductible if you incur these costs while collecting rent, inspecting the property, or travelling for some other reason related to earning rent or reparing and maintaining your investment property. In order to claim car expenses, you will need to record your vehicles engine size as well as the number of kilometres you travelled while maintaining your investment property each year. Any travel expenses relating to private travel should be apportioned on a reasonable basis. Also, travel expenses incurred prior to or at the time of purchase are generally not deductible nor can they be added to the cost base of the property for capital gains tax purposes.

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20 Water chargesWater rates are tax deductible if you (not your tenant) pay the water bill.

While the above expenses are the most common for investment properties, there may be other deductions that you are entitled to specif ically relating to your investment property.

Check with your tax advisor if unsure.

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Expenses you cannot claimYou are not able to claim a tax deduction for any expenses that are:

n Related to the acquisition and disposal costs of the property ( eg. travel costs to f ind or inspect prior to purchase; legal fees relating to conveyancing, stamp duty on purchase, advertising for sale);

n Not incurred by you, the property owner, for example any water or electricity charges that are incurred by your tenants;

n Not related to the rental and income generation of the property, such as if you personally use your holiday home.

However, you may be able to add these costs to the property’s cost base in order to reduce capital gains tax on disposal.

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About UsEclipse Accounting Group are award-winning Chartered Accountants and Business Advisors in the Sutherland Shire. We can assist individuals and businesses with advice or consultation regarding the following:

n Legally minimising tax and forecasting future tax liabilities.

n Bookkeeping and software assistance.

n Business planning and consultation for business improvement

n Effective Budgeting or reporting of key performance indicators for businesses.

n Self Managed Superannuation Funds (SMSF’s) set-up, admin or tax advice.

n Helping small or start-up businesses assess their financial viability or potential and improve profitability.

n Business structuring or restructuring to minimise personal asset exposure, income tax and future potential capital gains tax.

n Investment property - buying, selling and tax advice.

n Helping individuals set and achieve personal financial goals so as to create wealth for retirement.

n Helping businesses manage cash f low.

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19Telephone: 9531 0922 Facsimile: 9531 0899

EMAIL ADDRESS: [email protected]

POSTAL ADDRESS: PO Box 869, Caringbah, NSW 1495

BUSINESS ADDRESS: Level 1, 12-16 President Ave (entry from Burns Lane), Caringbah, NSW 2229

19 19Eclipse Accounting Group Property & Tax Guide – volume one

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