Housing affordability was a major focus of the 2017 Federal Budget. Among the measures announced was a tightening of some of the deduction rules around rental properties as follows:
Rental Property Travel
Deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential rental propety will be disallowed from 1 July 2017. Before this date, the rules were very generous and allowed an owner to claim everything from airfares, accommodation, overseas travel (in certain circumstances) and car expenses incurred when:
- Preparing a property for new tennants
- Inspecting the property during or at the end of tenancy
- Undertaking repairs, where the repairs are because of damage or wear and tear incurred while you rented out the property
- Maintaining the property (e.g. cleaning or gardening) while it is rented or available for rent
- Collecting the rent, and
- Visiting your agent to discuss your rental property.
In light of these changes, there are a few important take away points for property owners as follows:
- Category (a), (c) and (f) expenses appear to be still claimable under the new rules (we will need to await the final legislation to confirm this)
- This measure will not prevent investors from engaging third-parties such as real estate agents for property mamagement services. These expenses will continue to be deductible. Indeed, if the travel is costly (e.g interstate) then you may wish to engage third parties to undertake Category (b), (d) and (e) expenses from 1 July 2017 rather than you personally.
Restriction on Depreciation Claims
From 1 July 2017 “plant and equipment” depreciation deductions are now limited to outlays actually incurred by investors in residential real estate properties. Plant and equipment items are usually mechanical fixtures or those which can be “easily” removed from a property such as dishwashers and ceiling fans. This change was made to address concerns that some “plant and equipment” items are being depreciated by successive investors in excess of their actual value. Acquisitions of existing plant and equipment items will be reflected in the cost base for CGT purposes for subsequent investors…….
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Not a member? Join today //mytaxsavers.com.au/plans/subscriptions/ With Tax Time now here, the ATO is encouraging rental property owners to ensure that their deduction claims are accurate. It will be paying close attention to:
Excessive Interest Expense Claims
Your interest claim must be limited to interest you have actually paid from 1 July to 30 June on borrowed funds used to purchase the rental property.
Incorrect Apportionment of Rental Income and Expenses Between Owners
The way that rental income and expenses are divided between co-owners varies depending on whether the co-owners are joint tenants or tenants in common or there is a partnership carrying on a rental property business.
Co-owners who are not carrying on a rental property business (generally, it is very unlikely that a business is being carried on) must divide the income and expenses for the rental property in line with their legal interest in the property. If they own the property as:
Rental income and expenses must be attributed to each co-owner according to their legal interest in the property, irrespective of any agreement between co-owners, either oral or in writing, stating otherwise.
- Joint tenants, they each hold an equal interest in the property (therefore 50% of income, and 50% of expenses)
- Tenants in common, they may hold unequal interests in the property. For example, one person may hold a 20% interest and the other an 80% interest.
Homes That Are Genuinely Not Available For Rent
To claim rental property deductions, your property must either be being currently rented out, or be genuinely available for rent. In the case of the latter, the property must be habitable (for example, if you were carrying out major renovations this may render the property uninhabitable), and it would also be expected that you could produce evidence to show it being genuinely made available for rent (e.g. advertisements in newspapers, or listings with local real estate agents).
Incorrect Claims For Newly Purchase Properties
You cannot claim as a deduction acquisition costs such as Stamp Duty, conveyancing expenses, legal expenses). These costs form part of the property’s cost base and can only be taken into account for capital gains tax (CGT) purposes when you dispose of the property.
The other common expense that is not claimable as a deduction is initial repairs made to the property. If the repairs are performed just after the purchase of the property in preparation to rent it out, then they are considered to be initial repairs. These cannot be claimed as a rental property expense on your tax return. Instead they will form part of the cost base of the property and will reduce your capital gain (or increase your capital loss) when you sell the property.
REAL LIFE ATO CASE
Nancy recently purchased a rental property and had her tax return amended by the ATO to remove deductions for repairs, capital works and incorrectly apportioned borrowing expenses. Nancy had inappropriately claimed a deduction for repairs to defects present in a newly purchased property and the capital works, and borrowing expenses should have been spread over several years. Nancy also provided false receipts for property management fees undertaken by a family member.
Nancy was required to pay more than $57,000 back to the ATO as well as over $10,000 in penalties for making a false statement in her tax return.