Category: Tax

Rental Property deductions

The Tax Office has identified common mistakes made by people declaring rental income and claiming deductions.

In their returns for the 2004 tax year almost 1.5 million taxpayers declared rental income with 250,000 of these claiming deductions for the first time.
Advice for first-timers

For tax purposes there are two categories of rental property expenses you can claim:

* expenses for which you can claim a deduction in the year they are incurred, such as council rates, insurance and loan interest, and
* expenses which are deductible over a number of years, such as borrowing costs, deductions for capital works and deductions for the decline in value of depreciating assets.

You cannot claim acquisition or disposal costs, although they may form part of the cost base of the property for capital gains tax purposes.

You also cannot claim as immediate deductions the costs to repair damage, defects or deterioration that existed when you first purchased the property. They are capital expenditure and should be claimed as capital works deductions over either 25 or 40 years depending on when they were carried out.

Renovation costs are also capital expenditure and should be claimed as capital works deductions over the relevant number of income years.
Common mistakes

There are some common mistakes made by both first-time and other rental property owners:

* Incorrectly claiming the cost of the land as a capital works deduction, that is, as part of the cost of constructing or renovating the rental property.
* Incorrectly claiming the cost of improvements such as remodelling bathrooms or kitchens or adding a deck or pergola as repairs. These are capital improvements and should be claimed as capital works deductions.
* Overstating claims for deductions on the interest on the loan taken out to purchase, renovate or maintain the property. A loan may be taken out for both income-producing and private purposes, such as to purchase motor vehicles or other goods or services. The interest on this private portion of the loan is not deductible and should not be claimed.
* Incorrectly claiming the full cost of an inspection visit when it is combined with another private purpose, such as a holiday. In such cases, you can only claim that portion of the travel costs that relate directly to the property inspection.
* Claiming deductions for properties which are not genuinely available for rent.
* Incorrectly claiming deductions when properties are only available for rent for part of the year. If a holiday home or unit is used by you, your friends or your relatives free of charge for part of the year, you are not entitled to a deduction for costs incurred during those periods.
* Claiming deductions for items incorrectly classified as depreciating assets. The ATO has have produced a comprehensive list of more than 230 residential property items identifying whether they are depreciating assets eligible for a decline in value deduction, or as assets eligible for a capital works deduction. This list is in the Rental properties booklet. Call us if you would like a copy if this booklet
* If you financed the purchase of your rental property using a split loan facility, you cannot claim a deduction for the extra capitalised interest expense imposed under that facility.

From the ATO

What new in the 2006 tax return – Part 2

Superannuation contributions splitting

If a person makes a personal contribution to their own super fund and splits part of that contribution to their spouse’s super account, it is important to remember they cannot claim the superannuation spouse contributions tax offset for this contribution.

However, if they make a contribution directly to their spouse’s account they may be able to claim a tax offset, provided the spouse’s assessable annual income plus reportable fringe benefits is less than $13,800.

Capital gains tax and property

Changes have been made so that certain costs relating to property which were not previously included in the cost base and the reduced cost base must now be included.

These include:

* certain incidental costs of buying and selling property,
* costs of owning property in addition to non-capital costs like interest and maintenance, and
* costs of preserving the value of property and not just to increase its value.

These changes only affect property disposed of on or after 1 July 2005, however relevant costs incurred before that date must be included in the cost base and reduced cost base.

Capital returns

In the 2005-06 tax year, more than 850,000 individuals and self managed superannuation funds have received capital returns on listed company shares.

As a result of these capital returns, these shareholders will have to adjust the cost base of their shares and some may make capital gains which must be declared in their 2006 tax return.

The Tax Office will have a number of publications on its website from 1 July 2006 which provide advice on the tax consequences and/or treatment of capital returns from listed shares and share buy-backs including:

* Guide to Capital Gains Tax (which can also be ordered by phoning 1300 720 092)
* Non-assessable payments, and
* Key events for Australian shareholders.

There is also a range of detailed fact sheets on the website on the tax consequences of capital returns relating to specific companies including:

* Aristocrat
* CSR, and
* AMP.

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Share buybacks

During the 2005-06 tax year, listed companies in Australia have also bought back more than 150 million shares worth in excess of $3.5 billion.

Shareholders who have participated in these buy-backs need to calculate any capital gain or loss for inclusion in their 2006 tax return. Dividends paid as part of the buy-back must also be declared in their return.

Publications on the Tax Office website from 1 July 2006 which provide advice on the tax consequences of share buy-backs include:

* Guide to Capital Gains Tax (which can also be ordered by phoning 1300 720 092)
* Share buybacks, and
* Key events for Australian shareholders.

There are also a range of detailed fact sheets on the website on the tax consequences of share buy-backs by specific companies including:

* BHP Billiton
* St George, and
* Westpac.