Investing in property can be a smart financial move, but it also comes with various responsibilities, especially regarding taxes. One of the major benefits of owning an Australian investment property is the range of tax deductions available.
Understanding which expenses can be deducted will minimise your taxable income while increasing your return on investment. This guide will walk you through the most common tax deductions you can claim on your investment property and how to make the most of them.
Let’s Get Straight To The Point
Owning an Australian investment property allows you to claim various tax deductions, which can reduce your taxable income. Key deductions include rental expenses (e.g., advertising, property management fees, insurance), loan interest, repairs and maintenance, body corporate fees, and land tax.
You can also claim depreciation on the property’s structure and contents, such as appliances and furniture. Other potential deductions include legal and accounting fees, but travel expenses related to property inspections are no longer deductible.
It’s crucial to keep detailed records, claim deductions only during rental periods, and differentiate between immediate and capital expenses. To maximise your claims and ensure compliance, consult a tax professional.
Immediate Deductions For An Australian Investment Property
Expenses that can be claimed the same year they are incurred are known as immediate deductions.
These are the most common tax deductions property investors claim, as they directly reduce your taxable income.
Rental Expenses
Various ongoing costs associated with renting out your property are deductible. These include:
- Advertising Costs: You can claim the rent expenses for advertising your property. This includes online listings, print ads, and professional marketing services.
- Property Management Fees: The cost of hiring a property manager to find renters, collect rent, and make repairs is completely deductible.
- Council Rates: Local government rates charged on your investment property, such as municipal and water rates, can be claimed as deductions.
- Utilities: If you pay for utilities such as water, gas, or electricity on behalf of the tenant, these expenses are deductible. If the tenant is responsible for these, you cannot claim them.
- Insurance: Costs for landlord, building, contents, and public liability insurance can be deducted. Insurance premiums are generally one of the more straightforward deductions to claim.
- Pest Control: You can claim expenses for pest inspections and treatments, such as termite treatment. Keeping your property pest-free is essential to maintenance, making these costs eligible for tax deductions.
- Cleaning and Gardening: Cleaning and gardening services can also be claimed. These costs are part of the necessary upkeep to maintain the property’s rental condition.
Loan Interest
Interest on loans used to purchase or improve your investment property is one of the largest deductions you can claim. You can claim the interest on mortgages or loans used for purchasing and improving the property.
If the loan is used partly for personal reasons, you can only claim the portion related to the investment. Keep records to distinguish between the personal and investment portions clearly.
Repairs And Maintenance
The cost of upkeep and repairs needed to keep the home secure and livable can be deducted. This includes repairs for plumbing and electrical faults or fixing broken appliances.
However, it’s important to note that repairs are different from improvements. Improvements that add value to the property (like adding a new kitchen or building a deck) must be treated as capital expenses and cannot be immediately deducted.
If the work restores the property to its original state without enhancing its value, it’s generally considered a repair and can be claimed as a deduction.
Body Corporate Fees
Body corporate fees are deductible for properties in strata-titled buildings. These fees pay for the upkeep and administration of common areas (such as elevators, gardens, and corridors), which is a necessary recurring cost for strata property owners.
Land Tax
Land tax is also deductible if your property is rented out. Individual states or territories impose land tax based on the value of their land.
Each state has different thresholds and tax rates, so it’s important to stay updated on the specific regulations in your area.
Depreciation Deductions
Depreciation is the reduction in the value of a property and its contents over time. It is another significant way to reduce taxable income and applies to buildings and their assets.
Capital Works Deductions (Building Depreciation)
Capital works deductions are available for the structure and permanent fixtures of buildings constructed after 1987. This includes the foundation, roof, walls, and flooring.
For a maximum of 40 years, capital works deductions are allowed at 2.5% of the yearly construction cost. This valuable deduction can significantly reduce your taxable income each year.
Plant And Equipment Depreciation
Plant and equipment depreciation applies to items inside the property that aren’t permanently affixed to the building, such as:
- Appliances (e.g., dishwashers, refrigerators, washing machines)
- Carpets and floor coverings
- Air conditioners and heaters
- Furniture and fittings
Each item depreciates over time, and you can claim depreciation based on its estimated useful life. A qualified quantity surveyor can provide a depreciation schedule, ensuring you maximise your claim and stay within the regulations.
Other Deductions
Depending on your situation, you can deduct several other costs in addition to common deductions like property management fees and loan interest.
Legal Expenses
Legal fees related to managing your rental property can be claimed. This includes costs for dealing with tenant issues, such as unpaid rent or eviction notices. However, general legal fees unrelated to the property are not deductible.
Accounting Fees
If you hire an accountant or tax professional for tax advice or help prepare your tax return, these fees are also deductible.
This is especially relevant for complex property investment portfolios, where professional advice can help you structure your investments for maximum tax benefits.
Travel Expenses
As of 2017, travel expenses for inspecting or managing your rental property are no longer deductible for individual investors.
However, this rule may not apply if you engage a property manager or run a business managing multiple properties, this rule may not apply. Check the current laws to understand how this applies to your situation.
Key Considerations When Claiming Deductions
While it’s important to take advantage of the deductions available, there are a few things you should be aware of when preparing your tax return.
Keep Detailed Records
Proper record-keeping is essential to substantiating your claims. Keep receipts, invoices, and other documentation for all expenses related to your investment property.
The Australian Taxation Office (ATO) requires proof for any deductions you claim, so thorough records will help protect you during an audit.
Claim Only For Rental Periods
You can only claim deductions for periods when your property is rented or available. If the property is used personally or is vacant, you cannot claim expenses for that time.
It’s also worth noting that the ATO requires you to demonstrate that the property is genuinely available for rent, which means it must be advertised or listed with a reasonable expectation of tenancy.
Distinguish Between Immediate Deductions And Capital Expenses
One of the more common errors made by property investors is confusing immediate deductions with capital expenses.
Immediate deductions are claimed in the year the expense is incurred, while capital expenses are depreciated over time. If you are unsure whether an expense is an immediate deduction or capital expense, it’s always wise to seek professional advice.
Get A Depreciation Schedule
Consider hiring a quantity surveyor to prepare a depreciation schedule to ensure you claim the maximum allowable depreciation.
This document details the depreciation entitlements for the property’s structure and contents, ensuring you don’t take advantage of any tax deductions.
Conclusion
In Australia, there are several tax advantages to owning an investment property that can drastically lower your taxable income. There are numerous opportunities to reduce your tax bill, from immediate rental expenses like advertising and management fees to long-term depreciation on the building and its contents.
Knowing which expenses are deductible and ensuring you fulfil all compliance requirements. By keeping detailed records, understanding the difference between immediate deductions and capital expenses, and seeking professional advice, you can optimise your tax position and ensure that your investment property works as hard for you as possible.
Frequently Asked Questions
What Capital Expenses Are Not Immediately Deductible?
Expenses that improve the property, such as adding an extension, renovating a bathroom, or installing a new roof, must be claimed over time through depreciation.
Do I Need Receipts For All My Claims?
The ATO requires evidence such as receipts, invoices, and bank statements to support your deductions. Keeping accurate records will help avoid disputes during tax time.
Can I Claim The Cost Of Advertising My Rental Property?
Yes, expenses related to advertising your property for rent, including online listings, newspaper ads, and professional photography, are tax-deductible.
What If My Property Is Only Partially Rented?
If only part of your property is rented (e.g., a granny flat or a single room), you can only claim deductions for the rented portion.
Are Gardening And Pest Control Expenses Deductible?
The cost of maintaining gardens, including lawn mowing and tree trimming, is deductible. Pest control expenses, such as termite treatments, are also tax-deductible.