Do you own a rental property by the sea or are you considering purchasing that cosy rental property down the snow? The ATO is very clear about what income must be included in your tax return as well as what deductions you can and cannot make a claim for.
When you rent out your property the rental income, and any other rental related income, is the full amount that you receive, or become entitled to receive. This is irrespective of whether it is paid directly to you or your agent. Therefore, whatever your share of rental income is, you must include the full amount of rent you earn in your tax return.
Where rent and associated payments have been made in the form of goods and services, you will need to work out the monetary value of these non-cash payments as they are to be included in your tax return as rental income.
Rental Related Income
- If you are entitled to retain any rental bond money due to damage to your property or as a result of a default on the rent, you must include this as income.
- In the event of an insurance payout, there may be situations where the payout is to be included as income. One such situation is where you receive an insurance payment for compensation on lost rent.
- Where you receive a letting or booking fee, you need to include this as part of your rental income.
Co-Ownership of a Rental Property
How rental income is divided between co-owners will depend on whether they are joint owners, tenants in common or a partnership that is operating a rental property business.
Rental income and expenses must be apportioned to each co-owner according to their legal interest in the property, for example:
- joint tenants will each hold an equal interest in the property ie 50/50
- tenants in common may hold unequal interests in the property ie 80/20
This is regardless of whether there is a verbal or written agreement between the parties stating otherwise. If you are unsure as to whether your legal interest is as a joint owner or tenant in common, you can check the title deed.
Non-Claimable Deductions for Expenses Incurred
Some of the expenses for which you are unable to claim a deduction for include:
- acquisition and disposal costs of the property
- water or electricity charges paid by the tenant
- expenses not related to the rental of the property eg your own use of a holiday home that is rented out for part of the year
- travel expenses to inspect a property prior to purchase
- travel expenses and any other costs associated with rental seminars that help you find a rental property to invest in
Apportionment of Rental Expenses
In certain circumstances, rental expenses may need to be apportioned. These include:
- the property is only available for rent for part of the year
- the property is used for private purposes for part of the year, including use by friends or relatives free of charge
- only part of your property is used to earn rental income
- the property is rented at non-commercial rates
The ATO will look closely at whether or not a property is genuinely available for rent. Factors that indicate that a property is not genuinely available to be rented out include:
- advertising for a tenant in such a way that limits the exposure to potential tenants eg by word of mouth, at your workplace or outside of holiday periods when the likelihood of the property being rented out is low
- the location, condition and accessibility of the property that means a tenant is unlikely to seek to rent the property
- placing unreasonable conditions on the rental of the property that would limit the likelihood of the property being rented out eg setting the rent above market rates or placing a combination of restrictions such as “no children” or “no pets”
- you decline to rent out the property to interested people without adequate reasons
Travel and Car Expenses
Where you travel to inspect or maintain your property or collect rent, you may be eligible to claim the costs of travelling as a deduction. If the sole purpose of your trip relates to the rental property, you are allowed a full deduction.
If you travel to inspect your rental property and combine this with a holiday or other private activities, you may need to apportion the expenses. You need to consider the reasons for your trip. If the main reason is for a holiday with a view to calling in to inspect the property, then this is incidental to the main purpose. Therefore, you cannot claim a deduction for the cost of travel to the property. You may however be eligible to claim local expenses that directly relates to the property inspection as a portion of your accommodation expenses.
We have only touched the tip of the iceberg when it comes to what you can and cannot claim on your rental property. If you need more information, then please give us a call to discuss.