When investing in a rental property, you’ll need to keep records right from the start and work out what you can and can’t claim as a deduction.
Obtaining and owning a rental property
According to the latest information from the ATO, if you buy the property with someone else, you’ll also need to work out how to divide the income and expenses.
If you make a net profit from renting your property, you may need to make pay as you go (PAYG) instalments towards your expected tax liability. Generally, you only declare the income you earn from a property and claim related expenses if your name is on the title deed.
If you buy a property, the date you enter into the contract – not the settlement date – is your date of purchase for capital gains tax purposes.
Apart from buying, you can obtain a property by inheriting it, receiving it as a prize or gift, or having it transferred to you as a result of a marriage breakdown.
Keep records from the start
With an investment property, it’s important to keep records right from the start. You’ll want proof of all your expenses so you can claim everything you’re entitled to. You’ll also need records of the date and costs of buying the property so you can work out any capital gain (or capital loss) when you dispose of it.
While owning the property you need to keep track of any related income and expenses. You also need to keep track of any significant changes – for example, if you carry out repairs or improvements or subdivide and sell part or all of it.
Remember to keep the costs of repairs or improvements separate from depreciation costs (the decline in value of depreciating assets). This is necessary to work out your deductions correctly and any capital gain or loss when you sell the property.
What records are important to keep?
You need to keep proper records in order to make a claim, whether you use a tax agent to prepare your tax return or you do it yourself. You must keep records of:
- the rental income you receive and the deductible expenses you pay – keep these records for five years from 31 October or, if you lodge later, for five years from the date your tax return is lodged
- your ownership of the property and all the costs of purchasing or otherwise acquiring it and selling or otherwise disposing of it – keep these records for five years from the date you sell or dispose of your rental property.
As capital gains tax may apply if you sell your rental property, the ATO recommends you keep records of every transaction over the period of ownership of the property. This would include contracts of purchase and sale, and conveyance and loan documentation. Keeping these records will help you work out your capital gain or loss correctly and ensure you do not pay more tax than you need to.
Co-ownership of rental property
Rental property activities are generally considered a form of investment rather than a business. This means that where a rental property is owned jointly, rental income and expenses are divided among the co-owners according to their legal interest in the property. This is despite any written or oral agreement between co-owners stating otherwise.
However, where partners carry on a rental property business, the net rental income or loss is divided among them according to the partnership agreement.
Co-owners of an investment property – not in business
A person who simply co-owns one or more investment properties is usually regarded as an investor rather than being engaged in a rental property business with the other co-owners. This is because of the limited scope of the rental property activities and the limited degree to which a co-owner actively participates in rental property activities.
As investors, the co-owners must divide the property’s income and expenses in line with their legal interest in the property. If they own the property as:
- joint tenants – they each hold an equal interest in the property
- tenants in common – they may hold unequal interests in the property (for example, one may hold a 20% interest and the other an 80% interest).
Rental income and expenses must be attributed to each co-owner according to their legal interest in the property, even if there is an agreement between co-owners, either oral or in writing, stating otherwise.
Partners carrying on a rental property business
Most rental activities are a form of investment and don’t amount to carrying on a business. But where you are carrying on a rental property business in partnership with others, you must divide the net rental income or loss according to the partnership agreement. If you don’t have a partnership agreement, you should divide your net rental income or loss between the partners equally.
Pay as you go instalments and withholding
If you make a net profit from renting your property, you may need to make pay as you go (PAYG) instalments towards your expected tax liability for an income year.
An individual is generally required to pay PAYG instalments if they have gross business or investment income (including rental income) of $4,000 or more (or $1 for foreign residents) in their most recent income tax return and the tax outstanding on their income tax assessment is more than $1,000.
If you’re required to pay PAYG instalments, you will be notified by the ATO.
If your property is negatively geared you may be able to reduce the rate at which tax is deducted from your salary or wages (the PAYG withholding rate) to better match your year-end tax liability.
If you believe your circumstances warrant a reduction to your rate or amount of withholding, you can apply to the ATO for a variation.
Australian tax laws around investment properties are complex. Thankfully, the ATO has a wealth of information available on its website to assist investment property owners. Click to find out more.