Rental Properties 2015 - Australian Taxation Office

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Guide for rental property ownersRental properties2015This guide explains how to treat rental income and expenses,including how to treat more than 230 residential rental property itemsFor more informationgo to 1729-06.2015

OUR COMMITMENT TO YOUWhat if you lodge an incorrect tax return?We are committed to providing you with accurate,consistent and clear information to help you understandyour rights and entitlements and meet your obligations.If you become aware that your tax return is incorrect,you must contact us straight away.If you follow our information in this publication and it ismisleading or incorrect and you make a mistake as a result,we must still apply the law correctly. If that means you oweus money, you must pay it but we will not charge you apenalty. Also, if you acted reasonably and in good faith wewill not charge you interest. If correcting the mistake meanswe owe you money, we will pay it and pay you any interestyou are entitled to.Initiatives to complement self-assessmentIf you feel that this publication does not fully cover yourcircumstances, or you are unsure how it applies to you,you can seek further help from us.We regularly revise our publications to take account ofany changes to the law, so make sure that you have thelatest information. If you are unsure, you can check formore recent information on our website at contact us.This publication was current at May 2015.HOW SELF-ASSESSMENT AFFECTS YOUSelf-assessment means the ATO uses the informationyou give on your tax return and any related schedulesand forms to work out your refund or tax liability. We donot take any responsibility for checking the accuracy ofthe details you provide, although our system automaticallychecks the arithmetic.There are a number of systems and entitlements thatcomplement self-assessment, including:n the private ruling system (see below)n the amendment system (if you find you have leftsomething out of your tax return)n your entitlement to interest on early payment orover-payment of a tax debt.Do you need to ask for a private ruling?If you are uncertain about how a tax law applies to yourpersonal tax affairs, you can ask for a private ruling. To dothis, complete a Private ruling application form (not for taxprofessionals) (NAT 13742), or contact us.Lodge your tax return by the due date, even if you arewaiting for the response to your application. You may needto request an amendment to your tax return once you havereceived the private ruling.We publish all private rulings on our website. We edit thetext to remove all information that could identify you.Although we do not check the accuracy of your tax returnat the time of processing, at a later date we may examinethe details more thoroughly by reviewing specific parts, orby conducting an audit of your tax affairs. We also have anumber of audit programs that are designed to continuallycheck for missing, inaccurate or incomplete information.What are your responsibilities?It is your responsibility to lodge a tax return that is signed,complete and correct. Even if someone else – including atax agent – helps you to prepare your tax return and anyrelated schedules, you are still legally responsible for theaccuracy of your information. AUSTRALIAN TAXATION OFFICE FOR THECOMMONWEALTH OF AUSTRALIA, 2015You are free to copy, adapt, modify, transmit and distribute this material asyou wish (but not in any way that suggests the ATO or the Commonwealthendorses you or any of your services or products).PUBLISHED BYAustralian Taxation OfficeCanberraJune 2015JS 32977

CONTENTSINTRODUCTION3Tax and natural disasters3Publications and services3Is your rental property outside Australia?3RENTAL INCOME4Rental-related income4Co-ownership of rental property4RENTAL EXPENSES7Types of rental expenses7Expenses for which youcannot claim deductions9Expenses for which you canclaim an immediate deduction9Expenses deductible overa number of income years15WORKSHEET25OTHER TAX CONSIDERATIONS26Capital gains tax26General value shifting regime26Goods and services tax (GST)26Keeping records26Negative gearing27Pay as you go (PAYG) instalments27RESIDENTIAL RENTAL PROPERTY ASSETS28Definitions28Residential rental property items30MORE INFORMATIONRENTAL PROPERTIES

INTRODUCTIONRental properties 2015 will help you, as an owner of rentalproperty in Australia, determine:n which rental income is assessable for tax purposesn which expenses are allowable deductionsn which records you need to keepn what you need to know when you sell your rental property.Many, but not all, of the expenses associated with rentalproperties will be deductible. This guide explains:n how to apportion your expenses if only part of themare tax deductiblen what expenses are not deductiblen when you can claim those expenses that are deductible– some you can claim in the year they occur– others must be claimed over a number of years(including decline in value of depreciating assetsand capital works expenses).When you own a rental property, you may also need toknow about capital gains and goods and services taxes,negative gearing, pay as you go (PAYG) instalments andthe effects of the general value shifting regime. This guideexplains these at pages 26–27.PUBLICATIONS AND SERVICESTo find out how to get a publication referred to in thisguide and for information about our other services,see More information on page 39.IS YOUR RENTAL PROPERTYOUTSIDE AUSTRALIA?If your property is located outside Australia, specialrules apply to the deductibility of your rental propertyexpenses. For more information on foreign source income,see question 20 in Individual tax return instructionssupplement 2015. If you are unsure of your obligations,contact your recognised tax adviser or us.The examples given in this publication featuring Mr andMrs Hitchman are based on the assumption that theHitchmans own their rental properties as joint tenantswho are not carrying on a rental property business.TAX AND NATURAL DISASTERSWe have special arrangements for people affected bynatural disasters such as a cyclone, flood or fire occuringduring the financial year. For more information go and search for ‘Dealing with disasters’.If your tax records were lost or destroyed, we can helpyou to reconstruct them, and make reasonable estimateswhere necessary.Phone our emergency support team on 1800 806 218and we can discuss the best way we can help you.We can also:n fast track refundsn give you extra time to pay debts, without interest chargesn give you more time to meet activity statement, incometax and other lodgment obligations, without penaltiesn help you if you are experiencing serious hardship.RENTAL PROPERTIES

RENTAL INCOMERental and other rental-related income is the full amount ofrent and associated payments that you receive, or becomeentitled to, when you rent out your property, whether it ispaid to you or your agent. You must include your shareof the full amount of rent you earn in your tax return.nAssociated payments may be in the form of goods andservices. You will need to work out the monetary valueof these.EXAMPLE 1: Rental income received in the formof propertyYou must include as rental income any assessableamounts relating to limited recourse debt arrangementsinvolving your rental property. For more information, seeLimited recourse debt arrangements on page 24and see the Guide to depreciating assets 2015(NAT 1996).Steve owns a residential property. Steve’s friend Marialived in the residential property for a period of time. Inexchange for being allowed to live in the residentialproperty Maria provided Steve with an item of property.The value of the item was equivalent to what wouldhave been a reasonable commercial rent for theproperty for the period she lived there. The item ofproperty was able to be converted into cash.CO-OWNERSHIP OF RENTAL PROPERTYThe way that rental income and expenses are dividedbetween co-owners varies depending on whether theco‑owners are joint tenants or tenants in common or thereis a partnership carrying on a rental property business.Where any consideration is paid or given otherwisethan in cash, the money value of that considerationis deemed to have been paid or given. The provisionof an item of property instead of cash falls within theconcept of barter. The barter receipt is assessable tothe same extent as a cash payment. As the item wasconvertible to cash, Steve shows the value of the itemof property as assessable income.Co-owners of an investmentproperty (not in business)RENTAL-RELATED INCOMEYou must include rental bond money as income if youbecome entitled to retain it, for instance, because a tenantdefaulted on the rent, or because damage to your rentalproperty required repairs or maintenance.If you received an insurance payout, there may besituations where the payout needs to be included asincome, for example, if you received an insurance paymentto compensate you for lost rent.If you received a letting or booking fee, you must includethis as part of your rental income.Associated payments include all amounts you receive,or become entitled to, as part of the normal, repetitiveand recurrent activities through which you intend togenerate profit from the use of your rental property.If you received a reimbursement or recoupment fordeductible expenditure, you may have to include anamount as income. For example, if you received:n an amount from a tenant to cover the cost of repairingdamage to some part of your rental property and you canclaim a deduction for the cost of the repairs, you need toinclude the whole amount in your income4a government rebate for the purchase of a depreciatingasset, such as a solar hot-water system, you mayneed to include an amount in your income. For moreinformation, see Taxation Determination TD 2006/31 –Income tax: is a government rebate received by arental property owner an assessable recoupment undersubsection 20-20(3) of the Income Tax Assessment Act1997, where the owner is not carrying on a propertyrental business and receives the rebate for the purchaseof a depreciating asset (for example, an energy savingappliance) for use in the rental property.A person who simply co-owns an investment propertyor several investment properties is usually regarded as aninvestor who is not carrying on a rental property business,either alone or with the other co-owners. This is becauseof the limited scope of the rental property activities and thelimited degree to which a co-owner actively participates inrental property activities.Dividing income and expensesaccording to legal interestCo-owners who are not carrying on a rental propertybusiness must divide the income and expenses for therental property in line with their legal interest in the property.If they own the property as:n joint tenants, they each hold an equal interest in thepropertyn tenants in common, they may hold unequal interests inthe property, for example, one may hold a 20% interestand the other an 80% interest.Rental income and expenses must be attributed to eachco-owner according to their legal interest in the property,despite any agreement between co-owners, either oral orin writing, stating PROPERTIES 2015

EXAMPLE 2: Joint tenantsMr and Mrs Hitchman own an investment rental propertyas joint tenants. Their activity is insufficient for them to becharacterised as carrying on a rental property business.In the relevant income year, Mrs Hitchman phones usand asks if she can claim 80% of the rental loss. MrsHitchman says she is earning 67,000 a year, and MrHitchman is earning 31,000. Therefore, it would bebetter if she claimed most of the rental loss, as she wouldsave more tax. Mrs Hitchman thought it was fair that sheclaimed a bigger loss because most of the expenseswere paid out of her wages. Under a partnershipagreement drawn up by the Hitchmans, Mrs Hitchmanis supposed to claim 80% of any rental loss.Mrs Hitchman was told that where two people own arental property as joint tenants, the net rental loss mustbe shared in line with their legal interest in the property.Therefore, the Hitchmans must each include half of thetotal income and expenses in their tax returns.EXAMPLE 4: Co-owners who are notcarrying on a rental property businessThe Tobins own, as joint tenants, two units and ahouse from which they derive rental income. The Tobinsoccasionally inspect the properties and also interviewprospective tenants. Mr Tobin performs most repairsand maintenance on the properties himself, althoughhe generally relies on the tenants to let him know whatis required. The Tobins do any cleaning or maintenancethat is required when tenants move out. Arrangementshave been made with the tenants for the weekly rentto be paid into an account at their local bank. Althoughthe Tobins devote some of their time to rental incomeactivities, their main sources of income are theirrespective full-time jobs.The Tobins are not partners carrying on a rental propertybusiness, they are only co-owners of several rentalproperties. Therefore, as joint tenants, they must eachinclude half of the total income and expenses on theirtax returns, that is, in line with their legal interest in theproperties.Any agreement that the Hitchmans might draw upto divide the income and expenses in proportionsother than equal shares has no effect for income taxpurposes. Therefore, even if Mrs Hitchman paid mostof the bills associated with the rental property, shewould not be able to claim more of the rental propertydeductions than Mr Hitchman.EXAMPLE 3: Tenants in commonIn example 2, if the Hitchmans owned their propertyas tenants in common in equal shares, Mrs Hitchmanwould still be able to claim only 50% of the totalproperty deductions.However, if Mrs Hitchman’s legal interest was 75%and Mr Hitchman’s legal interest was 25%, MrsHitchman would have to include 75% of the incomeand expenses on her tax return and Mr Hitchmanwould have to include 25% of the income andexpenses on his tax return.Interest on money borrowed by only one of the co‑ownerswhich is exclusively used to acquire that person’s interestin the rental property does not need to be divided betweenall of the co-owners.If you don’t know whether you hold your legal interest as ajoint tenant or a tenant in common, read the title deed forthe rental property. If you are unsure whether your activitiesconstitute a rental property business, see Partnerscarrying on a rental property business on the next page.RENTAL PROPERTIES

Partners carrying on a rental property businessMost rental activities are a form of investment and do notamount to carrying on a business. However, where youare carrying on a rental property business in partnershipwith others, you must divide the net rental income or lossaccording to the partnership agreement. You must do thiswhether or not the legal interests in the rental propertiesare different to the partners’ entitlements to profits andlosses under the partnership agreement. If you do nothave a partnership agreement, you should divide yournet rental income or loss between the partners equally.See example 5.EXAMPLE 5: Is it a rental property business?The Hitchmans’ neighbours, the D’Souzas, own anumber of rental properties, either as joint tenants ortenants in common. They own eight houses and threeapartment blocks (each apartment block comprisingsix residential units) making a total of 26 properties.The D’Souzas actively manage all of the properties.They devote a significant amount of time, an averageof 25 hours per week each, to these activities.They undertake all financial planning and decisionmaking in relation to the properties. They interviewall prospective tenants and conduct all of the rentcollections. They carry out regular property inspectionsand attend to all of the everyday maintenance andrepairs themselves or organise for them to be doneon their behalf. Apart from income Mr D’Souza earnsfrom shares, they have no other sources of income.The D’Souzas are carrying on a rental propertybusiness. This is demonstrated by:n the significant size and scale of the rental propertyactivitiesn the number of hours the D’Souzas spend on theactivitiesn the D’Souzas’ extensive personal involvement in theactivities, andn the business-like manner in which the activities areplanned, organised and carried on.For more information about dividing net rentalincome or losses between co-owners, see Taxation RulingTR 93/32 – Income tax: rental property – division of netincome or loss between co-owners.For more information about determining whether arental property business is being carried on, determiningwhether it is being carried on in partnership, and thedistribution of partnership profits and losses, see:n Taxation Ruling TR 97/11 – Income tax: am I carrying ona business of primary production?n Taxation Ruling TR 94/8 – Income tax: whether abusiness is carried on in partnership (including ‘husbandand wife’ partnerships)n Taxation Ruling IT 2423 – Withholding tax: whether rentalincome constitutes proceeds of business – permanentestablishment – deduction for interestn Taxation Ruling IT 2316 – Income tax: distribution ofpartnership profits and losses.Paragraph 13 of Taxation Ruling TR 97/11 lists eightindicators to determine whether a business is being carriedon. Although this ruling refers to the business of primaryproduction, these indicators apply equally to activities ofa non-primary production nature.If you are carrying on a business, you may be eligible forthe small business concessions. For more information, seeConcessions for small business entities.Contact your recognised tax adviser or us if you areunsure whether:n your rental property activities amount to a partnershipcarrying on a rental property businessn you are carrying on a rental property activity as a jointtenant or a tenant in common, orn you are in both categories.Mr and Mrs D’Souza have a written partnershipagreement in which they agreed to carry on a rentalproperty business. They have agreed that Mrs D’Souzais entitled to a 75% share of the partnership profits orlosses and Mr D’Souza is entitled to a 25% share of thepartnership profits or losses.Because the D’Souzas are carrying on a rental propertybusiness, the net profit or loss it generates is dividedbetween them according to their partnership agreement(in proportions of 75% and 25%), even if their legalinterests in the rental properties are equal, that is, theyeach own PROPERTIES 2015

RENTAL EXPENSESYou can claim a deduction for certain expenses you incurfor the period your property is rented or is available for rent.However, you cannot claim expenses of a capital nature orprivate nature (although you may be able to claim declinein value deductions or capital works deductions for certaincapital expenditure or include certain capital costs in thecost base of the property for CGT purposes).TYPES OF RENTAL EXPENSESThere are three categories of rental expenses, those forwhich you:n cannot claim deductionsn can claim an immediate deduction in the income yearyou incur the expensen can claim deductions over a number of income years.Property available for part-year rentalIf you use your property for both private and assessableincome-producing purposes, you cannot claim a deductionfor the portion of any expenditure that relates to yourprivate use. Examples of properties you may use for bothprivate and income-producing purposes are holiday homesand time-share units. In cases such as these you cannotclaim a deduction for any expenditure incurred for thoseperiods when the home or unit was used by you, yourrelatives or your friends for private purposes.In some circumstances, it may be easy to decide whichexpenditure is private in nature. For example, councilrates paid for a full year would need to be apportionedon a time basis according to private use and assessableincome‑producing us

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