The 1st of July is coming fast, and all of Australia is getting ready to start the financial year with a bang. Refund Express want to do the best for our clients that we can. When completing your 2017 tax return, you need to claim all income you receive, so this also includes rental and other rental-related income.
Rental, and other rental-related income, is the full amount of rent and payments that you receive, or become entitled to, when you rent out your property. This could be a house, a set of apartments, or even farm land. If you share the rental property with a spouse or partner, you should claim your share of the full amount of rent you earn in your tax return.
Rental Income as Property and Goods:
Rent and associated payments may be in the form of goods and services. If this is the case, then you will need to work out the monetary value of these. For example;
Nadine has a rental property, and the tenant gives Nadine various gifts. This is classed as property and goods, instead of money. Nadine must then include the market value of the property or goods given to her as rental income in her tax return for 2017.
However, if the tenant had of just paid the money rather than giving Nadine various gifts then, Nadine would just record the money paid as rental income.
Another great example is;
George has a rental property he rents out to a local cattle farmer. Due to the farmer having low sale costs for his cattle this year, he had often given George various meat as rental payment. This is considered property and goods. George now must work out the market value of the meat he received as rental income for his tax return.
When claiming rental income, you also must include rental-related income. Rental-related income includes the bond money as income if you’re entitled to retain it for example;
Mary rents out an apartment to a young couple. When the couple move out to a house, Mary finds that the carpets haven’t been cleaned, and the walls of the apartment have chipped paint, as well as various scratches to the walls. Mary also discovers that due to the couple having pets, some of the outside fence has been dented and chewed on. Due to this Mary retains the bond for repairs to the rental property.
Due to Mary retaining the bond money Mary must include this as rental-related income.
Sometimes insurance payouts on a rental property needs to be included as rental-related income. An example of this is;
Douglas has a rental property which he rents to an elderly person. Due to unfortunate situations, Doug lost some rental income he was entitled to. Because Doug insured his rental property for situations like this, Doug receives a payout from his insurance company. Due to receiving this payout, Doug must include this in his tax return.
More rental related income includes;
- Letting or booking fees.
- Any payments or amounts you receive ,or become entitled to due to normal, repetitive, or recurrent events where you generate a profit from the use of your rental property.
A few examples of this rental-related income are;
Ben and Janet live in a large house. As a business venture they rent some of the rooms out to university students looking for a cheap place to live close to university. Due to them receiving income from renting out rooms of their home, this is considered rental-related income, and must be included in both of their 2017 tax returns apportioned evenly between them.
Vivian owns a bed and breakfast in a small town. When she receives bookings for customers to rent out a room in the bed and breakfast, Vivian charges a booking fee. Due to receiving income for renting out a room for her bed and breakfast and obtaining a booking fee per booking Vivian must claim this income as rental-related income.
Co-ownership of a Rental Property
Rental income between co-owners varies depending on whether they are joint tenants or tenants in common. The two tenant types broken down are;
- Joint Tenants: They each hold an equal interest in the property.
- Tenants in Common: They may hold un-equal interests in the property, an example of this is one person holding only 20% of interest while the other holds 80% interest in the company.
All rental income and expenses between co-owners must be split between the co-owners according to their legal interest in the property. This is despite any agreement between the co-owners either oral or in writing, stating otherwise.
Below we have included a few examples better explaining the two types of legal interest of co-owning a rental property:
Cade and Maria Balderas both own rental property as joint tenants. Maria Balderas calls her accountant to inquire if she can claim 80% of the rental loss. Maria says she is currently earning $65,000 a year, and that Cade is only earning $28,000, meaning it would be better if she claimed majority of the rental loss, as she would save more tax for the financial year. Maria Balderas also thought that it was only fair that majority of the loss went in her name, as most of the expenses were paid from Maria’s wages.
Maria Balderas was told that when two people own a rental property as joint tenants, the net rental must be shared in line with their legal interest in the property. Therefore, Cade and Maria Balderas must each include half of the total income and expenses in their tax returns.
Any agreement that Cade and Maria Balderas might draw up to divide the income and expenses other than the equal shares, has no effect for income tax purposes. Due to this Maria Balderas cannot claim 80% of the rental loss even though she paid majority of the expenses.
Tenants in Common:
Michael and Jenna McGuffey both own a rental property as tenants in common in equal shares they would only be able to claim 50% of any rental profit or loss. However, if Michael McGuffey legal interest was 75% and Jenna’s was only 25% then Michael would have to include 75% of the income and expenses on his tax return and, Jenna would have to include 25% of the income and expenses on her tax return.
NOTE: If you’re unsure, or don’t know whether you hold legal interest as a joint tenant or a tenant in common you will need to read the title of the deed for the rental property.
Co-Owners of an investment property (Not in Business)
A person who simply co-owns an investment property, or several investment properties, is usually regarded as an investor who is not carrying on a rental property or business, either alone or with the other co-owners. This is due to the limited scope of the rental property activities. An example of this is;
The Stevens own, as joint tenants, two units and a house where they receive rental income. The Stevens occasionally inspect the properties themselves, and interview prospective tenants. Mr Stevens performs majority of the repairs and maintenance on the properties himself, although he also relies on the tenants to let him know what is required. The Stevens do any cleaning or maintenance that is required when tenants move out themselves. Arrangements have been made with the tenants for the weekly rent to be paid into an account at their local bank. Although the Stevens devote some of their time to rental income activities, their main sources of income are their full-time jobs.
The Stevens are not partners carrying on a rental property business, they are only co-owners of several rental properties. Therefore, as joint tenants, they must each include half of the total income and expenses on their tax returns, that’s in line with their legal interest in the properties.
Partners Carrying on a Rental Property Business:
Most rental properties are a form of investment, and not for carrying on a business. However, where you are carrying out a rental property business in a partnership with others, you must divide the net rental income or loss according to the partnership agreement.
You must do this whether the legal interests in the rental properties are different to the partners’ entitlements to profits and losses under the partnership agreement. If you don’t have a partnership agreement, you should divide your net rental income or loss between the partners equally.
If you’re unsure about whether your rental property is carrying out a business, we have an example that should help;
The Smiths, own many rental properties, either as joint tenants or tenants in common. They own eight houses, and three apartment blocks (each apartment block comprising six residential units) making a total of 26 properties.
The Smiths actively manage all the properties. They devote a significant amount of time, an average of 27 hours a week, to these activities. They undertake all financial planning and decision making in relation to the properties. They interview all possible tenants and collect all the rent themselves. They carry out regular property inspections, and attend to all the everyday maintenance and repairs themselves or organise for them to be done on their behalf. Apart from income Mr Smith earns income from various shares, they have no other sources of income.
The Smiths are carrying on a rental property business. This is demonstrated by:
- the significant size and scale of the rental property activities
- the number of hours the Smiths spend on the activities
- the Smiths extensive personal involvement in the activities, and
- the business-like way the activities are planned, organised, and carried on.
Mr and Mrs Smith have written a partnership agreement in which they agreed to carry on a rental property business. They have agreed that Mrs Smith is entitled to 75% of shares of the partnership profits or losses and Mr Smith is entitled to 25% of shares of the partnership profits or losses.
Due to the Smiths carrying on a rental property business, the net profit or loss it generates is divided between them according to their partnership agreement (in proportions of 75% and 25%), even if their legal interests in the rental properties are equal.
You can claim deductions for certain expenses you incur for the period your rental property is rented, or was available for rent. This being said you cannot claim expenses that are of a capital or private nature.
The types of rental expenses are;
- Expenses you cannot claim.
- Expenses you can claim immediately.
- Expenses you can claim for many financial years.
Expenses you Cannot Claim
Expenses you cannot claim for are:
Acquisition and disposal costs of the property, expenses not incurred by you or partners, such as water or electricity that are paid by the tenants, expenses that are not related to the rental property, travel expenses to inspect a property before you purchase it, travel expenses to rental seminars about helping you find a rental property to invest in. This includes seminar costs and other costs relating to the seminar’s.
Expenses you Can Claim Immediately
Expenses you can claim immediately include the following:
Advertising for tenants, bank charges, body corporate fees and charges, cleaning, council rates, electricity and gas for home office, gardening and lawn mowing, in-house audio/video service charges, insurance; this includes building, contents, and public liability, interest on loans, land tax, lease document expenses, this includes the preparation, registration and stamp duty, legal expenses (excluding acquisition costs and borrowing costs), mortgage discharge expenses, pest control, property agent’s fees and commissions, quantity surveyor’s fees, repairs and maintenance, secretarial and bookkeeping fees, security patrol fees, servicing costs, for example, servicing a water heater, stationery and postage, telephone calls and rental, tax-related expenses, travel and car expenses; this includes rent collection, inspection of property and maintenance of the property and water charges.
You can claim a deduction for these expenses only if you incur them, and they are not paid by the tenant.
Expenses prior to the property being available for rent
You can claim expenditure such as interest on loans, local council rates, water and sewage rates, land taxes and emergency services levy on land you have purchased to build a rental property or incurred during renovations to a property you intend to rent out.
However, you cannot claim deductions when your intention for the rental property changes, this means you may originally want to rent the property out but later decide to use the property for private purposes instead.
An example of this is;
Jenny and Craig Miller own their house, and have a rental property their currently doing renovations on. They decided the renovations would help draw in tenants to the rental property. While renovating, Jenny and Craig decide that they prefer the house their renovating, and now intend to move out into the rental property and sell their other house. As renovations are still in the works, all expenses made to the rental property are now considered personal, as the owners decided to use the property for personal use.
However, if Jenny and Craig had decided to continue living in their home, and rent out the other property, then all renovations could be deducted in their Australian tax return.
Rental Properties Available for Part-Year Rental
Say you use your property for both private use and to produce rental income, you won’t be able to claim a deduction for the time any expenditure was made for private use. An example of properties that may be used for both private and rental purposes are; holiday homes and time-share units.
In situations like this, you can’t claim a deduction on expenses incurred for the periods when the home or unit wasn’t available for rent – this includes when it was used by you, your relatives, or your friends for private use.
In some cases, it may be easy to decide which expenditure is private in nature. An example of this could be council rates paid for the full year will need to be split based on the total time the property was rented out and available for rent throughout the year.
However, this method of apportioning your expenses may not be appropriate for all expense types. An example of this could be expenses that relate solely to the renting of your property (Property agent fees, or advertising fees) would be fully deductible and would not need to be apportioned. Expenses purely for the rental aspect of the property may also include phone calls to tradesmen to fix damage caused by a tenant, the cost of rubbish removal left by tenants.
However, no expenses that relate solely to the periods when the property wasn’t rented out are deductible. This may include phone calls to tradesmen to fix damage to the property you made when using the property for private use.
For added help we have an example below that helps show how you may apportion expenses for the property when it was only rented out for part of the year;
John owns a property in Perth, he rents the property out from the 1st of September 2016 to the 28th of February 2017. This is a total of 181 days. He lives alone in the house for the rest of the year. He pays council rates of $1,000.00 a year. He apportions the council rates based on the time the property was rented out.
Rental expenses x portion of year = deductible amount.
He can claim a deduction against his rental income of
$1,000.00 x 151/366 = $412.56
However, if John had to make a phone call to a local plumber to fix damage caused by a tenant or has other expenses that relate solely to the renting of the property, he would work the deduction for these by reasonably estimating the cost of each of the expenses; it wouldn’t be appropriate for John to work these expenses using the above method.
Another example is;
The Ryan’s have a property which they jointly own. They rent the property out at market rates and use it as a holiday home. They also advertise the property for rent during the year through a real estate agent. The Ryan’s use the property themselves for four weeks during the year.
Throughout the year, the Ryan’s expenses for the property are $34,801.00. This includes interest on the funds borrowed to purchase the holiday home, property insurance, agents commission, maintenance costs, council rates, the decline in value of depreciating assets and capital works deductions.
The Ryan’s receive $25,650.00 from renting the property out throughout the year. No deductions can be claimed for the four weeks the Ryan’s used the property for personal use. The Ryan’s can claim some deductions for their expenses based on the portion the property was rented or available for rent.
The Ryan’s rental income and deductions for the year are as follows:
Rent Received: $25,650.00
Rental Deductions (48/52 x $34,801.00): $32,124
Rental Loss: $6,474.00
Due to the Ryan’s being joint owners they must claim a rental loss of $3,237 each in their 2017 Australian Tax Returns.
Rental Properties on Only a Part of the Property is Used
If you only use part of your property to earn rental income, you can claim expenses for the part that relates to the rental income. For a general guide, apportionment should be made on a floor-area basis, this could be by reference to the floor area that is solely rented by a tenant and is not shared.
An example of this is;
Julie’s private residence includes a flat that is self-contained. The floor area of the flat is one third of the entire residence area. Julie rented out the flat for six months throughout the year at $200 a week. Throughout the rest of the year her niece, Betty, lived in the flat rent free.
The annual mortgage interest, building insurance, rates and taxes for the whole property amounted to $9,000.00. By using the floor-area method Julie would apportion the expenses by one third making $3,000.00 from the $9,000.00 applicable to the flat. However, because Julie used the flat to produce income for only half the year she can claim a deduction of only $1,500.00 which is half of the $3,000.00. If no other expenses were made, Julie would use the below method to calculate the income and expenses for the property as:
Rental Income: $5,200.00 (26 weeks x $200.00)
Expenses: $1,500 ($9,000.00 x 1/3 x 50%)
Net Rental Income: $3,700.00
Non-commercial Rental Properties
If you let a property, or even part of a property at less than normal commercial rates, this could limit the amount of deductions you can claim. To help explain this better we have included an example below;
Sarah and Dean have a holiday home they own jointly. During holiday periods, the rent is $840 a week. They advertise the property for rent during the year through a real estate agent. Sarah and Dean arrange with the agent for their friend Courtney to stay at the property for three weeks at a nominal rent of $200 a week. They also use the property themselves for four weeks during the year.
During the year, Sarah and Dean’s expenses for the property are $20,800 ($400 per week). This includes interest on loan to purchase the holiday home, property insurance, the agent’s commission, maintenance costs, council rates, the decline in value of depreciating assets and capital works deductions.
Sarah and Dean receive $10,000 from renting out the property during the year. This includes the $600 they received from Courtney. No deductions can be claimed for the four weeks Sarah and Dean used the property themselves.
Sarah and Dean can claim deductions for their expenses based on the proportion of the income year it was rented out or was available for rent at the market rate: 45/52 weeks x $20,800 = $18,000.
If Courtney had rented the property for the market rate, Sarah and Dean would have been able to claim deductions for the three-week period of $1200 (3/52 x $20,800 = $1200).
However, because the rent Sarah and Dean received from Courtney was less than the market rate and their expenses were more than the rent received during that period, they cannot claim all the expenses. Sarah and Dean can only claim deductions equal to the amount of the rent during this period – that is, $600.
Sarah and Dean’s rental income and deductions for the year would be as follows:
Rent Received: $10,000.00
Rental Deductions ($18,000.00 + $600.00): $18,600.00
Rental Loss: -$8,600.00
Due to Sarah and Dean being joint owners, Sarah and Dean claim a rental loss of $4,300 each in their tax returns.
NOTE: Remember it is always a good idea to keep all receipts, invoices, and bills. This will help to keep an accurate record of what income was earned for the year and what expenses you accrued throughout the year.
General advice disclaimer
General advice warning: The advice provided is general advice only as, in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.