The Australian Taxation Office have identified certain claims for tax deductions made by rental property owners that in their view are areas of concern where claims can be incorrectly made. Typically these are the higher dollar expenses such as Interest, Body Corporate fees, Legal Expenses and Repairs.
Interest
Interest that relates to a rental property that is rented or available for rent is tax deductible. It is irrelevant what security is used for the loan. The ATO are concerned that claims are being made for all of the interest on loans where only part of the loan relates to the rental property or that the loan does not relate to the rental property. The question to ask is “why was the borrowing incurred?” If the answer is “to buy an income producing asset” the interest should be tax deductible. Please note that interest may also be deductible where a property is being renovated with the view of being rented. Interest may also continue to be deductible after the tenancy has finished.
Body Corporate Fees
Usually body corporate fees are levied to provide for the on-going administration of the strata plan and operating expenses. Typically the body corporate would incur expenses such as electricity, insurances, repairs etc, where in such cases your levies would be tax deductible, however if the body corporate requires you to make payments to a special purpose fund or payments to the sinking fund to pay for capital expenditure, these levies are not deductible. This is a difficult situation as many members of strata plans will find that their contributions are divided between the administration fund and the sinking fund. As such, many will claim the total levies as a tax deduction, however some of the sinking funds money may be used for capital expenditure.
Legal Expenses
Some legal expenses such as costs of evicting a non paying tenant are tax deductible, however most legal costs are of a capital nature such as purchasing or selling the property, resisting land resumption and defending your title to the property. These are not deductible however they can be carried forward as part of the cost of the property when determining any capital gains made on the sale of the property.
Repairs and Maintenance
Repairs you make to a rental property may be deductible, however the repairs must relate directly to wear and tear or other damage that occurred as a result of renting the property. It is sometimes difficult for property owners to differentiate between tax deductible repairs and non tax deductible improvements. The word 'repairs' has its ordinary meaning. It ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated, e.g. internal painting of a rental property would qualify as a repair.
An improvement (capital works) changes the nature of the asset. Such things as renovations, extensions and alterations are non deductible capital improvements and are not tax deductible although they can be carried forward as part of the cost of the property when determining capital gains. Replacement of things such as free-standing stoves, refrigerators and furniture is not deductible; however these items (if they are not permanent fixtures) are plant on which depreciation is allowable. The cost of replacing items such as locks and exhaust fans, which are permanent fixtures installed in rental premises is deductible as a repair provided it is a replacement of a worn out unit by a new unit of a similar design that simply restores its efficiency of function and is not an improvement. Care must be exercised when claiming repairs prior to the property being rented out as these are normally not deductible, also repairs carried out after the tenancy has ceased may still remain deductible repairs as long as the damage can be identified with the period when the property was rented.
PLEASE NOTE: As at July 2010, the above is intended as general news and not advice, as each individual's situation will vary depending upon specific circumstances relating to that individual you should seek Professional Legal or Accounting advice as it relates to your own circumstances.
