An Illawarra expert says now is a good time for rental property owners to ensure they understand what costs are tax deductible.
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Adam Cole, a tax and business advisory partner at KPMG Wollongong said there are two key changes to long-standing rental property tax deductions that apply to residential rental properties landlords from July 1, 2018.
The changes affect individuals, self-managed super funds and discretionary trusts which invest in residential real estate.
The changes are:
*Travel expenses relating to inspecting, maintaining or collecting rent for a residential rental property can no longer be claimed as a tax deduction.
“You can continue to claim a tax deduction for these costs where the property is owned by a company, or you are deemed to be carrying on a business of property investing, which is far more involved than merely owning several rental properties,” he said.
*Plant and equipment depreciation deductions will be limited to outlays actually incurred by the property investor.
Plant and equipment is typically mechanical fixtures or items that can be relatively easily removed (eg. hot water system, carpet, dishwasher).
“This change applies prospectively, such that plant and equipment forming part of residential investment properties as of May 9, 2017 will continue to give rise to a tax depreciation deduction until the owner no longer owns the asset, or the asset reaches the end of its effective life,” Mr Cole said.
“For example, if you purchased a residential rental property during the June 30, 2018 tax year, the plant and equipment such as a dishwasher installed by the previous owner will be ineligible for a tax depreciation claim.
“However, if you purchase a new dishwasher after you own the property, you will be entitled to claim tax deprecation.”
Mr Cole said pre-paid rental property expenses incurred by an individual in the 2017/18 tax year, covering a period of 12 months or less, may be entitled to an immediate deduction.
Examples of common rental property expenses which are pre-paid include interest, insurance and body corporate fees.
“This provides a tax planning opportunity which is a timing benefit, by bringing forward deductions that may otherwise be claimed in a subsequent financial year and can be useful in smoothing out an individual’s taxable income for a year where higher than normal income is received,” he said.
“It is important to note that if these expenses do not continue to be pre-paid in the next financial year, the individual will not be entitled to claim a tax deduction for the pre-paid cost, given the deduction was claimed in the earlier year – which can be a trap.”
Mr Cole also said a common area that the Australian Taxation Office review for rental properties is checking whether the property is genuinely available for rent, and where properties have excessive interest deductions.
“Where your property is only available for rent for part of the year, you are only entitled to claim a tax deduction for the period the property was earning rental income,” he said.
“Like most things tax-related, the devil is in the detail. Keeping the right records supporting rental deductions is critical, in the event that your tax return is subject to review by the ATO.”
