News, views and more

1.  Can I claim deductions on my holiday house?

Provided you rent the holiday house out, you can claim deductions to the extent the property has been used to generate income. The main costs you will wish to claim are interest, rates, strata levies, land tax, insurance and repairs and maintenance (holding costs). 

Provided the property is "available for rent", then costs will be deductible. The ATO provides guidance on what is "genuinely" available for rent. If you use the property for private purposes, only part of the property is available for rent, and you will be entitled to a deduction for a proportion of your expenses. If you rent out at non-commercial rates, e.g., 60% of the market rates, your tax agent will need to apportion deductions accordingly.

Even if expenses are non-deductible, you should keep a record of these costs, as they will reduce the capital gains tax in the event you sell the holiday home. The ATO provides some examples of situations that are not "available for rent".

Unreasonable Rental Conditions

Josh and Maria are retired and own a holiday home where they stay periodically. They advertise the property for short-term holiday rental through a real estate agent.

Josh and Maria have instructed the agent that they must personally approve tenants before they are permitted to stay, and prospective tenants must provide references and have no children or pets.

At no time during the year do Josh and Maria agree to rent out the property even though they receive several inquiries.

The conditions placed on renting the property and Josh and Maria's refusal to rent it to prospective tenants indicate their intention is not to make income from the property, but to reserve it for their own use. Josh and Maria cannot claim any deductions for the property.

Private Use by owners during Key periods

Daniel and Kate have two school-aged children and own a holiday house near the beach. The house is located in an area popular with summer holiday makers but only accessible by four-wheel drive vehicles.

During the year Daniel and Kate advertise the property for rent through a local real estate agent. However, Daniel and Kate advise the agent that the property is not to be rented out during each school holiday period. They want to reserve the property for their own use.

While there would be demand for the property during the summer holiday period, there is no demand outside this period because of the small number of holiday makers and the location and limited access to the property.

The house is not rented out at all during the income year.

In Daniel and Kate's circumstances, they cannot claim any deductions for the property. They did not have a genuine intention to make income from the property. It was essentially for private use.

If in the circumstances, Daniel and Kate happened to rent out the property for a period; they can claim a deduction for a proportion of their expenses based on the period the property was actually rented out. For example, if the house was rented out for two weeks, they could claim a deduction for 2/52 of their expenses.

2.  I have an investment property that needs renovation. Can I claim deductions?

I have an investment property that required a new kitchen and a new bathroom, as they were run down and old. With delays in getting builders and building supplies it takes 3 months to do the work. The property was rented out immediately before and after the repair work. Can I claim deductions for interest, rates and taxes during the period it was being renovated? 

Since July 2019, the ATO brought in rules to prevent the deduction of holding costs (section 26-102 ITAA1997) during building works. A Draft Ruling TR 2021/D5 suggests that whilst a property is being repaired, these holding costs are still deductible. 

However, where residential premises are being Substantially renovated, then no deductions are available until the premises can be lawfully occupied. "Substantial Renovations" are defined by GSTR 2003/3.

• the renovations need to affect the building as a whole; and

• the renovations need to result in the removal or replacement of all or substantially all of the building.

For renovations to be substantial, they must directly affect most rooms in a building. The renovation of only one part of a building, without any work on the remaining parts, would not constitute substantial renovations.

For example, the owner of a large 4 bedroom house removes the wall between two bedrooms to create a large bedroom with an ensuite. The former door to one of the bedrooms is removed and replaced with gyprock so that the newly created larger bedroom can only be entered by one doorway. The room is repainted and recarpeted. Although significant, the work does not constitute substantial renovations as only one area of the house is affected.

Therefore, although the property is not available for rent during the renovations, because the renovations are not substantial and the principal purpose of incurring expenses is to generate income, all holding costs incurred during the period of renovation should be deductible. ATO guidance TR 2021/D5 is still in draft mode in relation to the claiming of holding costs for vacant land.  

3.  Can I claim travel expenses to inspect my investment property?

Since 1 July 2017, taxpayers are not able to deduct travel expenses to inspect their residential investment properties, even for the purpose of maintenance, unless they are in the business of letting rental properties.

If you are an individual and you receive income from letting property to a tenant, or multiple tenants, you are not typically carrying on a business of letting rental properties. Generally, these activities are a form of investment rather than a business, so you can't claim deductions for travel expenses.

Entities that can claim travel expenses

You can claim travel expenses if you're a:

• corporate tax entity

• superannuation plan that is not a self-managed superannuation fund

• public unit trust

• managed investment trust

• unit trust or a partnership, where all of the members are entities of a type listed above.

However, if you are an individual owning a commercial investment property you can claim travel expenses to inspect the commercial property. 

Also, if you own a property overseas, or if you travel a considerable distance to inspect a rental property requiring overnight accommodation, you will be allowed a deduction for travel and accommodation costs provided inspecting the property is the main purpose of the trip.  

4.  I have heard I can claim depreciation on my investment property. What is this and what can I claim?

Property depreciation is a "non-cash deduction" that allows investors to offset their investment property's decline in value from their taxable income.

Claims on property depreciation will fall into one of two categories:

• Capital works allowance (Division 43) - covering the value of the building's structure

• Plant and equipment depreciation (Division 40) - covering the value of removable items

Generally, you will need a quantity surveyor's report to identify and separate the cost of the building structure subject to the 2.5% capital works allowance and the Plant and Equipment which can be deducted roughly over 5 – 15 years. Examples of Plant and Equipment are floating timber flooring, carpets, curtains, appliances, hot water systems and furniture. In order to get the tax deduction for plant and equipment (division 40), the home will need to be brand new or substantially renovated when the property is purchased and/or you subsequently purchase equipment (new or 2^nd hand) after you purchase the property. In addition, you will need to rent out the property immediately after purchase. If you purchase an older property and perform substantial renovations, you can claim depreciation on these.  

Substantial renovations of a rental property are renovations in which all or substantially all, of a building is removed or is replaced. This could include removing or replacing foundations, external walls, interior supporting walls, floors, roof or staircases.

5.  I want to purchase a larger home and keep my existing apartment as a rental property. Is this a good idea from a tax perspective?

I want to purchase a larger home and keep my existing apartment as a rental property. I have been paying principal and interest repayments on my existing apartment for the last 5 years. Is this a good idea from a tax perspective?

Whether this is a good idea from a tax perspective or not, it may be a good investment idea. Therefore, you will need to weigh up the pros and cons. Assuming your equity in the property is significant, given the principal and deposit paid, it is likely the apartment will become a "positively geared" investment. Positively geared means the rental income exceeds the allowable deductions of holding costs (i.e., interest, rates, repairs etc.) and depreciation. If you currently have low taxable income, then this could be a good idea, even though you will likely have less deductions for depreciation than if you purchased another investment property.

However, if you have to borrow a significant sum to purchase the larger home and you have high taxable income, a better tax outcome will be to have a "negatively geared" Investment with more borrowings for the investment property and less borrowings for the non-deductible home. Negatively geared means the costs, including depreciation incurred in earning rental income, exceed the rental income and the loss on the rental property can be deducted from your other income.

Refinancing the loan for the apartment cannot bring back paid-off debt to become deductible debt.

As per TR 2004/4 Interest is deductible if

• the interest is not incurred 'too soon', is not preliminary to the income earning activities, and is not a prelude to those activities;
• the interest is not private or domestic;
• the period of interest outgoings prior to the derivation of relevant assessable income is not so long, taking into account the kind of income-earning activities involved, that the necessary connection between outgoings and assessable income is lost;
• the interest is incurred with one end in view, the gaining or producing of assessable income; and continuing efforts are undertaken in pursuit of that end.

6.  When should I talk to my accountant and financial adviser?

1. 1. When you start considering a property purchase

      To assess affordability and consider strategies

   2. Before you apply for finance with a mortgage broker

      To ensure tax debts are paid,

      Consider the structure of ownership and tax deductibility of loans

   3. Before you sign a property contract

      To consider ownership

   4. When the property settles

      Ensure you have insurance

   5. Before conducting any initial repairs or renovations AND

   6. Before the end of the financial year.

WLM can help

If you would like advice or assistance, please contact us.