Chartered accountant GAIL FREEMAN shares the advice she gave a couple who had just bought a holiday rental property at the coast.

Sanjay and Aditi have just bought an investment property and had heard the Australian Taxation Office (ATO) was focusing on the rental sector this year.

They came to see me wanting to know what they needed to know.

“Sanjay, rentals can be quite complex and there are a few things that you need to know,” I said.

“I recently read that the ATO had said nine out of 10 rental property returns lodged are incorrect. So as far as the ATO is concerned, this is a big problem.

“It is not uncommon when you buy a new investment property that you have to do repairs.

“But the first rule with repairs is that they have to arise during your period of ownership. If the property needs repainting when you bought it, the need must have arisen before you owned it. If it arose before you bought it, that is regarded as an initial repair and either comes off the capital gain when you sell or it can be depreciated over several years while you own the property.

“On the other hand, if you repaint the property in a couple of years’ time the need for the repaint arose as a direct result of it being rented out by you and you can claim the cost in full.

“Exterior painting can only be claimed every few years as it is less likely to be damaged by the tenants.”

I told the couple that there were also issues around large items of capital expenditure that they might think were a repair but the ATO would consider to be an improvement. These have to be written off over 40 years.

Aditi said their investment property was at the coast and they spent a few nights there this year. She wanted to know if that had any impact on the calculations?

I said: “Yes, Aditi, you will need to keep a record of your private use every year and that will enable us to apportion the deductions.

“It is important to note that the property needs to be available for rent and the ATO has provided details of when they regard a property as being available for rent.

“The best idea is to have it listed with an agent all year round. If it is only available to friends and family and not advertised anywhere, the ATO regards this as not being available for rent all year and the apportionment is quite different.

“Also the income and deductions have to be claimed in the ratio in which the property is owned, not in a way that provides a larger tax benefit for one or other of you.”

The other area that caused a lot of difficulty was interest claims, I told them.

“In simple terms it is the purpose of borrowing that determines the deductibility of interest,” I said.

“So if you draw down on your mortgage to buy a car, for example, that component of the interest is not deductible. A loan apportionment is required to be prepared.

“It is not the security you give for a loan that allows you to claim the interest, it is the use to which the funds are put. So be careful if you renegotiate the loan, draw down or even make additional repayments.

“You would be wise to seek advice before you actually make any changes to the loan. Also using an offset account for an investment property may not be as helpful as it is when used for your home mortgage.”

Sanjay said: “That’s a lot to absorb, Gail. I’m sure we’ll have further questions for you in the future.”

If you need advice on rental property claims or any other tax matter, please contact the expert team at Gail Freeman & Co Pty Ltd on 02 6295 2844, email info@gailfreeman.com.au or visit gailfreeman.com.au

Disclaimer
This column contains general advice, please do not rely on it. If you require specific advice on this topic please contact Gail Freeman or your professional adviser. Authorised Representative of Lifespan Financial Planning Pty Ltd AFS Lic No. 229892.