Investing in a rental property has taxation implications. While the rental income and any capital gain on disposal are assessable income, expenditure in financing the acquisition of the property and its ongoing maintenance is generally deductible. residential rent is input taxed while commercial rent is subject to GST.

Tax Tips for the Property Investor

Capital Gains Tax (CGT) - The purchase and sale of investment properties is subject to Capital Gains Tax. This tax is levied on the difference between the purchase cost(s) and the sale cost(s). These is no set CGT tax rate as it is dependent on your taxable income at the time of disposal of the asset. 

If the property has been purchased by an individual, trust or partnership, it is able to reduce the capital gain by 50% provided the asset has been retained for a period exceeding 12 months. This means that effectively, the tax rates are halved.

Depreciation - When claiming expenses associated with rental properties, you should never overlook claiming your depreciation expense for the deterioration of the fixtures and fittings each year in the property, from carpets to cupboards.

Furthermore, if the residential property was constructed after 18/7/1985, you will also be able to claim depreciation of the building.

Companies - Broadly speaking, companies are not desired investment vehicles for buying and selling properties. This is due to the fact that they do not received the Capital Gains Tax 50% Discount on profits from the sale.

Discretionary Trusts - It is generally believed that the best and most tax effective investment vehicle for property investment is a Discretionary Trust. This is due to the fact that profits are distributed at the trustee's discretion to beneficiaries including family members and associated companies. Furthermore, asset protection advantages may also be attractive to taxpayers who may be exposed to litigation.

The Golden Rule is "Own Nothing, Control Everything"

Land tax - Properties owned by you other than your pricipal place of residence exceeding the threshhold attracts Land Tax. If your land value exceeds this threshhold, you should research the various concessions and exemptions that are available depending on the type of use of the land.

Self-Managed Superannuation Funds - If you are unhappy with your current superannuation performance, you may consider setting up a SMSF to assist in the purchase of an investment property. By combining a unit trust and SMSF, the taxpayer is able to fund for their retirement by direct property investment.

Unit Trusts - The Unit Trust has emerged as the best vehicle for syndicated property investments. When unrelated parties are involved in property investment, a Unit trust allows each party to receive a fixed entitlement. Examples of these include the big property managed funds and private property developers. The various advantages associated with this structure include possible access to the Capital Gains Tax 50% Discount and the acceptance of Self-Managed Superannuation Funds as unit holders.

Stamp Duty - If you own a rental property and later wish to transfer it to other family members or associated parties, you will incurr full ad valorem duty on transfer.

If the property was acquired in a unit trust and had value less than $1 million, then the unit trust could redeem the units and issue new units to the incoming family member or associated party. There would be no stamp duty payable as there has been no transfer of ownership.

Principal Place of Residence (PPR) - All Australians are able to claim a capital gains tax exemption for their PPR. If you do  not live in the property, you may still be able to access this exemption provided a PPR Election is completed. Further, you may continue treating the property as your PPR for a period of 6 years even if it is being rented.

Rental Income includes:-

• rent
• compensation for lost rent (ie insurance payment)
• letting fees
• reimbursements (perhaps by tenant)
• lease surrender receipt
• lease premium receipt

Bond money is NOT income and therefore when repaid, cannot be claimed as an expense. If all or part of the Bond is kept, it is then included as income

Rental Expenses you can claim immediately include:

• advertising for tenants
• bank charges
• body corporate fees
• cleaning
• council rates
• electricity and gas
• gardening and lawn mowing
• in-house audio/video service charges
• insurance:
•  - building
•  - contents
•  - public liability
• interest on loans ( time effected)
• land tax
• legal expenses (time effected)
• Lease costs: (exceptions apply)
•  - preparation
•  - registration
•  - stamp duty
• mortgage discharge expenses (in year incurred)
• pest control
• property agent's fees and commission
• quantity surveyor's fees
• repairs and maintenance
• secretarial and bookkeeping fees
• security patrol fees
• servicing costs - i.e. a water heater
• stationery and postage
• telephone calls and rental
• tax related expenses
• travel and car expenses: (restrictions apply)
•  - rent collection
•  - inspection of property
•  - maintenance of property
• water charges

In order to claim any of the above, you must have actually incurred them.

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