Investment Property Tax Guide – Common Property Expenses You Can’t Claim on Your Taxes

By Defy Gunadi May 5, 2024 | Tags: Property Investment, Property Tax

Investment Property Tax Guide

Recently, the Australian Taxation Office (ATO) has announced that property expense claims will be a focal point of their scrutiny. This initiative stems from observations that some taxpayers tend to overclaim their investment property expenses. Even those who enlist the services of an accountant are not safe to these discrepancies. In some cases, clients may engage accountants who prepare tax returns on the spot, a practice that does not afford them sufficient time to thoroughly review information or reflect adequately on the case at hand. This rushed process can lead to errors or omissions in claiming legitimate deductions.

In our experience, the majority of property investors actually underclaim their property expenses, simply because they are not aware of what they can claim. For example, we recently spoke with a client named Sheryl who couldn’t find her painting invoice from May 2023. As someone with limited time, she thought she would call the painter when she had a moment. She was not concerned about finding the invoice before lodging her tax return because she thought that the cost would be depreciated over two months and would not result in substantial tax savings.

Consequently, she was prepared to forego this year’s depreciation claim, simply to lodge her tax return sooner. She planned to add the depreciation in the next financial year, once she had time to chase the painter for a copy of the invoice. However, after speaking with us at Investax property tax specialist, she learned that she could actually claim the entire painting cost in this financial year. Motivated by the potential of a larger claim, she decided to pursue the painter and obtain the invoice before lodging her tax return. Therefore, it is vital for property investors to be well-informed about the full spectrum of deductible expenses to ensure they are maximising their tax benefits legally and efficiently.

We have written many articles and case studies on complex topics regarding investment properties, so we decided to go back to basics. However, our basics are full of twists and turns, so we have decided to segment this topic about investment property claims into two series. In this article, we will discuss what you shouldn’t claim, even though the expenses are directly related to your investment property. This can serve as a beginner’s guide to investment properties, while also providing valuable insights for seasoned investors.

Investment Property Expense Types

There are several expenses associated with rental properties. However, this does not mean you can immediately claim a tax deduction for all expenses related to an investment property.

For tax purposes, we categorize them into three categories:

Non-deductible expenses
Deductible expenses
Depreciation or amortization expenses

It’s important to understand the distinction in how these expenses are treated for tax purposes to maximise your financial benefits and comply with regulations.

Investment Property Tax Guide — Some expenses cannot be claimed as immediate deductions

Non-deductible expenses

Some expenses cannot be claimed as immediate deductions even though they are directly related to the property. For example, stamp duty paid to the government. However, these expenses can be recorded as acquisition costs, which will reduce future capital gains tax. In this section, we will cover annual deductions directly related to the investment property.

We have listed most common expenses for Residential Investment Property which you cannot claim deductions for your rental or investment property include:

Expenses not incurred by you, such as water or electricity usage charges that are paid by your tenants.
Expenses incurred when your property was not genuinely available for rent, including times when a holiday home is used privately. Please check Ron and Alex’s case study to understand more about what the ATO means by ‘genuinely available for rent.
Expenses unrelated to the rental activity of the property, such as personal use of a holiday home that is rented out part of the year.
Expenses associated with holding vacant land that is not being used to generate rental income.
The cost of acquiring certain second-hand depreciating assets for the property.
Acquisition and disposal costs of the property, which are typically capitalised.
Travel expenses to inspect a residential property before or after purchase.
Expenses incurred in relocating assets between properties prior to renting them out.
Expenses for attending rental seminars aimed at assisting you in finding a property to invest in.

Loan Interest is Not Tax Deductible

It is common knowledge among Australian taxpayers that you cannot claim home loan interest on your tax return for your primary residence. This is mainly because the Australian Tax Office does not allow people to claim personal expenses on their income tax. In some cases, even the loan interest on your investment property is not tax deductible. We have discussed some scenarios below:

Purpose of Withdrawal – Most investors in Australia have seen property appreciation over the last 10 years. It is common for investors who have borrowing capacity and equity in their properties to withdraw equity from their investment property, which provides additional funds on top of the mortgage borrowed from the bank to purchase the property. If you use this new withdrawal to purchase your primary residence or renovate your primary residence, the interest is not tax deductible, even though the loan is secured against your investment property. We have seen countless property owners make the mistake of claiming their investment loan on their taxes even though they used the additional funds for private purposes.

Property Genuinely Not Available for Rent – The interest on the investment property loan will not be tax-deductible if the property owner does not genuinely intend to earn income from the property and may instead be using it for personal purposes or reserving it for private use. This may also apply even if they have a genuine intention to rent out the property, but their overly strict rental requirements do not reflect this intention.

According to ATO guidelines, there are several indicators that a property might not be genuinely available for rent:

The property is advertised in a limited way, such as only at your workplace, by word of mouth, or exclusively during off-peak periods, which significantly reduces its exposure to potential tenants.
The location, condition, or accessibility of the property makes it unlikely that tenants will be interested in renting it.
Unreasonable or overly strict conditions are placed on renting out the property, reducing its likelihood of being rented. Examples include setting rent prices above market rates for similar properties in the area or imposing a combination of restrictive conditions, such as requiring references for short holiday stays, and stipulations like ‘no children’ and ‘no pets’.
The property owner refuses to rent to interested parties without valid reasons.

Part of the Year the property was used by the Owner – This generally happens to property investors who own holiday homes or rent out their properties through platforms like Airbnb. It’s important for these investors to understand that they cannot claim deductions for expenses incurred during periods of personal use.

For effective tax management, expenses must be apportioned based on the duration the property was rented out or was available for rent. For instance, loan interest and council rates for the year can be split according to the time the property was actively rented or available. Expenses that are directly associated with the rental activity, such as real estate agent fees, advertising for tenants, and repairs from tenant damage, are fully deductible.

Non-Deductible But Deductible

Seriously? Why does tax have to be so complicated? Below, we discuss some expenses that often confuse taxpayers and frequently become the basis for incorrect tax claims. The confusion arises because these expenses are tax-deductible when incurred for commercial properties, or, although incurred for residential properties, when those residential properties are owned by special or excluded entities.

Travel expenses are not generally tax deductible for residential properties; however, they are tax deductible for commercial properties, and some select entities, even if they own residential properties.

Travel expenses include the costs of:

travel to inspect, maintain or collect rent for the property.
meals and accommodation that relate to that travel.

The list of entities referred to as ‘Excluded Entities’ that can claim travel expenses, even if they own residential properties, is provided below:

A corporate tax entity
A superannuation plan that is not a self-managed superannuation fund
A public unit Trust.
A managed investment Trust, or
A unit trust or a partnership, if each of its members are entities of a type listed above at that time during the income year. For example, A Unit Trust Structure with a couple of companies as unit holders.

The same rule applies to certain second-hand depreciating assets. You cannot claim depreciation for second-hand assets against your residential property. However, depreciation deductions for second-hand assets are allowed if it’s a commercial property for the entities mentioned above.

For example, Adam bought an established residential property built five years ago and registered it under his name. Since its construction, none of the appliances, including the cooktop, oven, and air conditioner, have been replaced. Adam has rented out the property since his purchase and spent a few hundred dollars on travel and accommodation to inspect the property annually. In this case, Adam cannot claim any travel expenses or depreciation for the cooktop, oven, or air conditioner because they are considered second-hand assets.

However, if Adam had purchased this property under his company, Adam Pty Ltd, he would be eligible to claim both travel expenses and depreciation for these assets, even though they are considered second-hand.

Deductions for Vacant Land follow the same principle as mentioned above. Immediate deductions are not available for any maintenance costs if the land is vacant. However, these costs can be a part of the cost base element, which will reduce future capital gains if the land is sold. What is considered vacant? The answer is: there is no permanent structure that can be lawfully occupied, and it hasn’t been rented out or made available for rent.

On the other hand, if the land is used for commercial purposes by the landowner or the owner’s affiliate, the costs are tax-deductible. The land can be commercially used by the landowner, the landowner’s children, or an entity connected to the landowner. The expenses can be tax-deductible if the land has been used for primary production by the aforementioned people or entities.

Additionally, if the land is owned by the excluded or special entities mentioned above, the costs are tax-deductible even if the land is not used for commercial purposes. The Entities are –

A corporate tax entity
A superannuation plan that is not a self-managed superannuation fund
A public unit Trust
A managed investment Trust, or
A unit trust or a partnership, if each of its members are entities of a type listed above at that time during the income year. For example, A Unit Trust Structure with a couple of companies as unit holders.

Costs associated with property purchases and sales are not eligible for immediate tax deductions. However, they do form part of one of the three elements of the property’s cost base, which reduces the capital gain. If you would like to learn more about the cost base element, please feel free to visit Shan and Zan’s case study on our website.

You cannot claim a deduction for the costs of acquiring or disposing of your rental property against your rental income. Examples include:

Purchase price of the property
Fees for bank guarantees in lieu of deposits.
Conveyancing fees
Fees of a buyer’s agent you engage to find you a suitable rental property to purchase, including cases where the agent recommends a property manager free of charge as an optional or supplementary service.
Stamp duty on the transfer of the property (but not stamp duty on a lease of the property)
Agent commission for the sale
Advertising costs
Any repairs and maintenance costs related to the sale, especially when the property is not available for rent.
Cost of hiring furniture to make the property presentable for sale.

According to the ATO, the cost of lease preparation, including stamp duty and registration costs for leases, is tax deductible. For example, a freehold title cannot be obtained for properties in the Australian Capital Territory (ACT). They are commonly acquired under a 99-year crown lease. Therefore, stamp duty, preparation, and registration costs you incur on the lease of an ACT property are deductible to the extent that you use the property as a rental property.

This is the wrap for this particular topic of Non-deductible Investment Property Expenses. Since you’ve come to this part of the article, it seems you are really interested in understanding what works and what doesn’t. You must have noticed that the ownership structure makes a huge difference; some owners can claim travel expenses for their residential properties while others cannot. Similarly, some expenses are tax-deductible for commercial properties, whereas the same expenses are not for residential properties. Understanding the intricate details of tax deductions and ownership structures is not just beneficial—it’s crucial for maximizing your financial returns.

Navigating these complexities requires a thorough insight and an expert’s touch, especially given how impactful the right decisions can be on your financial outcomes. Whether you are a seasoned property investor or contemplating your first property purchase, knowing how to leverage these nuances can significantly affect your tax benefits. At Investax Group, we specialise in providing personalised tax advice that is tailored to each client’s unique circumstances. If you’re looking to ensure that you’re not only compliant but also making the most out of your investment properties, don’t hesitate to reach out. Contact Investax Group today and let us help you achieve the best possible tax outcomes for your investments.