If you rent out your home, you may be eligible to claim tax deductions on the interest portion of your home loan, even if the loan is still classified as an owner-occupied loan. The key factor that determines tax deductibility is how the loan funds are used. If your property is generating rental income, you can typically claim the interest on the loan as a tax deduction, because the borrowed funds are being used to produce assessable income.
For example, even if your home loan was initially for an owner-occupied property and you didn’t convert it to an investment loan, the interest becomes deductible once the property is rented out. The Australian Taxation Office (ATO) allows deductions based on the usage of the property rather than the original classification of the loan. However, you must ensure the property is either rented out or genuinely available for rent to claim these deductions.
Keep in mind that if a portion of the loan is used for personal purposes, you will need to apportion the interest and only claim deductions on the portion related to the income-generating rental activity.
From 1 July 2019, deductions are limited for losses or outgoings that relate to holding vacant land. Broadly, subsection 26-102(1) denies a deduction for losses or outgoings relating to holding land on which there is no substantial and permanent structure in use or available for use.
Subsection 26-102(1) clarifies that any interest or borrowing costs to acquire land are included as a cost of holding land. Examples of other costs of holding land include council rates, land taxes and maintenance costs.
In the context of section 26-102, we do not consider the costs of constructing a substantial and permanent structure on the land, or any interest or borrowing costs (to the extent they are associated with construction), to be a loss or outgoing related to holding land.
Some exclusions apply. This draft Rulingexplains the Commissioner’s view of the application and the exclusions of section 26-102 of the Income Tax Assessment Act 1997. The examples used in this draft Ruling all assume that the losses or outgoings described would be deductible if section 26-102 did not apply.
Ruling Example – Giovanna takes out a mortgage to purchase a vacant block of land in September 2019. Giovanna intends to build a house on the land (which she will rent out). Giovanna does not carry on a business. Giovanna takes out a separate loan for the construction of the house. Giovanna will not be able to claim a deduction for her interest expense which relates to acquiring the land until the house is lawfully able to be occupied and leased or available for lease. If a deduction is otherwise available for the construction loan interest expense, Giovanna will not be prevented from deducting the expense by section 26-102.
Let’s break down the ruling:
Initial Situation:
Giovanna buys a vacant block of land in September 2019.
She intends to build a house on the land to rent out, but she does not carry on a business (so she’s not considered to be operating as a property developer).
She takes out a mortgage to buy the land and then takes out a separate loan for the construction of the house.
Interest Deduction Rules:
The interest on the mortgage for the land cannot be deducted as an expense until the house is completed and is legally able to be occupied or is available for lease.
This means that until the house is ready to be rented out, the interest expense related to the purchase of the land does not qualify as a tax deduction.
Construction Loan Interest:
The ruling also mentions the construction loan interest.
It says that if Giovanna meets the general conditions to deduct the construction loan interest, section 26-102 of the tax law will not prevent her from doing so.
Explanation of the Last Two Lines:
“If a deduction is otherwise available for the construction loan interest expense”: This means that if, under normal tax rules, Giovanna would be allowed to deduct the interest on the construction loan (for example, because the property is used to generate income), then she can claim that deduction.
“Giovanna will not be prevented from deducting the expense by section 26-102”: Section 26-102 is a part of the tax law that limits deductions for interest expenses on vacant land. However, this section will not stop Giovanna from claiming the interest on the construction loan as a deduction, provided she qualifies for it under the general rules.
Summary:
Giovanna can only claim a deduction for the interest on the land mortgage once the house is ready for occupation and available for rent.
The interest on the construction loan can be deducted as long as it meets the general criteria for deductibility, and section 26-102 will not disallow this deduction.
You are allowed to claim 100% of the interest incurred on the loan used to purchase the investment property, even though the loan is in joint names with your spouse. The fact that the loan is in both names does not prevent you from claiming the full interest as a rental property expense.
As a general rule, rental income and expenses should be reported in the tax return of the legal owner of the property—that is, the person whose name is on the property’s registered title. According to Taxation Ruling TR 93/32, rental property income and expenses are normally split between the owners based on their legal interest in the property. While the outcome can differ if equitable interests in the property are different from the legal interests, the ATO generally assumes that legal and equitable interests are the same when the parties are related, such as between spouses.
Although clear public guidance on this specific scenario is limited, there have been private rulings where the ATO allowed one spouse to claim the full deduction for interest expenses, even when the loan was in joint names. This was typically permitted because the borrowed funds were used solely to acquire an income-producing asset held by that spouse. However, it’s important to note that private rulings issued to other taxpayers cannot be relied upon as a precedent for your situation.
In summary, you should be able to claim 100% of the loan interest on your rental property, as you are the sole legal owner, and the loan was used entirely to purchase the income-producing investment property.
Every state has its own land tax regulations. Below, we clarify some of the more confusing aspects of land tax rules related to the principal place of residence (PPOR) for those planning to be away from their primary residence.
Unoccupied Land Intended to be the Principal Place of Residence (PPOR) – 4-Year Rule
Unoccupied land refers to vacant land or land where an existing building is set to be renovated, demolished, and rebuilt. A tax exemption applies for up to four tax years under the following conditions:
The land was purchased during the year, or
The year in which significant steps were taken to enable building work to physically commence on the land, provided that no one other than the owner has occupied the land after its acquisition.
According to Revenue NSW, building work is considered to have physically commenced when demolition has begun, footings are excavated, or other preparatory work is undertaken. However, the preparation and lodgement of plans and development applications do not qualify as the physical commencement of building work.
We have encountered extreme cases where a house was destroyed by fire, and Revenue NSW regarded this as the physical commencement of building work. If you find yourself in a similar situation where your property is damaged or destroyed, and you are unable to occupy the land within four years, we recommend contacting Revenue NSW immediately to discuss your specific circumstances.
Change to principal place of residence – 6 Months
You might be able to get a PPOR exemption for two homes if you’ve bought a new home but haven’t sold or moved out of your old one by the tax date (31 December before each tax year). Both homes can be exempt for the same tax year if these conditions are met:
Your old home was your main residence on the tax date or the previous tax date.
You bought the new home within the 6 months leading up to the tax date.
You move into and live in the new home as your main residence by the next tax year’s tax date.
You don’t earn any income from the old home before the tax date during the time you own it.
This exemption for two properties only applies for one tax year.
Absent from your PPOR – 6 Years
You can be away from your main residence for up to six years and still keep your PPOR exemption for NSW land tax. For example, an owner may be absent during an extended holiday, or the owner may have taken an employment opportunity in another city.
You’ll still be considered as living in your home during your absence if:
You lived in the home for at least six months before leaving.
You don’t own, live in, or occupy another home during your absence.
You can rent out your home while you’re away, as long as it’s for no more than six continuous months or up to 182 days in the year before each tax date. Each overnight stay counts as one day.
If you rent out your home for longer, it might become liable for land tax the following year unless the rental income only covers basic expenses like council rates, water and energy bills, and regular maintenance (not mortgage repayments).
Basic maintenance includes things like lawn mowing, window cleaning, pool upkeep, and minor repairs. It doesn’t cover bigger jobs like repainting, replacing a water heater, or renovating a kitchen or bathroom.
As of 1 July 2024, the Superannuation Guarantee (SG) rate has increased to 11.5%. Employers must account for this change to ensure superannuation guarantee payments are correctly calculated. The SG rate is scheduled to further increase to 12% in July 2025.
Concessional Contribution Update:
The concessional super contributions cap has risen from $27,500 to $30,000 per year, effective from 1 July 2024. This is the maximum amount of before-tax contributions, including employer superannuation guarantee payments, that can be contributed annually without incurring additional tax, subject to any unused concessional cap amounts from previous years.
Non-Concessional Contribution Update:
The non-concessional super contributions cap has increased from $110,000 to $120,000 per year. If your total super balance is equal to or exceeds the general transfer balance cap ($1.9 million from 2023–24) at the end of the previous financial year, your non-concessional contributions cap is nil ($0) for the current financial year.
When Australian residents (for tax purposes) sell property valued at $750,000 or more and don’t provide a clearance certificate by settlement, 12.5% of the property purchase price must be withheld by the purchaser and paid to the ATO. This is known as the Foreign Resident Capital Gains Withholding (FRCGW) amount.
To avoid this withholding, Australian residents must obtain a ‘clearance certificate’ to prove they are not foreign residents. It is the vendor’s responsibility to secure the clearance certificate and provide it to the purchaser at or before settlement. To prevent any unforeseen delays and ensure the certificate is valid when presented to the purchaser, vendors should apply for the clearance certificate through the online form as early as possible in the sale process.
The main reasons a clearance certificate hasn’t been obtained before the settlement date are because clients:
Don’t allow enough time to make an application before settlement (the standard processing time is 28 days).
Have tax records that aren’t up to date.
Haven’t needed to lodge tax returns for several years (e.g., when returns were not necessary).
If this happens to you, you must lodge a tax return to claim the credit that was withheld, even if your income is below the threshold to lodge. Obtain the ‘payment confirmation’ from the purchaser. When completing the tax return, be sure to:
Declare your Australian assessable income, including any capital gain or loss from the disposal of the asset.
Claim a ‘Credit for foreign resident capital gains withholding amounts’ taken from the sale proceeds.
The withheld amount will be refunded in full if:
There are no tax debts.
There’s no CGT payable on the sale of the property.
No, you cannot claim a full Capital Gains Tax (CGT) exemption if you purchase a home with an existing lease agreement. Your primary residence is typically exempt from capital gains tax (CGT). For CGT purposes, this exemption applies from the time you acquire your home, as long as you move in as soon as practicable.
There are specific circumstances that can affect when your property qualifies as your main residence for CGT purposes:
Delays Due to Illness or Unforeseen Circumstances: If moving in is delayed due to illness or other unexpected events, your home remains exempt from CGT, provided you move in as soon as the cause of the delay is resolved (e.g., upon recovery from illness).
Property Rented to Someone Else: If you cannot move in immediately because the property is rented out, it will not be considered your main residence until you actually move in.
Owning Two Homes: If you buy a new home before selling your old one, you can designate both properties as your main residence for up to 6 months.
Example:
Emily signed a contract to buy a house in February. She took possession when settlement occurred in March.
We have provided two different scenarios below to explain what is considered practicable after settlement.
Scenario 1: Moving in as soon as practicable due to interstate work assignment
In early March, Emily’s employer assigned her to an interstate project for 5 months. She moved into the house when she returned in August.
Emily’s interstate assignment was unforeseen at the time she bought the house. She moved in as soon as practicable after the settlement of the contract. Therefore, she can treat the house as her main residence from the date she acquired it.
Scenario 2: Not practicable due to tenancy agreement
Alternatively, the house had an existing tenancy agreement that would not end until September, 6 months after the settlement. Due to this tenancy agreement, Emily could not move into the house until the lease ended in September.
In this case, Emily cannot treat the house as her main residence until she moves in. The property will only be exempt from CGT from the time she actually moves in, as it was not practicable for her to move in due to the existing tenancy agreement.
For Capital Gains Tax (CGT) purposes, your home qualifies for the main residence exemption from the time you acquire it, provided you move in as soon as practicable.
If you acquire a new home before you dispose of your old one, you can treat both properties as your main residence for up to 6 months under certain conditions.
You can claim this exemption if all of the following are true:
You lived in your old home as your main residence for a continuous period of at least 3 months in the 12 months before you disposed of it.
You did not use your old home to produce income (such as rent) during any part of that 12 months when it was not your main residence.
The new property becomes your main residence.
If it takes longer than 6 months to dispose of your old home, the main residence exemption applies to both homes only for the last 6 months before you dispose of your old home. For the period before this, when you owned both homes, you can choose which home to treat as your main residence. The other property will be subject to CGT for that period.
Buying your Principal Place of Residence (PPOR) in a Trust may initially seem like a strategic move for asset protection or tax planning. However, there are several significant drawbacks and complications that typically outweigh the potential benefits. Here are key reasons why you shouldn’t buy your PPOR in a trust:
Loss of Main Residence CGT Exemption
When you sell your principal place of residence, any capital gain is generally exempt from Capital Gains Tax (CGT) under the main residence exemption. If the property is held in a trust, this exemption is not available, meaning any capital gain realized on the sale of the property would be subject to CGT, potentially resulting in a significant tax liability.
No Land Tax Exemption
In most Australian states, your principal place of residence is exempt from land tax. However, this exemption does not apply if the property is owned by a trust. Consequently, you could be liable for land tax, which can be a substantial annual expense depending on the value of the property and the rates in your state.
Complexity and Costs
Setting up and maintaining a trust involves legal and administrative costs. Trusts require formal documentation, regular compliance, and annual financial reporting, all of which incur ongoing expenses without generating income from the property. This complexity adds an extra layer of management that is often unnecessary for a principal place of residence.
Financing Difficulties
Obtaining a mortgage for a property held in a trust can be more challenging than for a property held in an individual’s name. Lenders often view trust arrangements as higher risk and may require additional documentation, or larger deposits, making it more difficult and expensive to secure financing.
Personal Use Restrictions
A property held in a trust is generally considered a trust asset, which can complicate matters if you wish to make personal use of the property. Trust laws and the trust deed may restrict how the property can be used.
In conclusion, while there are scenarios where holding property in a trust can be beneficial, these are typically not applicable to a principal place of residence. The loss of significant tax exemptions, increased costs, and complexities usually make it an unattractive option for most homeowners. For tailored advice, it’s always best to consult with Investax Property Tax Specialists who can consider your specific circumstances.
