Property Investments and Tax

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PROPERTY INVESTMENTS AND TAX

If you own or are thinking of buying investment property there are some tax implications you need to know about. The ATO has prepared this list for API.

AUSTRALIAN BUSINESS NUMBER (ABN) AND WITHHOLDINGTAX

You don't need an ABN if you own a residential property but, if you buy any goods or services for the property and you can't see an ABN on the invoice, you must withhold 48.5 per cent of the payment for tax if it's over $50.

So, for example, if a plumber invoices you $250 for repairs to the property and there is no ABN on the invoice, you pay the plumber $129 and send $121 to the Tax Office.

You should get an ABN if you own a commercial property. If you can't quote an ABN then a business renting the property has to withhold 48.5 per cent of the rent.

GST

Generally GST only affects commercial properties. If you're registered for GST, you will include GST in the rent you charge and are entitled to claim GST credits for any rental expenses you have paid.

Assuming your only enterprise is the commercial property, you will need to be registered for GST if your gross rent, excluding GST, is more than $50,000 in a year. If your rent is less than $50,000 you can voluntarily register for GST.

If you're registered for GST and you buy something for the commercial property, you will need to have a tax invoice to be able to claim the GST credits. Similarly, you will need to give your business tenant a tax invoice so that they can claim the GST in the rent.

If you rent to an associate who is registered for GST and the rent is wholly business, the rent will include GST and you will be able to claim GST credits. However, if your associate is not registered for GST or the rent is partly for private purposes, then the GST is based on the market value. If, for example, you rent office space to your son who is not registered for GST and he pays $110 per week while the market value rent is $220 per week, you will account for $20 GST and be entitled to claim any GST credits.

INCOME AND EXPENSES

As well as rent, income from a rental property includes: bond money if you become entitled to keep it; some insurance payouts, such as compensation for lost rent; and profit generated from the use of the rental property.

Expenses include the costs of maintaining the property as well as body corporate fees and charges. The amount you can claim may be limited if you let the property, or part of the property at less than normal commercial rates. If, for example, you allow a family member to use it for free then you won't be able to claim any deductions for the time they use it.

You can't claim levies if they are paid to a special purpose fund to pay for particular capital expenditure. Nor can you claim special contributions for major capital expenses to be paid out of the general - purpose sinking fund. You may, however, be able to claim a capital works deduction for the cost of capital improvements or capital repairs once the cost has been charged to the appropriate fund.

Capital works deductions can be claimed over a number of years and relate to certain kinds of construction expenditure and the amount you can claim depends on the type of construction and the date construction commenced.

Other expenses that can be claimed over a number of years include borrowing expenses and amounts for decline in value of depreciating assets.

When you own the property with someone else, rental income and expenses must be attributed to each co according to their legal interest in the property, regardless of any agreement to the contrary.

CAPITAL GAINS

Some expenses you can't claim as deductions, such as the costs of buying or selling the property, may form part of the cost base of the property for capital gains tax purposes.

Depending on when you bought your rental property, capital gains tax may apply when you sell it. If the property is co owned, each co-owner may have a capital gains tax liability according to their legal interest in the property.

KEEPING RECORDS

You need to keep records of both income and expenses relating to your rental property.

For capital gains tax purposes, you must start keeping records if you purchase or inherit property, receive property as part of a divorce settlement or as a gift, or make improvements to property.

Records relating to your ownership and all the costs of acquiring and disposing of property must be kept for five years from the date you dispose of it.

Records must set out in English the date you acquired the asset, the date you disposed of the asset and anything received in exchange, the parties involved and any amount that would form part of the cost base of the asset.

MORE INFORMATION

The Tax Office has a number of publications that can help you, including Rental Properties 2003-04 and the Guide to Capital Gains Tax which are available at www.ato.gov.au or by calling the Tax Office on1300720092.