1 Jun 2009.
By Hugo Schouten Accountant, Adelaide, Australia.
1 Jun 2009.
TAX RETURN TIME FINISHES ON 31 OCTOBER
Tax Agents can help you to lodge a Tax return correctly. If you haven't lodge last year's return, don't despair! Most salary returns only $65. For Tax Returns by Internet email me. hugo@accountant.com
The Australian Tax Office has highlighted seven areas of concern with Rental Properties claims this year. There will also be an extensive audit program and thousands of rental properties WILL be audited. If you do not take care, you will face payment of additional tax, payment of penalties, prosecution in court and prison sentences (in case of fraud).
It is a well known rule of interest that the use of the funds determines the deductibility. The security provided has no impact on the deductibility of the interest.
eg if money is borrowed against security of your residence and the money is used to buy a rental property, then the interest is deductible.
However if money is borrowed on security of a rental home and the money is used to provide an extension on your residence, then the interest is not deductible.
If you have a loan to buy a rental property and then you use some of the loan to do repairs on your residence or to take a holiday, then the interest must be apportioned to calculate the deductible interest for the rental home.
Note also that the repayments made on the loan are NOT the interest deduction. The repayments comprise both principal and interest (unless an interest-only loan) and only the interest is deductible.
The deductibility of repairs is considered on a case by case basis, however the risk area is initial repairs.
Where repairs are made to a recently acquired property they are considered to be initial repairs and NOT deductible but capital expenditure. General upgrading of a property even several years after purchase can fall into this area if the work done is to renovate or repair defects in existence at the time of purchase.
Repairs involve restoring an item to its original condition and alterations and improvements are capital items.
Capital expenses however can form part of the cost for Special Building Write-Off and the cost base for CGT.
Depreciation of items in a rental home at the time of purchase are generally not itemised. The owner may make his own estimates of the value of depreciable assets at the time of purchase provided these are reasonable.
If the value of all depreciable items is less than $4000 this will probably be accepted.
For new properties acquired it is essential that a schedule be prepared listing each depreciable item room by room, showing the model of the item, how old it is, what its condition is and the market value at purchase. Remember that the market value in-situ in a house may be different from the market value of the item at a second hand market.
Building Write-Off items MUST be based on actual cost incurred in building the house or apartment. This can ONLY be determined by a Quantity Surveyor or other qualified person. Cost estimates from valuers, real estate agents, accountants and solicitors will not be accepted.
Travelling expenses in visiting a rental property are deductible but must be apportioned if the travel is connected with other business or private purposes. There is no limit on the number of visits provided it can be shown that it satisfies all the conditions for deductibility.
After a series of weekend lettings of a holiday home, a visit to tidy up, garden and carry out maintenance is accepted as being deductible. However, if this is at peak time eg Easter or Christmas, this could be questioned!
A property can be rented at below market value to a family member or friend. However the ATO will NOT then accept claiming 100% of the costs! The apportionment of expenses is required in the ratio of rent paid to market rental value.
Rental expenses can only be claimed if the property is genuinely available for rent. Where the income stream is restricted the the expenses will not be deductible.
eg A beach property was used by the owner on weekends. It was listed with a local real estate agent to let during the week. However the conditions placed on the property such as not available on weekends and the letting price about twice the norm for the area clearly indicated that the property was not genuinely available for rental.
Similarly a holiday home was used by the owner and rented to friends and relatives. No commercuial renting was done. In this case apportionment of the expenses claimed on a time basis is required between the private component and the rented component.
You can email me if you want to ask any Tax question for free .
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