PROPERTY TAX

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1. Property Expenses

Properties owners are allowed a range of tax claims for expenses related to the production of rental income. Deductible expenses in whole or in part include:
Advertising, Bank charges, Borrowing expenses, Cleaning, Commission, Council and Water Rates, Depreciation, Gardening, Insurance, Interest, Land tax, Lease expenses, Legal expenses (for collection of rent, arrears or ejectment; investigating credit, worthiness, lease preparation), Power supplied (gas/electricity), Preparation, registration, stamping of lease documents, Repairs, Replacement of cockery, linen etc.Safe deposit box fees, Secretarial, bookkeeping fees, Services expenses, Tax advice cost, Telephone, postage and stationery and Travel.

2. Interest

Interest paid on a loan used to purchase the rental property or for repairs is deductible and is claimed in the year in which it is incurred.

An investment is negatively-geared where the interest paid on the loan used to purchase the property exceeds the net income from the property.

Expenditure incurred in borrowing money or in the discharge of a mortgage is normally capital expenditure. However, sec. 67 specifically allows a deduction for borrowing expenses and sec. 67A for certain mortgage discharge expenses.

Borrowing expenses are deductible over the period of the loan or five years, whichever is the shorter period, beginning with the year in which they were incurred. If borrowing expenses incurred in any year are $100 or less, they are wholly deductible in that year.

Expenses in connection with the discharge of a mortgage are deductible to the extent that the loan money or the property was used for assessable income production. The Commissioner considers that deductible expenses incurred in the discharge of a mortgage would include penalty interest for early repayment of the loan.

3. Repairs

A deduction is allowed for repairs to the rented property, e.g. repainting, fixing leaks, mending broken parts, electrical repairs, replacing broken fences or windows. Repairs carried out soon after purchase may be disallowed as they are "initial repairs". You need to ensure that repairs are carried out when the property is still income-producing, otherwise the deduction may be lost. Capital improvements to the property are not deductible.

4. PAYG Withholding Reduction

Where the overall taxpayer's taxable income is reduced due to a net rent loss, the Tax Office may approve an application for the variation of tax instalment deductions from salary or wages for a taxpayer. It does not follow that the investment or related deductions have Tax Office approval.

5. Depreciation

If property is let furnished or equipped, the lessor may claim depreciation of plant, equipment and articles installed by the lessor; for example in the case of furnished residential premises, depreciation may be claimed on furniture and fittings, blinds, floor coverings, refrigerators, washing machines and stoves, television and radio sets, etc

An allowance for replacements is given in the case of small depreciable items where it is difficult or impossible to estimate their effective life, for example, crockery, cutlery, bedding, linen, etc.

An immediate 100% depreciation deduction is available for units of depreciable property acquired on or after 1 July 1991 where the effective life is less than three years or the cost of the unit is no more than $300 It is not necessary to pro rate for part of a year. However, the deduction is reduced where the unit is used only partly to produce assessable income.

The Commissioner accepts that even where a group of identical items is purchased at one time, each individual item which meets the above criteria may be written off in the year of purchase provided the item is regarded as a whole, can be separately identified and has a separate function.

6. Property Depreciation Table

Property Depreciation

Property Item	Prime Cost $	Dimishing $
Blinds, Venetian	13	20
Carpets	17	25
Chain saw	40	60
Crockery, cutlery, glassware	Replacement	Replacement
Curtains and drapes	20	30
Electric bed	13	20
Electric clock	13	20
Electric heater	17	25
Furniture and fittings	13	20
Garbage units compacting	20	30
Gas coppers	13	20
Hot water services	13	20
Lawn mowers Motor	20	30
Lawn mowers Self propelled	27	40
Linen	Replacement	Replacement
Linoleum	17	25
Microwave ovens	20	30
Radios	17	25
Refrigerators	13	20
Solahart	13	20
Stoves	13	20
Television sets	17	25
Vacuum cleaners	17	25
Washing Machine	20	30

7. Building Allowance

Residential: If construction commenced on or after 18 July 1985 and before 16 September 1987 the costs are deductible at the rate of 4% . Where construction commenced after 15 September 1987, the costs are deductible at the rate of 2 1/2% per annum, except where the construction is pursuant to a "qualifying previous commitment", in which case the 4% rate continues to apply. Note from 13 May 1997 the amount claimed under this section reduces the Capital Gains Tax cost base.

8. Other property costs

Lease documentation

The cost of preparing, registering and stamping the lease is deductible as are costs associated with the assignment or surrender of the lease.

Insurance

Deductions are allowable for premiums on policies covering damage to premises or contents, fire burglary, storm damage, plate glass, public risk,etc.

Commissions, management fees

A deduction is allowable for commissions and management fees paid to estate agents for the collection of rent. Letting fees may also be deductible. However, no deduction is allowable for an initial letting because it is considered a capital expense except for the letting of holiday flats on short-term leases.

Rates, land tax

Deductions are allowed for council and water rates (including excess water rates). Land tax on the property is also deductible. Payments made on the purchase of the property as an adjustment of rates and taxes paid by the vendor are also deductible. Stamp duty on the purchase is not deductible, but may be taken into account in calculating the property's cost base for capital gains tax purposes.

Ejectment, legal costs

Legal expenses incurred by a lessor in ejecting a rent-defaulting tenant are usually deductible. Costs relating to fair rent hearings would be deductible as would legal costs of investigating the credit-worthiness of a prospective tenant.
Other incidentals

Deductions are also allowed for other expenses such as advertising for tenants, bank charges, cleaning, gardening, postage, stationery, telephone, secretarial fees, safe deposit box fees.

9. Vacancy

The absence of rental income does not automatically prevent the taxpayer from deducting expenditure incurred during that period. However it would be necessary to show that every effort was made to obtain tenants during that time.

10. Apportionment/Non Commercial

Apportionment

Expenses need to be apportioned if only part of the property is let, the property is let for only part of the year, or the property is let for a mixture of commercial and non-commercial purposes.

In the absence of a true partnership agreement between joint tenants, they each remain assessable on half the income and entitled to claim half the losses.

Non-commercial transactions

It is normally necessary to show that a lease has a commercial flavor the rental is considered assessable and outgoings deductible. A transaction is more likely to be accepted if:

(1) formal lease prepared;
(2) the rent is not nominal;
(3) rent is physically paid over;
(4) the lessor has had experience with other rental properties; and
(5) there is no moral or social obligation to subsidise the tenant.

If transaction has both a business and private elements, apportionment of the outgoings may be appropriate, or even the limitation of the deduction to the amount of income from the property.

11. Travel

Deductions are available for the cost of travel expenses for:* collecting rents
* repairs of the property
* preparing the property for incoming tenants
* inspecting the property

Travel costs to inspect a rent-producing property prior to purchase would not be deductible.

12. Temporary absence from `principal residence'

A dwelling may be considered to be the sole or principal residence (exempt from Capital Gains Tax) of a taxpayer if it temporarily ceases to be occupied as the sole or principal residence of the taxpayer.

For a dwelling to cease to be a sole or principal residence, it must have initially been the taxpayer's sole or principal residence. The period of any principal residence exemption will depend on whether the dwelling is used to produce income during the taxpayer's temporary absence. Maximum absence - 6 years if income derived.

If the owner sells the property prior to the end of the 6 year period of absence, there is no requirement to return to the principal residence to gain the CGT exemption.