Own an investment property in Australia? How do expenses affect your income tax position?

As an offshore investor, the way in which your investment is treated from a taxation perspective may vary depending on a) the location of the property and b) the country you are a citizen of.       

Here we take a look at investment property in Australia and the way expenses are treated and the impact this will have on your overall income tax position.   

Before we go on, please note we are not tax advisors or accountants. We are property experts and this information is intended as general information only. You should not reply on this information as tax guidance and you must seek advice from professional accountants or tax advisors if you are considering investing in Australia.

Operating and Management Expenses

Operating and Management expenses are referred to as ‘Immediate Deduction Expenses’ by the Australian Taxation Office (ATO). Immediate deduction expenses which can be claimed for immediate deduction (in the year they occur) are:

  • Advertising for tenants
  • bank charges
  • body corporate fees and charges
  • cleaning
  • council rates
  • electricity and gas costs incurred by the landlord
  • gardening and lawn mowing
  • in-house audio and video service charge
  • insurance costs for: 
    • building
    • contents
    • public liability
  • interest on loans
  • land tax
  • lease documentation expenses (including preparation, registration, and stamp duty)
  • legal expenses (excluding acquisition costs and borrowing costs)
  • mortgage discharge expenses
  • pest control
  • property agents’ fees and commissions (including prior to the property being available to rent)
  • quantity surveyors’ fees
  • costs incurred in relocating tenants into temporary accommodation if the property is unfit to occupy for a period of time
  • repairs and maintenance (including the cost of a defective building works report in connection to repairs and maintenance conducted)
  • secretarial and bookkeeping fees
  • Security patrol fees
  • servicing costs, for example, servicing a water heater
  • stationery and postage
  • telephone calls and rental
  • tax -related expenses
  • travel and car expenses to the extent they are deductible
  • water charges.
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Interest Costs on Finance

In Australia, landlords can claim the full amount of interest charged on their mortgage. However, in order to do so the property must be rented out, or genuinely available for rental, in the income year for which the deduction is claimed. 

While the property is rented (or genuinely available for rent) a landlord can also claim interest on loans taken out:

  • To purchase depreciating assets
  • For repairs
  • For renovations

Non-Cash Expenses 

Non-cash expenses in Australia are defined as “deductions for the declining value of depreciating assets”. In Australia, if you purchase a rental property, you are generally treated for tax purposed as having bought a building, plus various items of ‘plant’. Items of plant are depreciating assets such as air-conditioners, stoves, and other similar items.

Therefore, the purchase price of the property needs to be allocated between the building (capital improvements) and other depreciable items. Investors can then deduct an amount equal to the declining value of each asset from the income generated in the year which the asset was held, for each year of the useful life of that particular asset.

These will typically be classified as:

  1. Capital improvements (the building) 
  2. Plant; and 
  3. Various other depreciating assets.

Once you have your income and expenses, the profit or loss which is generated will be used to calculate the tax liability.  

Australian Income Tax Rates

In Australia tax rates are different for resident and non-resident investors and are set out below.

Income ThresholdTax Rate
$0 – $18,2000%
$18,201 – $37,00019%
$37,001 – $90,00032.5%
$90,001 – $180,00037.0%
$180,001 and over45.0%

Income Tax Rates (Foreign Residents)

Income ThresholdTax Rate
$0 – $120,00032.5%
$120,001 – $180,00037%
$180,001 + 45%

Calculating Tax Income Tax

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The calculations for determining the tax impact of purchasing an investment property for Australian residents and international buyers are different, because the Australian resident will have a domestic income which needs to be added to the property income to determine their tax costs. 

For domestic purchasers investing in property in Australia, the tax expense from owning the property can be less than the tax cost when the property is not owned, a tax credit is created. Because governments do not like simply giving money back to investors these tax credits are accumulated to future years where they can offset years with positive income and therefore reduce tax liability in that year.

For foreign investors, because there will be no domestic (Australian) income to consider, the tax liability is simply calculated on the net income generated by the property, which can be summaried as follows:

Gross Income

Less
Operating and Management Expenses
Interest on Finance

Less Non-Cash Deductions
Building Depreciation
Fixtures, Fittings & Equipment

We hope you have found this article useful, feel free to comment or ask any questions.  For more information on about property investment check out our other articles and request your copy of our Buyers Guides from [email protected]

We will shortly be launching our new platform where investor can use our calculators and analysis tools to forecast how much tax they will pay, specific to their own circumstances. This tool will be invaluable for investors, allowing you to analyse investment opportunities in detail, before you purchase. We’ll be looking for Beta Testers to trial the platform, so if you like to sign up email [email protected]

Important notice:  Proptech Pioneer and its associated companies seeks to provide investors with guides, information and tools, but we cannot guarantee this information to be accurate or perfect.  You use the information at your own risk and accept no liability if you rely on this information.   Proptech Pioneer is not a tax advisor, accountant conveyancer, lawyer, financial advisor or mortgage advisor.  You should seek independent advice from independent professionals before making any investment decision