The Australian Taxation Office (ATO) allows for expenses incurred to generate income that will be taxed to be claimed against that tax liability. Income before deductions is known as assessable income. Income after deductions is known as taxable income. The lower a person’s taxable income, the lower their tax liability.
Money spent on an investment property is considered by the ATO as spending to maintain an investment that will, in turn, continue to produce assessable income.
Therefore, items such as:
…and other costs related to the maintenance of the property can be used as deductions against assessable income. There is a difference between maintaining and improving the property, and the ATO does not recognise the costs of improvement as part of maintaining the investment (refer to ATO website).
Rental income, after deduction of allowable expenses, is subject to income tax at the investor’s marginal tax rate.
The following deductions can be made in regards to investment property if it is rented out and used to gain assessable income:
- Property management expenses
- Repairs and maintenance expenses (but not improvements or replacing an asset in its entirety)
- Rates, insurance and land tax
- Interest on borrowings
- Bank charges on accounts maintained to receive rental income
- Travelling expenses incurred in visiting the real estate.
The above costs are not deductible if the property is not rented out to produce assessable income. However, they can be included as part of the ‘cost of the investment property’, which can result in a smaller capital gain if the investment property is later sold.
If the deductible costs exceed the rental income derived, such costs should as a general rule be allowable as deductions against other income. A deduction can be claimed for the purchase of a capital asset up to $300, for example, furniture, television, window curtains and light fittings. Taxpayers who are not a small business entity may elect to write off items up to $1000 through a low value pool of assets. However, items over these values can be subject to depreciation allowances that can be used to reduce taxable income over the effective life of the asset. Some assets, such as land, are not depreciating assets.