Deductibility of Rental Property Repairs

Just did some repairs on your rental property and are unsure about the deductibility of the expenses incurred? Read on!

Expenses Which are Deductible Immediately

A landlord is entitled to claim a deduction for rental property repairs that relate to defects, damage or deterioration arising from the use of the property for income-producing purposes. A repair for tax purposes if the replacement or renewal of a worn out or damaged part of something, but not the whole thing.

For example, replacing some roofing sheets is a repair. In contrast, replacing the entire roof with roof tiles is not a repair for tax purposes and deemed to be capital.

Strategies to maximise deductions for repairs include:

  • Separate repairs from improvements
  • Fix a minor portion only
  • Fix damaged areas only
  • Replace less than 50% of a wall, ceiling or floor
  • Repair during occupancy or tenants

Expenses Which are Deductible Over a Period of Time

A deduction is not available for any part of a repair expense that relates to defects, damage or deterioration in existence at the time that the property was acquired. These are known as ‘initial repairs’ and are considered part of the cost of acquiring the property, and are treated as capital in nature.

Where repair expenditure is incurred after a rental property ceases to be used for income producing purposes (ie. the property becomes the owner’s main residence), then the expenditure may still be deductible if:

  • The necessity for the repairs relates to a period during which the property was used for income-producing purposes, and
  • The expenditure is incurred in a year that the property was used for income-producing purposes.

 

Prefer to speak to someone about possible deductions? Contact Fortiz Accountants to make an appointment to discuss taxes relating to your property investments or suitable structures for future purchases.

Are You a Resident or Non-Resident for Australian Tax Purposes? Don’t Get Caught Out!

In order to know your tax responsibilities in Australia, you have to know whether you are considered a resident or non-resident for Australian tax purposes. This may seem clear but if you are working overseas, travelling often, or you do not have a permanent home in Australia, you may think you are exempt from Australian taxation laws when you really aren’t.

What is a Resident for Tax Purposes?

If you reside in Australia, you have a home and you’re settled in Australia, it is quite clear, according to the ATO (Australian Taxation Office), that you are considered a resident and that you are subject to Australian taxation laws. But if your situation is not as clear, you might want to check with the ATO to see whether you are considered a resident.

The ATO has a number of detailed residency calculators on their website which you can access here. Remember that you only need to pass one of these to be considered as an Australian resident for tax purposes.

The reason why residency for tax purposes is complex is because there is not one defining factor that confirms your status. The ATO looks at a number of factors in your circumstance to define your status. Your citizenship may have nothing to do with your tax responsibilities. Even if you are a citizen of another country, you can be considered a resident of Australia for tax purposes, depending on your activities.

For example, you can be considered a resident if you:

  • Perform your day to day activities, especially those of a leisurely kind, in Australia, even if you are moving often without a permanent residence.
  • Have a business, assets, or a family in Australia, even if you stay elsewhere.
  • Have the intention to stay in Australia as soon as you arrive.

Some of your responsibilities as a resident for tax purposes include:

  • Lodging tax returns
  • Declaring all sources of income receivedworldwide, meaning all income earned in Australia as well as overseas
  • Paying the 2% Medicare levy, which automatically comes out of your income, if you earn over $18,000 a year

What is a Non-Resident for Tax Purposes?

If you do not pass the tests provided by the ATO, you may be considered a non-resident (also called “foreign resident” meaning that you do not need to claim your overseas income in your Australian tax return. But it’s best to have the ATO or an accountant look into your situation to make sure you do not make an incorrect conclusion.

As a non-resident for tax purposes, you will have to lodge a tax return if you earned any income in Australia (eg. rental income from investment properties located in Australia, shares traded on the Australian Securities Exchange, etc.).

Why Does All This Matter?

In 2016, a Malaysian investor suffered the consequences of assuming his non-residency status for his tax responsibilities in Australia. Sir Yii Ann Hii was faced with an order from the ATO to pay $50m in taxes because ATO had considered him to be an Australian resident for tax-purposes for a number of years, simply because his wife and children lived in Australia. Sabrina Ong, who is a partner here at Fortiz Accountants, commented on this case, informing of the many ways that the ATO can decide your residency status. Read more here.

Your Worldwide Tax Responsibilities

If you are a resident and you are claiming income from Australia and overseas, it’s possible that that income overseas is also subject to taxation laws in its source country. Australian’s double tax agreements (DTA) ensures that you don’t have to get taxed twice for the same income.

For a comprehensive list of countries with a tax treaty with Australia, click here.

What You Should Do Now

Know your status as soon as possible to avoid incurring payments that you are not aware of. Refer to the ATO’s comprehensive residency tests (above) to see whether you are subject to paying Australian taxes and to know what you have to claim in your next tax return. If you are still unsure about your tax responsibilities as a resident or foreign resident, an accountant will be able to help you!

 

Disclaimer: This blog post has been simplified to cover the common scenarios. This should not be construed as advice from Fortiz Accountants. There are many other factors to be considered and each case is unique. Therefore, we encourage readers of this blog post to contact Fortiz Accountants for assistance with their specific circumstances.

 

Our accountants are well-versed in the complexities of Australian taxation laws. If you are unsure about your residency status, or youre concerned about income from employment and investments overseas, contact our accountants here at Fortiz Accountants! As registered tax agents, we can also help you prepare and lodge your tax returns. Most importantly, we can help you to ensure that you fulfil all your tax obligations in Australia.

Contact us and see how we can assist you!

Australia & Malaysia Agree to Share Financial Data to Fight Tax Evasion

From time to time, Fortiz Accountants receive calls and emails from concerned Malaysians living in Melbourne and Malaysians planning to migrate to Australia regarding possible exchange of financial data of tax residents between Malaysia and Australia.

Some of the common questions relate to the transfer of EPF funds to Australia, transfer of cash savings or cash gifts received from parents to bank accounts in Australia, possible capital gains taxes implications on the sale of properties in Malaysia after moving to Australia, Australian tax on employment or business income earned in Malaysia while the rest of their family members live in Australia.

The 6-month rule, the 6-year rule and the other taxation topics, such as, taxation on worldwide income earned by Australian tax residents are often explained. During tax advice/tax planning sessions, we have provided clarity to clients regarding their personal circumstances and how the various tax laws apply to them. Our advice have included appropriate timing for disposal of assets, obtaining market valuations of assets, keeping important records and paper trails, and so on.

 

One of the partners at Fortiz Accountants moved from Malaysia to Australia over 20 years ago. Contact us for assistance if you are migrating from Malaysia to Australia, a recent migrant from Malaysia, planning to purchase an investment property in Australia or a Malaysian entrepreneur planning to start a business in Australia.

Can I Claim Deductions for Repair Expenses Incurred on a Property that was my Home?

A question that our firm is frequently asked is, ‘I am about to move out of my home and plan to do some repair works on the property before I rent it out. Are the costs of such repairs tax deductible?’

This is not a straightforward question to answer as there are various factors to consider.

Generally, a deduction is allowable under section 25-10 if, when the repair expenditure is incurred in a year of income, the property is held, etc., by a taxpayer for income producing purposes:

(a) even though the property has previously been held, etc. by the taxpayer for non-income producing purposes (eg. own home or principal place of residence); and

(b) even though some or all of the defects, damage or deterioration arise from, or are attributable to, the taxpayer’s holding, etc., of the property before its holding, etc. for income purposes, and

(c) provided that the repair is not capital expenditure.

 

Besides these, there are other matters to consider:

1. Whether the repair is classified as an ‘initial repair’

An ‘initial repair’ is repair that was due when the property was acquired and repaired after the acquisition of a property. In other words, the property was not in good order at the time of purchase. If a repair is classified as an ‘initial repair’, then the full amount is not immediately tax deductible and will have to depreciated over a number of years.

2. Repair versus Improvement

Repair involves restoration of a thing to a condition it formerly had without changing its character. Renewal, replacement or reconstruction of the entirety (ie. the whole or substantially, the whole)  of a thing or structure is an improvement rather than a repair.

Repairs are immediately deductible. However, improvements must be depreciated over a number of years.

For example, repairing part of a damaged fence is a repair, but replacing the entire fence is an improvement.

3. Timing of Repair

The timing of repair must be considered when there is private use of the property (eg. as principal place of residence before or after it is available for rent).

If the property was occupied for private use prior to being rented out, then the following must be considered:

  • Repair expenses are incurred after the property is advertised for rent with broad exposure to potential clients (this excludes advertising by word of mouth), and
  • Repair expenses must be incurred in the same financial year that the property generates an income.

For example, a rental property may be vacant but is advertised as being available for rental. Before the tenant moves in, storm damage occurs. Expenditure to repair the damage is tax deductible under Section 25-10 because the property is held for incoming producing purposes.

4. Free standing versus permanent fixtures

The cost of replacing free standing items such as ovens, refrigerators or furniture is capital in nature, which means that they have to be depreciated over a period of time.

The cost of replacing permanent fixtures such as locks and exhaust fans are immediately deductible in the year that they are incurred.

 

Additional Reading Material: Tax Ruling TR 97/23

 

Disclaimer: This blog post has been simplified to cover the common scenarios. This should not be construed as advice from Fortiz Accountants. There are many other factors to be considered and each case is unique. Therefore, we encourage readers of this blog post to contact Fortiz Accountants for assistance with their specific circumstances.

 

If you own an investment property or are thinking of purchasing one, it’s always wise to seek advice from a property-savvy accountant – that’s us! Make an appointment with us at either one of our offices to find out how we can assist you.

Newly Introduced Taxes & Surcharges on Properties Owned by Foreigners

The Melbourne & Sydney property markets have been booming for some time now. In a bid to address the lack of housing supply available, the Australian state and federal governments have introduced a number of new taxes and surcharges on properties owned by foreigners.

If you are a foreigner who owns properties in Victoria, here’s a brief summary of some taxes and surcharges which may apply to you.

Vacant Residential Land Tax (VIC State Government)

From 1 January 2018, a vacant residential land tax applies to homes that were vacant for more than six months in the preceding calendar year, if the home is located in one of 18 municipal council areas.

The 18 areas are Banyule, Bayside, Boroondara, Darebin, Glen Eira, Hobsons Bay, Manningham, Maribyrnong, Melbourne, Monash, Moonee Valley, Moreland, Port Phillip, Stonnington, Whitehorse & Yarra.

The vacant residential land tax is assessed by calendar year (1 January to 31 December) and the six months do not need to be continuous.

This is an annual tax set at 1 per cent of the capital improved value (CIV) of taxable land. For example, if a vacant home has a CIV of $500,000, the tax will be $5000.

The CIV of a property is a value of the land, buildings and any other other capital improvements made to the property as determined by the general valuation process. It is displayed on the council rates notice for the property.

This tax is not payable if you are exempt from paying Land Tax (for example, if it is Crown land or primary production land).

This vacant residential land tax has a self-reporting requirement which means you are required to notify the State Revenue Office (Victoria) if you are liable to pay the tax.

Further reading: Vacant Residential Land Tax and FAQs on Vacant Residential Land Tax

Annual Vacancy Fee (Federal Government)

The annual vacancy fee will be levied on foreign owners of residential real estate where the property is not occupied or genuinely available on the rental market for at least six months in a 12 month period.

Generally, the vacancy fee payable will be equivalent to the residential land application fee that was paid by the foreign person at the time the application for foreign investment approval was made to purchase the property.

The vacancy fee applies to foreign persons who make a foreign investment application for residential property from 7:30PM (AEST) on 9 May 2017 and to foreign persons who are purchasing in a development that has a New Dwelling Exemption Certificate which was applied for after 7:30PM (AEST) on 9 May 2017.

Foreign owners of residential real estate will be required to lodge an annual vacancy fee return with the Australian Taxation Office (ATO) after the end of the 12 month period (vacancy year) in which the foreign person may be liable for the vacancy fee for their property.

This annual vacancy fee has a self-reporting requirement which means you are required to notify the FIRB if you are liable to pay the tax.

Further reading: Annual Vacancy Fee

Absentee Owner Surcharge

If you own property in Victoria, you may have to pay land tax. An absentee owner surcharge of 1.5 per cent applies from 1 January 2017 to Victorian land owned by an absentee owner. The absentee owner surcharge is an additional amount that applies over the land tax you pay at general and trust surcharge rates.

If you are an absentee owner at 31 December, the surcharge will apply in the following land tax year.

The surcharge is calculated on the total taxable value of Victorian land you own and will be included on your Victorian land tax assessment. Depending on how and who owns the land, the surcharge also applies to jointly owned land.

If your land attracts special land tax, you’ll pay an absentee owner flat rate of 6.5 per cent from 1 January 2017 (previously 5.5 per cent).

The surcharge does not apply if land is exempt from land tax or if the total taxable value of your land(s) is below the threshold. It is also not payable if you are an Australian citizen or Australian Permanent Resident.

The absentee owner surcharge has a self-reporting requirement which means you are required to notify the SRO if you are liable to pay the tax.

Further reading: Absentee Owner Surcharge

Foreign Resident Capital Gains Withholding Taxes

The foreign resident capital gains withholding taxes is applicable when a foreign resident disposes of certain taxable Australian properties.

For all Contracts entered from 1 July 2017, if an owner sells a property for a price of $750,000 and above, the purchaser of the property is required to withhold 12.5% of the purchase price and pay this amount to the ATO.

Your conveyancer will be able to assist with this as part of their services for the settlement of the property transaction.

Further reading: Foreign Resident Capital Gains Withholding Taxes

 

All of these taxes and charges carry heavy penalties for non-compliance and the Government’s standard policy is that ignorance of the law does not excuse you from having to comply with that law.

Confused or worried about your situation? Make an appointment with us at either one of our offices to find out how we can assist you.

Tax Deductions for Property Investors

Just bought a new investment property or contemplating the purchase of an investment property, but are confused by the tax maze of possible deductions which apply?

Here’s a handy summary to guide you along!

Deductible Expenses

  • Advertising
  • Body Corporate Fees
  • Borrowing Expenses (to be amortised over up to 5 years if over $100)
  • Cleaning
  • Council Rates
  • Depreciation
  • Gardening & Lawn Mowing
  • Insurance
  • Interest on Loans
  • Land Tax
  • Legal Fees
  • Pest Control
  • Property Agent Fees & Commissions
  • Repairs & Maintenance
  • Stationery, Telephone & Postage
  • Travel Expenses (This deduction is no longer available for trips made from 1 July 2017 onwards)
  • Utilities which are not paid by tenants

Non-Deductible Expenses

  • Pre-Purchase Expenses eg. travel to inspect property prior to purchase, cost of inspection reports prior to purchase, sourcing fee, etc.
  • Expenses incurred during periods when the property was not available for rent eg. during periods of personal use including use as holiday accommodation
  • Certain outgoings which form part of the cost base of a property if subsequently sold, for capital gains tax purposes. Eg. stamp duties, capital expenditure on improvements to the property, legal fees incurred for the acquisition and sale of the property, fees paid to buyer’s advocate, auctioneer’s fees, etc.
  • Interest expenses where a portion of the loan was used to fund relating to purchases for private use, such as a boat.

 

Prefer to speak to someone about possible deductions? Contact Fortiz Accountants to make an appointment to discuss taxes relating to your property investments or suitable structures for future purchases.

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