Do you need to lodge a tax return if your Australian property’s maintenance costs are higher than the rent? How can this affect your profit?
Australian Tax Advisor Steve Douglas of SMATS Australian Taxation Services answers your question.
It’s a common misconception that you don’t need to lodge a tax return if you aren’t profiting from renting out your Australian property.
This is incorrect, as Australian citizens and permanent residents as well as foreign nationals who own an Australian property for investment must lodge a tax return for any taxable income.
Previously, if you had more expenses than income, there was no penalty if you forgot to lodge your return but caught up with the arrears at a later stage.
That ended in June 2000 when a new Late Lodgement Penalty of up to A$550 was introduced – even where no tax was payable.
This has increased over the years to A$900 per year outstanding, per taxpayer, which can add up to a significant annual cost for those who who don’t lodge a return based on the assumption that it isn’t necessary since no tax was due.
However, the Australian Taxation Office (ATO) can be flexible with the penalty and will often reduce it if a valid reason is provided. (But simply forgetting to lodge may not be a sufficient reason to do so.)
For those who aren’t lodging their returns, the loss of future tax benefits may be greater than the potential penalty issued by the ATO.
If your expenses are greater than the rental, then the subsequent short fall is permitted to be carried forward into future years to offset any future surpluses on the rent, sale of the property or future salary if you return or relocate to Australia.
All expenses relating to the property are allowed as a tax deduction including rates, management fees, maintenance and interest on borrowings used to help purchase the property.
You can also claim travel costs for inspection of the property.
Property investors can also claim depreciation allowances on the property. This includes normal items such as stoves, curtains and carpets, all of which can be claimed at generous amortisation rates.
Under Australian tax law, there is a significant incentive if the property was built after 1985, too. Any property rented and constructed after 1985 may claim an annual write-off of the original construction cost.
This can be a sizeable amount each year, and may prove to be very tax-effective.
The largest claims are available on brand new housing, but even if you acquire an established property, there will still be some write-off for the construction costs, as it passes from the previous owner to the new one over the period of claim, which can extend up to 40 years.
If you bought the property after 1997, this building write-off may be clawed back on sale of the property and increase your capital gains, though it is still in your favour to claim it yearly.
The combination of loan interests, ownership expenses, travel and depreciation make it normal for many offshore-based Australian property owners to have surplus taxable income. As such, it is unlikely that any tax would be payable.
Lodge your required tax return each year to avoid the A$900 potential penalty per owner, per year outstanding.
If you’re lodging your return yourself, the due date is 31 October, following the Australasian year end of 30 June every year.
From The Finder, December 2016
Steve Douglas is the Co-Founder and Managing Director of Australasian Taxation Services (ATS). ATS provides specialist taxation services for anyone looking to invest in Australian property, including Australian expatriates living overseas. Areas of specialisation include the Australian taxation aspects of property investment, as well as expatriate and migration planning. Find out more here.