Rental Properties and Tax Planning: What You Need To Know Before June 30

By BDO Kendalls partner Eddie Chung

Once again, we are approaching the end of another financial year and it is a good time to revisit some of the tax planning issues associated with rental properties:

1. Unless you are carrying on a property leasing business, rent is generally derived and becomes taxable when you have received it. Therefore, for once in a year, it might not be all that bad if the tenant pays their rent late. Watch out for ‘constructive receipts’ however – you are deemed to have received the rent if, for instance, the real estate agency which manages your property has received the rent on your behalf. Even if you did get paid, is any part of the rent attributable to a period after the 30th of June? If so, the prepaid portion will not be assessable income until the next financial year.
2. Could you bring forward expenses that are tax-deductible? For instance, if the tenant has been requesting that you to repair certain items in the property, bringing forward the expense now will directly reduce your tax bill. However, you need to differentiate repairs from improvements. Repairing something generally returns it to its original condition, while improving something may render it a capital expense, which may not be immediately tax-deductible.
3. Prepaying expenses such as interest and insurance is probably one of the most longstanding tax planning techniques, but the rules have changed so many times recently that it is easy to lose track of who can and who can’t claim a tax deduction on prepaid interest. The current general rule is – only individuals who are not carrying on a business or a ‘small business entities’ can claim a tax deduction on prepayments, provided that the prepaid amount only relates to the next 12 months or less. For instance, if the property is owned by a trust which merely holds investments, the prepayment will not be immediately deductible, unless the expenditure is less than $1,000 or required to be incurred by a law. Also, it should be remembered that prepaying an expense only provides a one-off timing advantage and you need to keep doing it after the first year to ensure that the benefit is not negated.
4. If the cost of a depreciating asset that is used to derive rental income does not exceed $300, it will be immediately deductible, provided that the property holding entity is not carrying on a business. If a GST credit has been claimed on the cost, it is the GST-exclusive amount that is relevant in determining if it exceeds $300. However, if the asset is part of a set of assets, the immediate write-off will not be available if the cost of each individual asset does not exceed $300 but the entire set costs more than that amount.
5. The tax deductions you may claim on a rental property will need to be apportioned if the property was not available for rent for some time during the year, e.g. if you use the property as a holiday house for a period. On the other hand, the fact that the property was vacant for a while does not mean that apportionment of expenses is required. So long as the property was available for rent, e.g. advertised by the local real estate agency, the expenses attributable to the vacant period will remain tax-deductible.
6. If you are selling your rental property, it may be an idea to defer the sale until after June 30th. Be careful with the timing of when the contract is signed though – a property is generally deemed to have been sold on the date of the contract for capital gains tax purposes, rather than settlement date, so executing a sale contract before 30 June 2008 will amount to a sale in the 2008 income year, even if settlement does not happen until after that date.

For further information please contact:

Helen Pham
BDO Kendalls
07 3237 5713

Nadia Farha
Three Plus Consulting
0408 535 993.

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