The costs of holding a rental property are basically the costs of owning it, and typically include council and water rates, land tax, building insurance and interest on borrowed funds used, for example, to acquire the property.  Maintaining a property includes the cost of repairing it and keeping it in a condition for rental and, as such, will generally also include the costs of renting and managing the property (eg the cost of advertising to find a tenant, real estate fees, etc).

Generally, such costs are deductible under S.8-1, provided they are not of a capital nature. However, a deduction is usually available under Division 40 for capital expenditure incurred to acquire depreciating assets for use with the rental property, or under Division 43 for certain capital expenditure incurred on building, extending, altering or improving the property.

In some cases, capital expenditure will form part of the property’s cost base for CGT purposes (eg where legal costs are incurred to oppose a development that would adversely affect a rental property’s value) or part of the cost of a depreciating asset used in connection with the property.

Given the complicated rules for dealing with rental property expenses (and the significant risk to Australia’s tax revenue that rental properties represent), the correct treatment of the costs of holding and maintaining a rental property continues to be a major audit focus of the ATO.

In particular, the ATO is concerted about the following:

(a) Excessive claims for interest deductions – Excessive interest claims typically arise where a property is not genuinely available for rent or where only part of the borrowed funds or only part of the property itself is used to derive income;

(b) Increasing claims for ‘tenant-related’ costs – The ATO expects many landlords will report lower rental returns (or increased losses) as they encounter longer vacancy periods and/or the eviction of non-paying tenants as a result of recent economic conditions;

(c) Incorrect claims for body corporate fees – In particular, the ATO is concerned that body corporate fees covering the cost of capital works (to a rental property) are being claimed;

(d) Errors arising from difficulties in distinguishing between capital improvements and repairs (including overstated claims for building write-off deductions, and initial repairs or renovations incorrectly claimed as deductible repairs and maintenance).

If you would like clarification on any claim or deduction that you are intending to make against your rental income, give us a quick call.