Rental Property Income: UNDERSTANDING wHAT Taxable Rental IS Income on Your Tax Return
Are you interested in increasing your wealth and want to understand the ins-and-outs of rental property investing?
Get rich by getting in the know
Whether you have an investment property, looking to buy one or even thinking of buying one we’ve put together a guide so that you can maximise your wealth. We want you to maximise the dollar return on your investment by reducing the tax paid.
Today’s session is all about understanding the income side of rental property ownership.
- What is considered rental income.
- What is not reportable on your income tax return.
Income received from rental properties is taxable.
If you are the legal owner of a property and receive income from renting it, you are generally required to include that income in your tax return. It doesn’t matter if the property is located here or overseas, if your name is on the purchase contract the income is assessable and goes into your Australian tax return.
There is a type of rental income that is not taxable.
The only time rental income is not declared in your tax return is when it’s domestic in nature.
The obvious one is you live in your property and therefore can’t report on your tax return that you’ve paid “rent” in order to then report rates, water, insurance and so forth as a deduction.
Another one is renting the property in the form of ‘board and lodgings’ to a family member or friend. For example, your adult child is now working, and they pay you to live there with you and eat food you have bought. Another example is your elderly parent has moved into the granny flat out the back and to cover the costs they pay you ‘board and lodgings’. Your intention is that you aren’t there to make money off them and no commercial lease agreement is in place.
It is important to note here that the ATO doesn’t see this as reportable income in your tax return. And therefore, as there is no reportable income you cannot claim any deductions for that property in your tax return.
Receiving rental income from family friends can still be reportable income.
There is a point where you rent to family and friends and that income is required to be declared as income in your tax return. It is a difficult scenario to provide clear guidance on and is determined on a case-by-case basis. But in general, if there is a commercial lease agreement and your goal was to earn income, then you are likely to fall into the bucket of having to declare the income in your tax return. Be warry though, you may want to give ‘mates rates’ to your friends and family to rent your property. This is generally a rental rate less than commercial rental rates in your area. In this circumstance the ATO may disallow deduction beyond that of the rent received.
Purchasing a property in a Family trust, only to live in it yourself.
If you purchase a property in a family trust and rent the property to a third party person the rent received is reported in the family trust tax return, and costs associated with renting the property are deductible on that income.
However, if you as a beneficiary of that family trust move live in that property don’t bother paying rent and declaring it in the family trust. In this scenario the ATO won’t allow you to declare the rental income you pay to the trust as income and therefore won’t allow the trust to apply expenses against this income.
Commercial properties effect on income.
Commercial properties are designed for shops, offices and warehouses, as opposed to living in.
You are legally bound to pay 1/11th of the income received on commercial rental incomes for annual amounts of $75,000 or more. If you are required to register you can also claim a reduction in GST payable on the expenses.
You’re doing great and start buying more properties to rent, but…
But watch out. You could be classified as a business and also need to register for GST if you earn over the above-mentioned threshold. It’s not all bad news. As you then may be eligible for small business concessions. There’s a lot to it when running a business. So a whole new topic.
So when does the ATO say your rental income is a ‘business’?
It’s a little tricky to pin-point exactly what makes you a ‘business’ in the ATO eyes. And there is no set number of rental properties one must own before the ATO put’s you in the ‘running a business’ bucket.
ATO applies indicators to determine if you are operating a business. They are:
- Your activities are ongoing and consistent
- You have business plans, records to manage the rental income and expenses
- There is repetition in what you do over all properties held. For example you grow equity to buy more properties or you renovate to sell or increase rent or divide the property to increase the rent and value.
- Is it a long-term activity and/or have a large quantity of properties, and receive significant income
- You’re in it to make a profit as rent far outways expenses or your goal is receiving a gain at the sale of property (as opposed to mearly realising the gain due to factors outside your control). An example is that your investing the rent into the property to renovate, subdivide or other means to increase the value of the property.
- Your heavily involved in the property and interviewing tenants, property maintenance, regular inspections, collecting money and financial management
- The income produced is your main or a main source of income, rather than a “job”
Apportioning income when there are multiple owners
If you are not seen as running a business the income recorded on your tax return must be apportioned per your legal ownership of the property being rented. You can own property as joint tenants or tenants in common in Australian, and these are written on the purchase contract of the property.
- Joint tenants mean you own the property in equal portions of the other owners of the property. For example, you own the property with your spouse as joint tenants. In which case your spouse declares 50% of the income in their return and the remaining in your tax return.
- Tenants in common means that the owners of the property own specific portions of the property listed on the purchase contract. For example you may own 20% and another party owns 80%. In this case you declare 20% of the income received.
Whatever the portion of income you declare on your tax return, you must declare the same portion of deductions as that applied to the income.
Deductions for loans
If there are multiple owners of the property and you take out a loan in one of the owners only (or not all of them), those owners with the loan liability can declare the full interest and loan fees against the loan. This scenario doesn’t require apportioning deductions in the same rate per the purchase contract. Loan’s of this nature are more seen in tenant in common purchase contracts.
A point on capital gains
Although this is not the topic of discussion it is still worth noting quickly about the impact of earning a rental income from your property.
- Your private home is not subject to capital gains
- If at any point of time you rent your property out it is subject to capital gains for the period it is rented.
- There is an exemption that allows you to claim your home as a primary residence even though it is being rented out. Check out more on this topic.
- You can own rental properties personal, via a trust, partnership, superfund or company. Selling property under each type of structure has difference capital gain effects. Check out more on this topic.
- If you rent out a portion of your home, for example a bedroom or granny flat, and the income is required to be reported in your tax return then for the period that portion of the home is subject to capital gains tax when you sell it.
- You’re considering or are renting a portion of your property to your personal business in order to receive a reduction in tax for that business. Perhaps think twice. You will have to declare that income in your personal tax return, and when you sell the property that portion of your property is subject to capital gains tax.
Rent can be received in many forms.
Here are some:
- Rent of a holiday home (not by you)
- Rental of a spare room for short term bed & breakfast or a long-term arrangement
- Rental of the granny flat out the back
- Rental of the full property for short term AirBNB or a long long-term arrangement
- Domestic rental properties designed for living in
- Commercial rental properties designed for offices, shops and warehouses
- Rented where you personally manage the leasing arrangements or you use a real estate or other agent
- Rent at normal ‘going rate’ or reduced ‘mates rates’
Final note on what is reportable rental income in your tax return.
We have gone on about different types of rental income. But what is the amount that we have to report to the ATO in our tax return?
Rental income includes the following:
- Rent for the entire or portion of property
- Payment for reimbursement of rates and utilities from that ‘tenant’
- Rental bond kept for payment for damages or rental loss
- Letting or booking fee received
- Insurance payout for damages or lost rent (if you receive cash from the insurance company for you to repair the damages then those repairs are deductible against this insurance claim)
- Receipt of goods instead of cash for rental. In which case you will need to determine the market value of those goods and record that amount is as rental income in your tax return
- Government rebates relating to the rental property, for example solar panel rebates.
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