TAX INFORMATION

[FAQ]

Disclaimer-The information obtained from the interview in between Michael Hung & Taxation Office on Vietnamese television C31 Australia. Therefore we however, cannot guarantee that every document will appear in the correct tax year, should check the content of all documents returned by this web site in response to your query and seek independent advice before embarking on a transaction.

Rental properties

Some of our viewers may be thinking about investing in a rental property. But what are the tax implications of buying, owning and selling a rental property? Today we'll look at some key areas. After you've sought professional advice and then found a suitable property, the first things you'll need to consider are how you're going to buy the property and what the tax consequences are.

That's right. You need to think carefully about things like whether the rental property will be purchased in joint names or just in one individual's name, because this may have long-term tax effects.If the property is purchased in joint names, the rental income will be divided equally among each of the owners. Any expenses will also be divided equally. However, if an individual buys the property, all the income and expenses will be shown on that individual's tax return.

The next thing to decide is how to finance your purchase - whether to use your personal or family funds or whether to borrow the money.If you're going to borrow the funds, you can claim the interest charged on the loan as an income tax deduction.

Viewers may have heard the expression 'negative gearing' and wondered if it applies to them. Can you explain this concept?

Negative gearing is when the income from the investment is less than the total of the interest on money borrowed and any other tax-deductible expenses for the investment. The difference can be claimed as a deduction in your tax return against other income such as salary and wages. I would urge viewers to seek professional advice before negatively gearing a property, as it may not suit everyone.

Borrowing expenses are charges that are directly related to taking out a loan. Although these expenses are not deductible in the year they are incurred, they are deductible over a five year period. What kinds of things are classified as borrowing expenses?

Borrowing expenses include fees for taking out a loan, for preparing and filing mortgage documents, for obtaining title searches as well as stamp duty charged on registration of a mortgage and valuation fees if the lender required a valuation be obtained as a condition of them lending you the money. If your borrowing expenses were less than $100, you can claim the total amount in the first year. However, if they are more than $100, you claim the amount over five years, or the period of the loan if that's less.

Another point to remember is that in the first year, a claim can only be made for the exact number of days in the financial year for which the loan existed. Any agent fees or stamp duty paid for the transfer of property are not borrowing expenses and are not tax deductible. However, they are taken into account in calculating any capital gain or capital loss when you sell the property.

So if someone borrowed money half way through the year, they can only claim half of the first year's borrowing expenses?

That's right.

When a property is rented out, the tenants usually pay a bond. Can you explain how is this treated for tax purposes?

If you're a landlord and your tenant causes damage to your property or fails to pay their rent, you may be entitled to keep all or part of your tenant's rental bond when they move out of your property. However, this bond amount is then treated as part of your income. Any insurance payout you receive later for repairs that have been made is also counted as income.

If you own an overseas rental property, can you claim that property's expenses against the rent received?

Yes, you can. If you're an Australian resident, you must include income you've received from any overseas rental properties when you complete your tax return, and you can claim any expenses from those properties as tax deductions. You need to convert the rent you received and expenses you had into Australian dollars before you include these amounts in your tax return.

Can you give us some examples of the types of expenses our viewers can claim if they have a rental property?

You can only claim expenses for the time the property is rented or is available for rent. Typically, these expenses would include things like:

- advertising costs to attract tenants

- agent fees charged to find tenants and collect rent

- building insurance· body corporate fees

- council rates on the property and gardening costs.

You can't claim for any portion of the expenses when the property was not available for rent or was being used for your private purposes.

That assumes that the property is rented at market rates. But what if your tenant is a family member who is getting a cheaper rent or even living in your property rent-free?

If the property is rented at less than the normal market rates, it's regarded as a non-commercial rental. This may mean that the amount of deductions you can claim will be limited if you allowed a relative or friend to stay in your property at non-commercial rates, the maximum amount of deductions you can claim for the period is the amount of rent you received.

If the relative or friend paid no rent, you can't claim expenses. There are a couple of important points I need to make about expenses. Firstly, the owner must have actually incurred the expenditure. So if your tenants paid the expense and they have not been reimbursed, you can't claim this as an expense. Secondly, expenses can't be claimed if they are of a capital or private nature.

So capital expenses would include things like purchasing the property, building extensions, renovations and improvements to your rental property. If you have to replace something like the hot water service, this is also a capital expense. But can you explain to our viewers what you mean by private expenses?

You normally only have private expenses when you use all or part of your rental property yourself, rather than your tenant, or if you don't make your property available for rent. If you do use the property yourself, you have to reduce any claims for deductions by the proportion of time you've used it.

Let's now look at deductions for the decline in value of assets, formerly known as depreciation. Can you outline the rules for working out deductions?

Your claim is generally based on the effective life of the depreciating asset. That means the length of time an asset can be used for income producing purposes, assuming normal wear and tear and that it will be maintained in reasonably good order and condition.

Can you give our viewers an example?

Yes, let's look at the purchase of a new stove. You can choose to make your own estimate of the effective life of the stove or you can simply adopt the effective life determined by the Commissioner of Taxation. In this case, the Commissioner estimates that a new stove has an effective life of 20 years.

Once you've worked out the effective life, what's the next step?

Firstly you need to know the cost of the asset. In the case of your new stove, this will include the original purchase price plus the cost of any improvements.There are two ways of working out your deduction but they are too detailed to go into now. Talk to your tax agent or the Tax Office for more information.

There are different rules for assets that cost $300 or less. Can you explain these rules for our viewers?

Sure. You can claim an immediate deduction for some assets that cost $300 or less, rather than working out their decline in value. An immediate deduction could be available for something like a new electric fan. As long as it's not part of a set costing more than $300, or it's identical to other items purchased in the same income year and the total cost of all the items is more than $300, the cost of the fan will be deductible in the year it's purchased. There are also special rules that apply to assets that cost less than $1,000 or have now declined in value to less than $1,000. You can choose to pool your assets together and work out deductions for them using set rates.Talk to your tax agent or the Tax Office for more information about this.

You can also deduct certain costs of the construction of your rental property, Can you tell our viewers about this?

Sure. For residential rental properties, deductions based on the cost of building or extending are generally spread over 25 or 40 years. These are referred to as capital works deductions.

After some time, if the owners decide to sell the rental property and they need to bring it up to a saleable condition, what expenses can they claim? What about real estate agent fees - are these tax deductible?

If the property is no longer being rented, the owners may still be able to claim the costs of necessary repairs, providing the need for repairs arose because the property was rented. Repair costs are incurred in an income year when the property was rented.Repairs might include replacing broken windows and plumbing maintenance but would not include garden landscaping.Selling costs cannot be claimed. These normally include the commission to the agent and any legal fees. However, these costs will are included in the cost base of the property for capital gains tax purposes.

Capital gains tax is another important consideration. Generally, assets purchased after 19 September 1985 are subject to capital gains tax. Can you outline for our viewers how the capital gain on a rental property would be calculated?

The cost base, or value, of a rental property is made up of things like the purchase price, other capital expenses, such as building improvements needed before the property could be rented and all other fees and stamp duty involved in buying and selling the property. You make a capital gain if you sell the rental property for more than the cost base of the property.

You, and any other owners of the property, are then liable for capital gains tax on this 'profit'.To work out your capital gain or loss from your rental property, you need to divide your capital proceeds between the property and all of the depreciating assets that are included in it. Talk to your tax agent or the Tax Office for further information.

All records that relate to both income received and all expenses incurred on the rental property must be kept for five years from the date you lodge your tax return. How long do viewers need to keep their records relating to capital gains?

For capital gains tax purposes, you need to keep your records from the date on which you buy the property. Records include details of the purchase, improvements you've made to the property, expenses that impact on the property cost base and details of the subsequent sale. These records must be kept for five years following the sale of the property and they must be in English