What Tax Deductions are Available for Property Owners in Australia

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Attention, Australian expats! Did you know that as an investor in property, or an owner of an Australia-based property, there are certain tax deductions you can apply for? There are several expenses and deductions you can claim.

The favourable Australian tax laws mean that property owners can notice a significant financial advantage due to the tax deductions they’re entitled to, helping you save money and reduce the cost you pay each tax year.

If you would like to know more about the tax deductions that apply to Australian real estate and investment properties come tax time, the information you need is just below.

What is a tax deduction in Australia?

Tax deductions are defined as deductions that can be itemised on a tax return after they have been paid for with your own money. In Australia, tax deductions help keep taxable income low and increase the tax refund that you receive at the end of the financial year.

How tax deductions work: The formula used to calculate taxable income

Tax deductions work like this. Since the money you earn from your business is classed as income that counts as taxable income, and tax deductions reduce the amount of taxable income, each of these is used as part of a formula to calculate the taxable income you earn.

The formula used by the Australian taxation office to work this out is as follows:

  • Your assessable income – (minus) your tax deductions = gives you the taxable income value

Let’s look at a typical example to see how this formula works.

So, if your annual income is $65,500 and the tax you paid was $13,000, you would receive a tax refund of approximately $1,300.

In other situations where you might have used your home office to work from home and have spent $3000 on expenses, $62,500 is the taxable income you earn.

In these individual circumstances, tax is paid on just $62,500, and not $65,500.

Now, what’s important to recognise is that there are several expenses that count towards tax deductions, which can reduce your taxable income.

Claim tax deductions for work related expenses for a home office

So, the question is, are you using part of your own property to run a business? If you are, as mentioned, this might be one of the tax deductible situations that apply to you. It’s one way you can pay less tax on home office expenses. However, bear in mind that if you own a property and are not using it to run your business, tax deductions don’t apply.

Of the cost you spend on running a business out of your home office, claiming a tax deduction is possible and might even factor in your home loan’s interest in addition to the maintenance expenses.

There is a calculation that applies to the tax deductions made on these expenses. It’s based on the ratio between the floor space of your property and how this compares with the space of your home office.

Other work related expenses that tax deductions apply to include occupancy expenses and mortgage interest costs.

Home office

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Which vehicle or travel tax deductions claims can I make?

The costs of trips made with a work related vehicle in which you travel from your Australia-based property to other destinations. In these circumstances, you can reduce your taxable income by claiming a deduction based on the costs incurred.

Certain expenses related to your work related vehicle cannot be claimed as tax deductions. For example, if you need to travel to your ordinary place of work to your property in Australia, you cannot make a claim. 

However, in other circumstances where your employer requests that you travel to several locations from your Australia-based property, or your work related vehicle is required to conduct tasks for your employer, or you need other accommodation when required to travel to work, you can claim these as tax deductible expenses.

Which home-based organisations or businesses are eligible for tax deductions?

Now, the Australian taxation office has put together a list that includes several examples of home-based organisations or types of business activity that are eligible for tax deductions. The list includes businesses such as:

  • Web design organisations
  • Tutoring businesses
  • Bed and breakfast businesses
  • Financial consultants
  • Bookkeepers and accountants

Factors to consider to qualify for tax deductions for home-based businesses

Say you’re running a business out of your home as an Australian expat, it’s obligatory that you maintain records that will go towards your tax deductions claims. These records and receipts related to any expense or money spent must be kept for five years. You must also demonstrate how the number of tax deductions was calculated.

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Claiming tax deductions for rental properties

Despite circumstances where you aren’t compensated or covered for property costs by the rental income you receive for the property, you can still make certain tax deduction claims. 

If you have invested in Australia based property, you’ll be able to claim any tax deductions on the investment income earned from the rent you receive as permitted by the Australian taxation office. 

However, this means that as an Aussie expat, in situations where you decide to return to Australia from abroad and live in the property, you won’t receive any tax deductions for the length of time you live there.

How is tax deductible for purchases like furniture?

Let’s now look at the tax deductible purchases that you might be able to claim for furniture. When you purchase new furniture for your rental property, and the items of furniture begin to depreciate in value (which are referred to as depreciating assets), tax deductions might apply here. 

You can therefore claim a tax deduction if your furniture loses value and it belongs to a rental property. However, a crucial factor to take into account is that according to tax law, claims can only be made for a value decline that applies to items in excess of $300.

So, to give you an example, despite having several depreciating assets such as an office chair or a desk that have depreciated by $50, you won’t be able to claim a tax deduction here under the depreciating assets classification unless you want to claim the entire cost of all items that are below $300. 

The claim you make for depreciation must equate to a value for items that is more than $300 in total if it’s classed as a depreciation claim.

What is a depreciable asset?

A depreciable asset is an item in the property that is not permanent and will most likely be replaced in the near future. They are not thought of as a part of the structure of the property either. Depreciating assets might be a completely new piece of furniture or a second hand one.

To give you an idea of items that are classed as depreciable assets, here are a few examples:

  • Old carpets 
  • Curtains that will be replaced
  • Old appliances such as tumble driers, freezers or fridges
  • Furniture such as sofas 
What Tax Deductions are Available for Property Owners in Australia

What are some other tax deductions you can claim for your own property (being used as a business)?

Some of the other deductions you can claim for your own property (if you’re using the property for business use) include the following home expenses:

  • Utilities and internet connections
  • Landline costs 
  • The costs of electricity 

Now, in terms of electricity costs, you can gain tax deductions on any electricity use that is more than the amount you’d ordinarily use.

For instance, if you normally pay $105 each month, or $420 each quarter, and your electricity costs are $600 with the extra costs of running a business, you can benefit from tax deductions in this case.

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What tax deductions apply for renting out rooms within my own property?

Since the Australian taxation office considers a rental property to be the same as a property with a rented room, tax deductions work the same way. In this case, your tax deductions work like an investment income for property investors.

Remember that if you rent out a room, tax deductions only apply for the duration of time that you rent out the room.

If you sell the property, keep in mind that capital gains tax might be incurred, and you might have to pay tax for this when tax time arrives. 

What are other tax deductions applicable to a property investor?

If you are an Australian expat who has invested in property and has earned income from the rental, you are eligible for tax deductible income. The following claims, referred to as capital works and home maintenance claims, can be made by a property investor.

Capital works claims

Capital works can be classed as tax breaks that might have taken place prior to the property being rented out. These tax breaks even extend to the property construction costs. As stated by the Australian taxation office, renovation or construction of a substantial amount can count as capital works.

Keep in mind, though, that your tax deduction rate will be worked out based on several factors, including:

  • How long the property will be/has been rented out for
  • How old the property is
  • What kind of renovation is carried out on the property

Capital works taxation deductions work in the following way. There is a specific rate of deduction, which is 2.5% each year, and this rate applies over the 40 years that follow construction (with 40 years being the highest period of time and 25 years being the lowest). 

There are many examples of capital works tax deduction circumstances, such as the following:

  • If you construct your home or carry out construction on your home, you can claim deductions
  • If you alter the structure or make alterations to the current building, this is classed as capital works
  • If you construct a fence in your garden or build an additional fence, this is also categorised as capital works
  • If you construct a garage or extend a building in terms of its size, you could claim deductions

Bear in mind that if your capital works costs have been covered by insurance, this will not be tax deductible.

What Tax Deductions are Available for Property Owners in Australia

Home maintenance claims

The second option you have as a property investor is to claim the costs of maintenance for your property. Some of the maintenance and repair work you will be able to claim includes plumbing work, flooring installations, painting and decorating, and electrical works carried out on the property.

What you should keep in mind is the distinction between the depreciable asset claims and the capital works claim. Each of these is different, with structural improvements and additions being classed as capital works and depreciable assets being classed as capital allowances.

Borrowing expenses and cost

Claiming expenses that you’ve accumulated when taking out a home loan is possible, and these can be claimed over the course of many years. In addition to fees related to loan establishment, you can also claim on the cost of documentation and broker fees, stamp duty and expenses that relate to property valuation.

The way borrowing expenses claims work is that, in cases where the money borrowed is more than $100, your tax deduction will either span five years or will span the loan term (depending on which of these is the shortest). 

It’s possible that your costs might be less than $100. In this situation, you’ll be able to make a full deduction claim of the whole value within the year you incurred these borrowing expenses.

Go to Odin Mortgage for more information on taxation and property

As an Australian expat who has either invested in property or runs a business in a home located in Australia, it’s vital that you stay up to date on the taxation laws of the Australian taxation office. To do this effortlessly, simply go to Odin Mortgage to get the critical facts!

Because if your goal is to learn more about capital gains tax, property taxation, mortgages, Odin Mortgage has all the latest facts ready and waiting for you!

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