Investors with properties that are genuinely available for rent are obliged to declare all rental-related income come tax time—from the full amount of rent down to reimbursement for deductible expenditure.
When declaring income, investors will be required to include all rental-related income, including the full amount of rent and other associated payments that they receive or become entitled to when the property is rented out. All income, whether received by the investor or the agent, must be declared in the tax return.
Apart from cash, income may also be acquired as goods and services. In this case, the investor must work out the monetary value of the goods and services received based on their current market value.
Rental-related incomes include the following:
In the instance that the property is co-owned, the division of rental income and expenses will depend on the co-owners’ legal interest in the property, regardless of any agreement they may have that states otherwise, whether oral or written. The legal interest held by co-owners is stated in the title deed for the rental property. However, interest on money borrowed by only one of the co-owners need not be divided between all co-owners.
If the co-owners are joint tenants, they will hold an equal interest in the property. For co-owners who are tenants in common, they may hold unequal interests in the property based on prior agreement.
Meanwhile, partners carrying on a rental property business, the net rental income or loss must be divided based on the partnership agreement, even if the legal interests in the rental properties are different from the partners’ entitlements to profits and losses as stated in the partnership agreement. If the partnership agreement does not exist, income and loss will be divided between partners equally.
Since the Australian tax system relies on the self-assessment of taxpayers, investors must be able to work out the income they need to declare and the expenses they can claim and show how they came up with the figures provided.
In some cases, investors may be required to show written evidence to support their claims. Thus, they are strongly encouraged to keep important records relating to their asset.
Apart from serving as proof of correct information, good records can also help investors ensure that they are able to claim all their entitlements, reduce the risk of tax audits and adjustments, resolve issues relating to disputed assessments and adjustments and avoid penalties. If they are working with a tax adviser, having well-prepared records can also minimise the cost of the management of their tax affairs.
While there is no set list of records to keep, investors are advised to keep as much as they can for an average of five years from the date of the lodgement of tax return.
Among the types of records to keep are:
Receipts and invoices are valid if their show the name of the supplier, the Australian business number (ABN) of the supplier, the amount of expense or purchase, the nature of goods or services purchased or expense incurred, the date when the expense was incurred and the date of the document.
In the instance where records are lost or destroyed, the investor can still be allowed to claim deduction for certain expenses if they have a complete copy of a lost or destroyed document or if the Australian Taxation Office (ATO) is satisfied that they took reasonable precaution to prevent the loss or destruction of the document and that it is not reasonably possible to obtain a substitute document.
At the end of the day, investors are responsible for lodging a tax return that is signed, complete and correct.
Investors are encouraged to engage with professionals, where appropriate, in order to understand their rights and entitlements and meet their obligations as rental property owners. The responsible lodgement of tax returns will ultimately help you save time and money while maximising the wealth-creation potential of your property.
The information has been sourced from the Australian Taxation Office.