Any income earned will be taxed by the Australian Taxation Office (ATO), including rental property income. This income must be included as part of your total assessable taxable income and must be declared when you do your income tax return.
Relevant expenses should be tracked to claim deductions against your taxable income and receipts and other forms of proof are required.
Claim deductions can include:
- management and maintenance costs,
- borrowing expenses,
- depreciation,
- property tax,
- land tax,
- capital gains tax, and
- negative gearing.
Here’s everything you need to know about rental income and rental loss, how they’re taxed, different types of deductions and how banks assess rental property income.
How to Work Out Rental Tax
Your total income, which includes rental property income, is taxed according to the progressive tax system. Naturally this means that the greater your total taxable income is for the financial year, the higher you get taxed.
| Taxable Income | Tax Payable |
| 0 – $18,200 | Nil |
| $18,201 – $45,000 | 19c for each $1 over $18,200 |
| $45,001 – $120,000 | $5,092 plus 32.5c for each $1 over $45,000 |
| $120,001 – $180,000 | $29,467 plus 37c for each $1 over $120,000 |
| $180,001 and over | $51,667 plus 45c for each $1 over $180,000 |
In Case of Rental Income |
In Case of Rental Loss |
||
| Nature | Amount | Nature | Amount |
| Gross Rent | $7,000.00 | Gross Rent | $7,000.00 |
| Less: | Less: | ||
| Council Rates | $1,541.00 | Council Rates | $1,541.00 |
| Water | $200.00 | Water | $200.00 |
| Legal Fees | $1,000.00 | Legal Fees | $1,000.00 |
| Interest | $5,000.00 | ||
| Rental Income | $4,259.00 | Rental Income | -$741.00 |
| Salary Income | $32,000.00 | Salary Income | $32,000.00 |
Taxable Income |
Taxable Income |
||
| Salary Income | $32,000.00 | Salary Income | $32,000.00 |
| Add: Rental Income | $4,259.00 | Less: Rental Income | -$741.00 |
| Taxable Income | $36,259.00 | Taxable Income | $31,259.00 |
Tax Payable |
Tax Payable |
||
| Up to $18,200 | $0.00 | Up to $18,200 | $0.00 |
| 19% on Balance Amount of $18,059 | $3,431.21 | 19% on Balance Amount of $13,059 | $2,481.21 |
| Total Tax Payable | $3,431.21 | Total Tax Payable | $2,481.21 |
What Qualifies as Rental Property Income Tax Deductions?
Any rental property expenses that you paid for yourself made directly for the investment property can be tax deductions.
If you purchased any new home items, you could claim depreciation losses. These can include:
- appliances,
- blinds,
- carpets,
- furniture, and
- water systems.
Management and Maintenance
- advertising,
- bank charges,
- body corporate fees,
- electricity and gas,
- insurance,
- legal expenses,
- agent fees,
- pest control,
- maintenance and repairs, and
- travel expenses for inspection.
Borrowing Expenses
- interest on the investment property’s home loan,
- lender’s mortgage insurance,
- mortgage broker fees, and
- stamp duty.
Property Tax
Property tax is otherwise known as council rates, which cover things like refuse removal and street cleaning. How much you are charged will be dependant on where your property is situated and its value.
Land Tax
A tax advisor can assist with working out the levy in your state and what it is in comparison to the value of your land. They will indicate when you can claim the cost back.
Capital Gains Tax
A capital gain is what you make in profit when you sell an asset such as property or shares. Subsequently, selling it for less than what you originally bought it for will result in a capital loss.
The capital gain is declared alongside other income earned.
If you’ve had your property for a year or more before selling it, a capital gains discount of 50% is applicable.
Negative Gearing
If the rental income you receive isn’t enough to cover your expenses and you’re making a loss on your investment property, this loss can be subtracted from your taxable income.
So How Do Banks Assess Rental Income?
| Current | |||
| Loan | Rate | Structure | Repay – PM |
| $500,000 | 3% | 5Y – IO | $1,250 |
| Income | |||
| Rental – PM | Fees | Rates + Insurance | Net Balance |
| $1,950 | 8% | $300 PM | $4,494 |
| Positive | $244 |
| Bank Assessment | |||
| Loan | Rate | Structure | Repay – PM |
| $500,000 | 3% | 25Y – P&I | $2,372 |
| Income | |||
| Rental – PM | Bank Use 80% | Net Balance | |
| $1,950 | $1,560 | $1,560 | |
| Negative | -$812 | ||
| Bank Assessment | |||
| Loan | Rate | Structure | Repay – PM |
| $500,000 | 3% | 25Y – P&I | $2,372 |
| Income | |||
| Rental – PM | Bank Use 80% | Net Balance | |
| $2,968.33 | $2,374.67 | $2,374.67 | |
| Positive | $2.67 | ||
| Yield to Loan | 7.12% | ||
Key Takeaways
Understanding tax pertaining to rental property income and expenses isn’t always easy. But, getting it right can save you hundreds of dollars by correctly deducting certain expenses.
Your total assessable income is taxed according to the progressive tax system, so the greater your total taxable income, the more you get taxed.
But, any expenses that you paid for yourself made directly for the investment property can be tax-deductible, such as:
- management and miantenance,
- borrowing expenses,
- property tax,
- land tax,
- capital gains tax and
- negative gearing.
Banks assess rental property income by applying a higher assessment rate to your repayments based on the remaining term of your principal and interest period. This means, even if your property is positively geared on paper, the bank might not lend you more money.
At the end of the day, the biggest investment you can make is employing the skills of a mortgage broker to guide you through this process. Contact The Mortgage Agency today to seek professional advice and get started.
Disclaimer:
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.
