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Property managers on owners and tax: Private investors and income
There’s one basic rule when it comes to taxation. What comes in, must go out – in the form of information on your tax return. Whether in money or in kind, anything you get given that’s linked to your rental property is considered to be income, and the revenue service wants to know about it. Baxton Property Management in Hobart spotlights some of the less well-known forms of “rental income” listed in the 2017 Rental Property Owner’s Guide from the Australian Taxation Office.
What has to be included along with the rent?
For tax purposes, rental income does not just refer to the renter’s weekly or monthly rental cheque. Disclosing that sort of income, is obvious. But there are other forms of income associated with your rental property that are equally relevant, but which do not immediately spring to mind when you are hunched over the tax forms.
In cash or kind: If you are renting out your property to earn a return on your investment, any payment received in return for accommodation there, is considered part of your income. That applies whether it is in cash, or in kind.
If you let young Joe live on your rental property for free, as long as he keeps the garden looking good and the swimming pool clean, as well as doing small maintenance jobs, your tax situation could be complicated. The same applies when someone like Chloe, who has parents on a farm, agrees to pay part of her rent in fresh potatoes. Or perhaps Sam, who’s in the premier league, gives you season tickets for rugby, in return for accommodation.
You will have to put a market value on any of these, from the rental value of Joe’s accommodation, to what the spuds or season ticket would have cost you. And you will have to add it to your rental income. You may be entitled to deduct some of the young man’s “rent” in terms of the legally deductible parts of the services he performs. But as far as your income goes, his “rental” does need to be included to balance the tax books.
Bond monies and tenant insurance pay-outs: If you keep part of a tenant’s security bond because they didn’t pay the rent, or because you have had to repair damage after a tenant moved out, it classifies as income. The same applies if your insurance company pays you out for rental you lost because a tenant left.
Reimbursements: There are times when you, as the owner, receive money in lieu of damage to get repair work done to your property. If a tenant gives you money towards the cost of the repair, again that money must be recorded as income. This is especially important if you want to claim the repair cost as a deduction.
Government rebates: The same principle applies for rebates as it does for reimbursements. If you install something like a solar system to supply hot water, for instance, the government may give you a rebate. As the solar system is a depreciating asset for which you will want to claim tax relief over a period of some years, you can’t claim for the entire value, if you didn’t actually pay the full amount because of the rebate you received.
When the amount claimed exceeds the amount you spent: In some more complicated cases, as with limited recourse debt arrangements, financing, refinancing and notional loans, you may not end up paying the full cost of the initial capital expenditure either. However, you may well want to claim deductions for this expenditure on a depreciating asset. In a similar way to the rebate situation, you could end up claiming for money you have not spent. The unpaid section has to be recorded as income, in order to balance a claim for the full expenditure.
These principles apply to all situations where rental income is involved. What may change is how the responsibility for that income is divided. This depends on how many owners are involved, and whether the property is a private investment, or part of a rental property business.
Baxton Property Management keeping you informed
To inform rental property owners and investors, Baxton Property Management in Hobart will be bringing you a series of informative articles on how the newly updated tax laws apply to you. Watch for the next one, which deals with shared ownership and how that affects income declarations. You’ll find it on the Baxton website.
- Tax: Maximising owner benefits?
- Important tax tips for property investors
- Property Investors: 5 tax tips
We hope you enjoyed this article
The information contained in this article is based on the authors opinion only and is of a general nature which is not indicative of future results or events and does not consider your personal situation or particular needs. Professional advice should always be sought relevant to your circumstances.
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