The Landlord's Guide To
Part 8 –
Tax Guide for Rental
Residential Property Investors treat tax as a
Tax is not a reason that property investors use to
stop buying or selling property.
Residential Property Investors look at ways to reduce
tax payable in the same way as they shop around for
loans to reduce the interest they pay; and use ways to
defer paying tax just as they find ways to patch up to
defer major repairs.
The Taxman looks at ways of collecting tax from
Residential Property Investors at each stage of a rental
property transaction, as follows:
- Buying a rental property – stamp duty, tax treatment
of purchase costs
- Owning a rental property – income tax on rents, tax
deductions, land tax, depreciation,
- Selling a rental property – capital gains tax, tax
treatment of sale costs
The Australian Tax Office would like to become the
landlord’s friend. The ATO’s Rental Properties Guide gives
advice to landlords on how to treat residential rental
property items. This article draws on advice from the ATO
Guide, and adds practical comments on the taxes payable on
residential rental properties.
It is assumed that the rental property investment is not
a rental property business or enterprise, otherwise
different rules apply. The rental property is assumed to be
Buying a rental property
Stamp Duty is a purchase tax. It is payable on
Contracts for Sale / Offer and Acceptance Agreements and on
Transfers of title. Stamp duty was first imposed in 1694 in
England to finance the Nine Years’ War against France. It
was so successful that it remains a major source of revenue
for States and Territories in Australia today.
After the purchase price is paid under a Contract, the
Transfer of title needs to be registered to complete the
conveyance. Stamp duty cannot be avoided because the Land
Titles Office will not register the Transfer of title for a
property unless it is stamped.
Purchasers are responsible to pay stamp duty. In most
States, stamp duty / transfer duty is payable in a set
number of days after the date the Contract is entered into –
it is 30 days in Qld & WA, 60 days in SA & NT, 90 days in
ACT and 3 months in NSW. In Vic it is payable 1 month after
the price is paid, in Tas, 3 months afterwards. Interest is
payable if stamp duty is paid late.
In practice, stamp duty is paid not later than the date
the purchase price is paid, so that the Transfer of title is
registered. The stamp duty rate increases as the price goes
higher. For example on a $300,000 price, it is around
$10,000; on a $600,000 price, it is around $22,500.
What are known as related party transfers, such as a
transfer to a family trust, or to an SMSF, or to a joint
owner, are liable for stamp duty based on a market valuation
by a property valuer. The main exceptions are transfers made
under Family Law Orders or to a beneficiary under a bare
trust or as an inheritance under a will, all of which are
free from stamp duty.
costs are treated as capital outlays in the same way as
the price. The Australian Accounting Standards Board
Standard 140 on Investment Property states – An investment
property shall be measured initially at its cost.
Transaction costs [legal fees, transfer taxes, etc.] shall
be included in the initial measurement. (paragraphs 20 & 21)
Therefore, purchase costs such as stamp duty,
conveyancing fees, pest and building inspection and survey
fees are capital costs which are added to the price to form
part of the cost base for capital gains tax calculations.
They are not expensed or deductible for tax purposes.
Repairs carried out immediately after the purchase are
also capital costs, even though they are repairs, because
the price paid reflects the state of repair of the
Borrowing expenses for the purchase are able to be
written off / amortised over 5 years.
Residential properties are free from GST (Goods and
Services Tax) when transferred, except for new residential
properties where GST is paid by the seller out of the price.
Owning a rental property
property profits (positive cash flow) are taxable as income.
Rental property losses (negative gearing) are able to be
offset against other income for income tax purposes.
Income tax was first imposed in Australia in 1915 to
finance the Great War – World War 1. Today, personal income
tax represents almost 50% of Australian Government revenue.
Rental Income is taxable as income when it is
received by the landlord or by their rental manager. Rental
Bonds are taxable as income when they are drawn down when
the tenant defaults. Loss of rent insurance claims are
taxable as income when received.
Rent is shared according to ownership shares for jointly
owned properties. For tax purposes, a joint tenancy is the
same as tenants in common in equal shares, in that each
owner includes a one half share of the rental income and
expenses in their tax return.
Are joint owners able to agree to divide property profits
and losses in different proportions to their ownership? The
answer is no - the legal ownership shares on the title deed
override the owners’ agreement.
The inflexibility of ownership in personal names when it
comes to dividing property profits is one reason why
purchasing an investment property in a family trust is often
preferred. Choosing the best name or entity to purchase a
property is important because changing a name or share
afterwards creates a stamp duty and a capital gains tax
Loan interest is tax deductible as a property
expense so long as the loan is used for the purchase,
building or renovation of an investment property.
The loan purpose is important. Some property owners who
move to a new home think about keeping their former home as
a rental property investment. They plan to take out a new
loan against the former home to pay for the new home, and
then to claim the loan interest as a tax deduction. This
plan does not work because the loan purpose is to buy a new
home - a private purpose, not an investment purpose, and so
the loan interest is not deductible.
Loan interest is only deductible while the property is
available for rent. Therefore if a property owner stays in
their holiday home, loan interest is not deductible during
way to defer tax until the next tax year, is to bring
forward property expenses. This is done by pre-paying
expenses up to 12 months in advance. To pre-pay loan
interest, an arrangement is needed with the lender, because
otherwise the lender will receive the payment as a principal
reduction. Strata levies and insurance premiums are often
If the loan is refinanced, or a new loan is taken out,
the interest paid is tax deductible so long as the loan and
the property are used for investment purposes. The borrowing
expenses are amortised over 5 years, if greater than $100.
Below $100, they are written off.
Repairs and maintenance to a rental property to
make it rentable or re-rentable, such as replastering holes
in a wall, repainting, replacing broken light fittings,
fixing doors and locks, caused by tenant wear and tear are
Replacement costs for a stove, kitchen cupboards,
carpets, hot-water system in a rental property are capital
expenses, and are depreciable items, unless the cost is $300
Travelling expenses to inspect the property, and
to do work, can be tax deductible, along with accommodation
expenses. Limits apply where the inspection is incidental to
Property outgoings - council rates, water rates,
insurance premiums, strata levies are tax deductible while
the property is rented or is available for rent. Special
purpose fund strata levies for particular capital works are
not tax deductible.
Property management fees, advertising and tenant
default expenses are tax deductible.
Tax was first imposed in its current form in 1692 in
England to finance the Nine Years’ War against France. It is
a property tax assessed on the value of the land, excluding
Land Tax is levied in all States and Territories in
Australia and raises billions of dollars.
Land tax payable is calculated at up to 2.25% of the land
value, the rate increasing according to ‘value’ bands. Land
tax is payable annually on land held at midnight on 31
December in a year. It is tax deductible.
Depreciation is a measure used by valuers to
calculate how long it normally takes for an asset to reduce
in value and needs to be replaced. This length of time is
called a useful life / effective life.
For example: carpet, lino and vinyl – 10 years; gas and
electric hot water systems – 12 years; light fittings – 5
years; window blinds – 10 years; stoves, cook tops and range
hoods – 12 years; dishwashers, washing machines and clothes
dryers – 10 years.
Depreciation can be expensed for tax purposes using
either the prime cost or diminishing value methods. If the
acquisition cost or depreciated value is $300 or less, the
cost can be written off.
Capital works deductions are available for capital
works. Capital works are a structural addition or
improvement such as a room, garage, patio or pergola; a
structural alteration such as adding or removing a wall; or
a whole building construction including walls, windows,
ceilings, floors, fences, and stairs. The cost base for the
capital works deduction is the construction cost.
The current tax law allows capital works deductions over
40 years, at the rate of 2.5% per year.
In most off the plan purchases, the property developer
will provide a depreciation schedule prepared by a quantity
surveyor for the purchaser to use to calculate the capital
works deduction. The capital works deduction can be used by
But there is a ‘sting in the tail’. The capital works
deduction reduces the cost base for capital gains tax
purposes. Therefore the capital gain is greater when the
property is sold.
Selling a rental property
costs such as selling commission, advertising and legal
fees, are not expensed for tax purposes because they are
capital expenses. On sale, mortgage discharge expenses are
deductible and often the residual value of depreciated items
is written off for tax purposes.
Capital Gains Tax was first imposed in Australia
on 19 September 1985, as a trade-off to lower the high
marginal tax rates of income tax
(the top rate was 60¢ in the $1).
Capital gains tax is only payable on sale of a property –
it is not payable on annual increases in value. Therefore,
if a property owner does not want to pay capital gains tax –
they don’t sell!
And when selling, a property investor waits for one year
after purchasing to halve the tax and sells after 30 June in
a year to defer the capital gains tax payable for a year.
The tax is calculated on the profit on sale. The profit
is the sale price, less the sale expenses, less the
purchase price, less the purchase expenses such as
stamp duty and legal fees, and less the cost base, as
adjusted for capital works done and deductions while the
property was owned.
The profit is then added as income into the income tax
return of the seller. The full amount is added if the sale
is within 12 months of the purchase, and one half is added
if the sale is more than 12 months after the purchase. A
property is treated as sold or purchased for capital gains
tax purposes on the day that the Contract for Sale becomes
Records for tax deductions need to be kept at least 5
years after the tax return is lodged. Records for capital
gains tax purposes should be kept until 5 years after the
property is sold.
There are practically no tax deductions available on the
purchase of rental property. While the rental property is
owned, a range of tax deductions are available for property
expenses and for depreciation, to offset the rental income.
On sale of the rental property, capital gains tax is
Finally, residential property investors should support
anti-war movements, because most property taxes originated
from a need to finance a war, and the taxes are never
repealed when the war ends!
The Landlord’s Guide to Renting has been produced by
Cordato Partners Lawyers, as part of its Property Law
practice. It contains a brief outline of the Tenancy Law.
Because it is a general guide, is not intended to be
relied upon for any specific tenancy situation. For those
situations professional advice should be obtained.
If you would like to receive the Guide as a pdf email
attachment rather than as a hard copy, or would like further
hard copies of the Guide to distribute to clients, friends
and relatives -
Contact us by email –
or by phone (02) 8297 5600 (speak to Sally Wade). Our office
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