Tax Obligations on a Rental Property in Australia

Once you have your dream holiday home in sight, it is important to ensure that you understand what your taxation obligations are in Australia.  There may be opportunities to structure your purchase better to minimize taxation over the life of your investment and when or if you decide to sell your property.

From a tax perspective, if you earn income in Australia you will generally be required to pay tax in Australia. That means that even if you are a tax resident of another country, you will be required to submit a tax return in Australia and pay tax on your holiday home income. A holiday home that you rent out for all or part of the year is generating income and therefore you will be required to pay income tax on the investment. You will also be able to claim deductions for some of the costs of maintaining and renting out the property.

Capitals gains tax on your property is also something that will need to be considered. This tax is payable in Australia when you sell the property, and is levied on the gain that you have made on the capital value of the property. Costs associated with purchasing the property may be included in the initial cost base of the purchase, which should help you minimize tax in the future.

Regardless of whether you are an Australian or Foreign tax resident some things you will need to keep in mind before you rent the property include:

• In order to claim any tax deductions on the property or declare income earned on it (such as rent), your name will need to be on the title deed of the property. If the property is purchased in the name of your partner, child, business or someone else, then the taxation obligations on the property will be theirs. If you decide to transfer the property to someone else you may be liable for capital gains tax at that time, so it is worthwhile ensuring that you structure your purchase the way you want at the time of purchase.
• Keep a copy of the purchase agreement and be sure to make a note of the contract date (not the settlement date), as that will be required when calculating capital gains tax on the property in Australia.
• If you live in the property for a while before renting it out, it may be worthwhile obtaining a market valuation at the time you start to rent it for capital gains purposes.

Once you are ready to rent the property out, you will need to consider the following for tax purposes:

• Ensure you keep all documents related to the purchase and ongoing maintenance of the property so that you can claim everything you are entitled to;
• Deductions that you may be allowed to claim against your rental income include the following:If you are furnishing the property, be sure to keep receipts for everything that you purchase.  It is a good idea to set up an asset register so that you can then use this for calculating depreciation on these assets.  The depreciation may be able to be claimed as a tax deduction in Australia or in your country of taxation.
  • Rates paid to local council
  • Interest on your mortgage
  • Insurance on the property or Landlord Insurance
  • Management and maintenance fees on the property

Costs that you may be able to included on the capital cost base of the property, which will then be taken into account when calculating the capital gain you have made on the property when it comes time to sell, include:

• Expenses involved in purchasing the property such as stamp duty, agents fees; and
• Capital improvements made on the property such as laying new carpet.

If you improve or repair the property you may be able to claim these expenses as either income tax deductions against the rental income, or as capital improvements that will then form part of the cost base of your property.

If you are a foreign tax resident and you are required to pay tax on your property in Australia, you may be entitled to a credit for that tax paid in the country of your tax residency.  This may be based on a double taxation agreement between Australia and your country of tax residence, or the country’s specific taxation laws. Having taxation obligations in more than one country can become complicated, and it is recommended that you seek advise from qualified taxation advisers in both Australia and your country of tax residence.

Purchasing a holiday home is an exciting time, but it also has some significant taxation consequences.  To make sure you are not caught out by the tax laws in Australia, and are able to structure your property purchase in your best interests it is worthwhile doing some research before you purchase. You can find a lot of information about what you are entitled to claim or not on the Australian Taxation Office website. It is also recommended that you seek the advice of a taxation advisor in Australia.