Understanding property tax is important to ensure that your tax return is completed correctly (if you prepare your own return) and, if using a property accountant to prepare your return, to assist your accountant in completing the return.
This guide outlines the fundamentals you should know about property tax in Australia.
1. Investment Property? You Must Declare Rental Income
If you own a property that earns income (like a rental), you must declare all rental income in your tax return. This includes:
- Rent received from tenants (even short-term like Airbnb)
- Bond money you keep (e.g. for damages)
- Insurance payouts related to lost rent
- Reimbursements from tenants (e.g. for utilities)
It’s important to keep good records from property managers or tenants throughout the year. Even better still, if you use a separate bank account for your rental property investments, that will make it much easier for your property accountant come tax time.
2. You Can Claim Deductions on Investment Properties
Owning an investment property gives you access to a wide range of tax deductions, such as:
- Loan interest
- Council rates and land tax
- Insurance premiums
- Repairs and maintenance
- Property management fees
- Depreciation on buildings and assets
Sometimes it can be confusing, but please note that repairs are deductible immediately, but capital improvements (like renovations or extensions) must be depreciated over time. Please contact your property accountant, like Nobel Thomas, if you have any questions about the distinction.
3. Negative Gearing Can Reduce Your Tax
If your rental expenses exceed your rental income, this is called negative gearing. The resulting loss can usually be offset against your other income (like salary), reducing your overall tax bill. This still remains one of the most effective ways to save tax. Please contact Nobel Thomas and we can run through your calculations through our spreadsheet to quantify the savings.
4. Principal Place of Residence (PPR) Is Tax-Free — Mostly
If you live in the property as your home:
- You don’t need to declare any income (because it’s not earning rent)
- You usually don’t pay capital gains tax (CGT) when you sell it
But if you rent it out for a period or use it for business purposes (like a home office), part of the property may become subject to CGT. Again, this can be a complicated area so please contact your property accountant, like Nobel Thomas, for a further explanation.
5. Capital Gains Tax (CGT) Applies When You Sell Property
When you sell a property (unless it’s fully exempt as your home), you may be liable for CGT. Key rules:
- Investment properties are subject to CGT
- 50% discount if owned for more than 12 months (if owned in a personal name or trust)
- Partial exemptions for properties that were once your home but later rented (but sometimes can be 100% tax free)
- Valuations are important if you inherited or changed use of a property
6. Holiday Homes Are Not Always Exempt
Many people assume their holiday home is exempt from tax—but if you rent it out even occasionally (e.g. on Stayz or Airbnb), it’s classed as an investment property, and you must:
- Declare rental income
- Apportion expenses between private and income-earning use
- Consider CGT on sale
7. Ownership Structures Matter
How you own the property affects your tax:
- Joint ownership: Income and gains are split by ownership percentage. For example, if a property is owned 50% by husband and wife, then the wife is required to declare 50% of all income and capital gains and likewise so is the husband.
- Trusts: Can offer flexibility and asset protection, but come with some form of complexity. A property accountant can shed further light on these attractive tax structures.
- Companies: Flat tax rate applies, currently 25%, no CGT discount Nobel Thomas offers no obligation consult meetings, to decide the best structure for you.
8. Property-Related Records You Must Keep
To support your claims and calculate CGT, you should keep:
- Loan and bank statements
- Invoices and receipts for expenses
- Property agent statements
- Depreciation reports
- Purchase and sale contracts
- Renovation costs
The ATO requires you to keep records for at least 5 years after lodging the relevant return.
9. You May Need to Pay Land Tax
Land tax is managed by state revenue offices, but is still a cost you must track. It will generally be deductible on investment properties.
10. Don't Forget to Declare Foreign Property
If you own property overseas:
- You generally need to declare rental income
- You may still have CGT obligations when selling
- You may be able to claim a foreign income tax offset if you paid tax overseas
Contact a property accountant, like Nobel Thomas, who can advise on foreign property tax.
