When purchasing an investment property, the choice of ownership structure is important to ensure you minimise the effects of taxation.

Available structures include self-managed superannuation funds (SMSFs), family or unit trusts and companies, as well as holding the property individually or in joint names.

When a rental property is purchased in your own name you can take advantage of negative gearing which effectively lowers your taxable income and reduces tax. If the property is held for longer than 12 months, individuals are eligible for the 50% general discount on capital gains, effectively halving the amount of capital gain you will pay tax on. 

Holding a rental property jointly with your spouse has the same advantages and disadvantages as owning the property individually, however any assessable income and deductions and therefore any tax benefits or tax payable is shared in the same proportions as the ownership of the property. 

SMSFs are useful for holding investments as they have a maximum tax rate of 15% on income and 10% tax on capital gains for assets held for more than 12 months. 

While the money available to invest is limited to the balance of the fund, borrowing money may be a viable option. Investors should be aware that once contributions are made to the fund, the money cannot be accessed until the conditions of release have been met (normally on retirement). SMSFs which are funding pensions pay no tax at all on investments or capital gains.

When a rental property is held by a trust the net income can be streamed to the beneficiaries in a tax effective manner. Losses from a negatively geared property though are trapped in the trust and can only be used to reduce future trust profits. These losses may not be available to the individual beneficiaries unless they have other income they can pass on to the trust. The ability to claim the 50% general discount on capital gains will be determined by the type of beneficiary or trustee as trusts are not taxed directly.

If a rental property is owned by a company, tax is payable at a rate of 30%. However any losses on the property, as a result of negative gearing, are trapped in the company and used to reduce future profits. Companies are not entitled to the 50% general discount on capital gains, and therefore pay tax on the full capital gain at 30% in the year it is sold.

It is also important that prospective and current property owners understand the taxation implications of their investment. The purchase and ownership of a rental property can incur many expenses which may be categorised differently for tax purposes.

Some expenses on the initial purchase are capitalised and treated as part of the asset cost base for future CGT purposes.

These may include:

  • stamp duty on the transfer of the property title with the exemption of property located in the ACT where stamp duty is an immediate deduction
  • conveyancing and settlement costs
  • building & pest inspection reports
  • Initial repairs to the property   

Some expenses can be claimed as a 100% tax deduction immediately.

These may include:

  • interest on the rental property purchase
  • interest on a depreciating asset  for the property
  • interest on renovations or maintenance
  • repairs and maintenance
  • costs of preparing a lease agreement with your tenant
  • costs associated with evicting a tenant
  • travel costs when the main purpose is tending to your rental property 
  • insurance
  • land tax
  • rates
  • advertising for tenants

Some expenses are claimed over many years or the life of the asset.

These may include:

  • the total cost of construction or building improvements
  • purchase and replacement of items such as a hot water system or air conditioner
  • borrowing costs such as stamp duty on mortgage and loan establishment fees 

Certain types of rental expenditure are constantly scrutinised and targeted by the Australian Taxation Office due to a lack of understanding of the tax rules or incorrect claims.

These may include:

  • deductions for rental properties not genuinely available for rent
  • interest on the drawdown of a loan  used  for other purposes
  • travel expenses 
  • deductions for initial repairs or repairs which in fact are improvements to be depreciated
  • rental to related parties for non-commercial rental rates for example rent to a family member

As the cost of getting the purchase structure wrong or the cost of making a mistake with your rental income and deductions can be large please contact our team for advice tailored to your specific needs and circumstances. 

This page has been prepared by RSM Financial Services Australia Pty Ltd ABN 22 009 176 354, AFS Licence No. 238282.

As everyone's circumstances are different and this article doesn't take into account your personal situation, it is important that you consider the above in light of your financial situation, needs and objectives, and seek financial advice before implementing a strategy.    
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