Australians love to invest in properties and earn rental incomes. In the financial year ended 30 June 2012, 1.9 million Australians or 19.3% of the individual taxpayers (almost one in every five) owned investment properties.
Of these, 72.8% of investors owned one property, 18.9% owned 2 properties while around 8% owned 3 or more properties. In 1994, 12.9% Australians owned investment properties, an increase of almost 50% over the last 18 years.
Property investors would have to pay taxes on weekly rental and related rental incomes such as bond money retained, certain insurance payouts and reimbursements from tenants. Income tax is payable on rental incomes and GST is payable on considerations for taxable supplies of certain rental properties. Investors are eligible to claim deductions for various expenses incurred to earn rental incomes including management fees; maintenance costs; borrowing costs plus interest on borrowing; depreciation on assets such as carpet, furniture and appliances as well as capital works.
Rent is an income according to ordinary concepts and it will therefore be assessable under section 6-5 of the Income Tax Assessment Act 1997. Rental income is assessable in the year it is received and the applicable tax rate is the individual rate of the returning investor.
A residential property investor is not require to have an Australian Business Number (ABN) and rental income is added to their assessable income from other sources such as salary and wages. A payment of board by adult children in a family would be considered as a domestic arrangement, no income tax would be payable on this payment and hence, no tax deductions would be allowable unless the board is an arms’ length commercial rent payment.
You need to carry out an enterprise to be liable for charging and remitting GST. Under section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999, leasing a single property or multiple properties continuously to one or more tenants will be considered an enterprise. The treatment of rents or lease payments for GST purposes will depend on the type of premises being rented out and their usage.
Predominantly, property investors are involved with residential premises. The supply of residential premises to tenants is input taxed. This means that investors as suppliers of these premises do not have to charge GST on the amount of rents received and are not eligible to claim input tax credits for the acquisitions made to make these supplies of rental properties. The overwhelming majority of mum and dad property investors have no involvements with GST.
If you meet registration threshold for GST and invest to make a supply of commercial residential premises such as hotels and motels or business premises or office premises, GST will be payable on the amount of rents received and you will be eligible to claim input tax credits on the cost of acquisitions to make these supplies. You would require an ABN to operate these types of commercial premises to earn rental incomes.
Dr Abul Jalaluddin is an Islamic Finance expert, Director of MCCA, taxation advisor and a regular columnist of AMUST. He is based in Sydney.