Buying a house on a quarter-acre block, surrounded by garden and with a huge backyard for the kids to play in – it’s the Australian dream.
And it’s also one that many Aussies are finding is increasingly hard to obtain.
We’ve all seen how property prices have skyrocketed over the last couple of years. As a result, many homeowners have turned towards renting.
And we haven’t even gotten started on the vast majority of small businesses that lease property instead of owning it outright!
Not only does renting come with different rights and obligations on the part of the resident – it also affects your accounting and tax situation.
How so? We’re glad you asked – join our business accountants in Melbourne as we explain how rental property accounting works for both renters AND landlords.
What happens to tenants?
As we all know, your assets (including property) influence your tax situation. So logically, the fact that you’re renting should also have an impact – the question is “how?”
Will I have to pay Land Tax?
You might think that since your name isn’t on the Title, you won’t have to pay land tax.
If you follow interstate legal developments however, you may have read something about landlords passing Land Tax onto their tenants.
Specifically, the NSW Retail Leases Act 1994 classifies Land Tax as a “type of outgoing expense that may be passed on to tenants in addition to rent”.
Our small business accountants in Melbourne frequently get asked by our clients whether or not they’ll have to start adding Land Tax to their monthly expenses.
Luckily for you, this is something that Victorian small businesses don’t need to worry about, since the equivalent Victorian Act specifically excludes tenants from having to pay Land Tax.
Operating vs capital leases
When it comes to commercial leases, there are two main types of lease. Which one you use can have dramatic impacts on your balance sheet, as well as your tax obligations:
- Operating leases
- Capital (financial) leases
The most important distinction for today’s topic? How the two are treated differently.
Since they’re long-term leases, capital leases are treated as assets and are recorded on the balance sheet.
By contrast, operating leases are short-term leases, and are instead recorded as expenses on the profit-loss statement.
Many businesses would abuse the system and try to get their commercial leases classified as one or another. For example, some businesses would account for rental property using capital leases to record higher expenses and reduce reported profit for tax reasons.
If you were thinking about making use of this loophole, our small business accountants in Melbourne advise against it – it won’t work anymore!
Since 2016, changes to international accounting standards (and by extension, Australian standards) have dramatically tightened up leasing rules, meaning that the vast majority of commercial leases are now recorded on the balance sheet as capital leases.
What about landlords? Our business accountants for rental properties explain
Of course, it isn’t just tenants whose financial situation is impacted by their rental or lease arrangement – if you’re a landlord, your financial and tax situation will be impacted by rental properties you own.
How rental income affects your income tax
As a form of income, it’s only natural that your rental income is included in your assessable income.
As any long-term landlord knows however, monthly payments aren’t the only type of rental income you may earn from your properties. There are many other types of income – most of which are assessable for tax.
For example, in some cases your bond is also included in your assessable income – specifically, any bond money you hold onto to compensate for damage to the property or overdue payments.
- Letting and booking fees
- Prepaid rent
- Certain insurance payouts
There’s a lot to keep track of when it comes to rental property accounting – luckily, it’s something our accountants in Melbourne can help with!
Non-financial rental income
While rare, in some cases, rental income isn’t paid with cash, but with goods and services.
There isn’t anything outlawing this – however, it does require some additional work when tax time rolls around.
Specifically, it requires you to first evaluate the monetary value of the goods and services offered as rental payments.
You’ll have to find the total market value of goods and services and add that to your assessable income as rental income.
Tax deductions for investment properties
Property investment is a surprising amount of work – it isn’t all passive income.
As the landlord you’ll be responsible for a range of different duties and obligations.
Fortunately, there are many tax breaks that make your job just that little bit easier (when it comes to accounting for rental properties, that is – you’ll still have to put in the hard yards when a pipe springs a leak!)
Some of these deductions include:
- Agent and advertisement costs
- Loan interest
- Repair and maintenance costs
- Depreciation (both for the building and for appliances)
- Insurance fees
- Capital gains tax discount (more on that later)
Basically, the majority of expenses that go into administering a rental property tend to be tax deductible.
And that also includes bookkeeping and accounting costs – something that can make it easier to hire an accountant in Melbourne to look after accounting for rental properties in your portfolio!
Capital gains tax
Our small business accountants in Melbourne have talked about capital gains tax (CGT) before.
If you missed that article however, capital gains tax is tax that’s applied to the profits (or loss) on the sale of any capital assets.
And that includes property.
If you sell a rental property within 12 months of owning it, you’ll be hit with the full rate on any net gain:
- 30% for companies
- 15% for super funds
- Your income tax rate for individuals
If you’ve held the property for longer than a year however, you may receive a CGT discount:
- 50% for individuals and small businesses
- 33.3% for super funds
- Companies are not eligible for discounts
Of course, that isn’t all there is to it – as with all taxes, there are exceptions and special rules such as foreign residents capital gains withholding.
Accounting for rental properties is a complicated procedure – luckily it’s one you don’t have to do on your own.
Our accountants in Melbourne look after your rental property accounting
Whether you’re a first-time landlord, a seasoned property investor, or a tenant who needs help getting their affairs in order, our accountants in Melbourne can help.
Our goal is simple: to get you where you want to be by providing financial clarity.
Since 1966, we’ve been helping individuals, small businesses and property investors all over Melbourne achieve their goals with qualified accounting services, in-depth analysis and advice.
We use dedicated rental property accounting software to ensure that your property situation is recorded properly, that you’re getting the right tax deductions, and to provide the best advice for your circumstances.