Taxation rules surrounding rental income can be quite complex in Australia. From deductible expenses to capital gains implications, many considerations impact the profitability of an investment property.

For Australians invested in the property market or considering entering it, understanding the tax treatment of rental income is crucial. By grasping taxation details, investors can increase their after-tax returns while maintaining full compliance with regulations from the Australian Taxation Office (ATO).

On that account, we’re here to answer the question, “How much tax do I pay on rental income?”

Rental Income as Taxable Income

To the Australian Taxation Office (ATO), any income you receive from renting out your property – all or part of it – is considered taxable income, just like wages, dividends, and interest earned.

So, you must declare your rental income in your annual income tax return, and it will be taxed at your marginal tax rate. The current marginal tax rates in Australia (as of April 2024) are as follows:

  • $0 – $18,200 >>> Nil
  • $18,201 – $45,000 >>> 19c for each $1 over $18,200
  • $45,001 – $120,000 >>> $5,092 plus 32.5c for each $1 over $45,000
  • $120,001 – $180,000 >>> $29,467 plus 37c for each $1 over $120,000
  • $180,001 and over >>> $51,667 plus 45c for each $1 over $180,000

Deductible Rental Property Expenses

Calculating Tax Deductible Rental Property Expenses

Fortunately, property investors are entitled to claim a range of expenses as tax deductions, which can significantly reduce the taxable rental income.

Under Australian tax law, many property expenses, like property management and advertising, can be claimed as deductions as long as they are for an investment property, not your principal place of residence.

The main categories of deductible expenses include:

  1. Management and Maintenance Costs
    • Advertising to find new tenants
    • Body corporate fees
    • Cleaning costs, pest control
    • Rental agent or property management fees and commissions
    • Gardening costs (not major landscaping that increases property value)
    • Legal expenses related to rental activities
    • Electricity and gas not paid by the tenant
    • Home, contents, and landlord insurance
    • Accountancy or tax advice costs associated with the rental property
  2. Borrowing Expenses
    • Loan establishment fees
    • Title search fees
    • Mortgage broker fees (if applicable)
    • Lender’s mortgage insurance (if applicable)
    • Interest paid on an investment loan (but not the principal amount)
  3. Depreciation
    • Capital works on structural elements of the property (roof, walls, driveway, etc.)
    • Plant and equipment, such as carpets, appliances, curtains, air conditioners, and furniture

It’s crucial to note that expenses related to your personal use of the property or the principal borrowed to purchase it cannot be claimed as deductions.

Land and Property Taxes

In addition to the above expenses, property investors can claim land and property taxes as deductions. Council rates, which fund local government services, are tax-deductible for periods when the property was rented out.

Furthermore, land tax – an annual tax payable on properties that are not your principal place of residence – is also deductible if applicable to your rental property.

Read further on whether you need a real estate licence to manage property.

Capital Gains Tax

Unlike your principal place of residence, when you sell an investment property, you are subject to capital gains tax (CGT) on any profit made from the sale. The profit is added to your assessable income and taxed at your marginal rate.

However, a capital gains discount applies if you’ve held the property for more than one year. The current discount is 50%, meaning if you made a profit of $100,000 on the sale after more than a year, you would only pay tax on $50,000 of that gain.

Negative Gearing

Another tax concession available to property investors is negative gearing. This term refers to the situation when an investment property makes a net loss (expenses outweigh income received). In such cases, you can deduct this loss from your taxable income.

Negative gearing is not a money-earning strategy; it’s more of a tax-reducing strategy. Essentially, you can use your rental property losses to reduce your taxable income in the short term, with the aim of recouping those losses when you eventually sell the property (and potentially pay capital gains tax on the sale profit).

Per contra, if your rental income exceeds your expenses, your property is considered positively geared, and the profit is added to your taxable income.

It’s important to note that negative gearing is effective if you plan to carry the loss and make a profit on the property in the future. Otherwise, you risk making an overall loss on your investment.

Also read here on how to report a property management company.

Keeping Records

Keeping Records for Rental Income Tax

Regardless of your gearing position, it’s essential to keep meticulous records of your rental income and expenses. According to the ATO, records must be kept for five years, especially for long-term deductions like asset depreciation.

You cannot claim any rental property expenses on your tax return without proof through receipts or bank statements. The ATO provides specific requirements for maintaining rental property records, and it’s strongly recommended to follow them diligently.

Wrapping Up

Taxation of rental income in Australia can be complex, with various deductions, concessions, and long-term considerations. Property investors must understand the rules and keep accurate records to ensure they comply with ATO regulations and maximise their tax benefits.

While this article provides an overview of the taxation of rental income, it’s advisable to seek professional tax advice, especially in complex situations or if you’re unsure about specific deductions or requirements. Proper tax planning and management can significantly impact the profitability of your investment property over time.