Documentation relating to rental income and expenses should be kept for five years.

Capital Gains Tax - If the property was acquired after 19 September 1985, capital gains tax may apply on disposal of the property. Certain expenses directly incurred in acquiring the property are capital expenses and are not allowable deductions against rental income. Those expenses will be taken into account in determining the capital gains or losses on disposal of the property. For further information, please ask for leaflets on capital gains at your local Tax Office.

Deductions - The following expenses are fully deductible in the financial year in which they are incurred: advertising, agent's commission, depreciation, gardening/maintenance, repairs, insurance, loan interest, travel, rates, lease preparation.

If the property was not available for rental for the full year, some of the expenses may need to be apportioned. A brief description of some expense items follows:

Interest is deductible where the loan was used to purchase, repair or renovate the income-producing property. If the interest paid exceeds the rental income, the property is said to be negatively geared.

Repairs made necessary by normal wear and tear or tenant damage are allowable deductions, provided they are not alterations, additions or improvements or the costs of remedying existing faults.

Depreciation is not allowed for blankets, crockery, cooking utensils or linen. A deduction may be claimed for the replacement of these items.

Some of the more common depreciation rates for items acquired after 25 May 1988 are in the table. There are two methods of depreciation, prime cost and diminishing value. You can choose which method to use.

The prime cost method allows a deduction equal to a fixed percentage of the initial cost. The diminishing value method uses a higher rate applied to the depreciated value of the item.

Ask at your Tax Office for depreciation rates for items acquired before 25 May 1988.

Building write-off - A deduction may be allowable for the construction cost of income-producing buildings. The amount will depend on the date that construction of the building began and whether it was for residential or non-residential use. The following table shows the rate-off deductibility:

Borrowing expenses directly incurred in getting a loan to buy income-producing property are deductible over five years or the period of the loan, whichever is the lesser. However, if the expenses are less than $100, they can be claimed in the year in which they were paid. Borrowing expenses include application fees, valuation, stamp duty on the loan (not on the property transfer, except in the ACT) and legal expenses incurred in getting a loan.

The following expenses are also deductible, to the extent that they are incurred in producing rental income:

• Lease expenses - The costs of preparation, registration and stamping of a lease.
• Land tax and rates such as land or water rates.
• Insurance premiums on the building/equipment and/or its contents, including public liability.
• The fee charged by your agent to manage the property (but NOT for its acquisition or sale).
• Travel or car expenses incurred in connection with the rental property, but not in connection with its acquisition or sale.

The following expenses are NOT deductible

• Stamp duty on property transfer (except in the ACT where land is leased, not owned).
• Legal expenses - These are generally of a capital nature. However, if you are 'carrying on a business' of renting out property, legal expenses up to a maximum of $50 may be deductible. Generally only large scale rental operations are considered to be 'carrying on a business'. Check with the Tax Office if you are in doubt.

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