When owning a property used for both personal and rental purposes, the ATO mandates that expenses must be apportioned according to the property's usage. This means that only the expenses directly related to the rental portion are tax-deductible. The ATO's position ensures that investors only claim deductions for the time when the property is genuinely available for rent.
Under Division 40 and 43 of ITAA 1997, investors must separate the costs incurred during personal use from those incurred for rental purposes. This applies to both plant and equipment (Division 40) and capital works (Division 43). A common misconception is that all expenses can be claimed if the property is rented for part of the year, which is incorrect. Only the portion of expenses corresponding to the rental period is deductible.
To see how this plays out, consider a scenario where you own a holiday home in Noosa, which you use personally for four months and rent out for eight months each year. If your annual expenses, including mortgage interest and maintenance, amount to $20,000, only the expenses for the eight months of rental use, which equates to $13,333, can be claimed as deductions. Assuming a 37% marginal tax rate, this results in a tax saving of $4,933.
In our experience reviewing thousands of properties across Australia, we find that many investors overlook the importance of detailed record-keeping for mixed-use properties. This oversight often results in incorrect apportionment of expenses, leading to potential ATO audits. Additionally, investors frequently miss claiming depreciation on plant and equipment during the rental period, which can significantly enhance tax savings.
The answer can differ depending on your situation. If you acquired a second-hand residential property after 9 May 2017, the rules for claiming Division 40 depreciation on previously used plant and equipment change. For properties held within a Self-Managed Super Fund (SMSF), different tax implications may apply. Properties used for business purposes alongside personal use, such as a home office setup, require careful consideration of expense apportionment. Additionally, properties rented for only part of the year or those with shared ownership need specific attention to detail.
Given the complexities involved, seeking professional advice is crucial. A Chartered Quantity Surveyor can provide precise depreciation schedules, while an accountant can ensure accurate apportionment of expenses, optimising your tax position.