As a property owner in Australia, it is crucial to understand the tax implications of rental income within the country. Once you know how rental income is taxed and how to use allowable deductions, you can better manage the overall profitability of your investment properties.
In the sections below, we discuss all there is to know about rental income tax in Australia, from how calculations are done to the various deductions and special tax considerations.
How is Rental Income Taxed in Australia?
Rental income tax in Australia applies to all tenant payments, including rent, reimbursements, and additional charges. As a property owner, you must report rental income as taxable on your annual tax return.
Deductions play a key role in reducing taxable rental income. Expenses such as property management fees, maintenance costs, mortgage interest, and asset depreciation are generally deductible. Investors can also claim deductions for advertising expenses and council rates.
However, only expenses directly related to the rental property are eligible.
Rental income is taxed at the individual’s marginal tax rate. For instance, if your total income, including rental earnings, places you in the 30% tax bracket, your rental income will also be taxed at that rate.
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Tax Calculation for 2024-25 Resident Tax Rates:
Below is a breakdown of the 2024-2025 tax brackets, including an example calculation for a taxable income of $200,000:
Income Bracket ($AUD) | Tax Rate |
$0 – $18,200 | No tax |
$18,201 – $45,000 | 16 cents for every $1 over $18,200 |
$45,001 – $135,000 | $4,288 + 30 cents for every $1 over $45,000 |
$135,001 – $190,000 | $31,288 + 37 cents for every $1 over $135,000 |
$190,001 and over | $51,638 +45 cents for every $1 over $190,000. |
Example calculation
For a property investor whose taxable income for the year is $200,000, the calculations are as follows:
- $0 – $18,200: No tax applies.
- $18,201 – $45,000: Tax is 16 cents for every $1 over $18,200.
Tax = ($45,000 – $18,200) x $0.16 = $4,288
- $45,001 – $135,000: Tax is $4,288 (fixed) plus 30 cents for every $1 over $45,000.
Tax = ($135,000 – $45,000) x $0.30 = $27,000. Total tax for this bracket = $4,288 + $27,000 = $31,288
- $135,001 – $190,000: Tax is $31,288 (fixed) plus 37 cents for every $1 over $135,000.
Tax = ($190,000 – $135,000) x $0.37 = $20,350
Total tax for this bracket = $31,288 + $20,350 = $51,638
- $190,000 – $200,000: Tax is $51,638 (fixed) plus 45 cents for every $1 over $190,000.
Tax = ($200,000-$190,00) x $0.4.5 =$ 4,500 + $51,638 = $56,138
Adding the 2% Medicare levy:
- Medicare levy = $200,000 x 0.02 = $4,000
- Total tax liability = $56,138 + $4,000 = $60,138
Reduce Your Tax Bill with These Deductible Expenses
In the process of running a rental property business, there are costs you will directly incur. Luckily, you can claim these expenses when reporting your income taxes so as to reduce the tax liability. Below are the different types of deductible expenses:
Eligible Expenses
These are expenses incurred directly in earning rental income. They include:
- Management & Maintenance Costs: These include property management fees, cleaning, pest control, and repairs necessary to maintain the property.
- Borrowing Costs: You can also deduct expenses such as loan establishment fees, mortgage broker fees, and interest on loans.
- Depreciation: This refers to the decline in value of assets such as appliances, furniture, and fittings.
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Land and Property Taxes
Unlike the other taxes, land and property taxes are unique to each state and territory in Australia. They are assessed annually and are based on the value of the property. While land taxes are generally deductible, they can significantly increase the cost of owning an investment property. You must understand these taxes to ensure accurate budgeting and maximised claims.
Non-Deductible Expenses
As the name suggests, these are expenses not directly related to generating rental income. Expenses in this category include costs associated with capital improvements, personal use of the property, and loan principal repayments. While you cannot claim these costs, you need to understand their impact for proper financial planning.
Special Tax Considerations for Investment Properties
Now that you know how rental income is taxed in Australia, you can plan your finances more precisely and even make strategic investments. But that is not the end. There are also some special tax considerations you need to know to leverage benefits and optimise your tax returns. Below are the two main ones:
Capital Gains Tax (CGT)
This tax is applied to the profit from selling an investment property. To calculate it, subtract the property’s total cost (I.e., purchase price + all associated costs) from the sale price.
If you have held the property for more than 12 months, you may qualify for a 50% CGT discount, which helps reduce the taxable amount.
Negative and Positive Gearing
In the property investment market, gearing refers to the financial strategy of borrowing funds to invest in property. It has two forms:
- Negative Gearing: This occurs when rental income is less than the expenses of owning the property, such as mortgage interest and maintenance costs. You can deduct the loss from other taxable income to help reduce the overall tax liability.
- Positive Gearing: Unlike negative gearing, this is a scenario where the rental income exceeds property expenses, resulting in a profit. While this will mostly increase your taxable income, it also provides a steady income stream and can enhance cash flow.
The Best Way to Do Taxes: Keep Your Records Right
Proper record-keeping simplifies the process of managing taxes and ensures accuracy when lodging your returns. As you pay tax on rental income in Australia, always prioritise accurate records to help substantiate claims and avoid penalties.
You should also keep all receipts, invoices, loan agreements, and depreciation schedules for at least five years, as required by Australian tax law.
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