Congratulations on taking the leap into property investment in Australia! While owning an investment property can be a rewarding venture, it’s really important to get off on the right foot.
Here’s what you need to do when you first purchase an investment property:
1. Understand Your Tax Obligations* (also see below this article)
As a property investor, you’ll have various tax obligations. These include declaring rental income on your tax return and understanding capital gains tax implications if you sell the property. You may also be entitled to deductions, such as interest on your investment loan, property management fees, and maintenance costs. Generally speaking, if you rent your property out to tenants, there will be a “rental schedule” within your personal tax return where your rental income and deductions are listed. If your expenses are greater than your rental income (which is often the case if you have a mortgage with large interest payments), then you’ll be in a net loss position which can be offset against your other tax return income in order to help improve your annual tax position overall, in many cases generating large tax refunds.
2. Get an Australian Tax File Number (TFN)
If you don’t already have one, apply for a TFN. You’ll need this for your tax dealings with the Australian Taxation Office (ATO).
3. Apply for Foreign Investment Approval (If Applicable)
If you’re a foreign person investing in Australian property, you must apply for foreign investment approval before purchasing your property. Check the ATO and Foreign Investment Review Board (FIRB) guidelines for your specific requirements.
4. Register Your Property
Once you’ve purchased your property, register it on the Register of Foreign Ownership of Australian Assets if you’re a foreign investor. Use the Online services for foreign investors provided by the ATO.
5. Lodge a Vacancy Fee Return (If Applicable)
Foreign owners of residential dwellings may need to lodge an annual vacancy fee return to report on the residential use of the property.
6. Set Up Proper Record-Keeping
Maintain thorough records of all income and expenses related to your investment property. This will be crucial for tax purposes and any future audits. Feel free to use our rental property excel template available on the resources section of our website to help you organise and collate your information.
7. Consider Landlord Insurance
Protect your investment with landlord insurance. This can cover you for tenant-related risks, including loss of rental income and damage to your property.
8. Hire a Property Manager (Optional)
A property manager can take care of the day-to-day management of your property, including finding tenants, collecting rent, and handling maintenance issues. At tax time, your property manager will hand you an annual summary which will outline your rental income and most of your expenses for your income tax return, making record-keeping easier.
9. Understand Stamp Duty and Other Costs
Be aware of stamp duty costs, which vary by state, and other upfront costs like legal fees, building and pest inspections, and loan establishment fees.
10. Plan for Ongoing Costs
Budget for ongoing expenses such as council rates, water charges, body corporate fees (if applicable), repairs, and maintenance.
11. Stay Informed
Tax laws and property regulations can change. Stay informed by checking the ATO website and consulting with our team or property adviser.
Understanding your tax obligations – further detail
When you lodge your first tax return after purchasing a rental investment property, there are several key points to consider:
Rental Income: You must declare all rental income you receive when it’s paid to you. This includes the full amount of rent before any fees or expenses are deducted by property managers or agents.
Rental Expenses: You can claim deductions for certain expenses related to the rental property for the period it was available for rent. These expenses may include interest on loans, property management fees, repairs and maintenance, and depreciation on assets. If you decide to use a property agent, their annual statement will summarise most of these expenses, though you’ll still likely have additional ones.
Apportionment: If the property was only available for rent for part of the year, or if you used it for private purposes at any time, you’ll need to apportion your income and expenses accordingly.
Capital Works and Depreciation: If you’re entitled to deductions for capital works (building construction costs) or depreciation on assets, you’ll need to consider the timing and eligibility for these claims.
Loan Documents and Borrowing Expenses: Keep records of your loan documents as borrowing expenses can be claimed over five years or the term of the loan, whichever is less.
Cost Base for Capital Gains Tax: Start keeping records for the cost base of your property from the date of purchase. This includes the purchase price, conveyancing fees, stamp duty, and other acquisition costs, which will be relevant for calculating capital gains tax if you sell the property in the future.
PAYG Instalments: If your rental income is significant, you may need to pay PAYG instalments towards your expected tax liability. (Usually quarterly repayments will be required).
Negative Gearing: If your property is negatively geared (expenses exceed income), you may be able to deduct the loss against other income, such as your salary or wages.
GST: Generally, residential rental income is not subject to GST, and you cannot claim GST credits for associated expenses. However, if you’re registered for GST and the rental relates to commercial property, GST implications may apply.
Record Keeping: Ensure you keep detailed records of all income and expenses, as well as contracts, loan agreements, and other relevant documents.
By following the above steps and considerations, you’ll be well on your way to a successful investment property journey. Property investment is a long-term strategy, so plan accordingly and don’t hesitate to get in touch with our team for assistance.
This blog post is intended as a general guide and does not constitute professional advice. Always consult with a tax professional or legal adviser for information specific to your situation.
