Tax Law for Tax Payers Assignment

Tax Law Assignment

It is very common to commit mistakes while claiming rental deductions (Tax Mates, 2016). It is
necessary that the taxpayers who own rental property get their claims done right regarding
deductions and expense to avoid costly penalties.
Every year the ATO contacts numerous taxpayers for issues regarding omissions and errors in
their returns. From the year 2015-16, the board has increased its focus on major problem areas
wherein the owners of rental property incorrectly claim their deduction either by error or by
design, that do not align with their circumstances. In the broader sense, there are four main areas
which are venerable to errors while claiming deduction in interest and expense. They are as
follows-
Claiming excessive deductions
Deductions must be claimed only for the period when the rental property is genuinely available
for rent*. In the present case, in the first four months there was no income from the property;
hence the owner cannot claim any expenses done in this period. Deductions are limited to the
amount of income which the property owner earns when the property is rented out.
*the property genuinely available for rent, means that the property has available tenants along
with the property which is advertised for exposure is prospective tenants. The absence of both
these factors imply that the property is not available to rent and will be considered vacant.
(Australian taxation Office, Australian Government, 2017)
Repairs or maintenance claims
A careful examination of the repair and maintenance costs done on the rented property must be
conducted. The costs associated with the ‘initial repairs and improvements’ are usually not
deductible, but these are generally added up in the capital cost of the property.
Claiming for interest deductions
The Interest expenses incurred on a rental property are deductible only when the acquired
property is used to generate rental income. The owner should be conscious that any interest
expense that is incurred from the personal use of the property is non-deductible.
Deductions on Investment Expenses

Generally, the deductions on investment expense which are incurred on acquiring of the rental
property are limited to the net income from investment. That is, the expense of investment must
not be more than the income produced from the investment in its estimated useful life. However,
the tax payers may carry forward the excess expenses to the taxes of future years. It may be
noted that the capitalized expense cannot be deducted, which means the expense which is added
to the principal amount may not be deducted. The cost of depreciation of the property must be
added along with the other costs of the asset.
Net Investment Income Tax (NIIT)
As per Jean Murray (2017), every owner of the rental property is subjected to pay an income tax
to the income generated by investment. The rate of NIIT is a 3.8% on the less of NII or the
excess of MAGI (modified adjusted gross income) over the threshold amount that differs on
filing status. The Net investment income may include rental income and other income generated
from passive activities.
What counts as income for owners for rental property?
Rental Income- The money received in the form of rent is generally taxable in the year when it is
received and not when it was due; therefore, the advance payments are included in income.
Tenant-Paid Expenses- Expenses paid by tenants are considered income. These expenses can
later be classified as rental expense if the tenant asks for the reimbursement.
Rental Income and Deductions
The owner of the property is eligible to claim income from property rentals and at the same time
is able to deduct expenses. Hence, rental properties can be viewed as any other business.
However, there are some rules that especially applicable to rental properties. There are also
available few strategies which the owner may use to reduce taxes.
Rental Income Recognition
Rent from the rental property is recognized when it is received by the owner. The advanced rent
received for terminating lease earlier than the actual time is also recognized in the same year in
which it was received, even if accrual method of accounting is used by the taxpayer (Rental