University Taxation Report: Rental Property Deduction Analysis

This report provides a comprehensive analysis of taxation related to rental properties. It begins with an introduction to the issue, which involves a client's confusion regarding deductions for interest and expenses during the initial months of owning a rental property. The report then defines assessable income, differentiating between ordinary and statutory income, and details allowable deductions under Section 8-1 of the Income Tax Assessment Act 1997. A significant portion is dedicated to deductions specifically related to rental properties, categorizing expenses into those with no deductions, immediate deductions, and deductions over multiple years. The report then delves into the treatment of interest expenses, referencing Taxation Ruling 95/25 and 2004/4 to clarify the principles governing interest deductions, including the importance of the purpose of the loan and the connection between the expense and assessable income. It concludes by summarizing the key findings and implications for the client, emphasizing the deductibility of interest expenses even before the property generates income, provided certain conditions are met.

Running head: TAXATION
Taxation
Name of the Student:
Name of the University:
Authors note:

2TAXATION
Table of Contents
Introduction......................................................................................................................................3
Deductions related to rental property..............................................................................................6
Treatment of interest expenses related to rental property................................................................8
Conclusion.....................................................................................................................................10
Reference.......................................................................................................................................11
Introduction
This report is based on the analysis of the treatment of claiming deductions with respect
to interest and expenses under rental property. Through this report an attempt has been made to

3TAXATION
correctly identify the cause of the issue that was stated in the case study and therefore analyzing
every aspects of the issue to suggest the best possible solution to the problem. As this case deals
with the issue which is related to allowable deductions with respect to interest and expense of
rental property. Therefore, an extended approach has been made to explain and describe the
basics of assessable incomes, the deduction that are considered as allowable deduction and also
those are linked with rental property and on the basis of such analysis appropriate
recommendation has been suggested.
Issue
After studying the case study, it can be observed that the issue is such that a client of the
firm has filed a tax return. Besides this, the client had recently purchased a rental property and in
that tax return the firm has claimed for deduction relating to the rental property which he has
recently acquired. However, afterward it was found that the client has returned the tax return
without signing the same stating that an error was made at the time of making a claim with
respect to deduction for interest and expenses regarding the first four months of the ownership of
that rental property (Gurran and Phibbs 2015). This was so because the client believes that, as
during that period the client was not drawing any income from that property, thus as per
matching principle he cannot claim any deduction for the same. Hence, here the issue arises and
the primary objective of the report is to analyze the issue and make the client understood the
appropriate procedures for making the tax return and address the same properly as per tax laws
prevailing in the country.
Assessable Income

4TAXATION
As per Section 4-1 of the Income Tax Assessment Act 1997, it is required that each and
every individual or business or company or any other entity who is deriving an income from any
source and such income is assessable and subject to payment of tax shall pay the income tax by
filing income tax return each year. In addition to this section 4-15 of the ITAA 1997, also
explains the complete process of how to work out one’s income that is taxable. In that very
section, it is stated that taxable income shall be computed after subtracting the total deductions
from the assessable income (Easthope 2014).
Assessable income can be referred to that income which is subject to payment of tax and
which exceeds an individual’s tax-free income limit. According to the Income Tax Assessment
Act 1997, the assessable income has been further divided into two categories. One is the ordinary
income under assessable income and the other is the statutory income. Section 6-5 of the
Income Tax Assessment Act 1997 define ordinary income as such income that has been drawn
by the assesse in an ordinary concept (Baum and Crosby 2014). In other words, the income
derived by any Australian resident, whether directly or indirectly from every sources that might
be from Australia or may be outside in a particular financial year is known as ordinary income.
Similarly, the definition of statutory income is set out under section 6-10 of the Income Tax
Assessment Act 1997. It states that there are certain income that cannot be termed as ordinary
income but still they are included in an individual’s assessable income. Such incomes are termed
as statutory income (Duffy et al. 2017).
In case if any such income that an individual might have received which is neither an
ordinary income nor a statutory income then such income cannot form a part of that individual’s
assessable income. This means that the individual will not require paying tax on such income.
Allowable deductions

5TAXATION
Section 8-1 of the Income Tax Assessment Act 1997 discuss about the general deductions
that are allowed to be claimed while filing tax return (Hulse and Burke 2016). According to this
section, it is found that one can subtract any loss to an extent of the amount:
 The loss is involved in the process of gaining an assessable income, or
 The loss is certainly involved for generating any assessable income through a business.
Nevertheless, the deduction cannot be claimed for a loss under this section to an extent
where:
 The loss is of capital nature or the loss is regarding capital loss itself, or
 The loss is related to private purpose, or
 The loss is related to any provision of this act and which prevents the individual from
subtracting the same, or
 The loss has incurred while generating income which is exempted from an individual’s
assessable income or which is an individual’s non-assessable income (Nicholls 2014).
Thus from the above points it can be understood that any such loss or expense which an
individual can deduct under section 8-1 of the ITAA 1997 can be termed as general deduction or
allowable deduction.

6TAXATION
Deductions related to rental property
In Australia, when an individual rent out any property and therefore the income which he
receives from that property in full amount along with other associated payments is called rental
or rent-related income of that individual.
There are certain circumstances under which an individual can claim for expenses that
has incurred with respect to the rental property income. However, it is not possible for an
individual to claim any deduction for such expenses incurred on rental property that is used for
capital purpose or for private purpose (Edmonds et al. 2015). The rental expenses have been
categorized into three parts or types:
a. The expenses on which one cannot claim any deduction;
b. The expenses that is related to the current financial year and on which one can claim
immediate deduction;
c. The expenses on which one can claim deduction over more than one year.
The later part of the report briefly elaborates every deduction.
1. The Expenses on which no deductions are allowed:
There are certain expenses on which no deduction is permitted to an individual, it includes the
following:
 Cost of the property related to disposal and acquisition
 Those expenses which the assesse have not incurred over the rental property such as
electricity charges paid by the tenant.
 Payments that are not linked to the rental property

7TAXATION
 Outgoings incurred by the assesse as travelling expenses with respect to the property
prior acquisition (Almy 2014).
However one can claim deduction on certain expenditures incurred prior acquisition of
the property such expenses includes interest on loan expenses, land rates and emergency services
levy on the purchased land, expenses associated with rates of sewerage and water, local council,
etc.
2. Expenses on which immediate deduction is allowed:
The expenditures incurred by the assesse and on which immediate deduction is allowed includes:
 Expenses incurred for the purpose of advertisement related to tenants
 Expenses related to bank charges
 Expenses related to fees and other charges of corporate bodies
 Clearing expenses
 Expenses related to insurance such as building, public liabilities, contents, etc.
 Expenses related to interest on loan
 Expenses related to preparation, registration and stamp duty charges for lease documents
 Expenses related to in-house audio and video services.
 Expenses related to mortgage charges
 Pest control charges
 Commission and fees related paid to the property agents
 Expenditures that are spent for the purpose of attending any seminar that is related to the
improvement of performances of a presently income generating property

8TAXATION
 Fees and charges of a quality surveyor.
 Expenses related to security patrol fees/ charges
 Cost of servicing, stationary and postage, telephone calls, tax related expenses.
However all the above expenses are allowable as deduction provided that the expenses
have been originally incurred or spent by the assesse himself and not by the tenant.
Treatment of interest expenses related to rental property
The taxation Ruling 95/25 deals with the deduction of interest under section 8-1 of the
Income Tax Assessment Act 1997. The Para 2 of the TR 95/25 deals with the general principle
governing the deduction of interest. The Para 2 says that interest expenses can only be allowed
as deduction if the taxpayer is producing assessable income and the expenses is not of the capital
nature (Warren 2016). In addition to this if the expenses related to interest is incurred for
carrying business operation and not private purpose then the expenses can be allowed as
deduction. The Para 3 of the TR 95/25 states that in the case of FC of T V Robert and FCT V
Smith the general principles that are relevant for the deduction of interest are discussed (Kangave
et al. 2016). The general principles that have been derived from the cases for the deduction of
interest are:
 The interest expenses should have sufficient connection with the gaining of assessable
income.
 The objective or the purpose of borrowed fund is analyzed to determine whether the
interest expenses should be allowed as deduction.

9TAXATION
 There should be relevant connection between the income producing activity and the
interest expenses. It is important that interest expenses should be capable of being traced
back to the interest income (Daley and Coates 2015).
 If the borrowed fund is only used for preserving the assets then only for this reason the
interest expenses cannot be deducted.
 The interest expenses related to borrowed fund will be continued to be deducted even if
the fund is ceased to be used for producing the assessable income.
The interest expenses that is incurred for purchasing the rental property can be claimed as
deduction. However, it is essential that the property should be rented or the property should be
available for rent in the income year in which the deduction related to interest expenses is
claimed (Harding 2013). That means if the property is used for the private purpose then the
interest expenses cannot be claimed as deduction from the time the property is started to be used
for the private purpose.
The property that is rented or available for rent can claim deduction for interest on loan if the
loan is used for purchasing the depreciable assets, renovation or repair. In addition to this the
interest expenses for the loan that have been taken for purchasing the land will be allowed as
deduction from the time the loan is taken out (Ingles 2015).
The Taxation Ruling 2004/4 deals with the deduction of interest expenses prior to the
commencement of income earning activity. The Para 6 states that borrowing is deducted after
analyzing the purpose of the borrowing (Gurran et al. 2015). The Paras 8 of the TR 2004/4
clearly provides that interest expenses cannot be treated as capital expenses as it is a recurring
expense. The Para 9 provides that interest incurred prior to the producing of assessable income
will be allowed as deduction if:

10TAXATION
 The interest expenses is not early to be regarded as a part of the preliminary activity;
 The period of outgoing interest prior to the earning of assessable income is not too long;
 The interest income is incurred only for the purpose of producing assessable income and
the effort is continuously made for full filling that end;
Thus from the above analysis it can be concluded that the expenses incurred by the assesse
on interest on loan for the rental property is allowed as deduction as per Taxation Rulings
2004/4. As it is evident from the above paragraph which clarifies that Para 9 of the Taxation
Rulings provide that interest expenses incurred before the rental property has started generation
income will be allowed as deductible if the same is not regarded as a part of preliminary activity.
Moreover, it is also mentioned under the deductions related Rental Property as laid down by the
ATO that the interest on loan expenses paid by the assesse will be considered as deductible
income for that current financial period.
Hence, it is thus established and proved through this report that the expenses which the client
has incurred with respect to interest on loan paid against the rented property for the first four
months when the property was not generating any income will be allowed as deduction.
Conclusion
After studying this report, it can be concluded that according to the taxation ruling and
legislations laid out by the Australian Taxation Office in the Income Tax Assessment Act 1997,
the expenses related to interest on loan will be allowed as deductible expenses even if the
property does not generate any income as well. After studying this report one can gain
considerable knowledge regarding assessable income, expenses which are subject to deduction,

11TAXATION
taxation rulings and ITAA 1997 with respect to allowable deduction, etc. which have immensely
assisted in coming to an appropriate solution and suggestion.
Reference
Almy, R., 2014. Valuation and Assessment of Immovable Property. OECD Working Papers on
Fiscal Federalism, (19), p.0_1.
Baum, A.E. and Crosby, N., 2014. Property investment appraisal. John Wiley & Sons.
Daley, J. and Coates, B., 2015. Property taxes. Grattan Institute.
Duffy, D., Kelleher, C. and Hughes, A., 2017. Landlord attitudes to the private rented sector in
Ireland: survey results. Housing Studies, 32(6), pp.778-792.
Easthope, H., 2014. Making a rental property home. Housing Studies, 29(5), pp.579-596.
Edmonds, M., Holle, C. and Hartanti, W., 2015. Alternative assets insights: Super funds-tax
impediments to going global. Taxation in Australia, 49(7), p.413.
Gurran, N. and Phibbs, P., 2015. Are governments really interested in fixing the housing
problem? Policy capture and busy work in Australia. Housing Studies, 30(5), pp.711-729.
Gurran, N., Phibbs, P., Yates, J., Gilbert, C., Whitehead, C., Norris, M., McClure, K., Berry, M.,
Maginn, P. and Goodman, R., 2015. Housing markets, economic productivity, and risk:
international evidence and policy implications for Australia—Volume 1: Outcomes of an
Investigative Panel. Australian Housing and Urban Research Institute, Melbourne.
Harding, M., 2013. Taxation of dividend, interest, and capital gain income.

12TAXATION
Hulse, K. and Burke, T., 2016. Private rental housing in Australia: Political inertia and market
change. Housing in 21st-century Australia: People, practices and policies, pp.139-152.
Ingles, D., 2015. Should capital income be taxed? And if so, how?. Browser Download This
Paper.
Kangave, J., Nakato, S., Waiswa, R. and Zzimbe, P.L., 2016. Boosting Revenue Collection
through Taxing High Net Worth Individuals: The Case of Uganda.
Nicholls, S., 2014. Perpetuating the problem: neoliberalism, commonwealth public policy and
housing affordability in Australia. Australian Journal of Social Issues, 49(3), pp.329-347.
Warren, N., 2016. e-filing and compliance risk: evidence from Australian personal income tax
deductions.