The rental deductions Brisbane and Ipswich investors miss, and the records behind them

Start with the settlement file

The paperwork from the week you bought is what owners lose first and need last. The contract, the settlement statement, the conveyancer's invoice and the loan offer sort every cost of buying into a deduction now, a deduction spread over several years, or the cost base you will use when you sell.

Borrowing costs are the ones that slip. Loan establishment fees, lender's mortgage insurance, the lender's valuation and title search, and a mortgage broker's fee are deductible. (Queensland stopped charging duty on mortgages in 2008, so there is no mortgage duty to claim on a Brisbane loan.) Once they total more than $100 they are spread over five years or the term of the loan, whichever is shorter. They tend to be claimed in the first year and then forgotten for the next four. If part of the loan paid for something private, the same share of those costs is private too.

Transfer duty on the purchase and the conveyancer's fees for buying are not borrowing costs. They are capital and go into the cost base.

Repair, initial repair or improvement

The ATO's test turns on when the damage happened and what the work did. Wear or damage that occurred while tenants were in is a repair, deducted in the year you pay. Fixing a defect that came with the purchase is an initial repair, and it is capital whether or not the building inspector spotted it. Work that leaves the place better than before, or swaps out a whole item, is an improvement and is claimed as capital works or depreciation.

• A repaint, new flooring and fence panels in the months after settlement, all claimed as repairs. If the wear belonged to the previous owner, that work is capital.
• One invoice for a bathroom that fixed a leaking shower and also retiled the room. Unless the cost can be separated, the repair part cannot be claimed on its own, so ask the tradesperson to itemise.
• A failed hot water system replaced and claimed outright. A replacement unit is a new depreciating asset, written off over its effective life.

Capital works: 2.5% of the right number

Houses and units where building work began after 15 September 1987 carry a capital works deduction of 2.5% a year on what they cost to build, running for 40 years from the day construction finished.

The base is the construction cost. The ATO will not accept the purchase price, the insured value or the replacement cost in its place. If the vendor gave you no capital works figures, a quantity surveyor can estimate them, and the fee is deductible in the year you pay it.

Later works carry their own deduction. An extension or a new deck has its own construction cost and its own 40-year clock from the day it was finished.

Every dollar of capital works you claimed, or could have claimed, comes off the cost base when you sell. Leaving the deduction unclaimed does not save it for later. Keep the surveyor's report, the invoice for each improvement and before-and-after photos, which the ATO lists among the records it expects to see.

The 2017 rule and the depreciation schedule

A quantity surveyor's report usually carries a second schedule of plant: carpets, blinds, ovens, air conditioners. On an established home bought as a rental from 7:30pm AEST on 9 May 2017 onwards, most of that list cannot be claimed, because those items are second-hand to you.

The rule reaches your own belongings too. Move out and let your former home from 1 July 2017 onwards, and the dishwasher and curtains you used while living there cannot be depreciated, even though you bought them new.

A new item you install after settlement can be depreciated. Keep the invoice, the date it was installed and a note of which property it went into. The deduction runs across the item's effective life, and the ATO wants the records kept for five years after the last claim.

The main exceptions are narrow: the property, or a second-hand asset bought for it, was acquired before that moment in May 2017, the owner carries on a business of letting, the property is let for something other than housing, or the owner is an excluded entity such as a company. A self-managed super fund is not an excluded entity.

Interest after a redraw

Interest is deductible according to what the borrowed money paid for. The usual slip is a redraw. You get ahead on the investment loan, take $15,000 back out for a car, and keep claiming all the interest.

From the redraw on, the loan is mixed. Interest is split between the rental and private balances, and the ATO expects that split to hold until the loan is repaid. You cannot aim repayments at the private part to clear it first; repayments are apportioned the same way.

The record that settles it is a note made at the time of each drawdown saying what the money was for, kept with the statement showing where it went.

Travel is off the list

Since 1 July 2017 an individual investor cannot claim travel connected with a residential rental. That includes driving out from Brisbane to meet a tradesperson at an Ipswich property, collecting keys, or seeing the agent. The exceptions are a business of letting and certain entities such as companies, and the ATO says that owning one or several rentals generally is not a business.

Seminars about finding a property to buy, and trips to inspect properties before you buy, are not deductible either.

Rates, land tax and body corporate

Council rates and water charges are deductible for the periods the property is let or genuinely available for rent. For any weeks the family stays there, that share is private.

Queensland land tax is claimed in the income year the liability relates to, not the year the money leaves your account. An assessment that includes arrears for an earlier year means amending that earlier return rather than adding it to this one.

Regular body corporate levies to the administrative fund or the general purpose sinking fund are deductible when you incur them. A special levy raised to pay for a particular capital improvement is not; once the work is finished, your share may be claimable as capital works. Keep the levy notice and the minutes that explain what it paid for.

The records that carry you to the sale

For capital gains tax, the ATO wants the records of buying, owning and selling a property kept for at least five years after you dispose of it. For each property, the file should hold:

• the purchase contract, settlement statement, transfer duty, conveyancing fees and any survey or valuation fees
• loan documents for the original loan and every refinance, with the note of what each drawdown paid for
• the quantity surveyor's report, and the invoices and photos for each improvement
• property manager statements, rates and land tax notices, body corporate levy notices and insurance
• a record of any time you or family used the property, or it was not available for rent
• at sale, the contract, the agent's commission, legal fees and the settlement statement

Keep a separate set for each property. One folder for two properties is how an invoice ends up claimed against the wrong one.

There is a newer reason to keep it. The ATO says the capital gains changes starting on 1 July 2027 apply only to gains that accrue after that date, so property you already hold will have its gain looked at in two parts. Whatever the method for splitting it, the starting point is the cost base, and the cost base is this file.

Before you lodge

If some of this describes a return already lodged, it can often be amended within the ATO's time limits. Start with the tax return questionnaire and have the property file to hand, or use the new client form if we have not worked together before. To talk through your own figures, get in touch.