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Income from Real Estate
Assessment of income from real estate
The current net income from real estate is treated as income for DVA purposes.
Income from real estate includes income from the letting, leasing or rental of a house, shop or land, which is owned or partly owned by the pensioner, or in which they have a life interest. Income earned from renting out a timeshare is treated as assessable income. This is regardless of whether the person owns a fractional share in the property, or purchased a timeshare through entering into a contract which provides them with a right to use the property in a regular basis.
If a pensioner is receiving rental income from a property that they do not legally own, then it is the gross income which is assessable. This is because expenses can only be deducted from rental income when the person owns the rental property and therefore has a legal obligation to meet expenses such as rates and utilities provision, as well as maintenance costs associated with earning rental income.
Note: If the pensioner is residing in a care situation, and paying a daily accommodation payment or a daily accommodation contribution, an accommodation charge or an accommodation bond by periodic payment, any rent received from the former home is exempt from the income test.
Person may not have the right to receive rent
If a pensioner has a life interest in a property and the property is rented, the pensioner may not have the right to receive the rent. The terms of the bequest must be checked to establish if the pensioner is entitled to receive the rent and whether or not they are required to maintain the property. For example, it is possible that under the terms of the will the person may only be entitled to live in the property.
Allowable deductions for real estate
Generally, taxation procedures are accepted in determining the net income to be assessed for DVA purposes. However, some deductions are allowable for taxation purposes, but not for DVA purposes.
In general, allowable deductions for DVA purposes include expenses such as:
· specific body corporate fees and charges,
· specific interest charges on loans and mortgages,
· specific legal expenses (for example, the costs of evicting a tenant),
· advertising for tenants,
· council rates and land tax,
· insurance (building, contents and public liability),
· property agent’s fees and commissions,
· repairs and maintenance that relate directly to wear and tear on the property as a result of renting it out (for example, replacing broken windows or servicing a heater),
· water, electricity and gas charges (as long as the charges are paid by the landlord and not the tenant),
· pest control, cleaning, gardening and lawn mowing (as long as the expense is incurred by the landlord and not the tenant),
· in house video/audio service charges, and
· costs associated with managing the property (for example, secretarial and book-keeping fees, telephone calls and rental, and tax-related expenses).
Note: The costs must be directly related to securing income from the rental property and relate to the time that the property was available for rent. The pensioner must have actually incurred the expense in order to claim a deduction for that expense from their rental income.
There are very specific taxation rules about allowable deductions which may vary from year to year. Please check the current Rental Properties Guide on the Australian tax office website for clarification.
Non-allowable deductions for real estate
The following are not allowable deductions for DVA purposes, even though they are allowable deductions for taxation purposes:
· capital allowances (formerly known as capital depreciation),
· capital works deductions (formerly known as special building write off),
· construction costs,
· borrowing costs, such as bank fees and charges or legal fees associated with borrowing, and
· offsetting of losses between rental properties.
If the current net income from real estate is a negative amount, then for DVA purposes the:
· assessable income is nil, and
· losses from one property cannot be offset against income from another property.
Note: Depreciation is an allowable deduction against business income, but is not an allowable deduction against income from real estate unless a person owns a real estate rental business, that is, a business establishing for the purposes of renting out properties.
Allowable deductions from business income
Allowable mortgage interest deductions
Mortgage interest payments can be an allowable deduction for tax and DVA purposes even if the mortgage is secured against another property, such as the person’s home. This depends on the loan having been obtained for the purpose of obtaining rental income. This includes a loan for the purpose of purchasing an income producing property. Loans for the purpose of repairs, renovations or the purchase of a depreciating asset for the rented property are also acceptable.
If the purpose of the loan was specifically to purchase a home property, thus freeing up the original 'principal home' to become a rental property, the interest is not an allowable deduction for tax or DVA purposes even if the mortgage is secured in full or part against the rental property. For example, if a pensioner obtains a loan to buy a home property using a rental property as security for the loan. The interest is not an allowable deduction as the expense is not related to getting rental income.
Assessing current net income
If a pensioner is responsible for expenses on a property, such as rates, taxes, insurance and repairs, or a property in which a pensioner has a life interest is rented out and the pensioner is required under the terms of the will to maintain the property, then the pensioner’s tax return, income tax assessment notice and financial statements detailing actual expenses will provide evidence of the deductions claimed and allowed against the gross rental income for taxation purposes. Supplementary sources of evidence, for example, monthly rent statements may also be considered. However, they must contain sufficient detail to allow a delegate to be satisfied that the deductions are allowable for DVA purposes. If any doubt exists, additional information should be sought.
Income retained by an agent
Rental amounts retained by an agent to cover anticipated future expenses are regarded as part of the pensioner’s gross income from the rental property. This is because these amounts are derived by the pensioner for their own use or benefit. Allowable deductions from this gross amount can then be calculated to determine the pensioner’s net income from the property.
Interim estimate of deductions where no tax return or financial statements are available
If a tax return, tax assessment notice or financial statements detailing actual expenses are not available, deduction amounts will need to be estimated. For example, if a pensioner has recently purchased a property there will be no tax return available and a pattern of expenses has not yet been established. Similarly, a person’s taxable income may be below taxation thresholds and they may not be required to actually lodge a tax return.
In these cases DVA will allow 1/3 of the gross rental income received as an interim deduction pending confirmation of the actual expenses. This estimate takes into account land tax, rates, insurance, repairs etc, but not mortgage interest payments. An additional deduction for any mortgage interest payments is also allowed.
The pensioner must be requested to provide confirmation of the actual expenses as soon as possible.
Note: If the person provides evidence that expenses are more than 1/3 of the gross amount of rent received, for example if extensive repairs were required to make the property habitable, then the total amount expended can be accepted. Structural alterations or improvements to the property are not an allowable deduction.
Assessment of deductions where tax returns or financial statements are available
If a tax return, tax assessment notice or financial statements detailing actual expenses are available, deduction amounts can be accurately calculated using the actual information provided.
The information provided will detail the deductions claimed and allowed against the gross rental income for taxation purposes. Any items that are not allowable deductions for DVA purposes must be removed when calculating the total allowable deductions to be subtracted from the gross rental income.
If a property is sold and a capital gain is made, the capital gain is not treated as income for DVA purposes. If a capital loss is made, the capital loss cannot be offset against other income amounts.
Claiming GST as a deduction
Individuals who receive income from residential rental properties cannot charge or claim input tax credits on items for the rental property. This means that GST is incurred in earning the rental income are allowable deductions for DVA purposes. For example, it the individual uses a property manager to manage the rental property, the property management fee will include a GST amount. The full management fee (including GST) is an allowable deduction.
The fact that a landlord may have an Australian Business Number (ABN) does not necessarily mean that they are running a business. In some situations, real estate agents have advised landlords to obtain ABNs in case they are needed. Where the rent on the residential property is paid by a company, the landlord may need an ABN to avoid the company withholding part of the rental payment as tax.
Real estate not producing income
If the property is vacant, with no rent or lease monies being received from it, then no income is available to be treated as income for DVA purposes. There is no requirement that a person rent out a vacant property in order to produce income.
Where a pensioner’s real estate property is occupied on a rent-free (or low rent) basis by a family member/s for residential purposes only, such an occupancy does not constitute deprived income. However, where a property is occupied by other than a family member/s, or is used for other than residential purposes (including by a family member/s), and the market rate of rent is not received, then deprivation has occurred.
A life interest arises when a pensioner:
- acquires the right to use assets or the income produced by those assets, or
- transfers a non-exempt asset to another person, but retains an interest in the asset, or
- is created by the will of a deceased individual.
A life interest remains current until the pensioner:
- sells the asset, or
- formally surrenders the asset.
Goods and Services Tax
According to section 5L of the VEA a family member, in relation to a person, means:
- the partner, father or mother of the person, or
- a sister, brother or child of the person, or
- another person who, in the Commission's opinion, should be treated as one of these relations for the purposes of this definition.
Please note, the definition of a parent is further defined in section 10A of the VEA.