The delightful ATO

[Tarby777]

Hi folks,

 

If there was no ATO, my rental property would cover its costs

 

There isn't much interest on the mortgage and I don't have too many expenses other than the rental agent's commission, so most of the income from the property is treated as taxable by the ATO. The result of this is that I end up with the property negatively geared, but only because of them.

 

I know that if the property was negatively geared before considering tax, there would be things that I could claim at tax time. How do I stand, given that it's only negatively geared because of the tax that I have to pay on it?

 

TIA

Tarby

[Eera]

You only pay tax on what you *make* on a property in terms of rental income. You shouldn't be paying tax against the full rental income, only that which drives you into positive territory, so the ATO cannot make you go into negative as they should only effectively be going off net profit (ATO figure it so you pay tax on gross profit, but claim back on gross losses so it's break even until you gain more than you pay).

Have you got a depreciation schedule? Those are where you start making money as your taxable income gets reduced by the annual depreciation of the property, effectively it's tax back and should offset any losses on the interest payments. If it's because you're paying capital as well as interest that's causing the problem, there's not a lot you can do about that and should see a tax accountant to see if there's a better way of setting your finances up.

[Tarby777]

Thanks Eera. I must have the wrong end of the stick... perhaps I'd understand it better if you could run through some figures with me. Assuming a fictional gross rent received of $100 per month, here (proportionally) is how a month typically stacks up for me:

 

rent paid to agent 100

agent commission 15

rent paid to me 85

my mortgage payment 65

interest on my mortgage 8

 

The $65 is just the regular mortgage payment set by the building society, with no overpayment. My understanding was that the ATO would see the $100 as taxable income and the only things I could offset against it were the $15 agent commission and the $8 interest, meaning that the ATO would tax me on $77 at my marginal rate. Is that not the case?

 

TIA

Tarby

[Ken]

Thanks Eera. I must have the wrong end of the stick... perhaps I'd understand it better if you could run through some figures with me. Assuming a fictional gross rent received of $100 per month, here (proportionally) is how a month typically stacks up for me:

 

rent paid to agent 100

agent commission 15

rent paid to me 85

my mortgage payment 65

interest on my mortgage 8

 

The $65 is just the regular mortgage payment set by the building society, with no overpayment. My understanding was that the ATO would see the $100 as taxable income and the only things I could offset against it were the $15 agent commission and the $8 interest, meaning that the ATO would tax me on $77 at my marginal rate. Is that not the case?

 

TIA

Tarby

 

Yes, you must have the wrong end of the stick, because your rental property is more than covering it's costs (which as you say are 15 of Agents commission and 8 of interest). Naturally you have to pay tax on the remainder. Any of the rental income that you spend on paying down your debts doesn't affect your tax position because it is purely a paper movement from your bank account to your mortgage account which doesn't change your total wealth in any way.

[Eera]

All your fees are tax deductable, so you'll get tax back on what you pay to the agent and anything else that will be offset against what the ATO is taking. So basically, add your expenses up, minus that from the gross rent, any net profit left over is what the ATO will look at.

 

With one of my places, the rent is marginally more than the repayment by $8, the agent fees are about $50 a week which puts me $42 dollars in negative territory which means I'm not being taxed on that $8 but getting rebate based on $42, but the depreciation is $17,000 which comes off my taxable income which means although the property is neutral to negative geared, it's actually cash flow positive.

[Tarby777]

Sorry folks - the more you explain, the more confused I get. One person seems to be saying that only the profit is taxable and the ATO can't put me into a situation where it is costing me more money to rent it out than if I wasn't renting it at all, while the other seems to be saying that - in my situation - only agent commission and mortgage interest are deductible, and tax has to be paid on the rest. If the latter is true, then the sums go like this:

 

gross income: $100

deductible expenses: $23 ($15 commission + $8 interest)

nett income as seen by ATO: $77 ($100 - $23)

tax to pay: $28.50 ($77 x 37%)

 

Therefore my outgoings for the month are $93.50 ($65 mortgage + $28.50 tax), but I only received $85 from the rental agent, so it's costing me money to rent it out. The only way I stay in positive territory is if the mortgage payment comes into play, but it's a repayment mortgage (i.e. not interest-only) with only a couple of years left to go, so nearly the whole payment is reducing the principal each month, and not just the interest.

 

I assume that I can't get into a depreciation schedule because the property is unfurnished. I appear to be royally screwed!

[Rupert]

Sorry folks - the more you explain, the more confused I get. One person seems to be saying that only the profit is taxable and the ATO can't put me into a situation where it is costing me more money to rent it out than if I wasn't renting it at all, while the other seems to be saying that - in my situation - only agent commission and mortgage interest are deductible, and tax has to be paid on the rest. If the latter is true, then the sums go like this:

 

gross income: $100

deductible expenses: $23 ($15 commission + $8 interest)

nett income as seen by ATO: $77 ($100 - $23)

tax to pay: $28.50 ($77 x 37%)

 

Therefore my outgoings for the month are $93.50 ($65 mortgage + $28.50 tax), but I only received $85 from the rental agent, so it's costing me money to rent it out. The only way I stay in positive territory is if the mortgage payment comes into play, but it's a repayment mortgage (i.e. not interest-only) with only a couple of years left to go, so nearly the whole payment is reducing the principal each month, and not just the interest.

 

I assume that I can't get into a depreciation schedule because the property is unfurnished. I appear to be royally screwed!

 

 

Yourmortgage payment of £65 is irrelevant. This is a capital repayment i.e. transfering money from your bank account to your mortgage account as somebody put it.

 

Your net income is £77 as you have described, then you pay tax of £28.50 (your calc) leaving you with £48.50 profit, you are not in the slightest bit screwed. You have separately paid £65 off your borrowings, this is not an outgoing, this is a cashflow movement.

[Eera]

The building itself is depeciable, the amount depends on the age; mine are relatively new builds so its 2.5% of the actual build cost per year. Has it get a hot water system, shower, bath, carpets, curtains, fixtures and fittings of any way shape or form? All depreciable. If it's had renovations or the building is less than 40 years old, it's depreciable. Any capital works are also depreciable.

 

A depreciation survey costs 300-500 bucks; on our mid '80s unit it knocks $3k off our taxable income, on another place it's $17k, another one is $14k (note, not that amount returned to you but that amount off your tax return, so approx 37% of those values as that's my tax bracket). Quantity surveyors do them.

 

You'd be best advised seeing a tax accountant as it really doesn't sound like you're set up to your best advantage right now.