Under what circumstances can you claim interest on your Australian property? Australian Tax Advisor, Steve Douglas of SMATS Group, answers your questions.
It's common these days for people to purchase property in Australia and have a family member live in it. This is advantageous, as you will have someone you trust looking after your property and likely be able to stay there during visits to Australia. Plus, you’ll fulfill family obligations to support your parents or other relatives.
Australian tax law is very simple: In order to claim any costs, you must receive some income. Therefore, if no rent is collected from your relative, you cannot claim any interest or other property costs. This means that if you choose to have family members living in your house, and they do not contribute any rent, then no costs of the property are allowed as a tax deduction.
Given that interest is usually the largest cost, it is preferable to have a low or zero mortgage on a property that is solely for use by a family member, especially a parent. If you do charge rental, then it is possible to claim all costs of the property in your Australian taxation.
One major issue here though is that, when the property is rented to a relative, the Australian Tax Office (ATO) requires you to declare the true market value of the rental as income, regardless of what you may collect.
So, even if you only receive a below-market amount of, say, A$100 per week, you will need to declare the true market value in order to be able to claim full expenses, as can be determined by a real estate agent, in your tax return. If that is higher than the actual amount received, then the higher figure must be put in your tax return.
This means you need to establish what the market rental is and what your total costs of ownership are. If the costs are greater than the market rental, it is worth declaring the property in your taxes. If the costs are less than the market rental, then likely you should leave the property out and treat it as a family arrangement.
Regardless of what method you choose, the property will remain subject to Capital Gains Tax on its eventual sale, so you also need to be mindful of the implication thereon.
In some cases, especially where it is genuinely your parents’ or relatives’ home, it may be better to have the property in their name, as they would be entitled to a Capital Gains Tax Free Status as the property’s principal residents.
The decision about what to do can be based on many factors, including debt level, availability of finance, type of property and family obligation. Everyone’s situation will be different, so it is strongly recommended that you seek professional advice prior to any contractual commitment to evaluate the best options for your circumstance.
It is possible to accrue tax benefits on property that your relations may live in – just remember that the property needs to be treated as a proper commercial environment. The ATO doesn’t mind you helping your family; they just don’t think it’s fair that they should help subsidise the lower rent you may want to offer.