AU Rental Property

AU Rental Property

AU Rental Property

AU Rental Property

Australia Rental Property -- Income & Deductions Skill v1.5

Australia Rental Property -- Income & Deductions Skill v1.5

Section 1 -- Quick Reference

Section 1 -- Quick Reference

Field	Value
Country	Australia (Commonwealth of Australia)
Tax	Income Tax -- Rental Property Schedule
Currency	AUD only
Tax year	2026-27 (1 July 2026 -- 30 June 2027)
Primary legislation	Income Tax Assessment Act 1997 (ITAA 1997)
Supporting legislation	ITAA 1936; TR 97/23 (repairs vs improvements); TR 2026/1 (rental income and deductions for individuals not in business); PCG 2026/2 (apportionment); PCG 2026/3 (holiday homes and section 26-50); ATO, Rental properties guide 2026
Tax authority	Australian Taxation Office (ATO)
Filing portal	myTax / tax agent lodgement (Online Services for Agents)
Filing deadline	31 October (self-lodgement); agent-managed deadlines vary
Skill version	1.5

Select the income year before calculating

The rate and threshold tables immediately below are for 2026-27. Ask which income year is being prepared before calculating anything: the second resident bracket was 16 cents in 2024-25 and 2025-26 and is 15 cents from 1 July 2026, and the Medicare levy surcharge thresholds move each year. For a prior year, use that year's tables on ato.gov.au. ATO, Tax rates: Australian resident

The classification, deduction, depreciation and CGT rules in Sections 2 to 8 do not depend on the income year, except where a section says otherwise.

Key Thresholds (2026-27)

Key Thresholds (2026-27)

Item	Value
Tax-free threshold	$18,200
Medicare levy	2% of taxable income
Medicare levy surcharge (no PHI)	1%, 1.25% or 1.5% where income for MLS purposes exceeds $105,000 single or $210,000 family in 2026-27 ($101,000 and $202,000 in 2025-26)
CGT discount (individuals, 12+ months)	50%
Div 43 rate (post-Sep 1987 residential)	2.5% of construction cost
Div 43 rate (post-Feb 1992 short-term traveller)	4%
Low-value asset pool threshold	$1,000 (Div 40)
Immediate deduction threshold (Div 40)	$300

Individual Marginal Tax Rates (2026-27)

Individual Marginal Tax Rates (2026-27)

Taxable Income (AUD)	Rate	Cumulative Tax at Top
0 -- 18,200	0%	$0
18,201 -- 45,000	15%	$4,020
45,001 -- 135,000	30%	$31,020
135,001 -- 190,000	37%	$51,370
190,001+	45%	--

Conservative Defaults

Conservative Defaults

Ambiguity	Default
Unknown apportionment (private vs rental)	0% deductible
Unknown whether repair or improvement	Treat as improvement (capitalise)
Unknown construction cost for Div 43	Do not claim -- obtain quantity surveyor report
Unknown settlement date for CGT	Do not compute -- obtain contract
Unknown cost base	Do not compute CGT -- escalate

Section 2 -- Classification Rules

2.1 Rental Income

Rental Income Types

Income Type	Treatment
Rent received from tenant	Assessable -- full amount received or receivable
Bond forfeited (retained for damage)	Assessable in year retained
Insurance payout (loss of rent)	Assessable
Reimbursement from tenant (excess utilities)	Assessable
Key money / lease premium	Assessable

• All gross rental income — All gross rental income is assessable. Report at Item 21 (Rent) on the Individual Tax Return. (Report at Item 21 (Rent) on the Individual Tax Return)

2.2 Negative Gearing

• Negative gearing — Where total deductions exceed gross rental income, the net rental loss reduces other assessable income (salary, business income). This remains the position for income years up to and including 2026-27.
• Enacted limit from 1 July 2027 — Negative gearing for residential property investments is limited to new builds from 1 July 2027. Properties held at 7:30 pm AEST on 12 May 2026 are exempt from the limit. The measure was announced in the 2026-27 Federal Budget and the ATO states it is now law. Establish the acquisition date and whether the property is a new build before projecting a rental loss into 2027-28 or later. (ATO, Reforming negative gearing and capital gains tax; Treasury Laws Amendment (Tax Reform No. 1) Act 2026)

2.3 Deductible Expenses (Immediate)

Deductible Expenses (Immediate)

Expense	Treatment	Notes
Interest on investment loan	Deductible	Must trace loan purpose to rental property
Council rates	Deductible	Apportioned if part-private
Water rates / charges	Deductible
Body corporate / strata fees	Ordinary administration and general maintenance contributions may be deductible	Special levies funding a particular capital improvement are not immediately deductible. Check capital-works eligibility and timing after work is completed and charged to the fund. ATO common property expenses
Land tax	Deductible
Property management fees	Deductible	Agent commissions, letting fees
Insurance (landlord, building, contents)	Deductible
Advertising for tenants	Deductible
Pest control	Deductible
Gardening / lawn mowing (if provided to tenant)	Deductible
Tax agent fee (rental schedule portion)	Deductible
Travel to property (removed from 1 Jul 2017)	NOT deductible	Unless carrying on a rental property business

• Borrowing expenses — Loan establishment fees, lenders mortgage insurance, valuation fees and stamp duty on the mortgage are borrowing expenses, not interest. If they total more than $100, spread them over five years or the loan term, whichever is shorter; $100 or less is deductible in the year incurred. (ITAA 1997 (Cth) s 25-25; ATO, Common property expenses)

2.4 Repairs vs Improvements (TR 97/23)

Repairs vs Improvements (TR 97/23) (TR 97/23)

Characteristic	Repair (immediate deduction)	Improvement (capitalise)
Restores to original condition	Yes	No
Replaces with substantially same materials	Yes	No -- better quality/different character
Initial repair on acquisition	NOT deductible (capital)	Capital -- add to cost base
Replaces a roof	Can be a repair where it restores part of the building without an improvement; the roof is not automatically the relevant entirety	Initial repairs, improvements and replacement of the relevant entirety are capital; apply TR 97/23 to the facts
Example: patching cracked tiles	Repair	--
Example: replacing all tiles with stone	--	Improvement
Example: replacing broken tap with same model	Repair	--
Example: full kitchen renovation	--	Improvement

• Identify the entirety and the cause — For each repair, identify the asset or entirety repaired, its condition when acquired, the cause of the deterioration and what the work changed. Modern materials can restore an asset without making every job an improvement, and an itemised invoice that separates repair from capital work supports the split. (ATO, Repair and maintenance expenses)

2.5 Division 40 -- Plant & Equipment Depreciation

Division 40 Effective Lives (Income Tax Assessment (Effective Life of Depreciating Assets) Determination 2025, Table A, Residential property operators (67110). 2025 determination, Schedule 2 Table A)

Asset	Effective Life (ATO)	Decline Method
Hot water system (gas or electric)	12 years	Diminishing value or prime cost
Hot water system (solar)	15 years	Either
Carpet	8 years	Either
Internal blinds	10 years	Either
Curtains	6 years	Either
Oven / cooktop	12 years	Either
Air conditioning (split system)	10 years	Either
Dishwasher	8 years	Either
Smoke alarm	6 years	Either
Ceiling fan	5 years	Either

The table follows Table A, Residential property operators (67110), in the Income Tax Assessment (Effective Life of Depreciating Assets) Determination 2025. Choose the applicable determination under section 40-95, including its contract-date and start-time rules, or a valid self-assessed life; do not automatically reset an existing asset register. See 2025 determination, Schedule 2 Table A.

• Diminishing value rate — 200% ÷ effective life
• Prime cost rate — 100% ÷ effective life
• Limitation (from 1 Jul 2017) — For residential rental properties, only the first owner (or entity that had the asset newly installed) can claim Div 40 deductions. Subsequent owners cannot claim plant & equipment depreciation on existing assets -- they inherit zero depreciable value for previously used items (unless an exception applies, e.g., refurbishment by new owner).
• Exceptions to the second-hand asset limit — The limit has commencement and transitional rules and exceptions, including qualifying new residential premises, substantially renovated premises and specified entities or businesses. A new appliance bought by the owner is not denied because the building is old; the test is whether the asset was previously used. (ATO, Second-hand depreciating assets)

2.6 Division 43 -- Capital Works Deduction

Division 43 Capital Works Deduction Rates

Construction Date	Rate	Notes
Before 18 July 1985	0%	No deduction available
18 Jul 1985 -- 15 Sep 1987	4%	Residential/non-residential
After 15 Sep 1987 (residential)	2.5%	40-year write-off
After 15 Sep 1987 (short-term traveller)	4%	Certain accommodation

• Base — Original construction cost (obtain from quantity surveyor report or builder records). NOT the purchase price of the property.
• Undeducted construction cost — Undeducted construction cost passes to new owner on sale -- the new owner continues the 2.5% deduction on the remaining undeducted amount.

2.7 Interest Deductibility

• Nexus requirement — The loan must have a clear nexus to producing rental income. Key rules follow in the table.
• Mixed-purpose loans and redraws — A private redraw creates a private component of the loan, and later repayments reduce the rental and private components proportionately; the owner cannot direct every repayment to the private debt. Interest follows the use of the borrowed money, so trace each drawdown and keep the split current. (ATO, Interest expenses; TR 2000/2)

Interest Deductibility Scenarios

Scenario	Deductible?
Loan to purchase rental property	Yes -- full interest
Loan to renovate rental property	Yes -- full interest
Refinanced loan (same purpose, same or lower amount)	Yes
Loan redrawn for personal use	No -- apportioned
Line of credit (mixed purpose)	Must trace each drawdown
Interest on loan while property vacant (available for rent)	Yes
Interest during construction period	Deductible from date available for rent (or capitalised to cost base)

2.8 CGT on Disposal

CGT on Disposal Elements

Element	Treatment
Cost base	Purchase price + stamp duty + legal fees + capital improvements - Div 43 deductions claimed
Capital proceeds	Sale price - agent commission - legal fees on sale
Net capital gain	Proceeds - cost base
50% CGT discount	Available if held 12+ months (individuals/trusts only)
Main residence exemption (partial)	Available if property was main residence for part of ownership period
6-year absence rule	Treat as main residence for up to 6 years of absence if no other main residence claimed
Non-residents	No 50% discount (from 8 May 2012 for gains accruing after that date)

2.9 Non-Resident Rental Withholding

Non-Resident Rental Withholding Rules (ATO, FRCGW)

Rule	Detail
Applies to	Non-resident landlords receiving Australian rental income
Rate	Payer (tenant/agent) must withhold amounts as directed by ATO
FRCGW (foreign resident CGT withholding)	For contracts signed from 1 January 2025, 15% of the sale price on all Australian real property, with no value threshold. For contracts from 1 July 2017 to 31 December 2024, 12.5% where the value was $750,000 or more. ATO, FRCGW
Clearance certificate	An Australian resident vendor obtains one and gives it to the purchaser before settlement to avoid FRCGW. Apply for it early; processing is not immediate
Variation	A foreign resident vendor can apply for a variation where 15% exceeds the expected Australian tax on the sale

Section 3 -- Transaction Pattern Library

3.1 Income Patterns (Credits)

Income Patterns (Credits)

Pattern	Treatment	Notes
REAL ESTATE AGENT [name], RENT COLLECTION	Assessable rental income	Net of agent commission (report gross; deduct commission separately)
TENANT [name], RENT PAYMENT, BOND TRANSFER	Assessable rental income	Bond held in trust is NOT income until forfeited
[INSURER] CLAIM PAYOUT, LOSS OF RENT	Assessable	Insurance for lost rent
AIRBNB PAYOUT, STAYZ PAYOUT	Assessable	Short-term rental income

3.2 Expense Patterns (Debits) -- Immediate Deductions

Expense Patterns (Debits) -- Immediate Deductions

Pattern	Category	Treatment
[COUNCIL NAME] RATES, COUNCIL RATES	Council rates	Fully deductible
WATER CORP, SA WATER, SYDNEY WATER	Water rates	Fully deductible
BODY CORPORATE, STRATA LEVY, OWNERS CORP	Body corporate fees	Fully deductible (admin + sinking fund)
[STATE] LAND TAX, REVENUE NSW, SRO VIC	Land tax	Fully deductible
[AGENT NAME] MANAGEMENT FEE, LETTING FEE	Property management	Fully deductible
[INSURER] LANDLORD INSURANCE, BUILDING INS	Insurance	Fully deductible
PLUMBER, ELECTRICIAN, [TRADESPERSON] REPAIR	Repair (if restoring)	Deductible if repair per TR 97/23
BUNNINGS, HARDWARE (minor repair materials)	Repair materials	Deductible if repair nature
PEST CONTROL, TERMITE INSPECTION	Pest control	Fully deductible

3.3 Expense Patterns (Debits) -- Capital (Depreciate)

Expense Patterns (Debits) -- Capital (Depreciate)

Pattern	Category	Treatment
KITCHEN RENOVATION, BATHROOM RENO	Capital improvement	Add to cost base; Div 43 if structural
NEW HOT WATER SYSTEM (replacement-upgrade)	Div 40 asset	Depreciate over 12 years
NEW AIR CONDITIONER (split system install)	Div 40 asset	Depreciate over 10 years
NEW CARPET (full replacement, better quality)	Capital improvement	Div 40 for first owner; cost base for subsequent

3.4 Loan / Interest Patterns

Loan / Interest Patterns

Pattern	Category	Treatment
[BANK] HOME LOAN INTEREST, INVESTMENT LOAN INT	Interest expense	Deductible (if loan traces to rental property)
[BANK] LOAN REPAYMENT, PRINCIPAL + INTEREST	Mixed	Only interest portion deductible -- NOT principal
[BANK] OFFSET ACCOUNT INTEREST	Interest saving	Reduces deductible interest (net interest method)
[BANK] LINE OF CREDIT DRAWDOWN	Capital movement	NOT income; trace use of funds

3.5 Exclusions

Exclusions

Pattern	Treatment	Notes
BOND LODGEMENT, RTA BOND, RTBA	EXCLUDE	Bond held in trust -- not income
MORTGAGE PRINCIPAL REPAYMENT	EXCLUDE	Capital repayment -- not deductible
PERSONAL USE period expenses	APPORTION	Deduct only rental-use portion

Section 4 -- Computation Method

Step 1: Gross Rental Income

• Gross Rental Income — Sum all assessable rental receipts for the financial year.

Step 2: Immediate Deductions

• Immediate Deductions — Sum all allowable expenses (interest, rates, insurance, management fees, repairs, body corporate, etc.).

Step 3: Depreciation (Div 40 + Div 43)

• Depreciation — Add capital works deduction (2.5% of construction cost) and plant depreciation (per ATO effective life schedules).

Step 4: Net Rental Income / Loss

• Net Rental Income / Loss — Gross income − deductions − depreciation = net rental income (or loss if negative gearing).

Step 5: Report on Tax Return

• Reporting outcome — Positive: included in assessable income and taxed at marginal rates. Negative: offsets other assessable income (salary, business) dollar-for-dollar.

Section 5 -- Filing Requirements

Filing Requirements

Item	Detail
Form	Individual Tax Return (ITR) -- Rental Property Schedule (Item 21)
Reporting	Per-property basis (complete separate schedule for each property)
Joint ownership	Each co-owner reports their share (typically 50/50 for joint tenants)
Records retention	5 years from date of lodgement (longer if CGT applies -- keep until 5 years after disposal)
Quantity surveyor report	Recommended for all post-1985 properties to substantiate Div 43 and Div 40 claims

Section 6 -- Edge Cases

6.1 Property Vacant

• Vacancy deduction rule — Expenses are deductible during vacancy ONLY if the property is genuinely available for rent (advertised, not restricted in availability). If withheld from the market (e.g., reserved for personal use or holiday), deductions are denied for that period.

6.2 Part-Year Rental / Part-Private Use

• Apportionment rule — Apportion all expenses on a time basis (days rented or available ÷ 365). Interest remains fully deductible if the property was available for the full year even if vacant.
• Co-owners and domestic arrangements — Co-owners allocate income and expenses by their legal interests; one owner paying the bills does not change the split. A partnership carrying on a rental business needs separate analysis, and sharing household costs with a family member is not automatically a commercial rental arrangement. (ATO, Rental income you must declare)

6.3 Holiday Homes

• Holiday home deduction limitation — If the property is available for rent at below-market rates, or restricted to holiday periods only, or rented to relatives at reduced rates -- deductions are limited to income received (no negative gearing). ATO scrutinises holiday letting closely.
• Section 26-50 leisure facilities — Section 26-50 denies expenses associated with owning or using a leisure facility unless it is used or held mainly to produce assessable income. Offering a holiday home for a few rental weeks does not meet that requirement; keep advertisements, agent agreements, booking records and evidence of commercially realistic rent and tenant access.
• TR 2026/1 and the 2026 compliance guidelines — TR 2026/1 sets out when rental receipts are assessable, when outgoings are deductible and how to apportion mixed use for individuals not in business. PCG 2026/2 gives the apportionment methods the ATO accepts, and PCG 2026/3 its compliance approach to section 26-50 for holiday homes that are also let. Read them before claiming a loss on a property with any private use. (ATO, What's new in the rental properties guide 2026; ITAA 1997 (Cth) s 26-50; ATO, How to claim rental expenses)

6.4 Subdivision and Development

• Subdivision profit treatment — If a rental property is subdivided, the profit on sale of subdivided lots may be ordinary income (not CGT) if the taxpayer has a profit-making intention. Escalate to specialist.

6.5 Deceased Estates

• Deceased estate rental treatment — Rental property passing through an estate: the legal personal representative (LPR) reports rental income in the estate return until the property is transferred to a beneficiary. CGT is deferred until the beneficiary disposes.

Section 7 -- Prohibitions

• Prohibitions — NEVER claim travel to a residential rental property as a deduction (removed from 1 July 2017 for non-business landlords); NEVER claim Div 40 plant depreciation for a subsequent owner of residential property (post-2017 rule) unless the asset was newly installed by that owner; NEVER claim Div 43 without evidence of construction cost (quantity surveyor report or original builder records); NEVER deduct loan principal repayments; NEVER deduct expenses relating to periods of genuine private use without apportionment; NEVER claim the CGT 50% discount for a non-resident individual; NEVER omit prior Div 43 deductions from the cost base on disposal (reduces cost base); NEVER present tax calculations as definitive -- always label as estimated

Section 8 -- Which tax applies, and where its rules live

A property transaction can touch four separate regimes at once. Work out which apply before calculating anything, because the answer to one changes the inputs to another.

8.1 Decision table by event

Decision table by event

Event	Income tax	GST	CGT	State or territory
Buying a residential investment property	Borrowing costs, and holding costs once available for rent	Generally input taxed on an existing residential premises, so no credit on the purchase. New residential premises may be taxable and may trigger GST at settlement	Establishes the cost base	Transfer duty, and possibly foreign purchaser surcharge duty
Holding and renting it out	Rental income assessable, deductions under Section 2, Div 40 and Div 43	Residential rent is input taxed, so no GST on rent and no credits on expenses	Deductions claimed under Div 43 reduce the cost base	Land tax, and possibly a foreign owner or vacancy surcharge
Renovating	Repair deductible, improvement capital	Credits depend on whether the premises remain input taxed	Capital work enters the cost base or Div 43	Nil, unless it changes the land tax position
Short-stay or holiday letting	Apportionment for private use and periods not genuinely available	Commercial residential premises can be taxable rather than input taxed. Test this, do not assume	Main residence exemption can be lost or reduced	Some jurisdictions apply short-stay levies
Buying or holding a commercial property	Rent assessable, deductions available	Generally taxable, so GST on rent and credits on expenses, subject to registration. A going concern or margin scheme may apply on sale	Cost base as normal	Transfer duty and land tax
Selling	Balancing adjustments on Div 40 assets	See au-gst-property.md. GST at settlement can require the purchaser to withhold	The CGT calculation. See au-capital-gains.md	Duty is payable by the purchaser, not the vendor
Selling as a foreign resident	Rental income to the date of sale	As above	No full 50% discount, and the main residence exemption is generally unavailable	As above

8.2 The GST decision path

1. Is the supply residential premises? Existing residential premises are input taxed: no GST on the sale or the rent, and no credits on related acquisitions.
2. Are they new residential premises? New residential premises are generally taxable, which changes both the GST on sale and the purchaser's withholding obligation at settlement.
3. Are they commercial residential premises? Hotels, motels and similar are taxable, not input taxed. Short-stay accommodation sits near this boundary and needs the actual facts.
4. Is it commercial property? Generally taxable, subject to registration and turnover.
5. Does an entity-level test change the answer? Registration, the $75,000 threshold, and whether the activity amounts to an enterprise all sit upstream of the supply classification.
6. Does a special rule apply on sale? The margin scheme, the going concern exemption and GST at settlement each have their own conditions.

The full rules are in au-gst-property.md and australia-gst.md. Do not decide a property GST question from this file alone.

8.3 State and territory taxes are not federal, and are not uniform

Land tax, transfer duty, foreign purchaser and foreign owner surcharges, and vacancy or short-stay levies are imposed by each state and territory under its own Act. Thresholds, rates, exemptions, aggregation rules, trust surcharges and the definition of a principal place of residence all differ. A rule from one jurisdiction must never be applied to another.

Establish the jurisdiction first, then read that jurisdiction's own guidance:

Jurisdiction revenue authorities

Jurisdiction	Revenue authority
New South Wales	Revenue NSW, https://www.revenue.nsw.gov.au/
Victoria	State Revenue Office Victoria, https://www.sro.vic.gov.au/
Queensland	Queensland Revenue Office, https://qro.qld.gov.au/
Western Australia	RevenueWA (Department of Treasury and Finance), https://www.wa.gov.au/organisation/department-of-treasury-and-finance
South Australia	RevenueSA, https://www.revenuesa.sa.gov.au/
Tasmania	State Revenue Office Tasmania, https://www.sro.tas.gov.au/
Australian Capital Territory	ACT Revenue Office, https://www.revenue.act.gov.au/
Northern Territory	Territory Revenue Office, https://treasury.nt.gov.au/dtf/territory-revenue-office

8.3 State and territory taxes are not federal, and are not uniform

Land tax paid on an income-producing property is generally deductible in the year it is incurred. Transfer duty on the purchase is not deductible; it is a cost base element. See au-land-tax.md and au-stamp-duty.md for the jurisdiction-specific detail.

8.4 Related guides

Related guides

Question	Guide
GST on a property sale, margin scheme, GST at settlement	au-gst-property.md
CGT calculation, losses, discount, the 1 July 2027 changes	au-capital-gains.md
Land tax by jurisdiction	au-land-tax.md
Transfer duty by jurisdiction	au-stamp-duty.md
Reporting the rental schedule in the return	au-individual-return.md
Deductions and offsets generally	au-deductions-offsets.md
Foreign resident disposals	au-nonresident-cgt.md
Property held in a trust or SMSF	au-trust-distributions.md, au-smsf.md

Disclaimer

This skill and its outputs are provided for informational and computational purposes only and do not constitute tax, legal, or financial advice. Open Accountants and its contributors accept no liability for any errors, omissions, or outcomes arising from the use of this skill. All outputs must be reviewed and signed off by a qualified professional (such as a CPA, CA, registered tax agent, or equivalent licensed practitioner in your jurisdiction) before filing or acting upon.

The most up-to-date, verified version of this skill is maintained at openaccountants.com. Log in to access the latest version, request a professional review from a licensed accountant, and track updates as tax law changes.

Contributed by Ryan Duguid.

Contributed by Ryan Duguid.

Contributed by Ryan Duguid.