4.3.8.30 Income from real estate
Summary
This topic provides information on:
- assessable income - allowable deductions from gross income
- estimate of deductions where no tax return is available
- real estate - life interest in property
- capital gains, and
- GST costs.
Income from real estate is income obtained from renting property or land. It does NOT include income from boarders or lodgers.
Exception: If the person is residing in a care situation (1.1.C.25), and entered the care situation before 1 January 2017, AND
- an accommodation charge (1.1.A.18) is payable, OR
- a daily accommodation payment/daily accommodation charge (1.1.D.05) is payable, OR
- they are paying some or all of an accommodation bond (1.1.A.15) by periodic instalments
then any rent received from the former home is exempted from the income test.
Note: For the purposes of the rental income exemption, a person is still considered to have entered aged care before 1 January 2017 following absences from aged care of up to 28 days. There is no time limit if the person is on leave from aged care.
If, after 1 January 2017, a person re-enters aged care after having been absent for more than 28 days (other than being on leave) they will not be able to access the rental income exemption.
Act reference: SSAct section 8(8)(zn) while a person is accruing …, section 8(8)(zna) while a person is liable …, section 8(8)(znaa) while a person is liable … daily accommodation …, section 8(10B) Paragraphs (8)(zn), (zna) and (znaa) do not apply …
Policy reference: SS Guide 4.3.2.30 Income exempt from assessment - legislated, 4.3.8.40 Income from boarders or lodgers
Assessable income - allowable deductions from gross income
Income from real estate for social security purposes is the same as that assessed for taxation purposes with some exceptions. The person's tax return and income TNA will provide evidence of the deductions claimed and allowed for tax purposes. Most common deductions will be necessary costs such as agent's fees, repairs, land and water rates.
If a loan was obtained to purchase the rental property, then those interest payments CAN be an allowable deduction for tax and social security purposes even if the mortgage is secured against another property, (e.g. the person's home).
Exception: If the purpose of the loan was to specifically 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 and social security purposes. This applies even if the mortgage is secured in full or part against the rental property. The reason being, the dominant purpose of the loan was to purchase a home to live in and not to purchase an investment property. For further information, please contact the ATO.
The following deductions are allowed for tax purposes but NOT allowed for social security purposes:
- capital depreciation
- special building write off
- construction costs, AND
- borrowing costs, for example, loan establishment fees.
For social security purposes:
- if the net income is a negative amount, the income for social security purposes is nil, AND
- losses from one property CANNOT be offset against income from another property.
Policy reference: Administrative Appeals Tribunal decision MacDonald and Secretary, Department of Family and Community Services (2004) AATA 901
Estimate of deductions where no tax return is available
If a tax return and/or a TNA are not available, deduction amounts will need to be estimated. The estimation method is ONLY to be used where there is no tax return or TNA.
This method should only be used in exceptional cases, such as when a property has been newly rented. As soon as the next tax return is available, the estimate should be discontinued in favour of figures derived from the tax return.
| Step | Description |
|---|---|
| 1 | Deduct one third from the gross amount of rent received (this takes into account land tax, rates, insurance, repairs, etc). |
| 2 | Deduct any mortgage interest payments from this amount. |
Exception: If the person provides evidence that expenses are MORE than one third of the gross amount of rent received, for example if extensive repairs were required to make the property habitable, then deduct the ACTUAL amount spent at Step 1 instead of one third of gross rent. Structural alterations or improvements to the property are NOT allowed as a deduction.
Real estate - life interest in property
If a person has a life interest in a property and the property is rented out the person may not have the right to receive the rent. Check the terms of the bequest to establish if the person is entitled to receive the rent and whether or not they are required to maintain the property.
Explanation: Under the terms of the will the person may only be entitled to live in the property.
There is no requirement that a person use their property to produce income. If no money is received from a property, then NO income is taken into account. Although no income is taken into account under the income test, assets test rules still apply.
Capital gains
Sale of real estate may result in a capital gain. A capital gain is NOT treated as income for social security income support purposes. If a capital loss is made it CANNOT be offset against other income amounts.
GST costs
People who receive income from residential rental properties cannot charge GST and cannot claim input tax credits for items for the rental property.
This means GST costs incurred in earning the rental income ARE allowable deductions for social security purposes.
Example: If the person uses a property manager, the management fees will include GST. The full management fee (including GST) IS an allowable deduction.
The fact that a landlord may have an 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.
Example: 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.