Essay On Issue Arising On Rental Income Tax: Rental Property

Rental properties 2017 Act and Australian Tax Office regulations are set to guide on when and how rental income is assessed and recognized as well as its provisions on when rental income allowable deductions are applicable. The 2017 Australian Rental Property Act is seen to define rental income as any amount paid as rent when you allow a person to live or use your rental property. It is a payment of the service of allowing the tenant to use your premises Poterba(2008). It is mostly paid over an agreement between the landlord and the tenant or an agent who sets terms of payment as well as the rent rate payable as well as payment timelines i.e  whether monthly, quarterly or annually.

Australian Tax Office requires that any amount earned as rental income or relating to the rental property should all be included as taxable income and further filed as rental income tax return after subjection to the allowable deduction. Australian Tax Office has set guidelines on all the cluster of expenses relating to rental property whether before, during or after the construction of the rental property. Australian Tax Office allows property owners to claim immediate tax deduction expense on any expense relating to the rental feature the likes of management agency fee, payment of interest on the loan issued to finance the property construction Reinhardt (2006).

It further outlines, more on their significant consideration to the property owners, whose finance cost or the loan payment value in their loan amortization schedule, is seen to be more than the return on investment or slightly less than what they get. Hence are allowed to claim a deduction on it an aspect referred to as negative gearing in Australian Tax Office advice. This negative gearing aspect mostly makes the property owner operate on a loss that is claimable in line with tax law on their income whether salary or any investment income at the point of filing tax return Saarimaa(2011). However, in case the property owner’s wages are not enough to set off the rental loss mostly forwarded for future settlement during the next financial year Hulse (2014). Immediate expense deductions are only applicable if the property is seen to be marketed for rent purposes as well as if it is a rented residential property McGregor-Lowndes (2009). Likewise, if it is a residential property under construction, the land in which it is building its existence gives the owner to claim the deduction. The following outlined expenses are what classified as immediate deduction, i.e., water and sewerage rates, land rates, cleaning expenses, tenants advertising cost, i.e., printing magazines or even television and through internet means among other expenses directly relating to the property before its full occupancy Antoniades (2014).

With all the above guidelines set in place by ATO, I believe we are now able to classify the specific cluster and scenario the management account issue falls as well as being able to offer appropriate treatment on the deduction. The first thing to admit about the management accountant is that he owns a rented property hence we expect him to either be enjoying income from it or hoping revenue from it shortly and likewise we anticipate him to be currently incurring expenses or waiting for expenditures as occupancy proceeds Hulse(2012).

The issue at hand is that the management accountant refuses to sign his rental tax return with the allegation that the interest and expenses claimed are contrary to the free accounting principles present mainly because within those four months of claim there was no income he was making. I wish first to appreciate the management accountant concern and cautious sense on tax matters and further inform him that  Australian Tax Office has set guidelines on how expenses and interests are supposed to treated whether after or before rental income is earned.

If we analyse the expenses and interest in the context, we learn that they were incurred within the four months period when there was no income generated from the rents. If then allowed I wish to term this as an immediate deductible allowance expense that is acceptable in the tax office. These immediate expenses qualify for deduction mainly because there is an admissive aspect that it is incurred on the rental property owned by the management accountant Marcus (2013) as informed by the accountant that it was incurred four months ago when the property was not generating income at all.

By assuming that the interest expense in the management accountant issue, is that one of financing a loan that he acquired to procure the rental property. Thus a relative approach of negative gearing is seen to occur since we are seeing him paying the mortgage whereas the rental property has not yet started generating income for him hence held in a rental loss situation Burke (2012). At this position, we expect legal claimable process conducted by the management accountant where he can claim the expense settle the tax part of his other income from consultancy service or his part-time teaching job. If not willing to set it off from his salary he has, therefore, a chance to carry it forward for the future claim on the rental income.

Mark you, this scenario of claiming the rental loss in future, in my opinion; I guess it is what applies to the management accountant. Just because the persons are filing for him, the tax return is claiming for him the expense he incurred four months ago whereas in reality there was no income being generated that related to the cost Fane (2005).

Either of the two approaches, i.e., the one whose interest termed as the direct expense or the latter termed as negative gearing are both under the circumstance of the existence of the rental property owned by the management accountant makes him worth the claim as per Australian Tax Office advice.

Having exhausted the two scenarios on the interest expense, I, therefore, wish to advise the management accountant by telling him not to worry about the tax return filed by the firm relating to interest claim just because the action and the filing done is as per the set Australian regulation in place Pivo(2008). The management should likewise be seen signing the tax return without fear or favour since all process involved complied with Australian tax law Pivo (2008).

In case this interest was deemed as net rental property loss, something that in my view I think it is was the consideration made on the signed tax return; we anticipate seeing the IT6 label. Informing the Australian Tax Office that the loss is amended at the taxable rental income for the month earned due to the nature of Australian tax system that deemed federal Lai (2008).As per the law the exist a room of setting of a loss on future income but only upon provision of proof beyond reasonable doubt, which if done out of malice the tax payer is charged and penalized under the act of tax evasion.

However interest on borrowings is incentivised to property owners up to the extent of a loan whose amortization period is 5year and below. For any deduction to be termed allowable the law expects the claimer to present all relevant documents to substantiate the claim and hence from this I suppose the firm before file return and claim the interest expenses they had a broad back up of documents proofing qualification for the set-off.

I, therefore, conclude by telling the consultancy firm to take back the tax return to the management account and urge him to sign it. Just because it is according to the Australian Tax Office and likewise provide him with relevant tax clauses as well as a copy of this essay to back up the reasons why the firm thinks the interest expense is part of his deductions. By doing so will be elevating doubt in him as well as providing satisfaction on the same. As much as we are concentrating with the deduction aspect raised by the management accountant, let us not forget to always report all the revenue income generate by the property whether earned to expected to be earned.

Ideally deductible allowable expenses were introduced to net-off tax liability over the incomes earned by them, hence excusing entities that can lawful utilize this privileges for the relieve to do so pursuant to Australian Tax Office expectation set in place. Most taxable revenue earned consequently involves expenses that ought to be settled off so as to declare the taxable income available. Australian Income Tax Act 2017 further gives instruction on how and when rental income is earned as well as at what point is it worth being subjected for tax purposes.

This platform of interest on expense both for immediate and that on rental loss is seen to boost capital expenditure, primarily to persons who use means of loan or mortgage to finance the project thus making most investors in Australia preferring investing in real estates and rentals more than in private residence. The waive they access from Australian Tax Office is what causes this. More considerable incentives on interest rental loss expense is been seen improving housing developments in Australia Blessing (2011).

Finally, I wish to state that for anyone to enjoy all these benefits relating to rental interest expense, of course, they must register with the Australian Tax Office first for tax purposes and second for the claim they must produce all the expenses claimable at the time of reporting. This is expected to be witnessed in the claim of interest expense by the management account whereby he was expected though his agents the firm that, as he files the return he likewise need to attach the rental interest expense loss claimable.

References

Antoniades, H., 2014. Housing Affordability in Australia: The National Rental Affordability Scheme v. Public Housing and Welfare Programs. In Asian Real Estate Society 19th International Conference. AsRES. 

https://scholar.google.com/scholar?start=100&q=negative+gearing+in+australia&hl=en&as_sdt=0,5

Blessing, A. and Gilmour, T., 2011. The invisible hand? Using tax credits to encourage institutional investment in social housing. International Journal of Housing Policy, 11(4), pp.453-468.

https://www.tandfonline.com/doi/abs/10.1080/14616718.2011.626609 

Burke, T., 2012. The Australian residential housing market: institutions and actors. Australia’s unintended cities, pp.35-49.

https://books.google.co.ke/books?hl=en&lr=&id=nQw6AGB4yCIC&oi=fnd&pg=PA35&dq=negative+gearing+in+australia&ots=FAx1iO6bBE&sig=Y1EbfpPOWFBelqu7RpoCQnY5imA&redir_esc=y#v=onepage&q=negative%20gearing%20in%20australia&f=false 

Fane, G. and Richardson, M., 2005. Negative gearing and the taxation of capital gains in Australia. Economic Record, 81(254), pp.249-261.

https://onlinelibrary.wiley.com/doi/10.1111/j.1475-4932.2005.00259.x/full 

Hulse, K. and Pawson, H., 2010. Worlds apart? Lower-income households and private renting in Australia and the UK. International Journal of Housing Policy, 10(4), pp.399-419.

https://www.tandfonline.com/doi/abs/10.1080/02673037.2013.873115

Hulse, K., Burke, T., Ralston, L. and Stone, W., 2012. The Australian private rental sector: changes and challenges. Australian Journal of Political Science, 35(1), pp.99-110.

https://www.ahuri.edu.au/__data/assets/pdf_file/0012/2802/AHURI_Positioning_Paper_No149_The-Australian-private-rental-sector-changes-and-challenges.pdf

Hulse, K., Reynolds, M. and Yates, J., 2014. Changes in the supply of affordable housing in the private rental sector for lower income households, 2006–11. Australian Housing and Urban Research Institute at Swinburne University of Technology and The University of Sydney, p.8.

https://www.researchgate.net/profile/Kath_Hulse/publication/284180051_Changes_in_the_supply_of_affordable_housing_in_the_private_rental_sector_for_lower_income_households_2006-11/links/564e7c7d08aefe619b0fe55a/Changes-in-the-supply-of-affordable-housing-in-the-private-rental-sector-for-lower-income-households-2006-11.pdf 

Lai, J., Yik, F. and Jones, P., 2008. Expenditure on operation and maintenance service and rental income of commercial buildings. Facilities, 26(5/6), pp.242-265.

https://www.emeraldinsight.com/doi/abs/10.1108/02632770810865014 

McGregor-Lowndes, M. and Newton, C.J., 2009. An examination of tax deductible donations made by individual Australian taxpayers in 2006-07.

https://eprints.qut.edu.au/20579/

Marcuss, R., Contos, G., Guyton, J., Langetieg, P., Lerman, A., Nelson, S., Schafer, B. and Vigil, M., 2013. Income taxes and compliance costs: How are they related?. National Tax Journal, 66(4), p.833.

https://search.proquest.com/openview/83b9357a72d9c3c7d51736d51a4e852c/1?pq-origsite=gscholar&cbl=41305

Pivo, G. and Environment Programme Finance Initiative Property Working Group, U.N., 2008. Responsible property investing: what the leaders are doing. Journal of Property Investment & Finance, 26(6), pp.562-576.

https://scholar.google.com/scholar?start=130&q=rental+income+expenses&hl=en&as_sdt=0,5

Poterba, J. and Sinai, T., 2008. Tax expenditures for owner-occupied Housing: Deductions for Property Taxes and mortgage interest and the exclusion of imputed rental income. The American Economic Review, 98(2), pp.84-89.

https://www.jstor.org/stable/29730000?seq=1#page_scan_tab_contents

Reinhardt, S. and Steel, L., 2006. A brief history of Australia's tax system. Economic Round-up, (Winter 2006), p.1.

https://search.informit.com.au/documentSummary;dn=321151613629366;res=IELBUS

Saarimaa, T., 2011. Imputed rental income, taxation and income distribution in Finland. Urban Studies, 48(8), pp.1695-1714.

https://journals.sagepub.com/doi/abs/10.1177/0042098010377474