Early in 2025, the Australian Taxation Office (ATO) announced it was cracking down on landlords, using its data-matching program to uncover tax non-compliance.
The rental bond data-matching program identifies individuals who may be failing to meet their tax obligations and helps them correctly report rental income and associated deductions in their individual tax return.
This initiative, said the ATO, is designed to ensure that property investors are accurately reporting their income and claiming only legitimate deductions.
This has made it more important than ever for property investors to understand which expenses they can legitimately claim as tax deductions, and which they cannot.
Understanding your expenses
If you own an investment property, you may be entitled to claim various expenses as deductions on your tax return. These deductions can significantly reduce your taxable income, so understanding what you can and can’t claim can help maximise your tax benefits and keep you tax compliant.
There are three categories of expenses related to rental properties. These are expenses you:
- Can claim in the year you incur the expense
- Can claim over several years
- Can’t claim
What you can claim
Loan interest and fees
Interest on your investment property loan is deductible, but only the portion directly related to the investment property.
Council rates and water charges
If you pay for council rates or water charges on your investment property, these are deductible expenses.
Professional services
If you employ a property manager to handle tasks like finding tenants, collecting rent and organising repairs, their fees are deductible.
Legal and accounting expenses related to the property can also be deducted.
Repairs and maintenance
Immediate deductions are available for repairs that restore the property to its original condition, such as fixing a leaky tap. However, improvements or upgrades must be depreciated over time as they relate to expense category number two (see below for capital works).
Depreciation
Depreciating assets that cost $300 or less, like small appliances, can be claimed as an immediate deduction.
Assets that cost more than that can be claimed for the decline in value over their effective useful life. This could include assets such as carpets, curtains, large appliances or furniture. Special rules may apply to assets you bought second-hand, like the air conditioning already installed in the property when you bought it.
Insurance
Premiums for landlord insurance, building insurance and public liability insurance are deductible.
Capital works
This can include expenses for building the priority, as well as structural repairs, improvements or alterations. Fees associated with the construction, like engineers and architects’ fees, surveying costs and the cost of building permits, can be included.
You can only claim a deduction for capital works on a rental property if the property was built after 17 July 1985 and is used.
The rate of deduction for these capital works is generally 2.5% or 4% per year, spread over a period of 40 or 25 years, respectively.
Borrowing costs
Any costs you incurred during the process of securing your investment property mortgage can be claimed, but for a period of five years or spread over the term of the loan, whichever is shorter.
This can include mortgage broker fees, loan establishment fees, lender’s mortgage insurance and valuation costs.
What you can’t claim
Acquisition costs
Expenses like stamp duty on the property purchase, conveyancing fees, and the property’s purchase price itself are not immediately deductible. These costs are typically included in the property’s cost base and may reduce your capital gains tax (CGT) when you eventually sell the property.
Expenses paid by tenants
If your tenants pay for a particular expense, such as a water bill, you cannot claim this.
Travel expenses
Travel expenses related to inspecting or maintaining a residential rental property are generally not deductible.
GST credits
GST doesn’t apply to residential rental properties, including anything you purchase to lease the premises. However, when claiming the expense as a deduction, you can claim the total amount you paid, inclusive of GST (where applicable).
Why accurate record-keeping matters
The ATO’s data-matching program is designed to catch errors and deliberate non-compliance. As a property investor, it is important to maintain clear and accurate records of all income and expenses related to your property. Keep your invoices, receipts and bank statements to ensure your claims are well-supported.