Renting and Leasing Commercial Property – Tax Compliance
Depending on whether you are the owner (lessor), or tenant (renter), different reporting and or compliance measures will apply to you. This is with regard to income tax and GST, and the deductions claimed on relevant expenses with respect to position as owner or tenant. Income related expenses are calculated according to how you generate taxable income, and deductions from your tax liability are made on the basis of these income-related expenses.
For an owner/lessor, expenses that facilitate the derivation of rental income from the premises are income-related expenses. For a renter/tenant, rent payments themselves are income-related when they are renting their business premises, and therefore rent is an income-related expense.
As the owner of a commercial property which you lease to a tenant or renter, payments received for rent or rent-related payments are included in your personal income. When lodging your personal income tax return, you will need to include the full amount paid to you by tenants in your income statement.
You may be able to claim tax deductions on certain expenses related to the acquisition of rental income from the property you own. These expenses are referred to as income related expenses.
You are able to claim a tax deduction on income related expenses incurred during the reporting period, so long as the property was rented or actively available for rent during that period. You are generally able to claim an immediate deduction for expenses related to the maintenance and management of your commercial rental property, this includes the interest paid on some loans.
Tax deductions on other expenses may need to be claimed over several years. For example, costs of depreciation are calculated over a number of years and claimed for the value of that depreciation at the time the claim is made. Depreciation costs that may be income related for lessors include the depreciation of an asset’s value, such as furnishings and fixtures, as well as some construction expenses that may be assessed as capital works expenses.
As the owner/lessor of a commercial premises, you are generally unable to claim tax deductions on the following:
• The costs of acquiring and disposing of the premises, though these costs may be used to calculate the cost base of the premises when determining any capital gains tax liability.
• Expenses paid by tenants/renters, including amenities like electricity and water, as well as maintenance or other works paid for by renters.
• Expenses with a private component or that otherwise do not relate to the property’s function of deriving rental income.
GST Liability for Owners/Lessors
If you are assessable as operating an enterprise, then you are required to register for GST. The details of this assessment depend on individual circumstances, but if you are involved in the purchasing, sale, developing, or leasing of property and the turnover derived from this exceeds the GST threshold, you will attract a GST liability.
In this case, you are able to claim GST Credits on expenses/purchases that allow you to derive rental income from your commercial property. These rules are the same general rules applying to GST credits for all enterprises, and they allow you to claim credits on GST included in expenses such as conveyancing or agent’s fees.
If you are renting a commercial property and using this as your business premises, you may deduct the amount paid in rent from your tax liability. If GST is included in your rent (both you and the owner/lessor are registered or required to be registered for GST) then you are able to claim GST credits for this.
For tax purposes, rent paid on your business premises is an income-related expense, as without it you are unable to carry on your going concern. Likewise for lessors, payments that are necessary in order for you to continue deriving rent income are income-related and potentially deductible.
Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about our Melbourne tax compliance services, or email us at email@example.com.