Tax with Max: Claiming tax deductions for an investment property

Renting out one room in an investment property, more on withdrawing a super lump sum and commuting a pension.

Summary: Someone who buys a property, lives in it and rents out one room is able to claim some expenses as tax deductions. The investor needs to calculate how much of the property the tenant is using. If the tenant has access to 40% of the house, the investor can claim that percentage of interest on borrowings to purchase the property, rates and taxes, electricity and water.

Key take-out: A quantity surveyor can help an investor in this situation maximise their tax deduction.

Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

Renting out one room in an investment property

If I buy a property and live in it and also rent one room out, is there any way of claiming tax deductions based on it being an investment because I am receiving rental income?

Answer: Someone who will be earning income from renting one room out will be able to claim the expenses relating to what is being used by the tenant. The first thing to do is to calculate by area how much of the property is being used by the tenant.

The areas to include in this calculation will be the bedroom used by them and, if your bedroom has an en suite and the tenant has the use of the bathroom, the area of the bathroom would be included. In addition, it is necessary to include the tenant’s half share of common areas such as the kitchen and living areas.

If the area of the house open for use by the tenant came to 40% of the total area of the house, someone in this situation could claim that percentage of interest on borrowings to purchase the property, rates and taxes, electricity and water.

An investor in this situation will also be able to claim a tax deduction for the depreciation of certain items of fixtures and fittings used by the tenant. To ensure that you maximise your tax deduction, and to avoid the ATO challenging your calculations, you should engage the services of a quantity surveyor. They will be able to calculate how much depreciation relates to the tenant and also may be able to assist in relation to working out what percentage of the property is being used by them.

More on withdrawing a super lump sum

I turn 63 this month and my partner turned 65 in July, 2014. We have an SMSF with about $700,000 in total assets. I receive a small Newstart allowance, she receives a part age pension, and we both work part-time. She contributed part of her super into my accumulation account in June 2014 to reduce its effect on her age pension entitlement.

We had planned to withdraw a lump sum of about $100,000 when I turn 65 to carry out house repairs, buy a new car, and possibly have a holiday. I read in your column your advice concerning the withdrawal of $150,000 from an SMSF, and its potential effect on subsequent pension entitlement (see Tax with Max: Withdrawing a super lump sum, December 10, 2014).

Might it be better for me to commence an allocated pension now at say 10%, lose my Newstart, and put most of that money aside or use it as above, rather than wait until I am 65 and lose more from the age pension then?

Would it be better to withdraw the money from her account this year, and for me to re-contribute it to my accumulation account before I turn 65? Can any amounts be withdrawn as lump sums without losing the age pension by either of us after this year?

If a lump sum is withdrawn from an SMSF is it better to do it in one year so as to only lose pension entitlement for that particular year, rather than spread it over two or three years and lose pension for all those years? Does income tax apply to the sum withdrawn?

Answer: It would appear that you are no longer working and therefore should meet the retirement condition of release for superannuation. If this is the case it does not make any sense taking an allocated pension, which could result in you losing some of your Newstart, when you could take lump sum superannuation payments.

These lump sum payments should not be counted as income but they will be counted under the assets test and also be subject to the deeming rules. This may mean a small decrease in the Newstart allowance that you receive and possibly the age pension that your wife receives. This will depend on whether the income or the assets test currently affects your wife’s pension.

With regard to whether it will be better to withdraw one large amount as a pension income payment for your wife, and then re-contribute that to the superannuation fund as a non-concessional contribution for you, I am not sure at this stage. I am still waiting to hear back from the Department of Human Services for confirmation of what occurs if a person loses their pension due to taking too much income in a year. I am not sure whether in this situation they will lose the benefit of the grandfathering provisions.

Someone whose wife is currently affected by the assets test may over a period of two to three years to make large pension payments to her that result in no loss of pension. These amounts could then be re-contributed by the husband.

As your superannuation fund will be made up of taxable and tax-free super benefits, and you are both over 60, no income tax is payable on either pension or lump sums taken. Before taking any action you should seek advice from a professional that specialises in superannuation and age pension matters.

Commuting a pension

Could I nominate withdrawing $150,000 from my SMSF for a caravan and car as a commutation rather than a pension amount?  I know this will reduce my deductable amount calculated by using the Relevant Number (RN) but is an amount of this magnitude permitted without any other impacts and if it is withdrawn after January 1, 2015, does it matter except in reducing the deductible amount referred to above?

Answer: If someone commuted their pension to take a lump sum this would mean their current pension would cease and the grandfathering provisions would be lost. If they took the $150,000 partial commutation this would not be counted as income and therefore should mean that the grandfathering provisions would continue to apply to them.

As a result of taking the partial commutation, there would however be a change to the deductible amount counted under the income test. For example if when they started the account-based pension they had $500,000 in their superannuation account, and the relevant number at the time of them commencing the pension was 20, they would have had an annual deductible amount of $25,000.

This means if they were taking an account-based pension at the minimum rate, and their pension account balance at the start of the year was still $500,000, their account-based pension would have been $25,000. After deducting their annual deductible amount this would result in no pension income being counted under the income test.

If they took the $150,000 as a partial commutation this would result in their annual deductible amount reducing to $17,500. This is because the original RN is still used to calculate the deductible amount. Assuming after they have taken the partial commutation their superannuation account balance was $350,000, and they took the minimum pension amount of $17,500, no income would be counted under the income test.

If they still needed to take $25,000 a year as an account-based pension this would mean, as a result of the reduced deductible amount, $7500 would be counted under the income test. I can only assume that if the $150,000 partial commutation is taken part way through a financial year the deductible amount would need to be pro-rated.


Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs. Also go to www.smsfsurvivalcentre.com.au.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au