What expenses can you claim when renting out a room?

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Mark has converted his rumpus room into a self-contained unit and wants to know what expenses he can use to offset against the income from leasing out the unit.

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Q. Mark
I receive the full married rate of the Age Pension (one person eligible) as my wife has not reached retirement age yet. We own our own home and are thinking of turning a large rumpus room into a self-contained granny flat that we would rent out. I understand that there would be deductions to be offset against income (electricity, rates, insurance, etc) but because we don’t know what these costs would amount to, we were wondering how Centrelink works it out. This will be a first-time rental and our costs will not be known until the end of the financial year. I think the flat would have a rent return of about $300 per week and we would be paying all the outgoings.

A. Normally your tax return or Tax Notice of Assessment will provide evidence of the deductions claimed.

However, if a property has been newly rented, as in your situation, and a Tax Notice of Assessment is not available, deduction amounts will need to be estimated by Centrelink.

As soon as the next tax return is available, the estimate will be discontinued in favour of figures derived from your tax return.

To estimate the deductions, Centrelink will deduct one-third from the gross amount of rent received (this takes into account land tax, rates, insurance, repairs, etc) and then deduct any mortgage interest payments from this amount.

If you are able to provide evidence that expenses are more than one-third of the gross amount of rent received, for example if extensive repairs were required, then Centrelink will deduct the actual amount spent instead of one-third of gross rent. However, structural alterations or improvements to the property are NOT allowed as a deduction.

Have you considered renovating your house to earn some extra income? How has the situation worked out, if this is something you have undertaken?

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Written by Ben

5 Comments

Total Comments: 5
  1. 0
    0

    Rent out very privately and get only cash.

  2. 0
    0

    “Centrelink will deduct one-third from the gross amount of rent received”
    Centrelink usually adds to the amount of rent received before they deduct an amount from the income.
    We have never rented out a room but as we have more than 5 acres of land they assume we have rented out that land and we lost a lot of our part pension because of that assumption.
    A quick look would have shown them we couldn’t rent it to anyone as it is on a steep slope and useless for grazing or living in a tent.
    Never trust Centrelink to be fair to aged pensioners.

    • 0
      0

      I think (note ‘think’ not ‘know’) you are mistaken into suggesting Centrelink ‘assumes’ you are renting land in excess of five acres. Centrelink assesses the value of your land and, deducting the ‘value of your residence and associated five acres, determines how much your land is valued for the assets test. For example if you have 20 acres of land worth $1million, the assessed values of each acre is $50k. If your residence (ie building only plus associated outhouses) is valued at $200k then Centrelink will deduct $450k (ie the house plus 5 acres) from the $1million to add $550k to your assets. You should have received a Centrelink assessment notice to see exactly how it was worked out in your circumstances.

      ,

  3. 0
    0

    I rent out 2 rooms for $110pw each. I have advised Centrelink of my income and they took only about $30. You are allowed to earn a certain amount before it affects the pension.
    The article talks about deductions regarding structural alterations are not allowed. I thought they would be but check with your accountant. Maybe the payments and interest on the loan to do the work is deductible?? Don’t forget you can claim all the furniture you purchase. If they use your washing machine you can claim depreciation on that as well. Speak to your accountant before you start anything. You may get a surprise when you do that. A good one I think. Good luck.

  4. 0
    0

    If you convert part of your home to gain an income, will your asset test be effected. Will Centrelink reduce the value of your home by the deemed value of your new rental investment property and increase your assets by the same amount. I would be interested to know if they can treat the home as two separate entities once the conversion is completed.


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