An Opportunity to Salary Sacrifice Rental Deductions

Do you know about salary sacrifice and the possible rental deductions you can claim?

Are you property investors with a high income earner and a stay at home spouse with nil or low income but dedicated to looking after the kids?

You’ll be happy to hear about a new solution to negative gearing when couples have different incomes but purchased a property as joint tenants and forgot that being joint tenants may not necessarily result in a big refund.

The term “tenant” is confusing for many investors when they purchase property and are actually owners. The implication is all land belongs to the Crown and it is purchased as a tenant in perpetuity having rights to the use and sale subject to the approval of the Crown or government. So owners of land and property are called “tenants”.

There are two ways to purchase property – as “joint tenants” or “tenants in common”. Tenants in common can stipulate the percentage of the property they have purchased. It is not necessarily 50/50 but can be say, 70/30 or even 99/1. This can be ideal for investors where one person has a very high income with correspondingly high tax and the other a very low income and low tax. Purchasing as tenants in common allows you to structure the purchase to achieve better refunds.

Most couples purchase investment property as joint tenants as this acts as a protection should one person die. Then, under the right of survivorship, the interest of a joint tenant passes automatically upon death to the surviving joint tenant.

So, you have probably purchased your investment property as joint tenants instead of tenants in common. Joint tenants share everything in an equal 50/50 split. The spouse on the high income receives 50% of the income and 50% of the deductions and the low income earning spouse also receives the same 50% of income and 50% of the deductions. This results in a significantly lower refund for their tax than the couple might have expected because those deductions had to be shared with the spouse on the lower income, reducing the benefits of negative gearing. (See the example below.)

A way around this dilemma has recently surfaced, and it is now possible to do the previously unthinkable! The spouse with the high income can do a salary sacrifice and have the expenses of the rental property paid by his or her employer. This means the rental investment expenses can be used to reduce the higher earning spouse’s income, resulting in a higher refund. (Refer to the Court ruling: Australia Bank v FCT (1993) 26 ATR 503 and also to ATO 2005/219).

What is even more exciting is there is no fringe benefits tax to pay, as the expenses follow the “otherwise deductible rule”. This simply means the expenses must have the potential to be able to be claimed within the joint tenants rental returns before you are entitled to claim them via salary sacrifice.

You can’t apply this to all expenses. Salary sacrifice for rental deductions only applies to expenses which are actually paid or due to be paid. Depreciation can’t be included in salary sacrifice because it is not actually “paid”.

Have a look below at the example and the effect on this couple’s tax refund.

Before salary sacrifice arrangement;

John Helen
Salary $165,000.00 $0.00
Gross Rent $16,500.00 $16,500.00
Rental Expenses -$22,000.00 -$22,000.00
Taxable Income $159,500.00 – $5,700.00
Tax Payable $54,517.00 $0.00

After salary sacrifice arrangement;

John Helen
Salary $165,000.00 $0.00
Gross Rent $16,500.00 $16,500.00
Rental Expenses $44,000.00 $0.00
Taxable Income $137,500.00 $0.00
Tax Payable $44,913.00 $1,822.00

Tax savings $7,782.00

Salary sacrifice often assists high income earners who mainly use it for their motor vehicles. They also use it for other expenses such as school fees where Fringe Benefits would be applied. Claiming rental deductions via salary sacrifice is a different approach to help investors effectively plan their finances and tax enabling deductions to be paid via salary sacrifice by the higher salary earner.

If you as a couple purchased property as joint tenants, this is a way to still achieve high refunds and later when you, as the high income earner, retire, or the property has been paid off, it is possible to stop using salary sacrifice to manage the property. Using salary sacrifice for your rental property can now provide you, as joint tenants, with the best of both worlds.

For all your salary sacrifice and rental deduction questions, contact Easy Tax today.


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