Every dollar of rental income you earn from an investment property in Australia is assessable income. Whether you hold the property personally, through a trust, in a company, or within an SMSF, the ATO expects you to declare all rental income in your tax return and pay tax on it at the applicable rate. But rental income taxation is not just about declaring the rent and paying tax on it. The way you structure ownership, claim deductions, and manage the transition between personal use and income-producing use has direct implications for how much tax you pay, and it determines when and why you need a property valuation.
This guide explains how rental income is taxed across different ownership structures, what deductions are available, the critical role of property valuations in managing your tax position, and the specific rules that apply to SMSF-held rental property.
How rental income is taxed: the basics
Rental income includes all payments you receive from tenants for the use of your property. This covers regular rent payments, lease premiums or key money, reimbursement of expenses (such as water or electricity the tenant pays you for), insurance payouts for lost rent, and any non-cash benefits received in lieu of rent.
All rental income must be declared in the income year it is received (cash basis for most individuals) or the year it is earned (accruals basis for companies and some trusts). The ATO matches rental income data from property managers, tenancy bonds, and land title records against your tax return. Undeclared rental income is one of the most common audit triggers for individual taxpayers.
Tax rates on rental income by ownership structure
| Ownership Structure | Tax Rate on Net Rental Income | Key Considerations |
|---|---|---|
| Individual | Marginal tax rate (19% to 45% plus Medicare levy) | Net rental income added to all other income. Negative gearing offsets other income. |
| Trust | Distributed to beneficiaries at their marginal rates, or 45% if undistributed | Flexibility in distribution. Streaming of rental income to lower-tax beneficiaries (subject to anti-avoidance rules). |
| Company | 25% (base rate entity) or 30% | Flat rate. No negative gearing benefit to individuals. Profits taxed again when distributed as dividends (franking credits apply). |
| SMSF (accumulation phase) | 15% | Concessional rate. Fund-level deductions apply. Related party leases must be at market rent. |
| SMSF (pension phase) | 0% | Tax-free on income supporting a retirement phase pension. From 1 July 2026, Division 296 applies additional tax for members above $3 million. |
The difference between holding a rental property personally (up to 47% tax) versus within an SMSF (15% or 0%) is substantial. This tax differential is one of the primary motivations for transferring business real property into an SMSF.
Deductions you can claim against rental income
You can reduce your taxable rental income by claiming deductions for expenses incurred in earning that income. The main categories are:
Interest on borrowings. Interest on a loan used to purchase the rental property is deductible. This is the foundation of negative gearing: if your interest and other expenses exceed your rental income, the net loss can offset your other income (for individuals and trusts). For SMSFs, interest on a Limited Recourse Borrowing Arrangement (LRBA) is deductible against the fund’s income.
Property management fees. Fees paid to a property manager for letting, collecting rent, and managing the property.
Council rates, water rates, and land tax. Deductible in the year they are incurred.
Insurance. Landlord insurance, building insurance, and contents insurance for the rental property.
Repairs and maintenance. Costs to restore the property to its original condition (not improvements) are deductible in the year incurred. The distinction between a repair (deductible immediately) and an improvement (capitalised and depreciated) is one of the most common areas of dispute with the ATO.
Depreciation. Capital works deductions (Division 43) for the building structure (2.5% per year for buildings constructed after 15 September 1987) and decline in value deductions (Division 40) for plant and equipment items within the property (carpets, blinds, hot water systems, air conditioning). A tax depreciation schedule from a quantity surveyor maximises these deductions.
Body corporate fees. For strata-titled properties.
Advertising for tenants. Costs of advertising the property for lease.
Legal expenses. Costs of preparing or reviewing a lease agreement (but not the cost of purchasing the property, which is a capital cost).
Travel. From 1 July 2017, travel expenses to inspect or maintain a rental property are no longer deductible for individuals (with limited exceptions for taxpayers who carry on a property rental business). SMSF trustees can still claim travel as a fund expense where it is necessary for fund management.
Where property valuations fit into rental income taxation
Property valuations intersect with rental income taxation at several critical points. Understanding these connections helps you manage both your income tax position and your CGT position.
Converting your home to a rental property
When you stop living in a property and start renting it out, two things happen simultaneously from a tax perspective. First, you start earning assessable rental income (and can claim deductions). Second, Section 118-192 of the ITAA 1997 resets the property’s CGT cost base to its market value at the date of first income-producing use.
This is the single most important intersection of rental income and property valuation. The market value at the conversion date becomes your starting point for calculating CGT when you eventually sell. Without a valuation at that date, you have no defensible cost base. Our home-to-rental conversion valuation guide explains this in detail.
If you converted years ago and never got a valuation, a retrospective valuation as at the conversion date can establish the cost base now. At $245, this is one of the most cost-effective tax planning steps a property investor can take.
SMSF rental income and arm’s length compliance
If your SMSF holds commercial property and leases it to a related party (your business), the rental income must be at market rate. The ATO applies the non-arm’s length income (NALI) rules under Section 295-550 of the ITAA 1997. If the rent is below market, the entire rental income (not just the shortfall) may be taxed at 45% instead of the fund’s concessional rate.
A rental assessment from an independent valuer provides the evidence that the rent is at market rate. Our commercial valuation reports include a rental assessment as standard for $550.
Depreciation and the cost base
For properties where you claim depreciation (capital works and plant and equipment deductions), the depreciation claimed reduces the cost base of the property for CGT purposes. When you eventually sell, the capital gain is larger because the cost base has been reduced by the depreciation claimed. The conversion-date valuation establishes the starting cost base, and depreciation deductions claimed after that date reduce it. Understanding this interaction is important for long-term tax planning.
Negative gearing and the decision to sell
Many negatively geared investors eventually sell the property to realise the capital gain. At that point, the CGT calculation depends on the cost base, which depends on whether a valuation was obtained at the right time (particularly if the property was once a main residence). Planning for the eventual sale should start when the property first becomes income-producing, not when you decide to sell.
The six-year absence rule and rental income
The six-year absence rule allows you to continue treating a former home as your main residence for CGT purposes for up to six years while it earns rental income. During this period, you declare and pay tax on the rental income normally, claim all available deductions, but may be fully exempt from CGT if you sell within six years.
The trap is exceeding six years. If you rent the property for longer than six years without moving back in, the main residence exemption expires for the excess period, and the conversion-date valuation becomes essential for calculating the partial CGT liability. Many landlords do not realise this until they sell, by which time the conversion may have been a decade earlier.
GST on commercial rental income
Residential rental income is input taxed, meaning no GST applies. Commercial rental income is subject to GST at 10% if the landlord is GST-registered (compulsory if commercial rental turnover exceeds $75,000). The GST is charged on top of the rent and remitted to the ATO through the Business Activity Statement.
For SMSFs holding commercial property, GST registration may be required, and the fund can claim input tax credits on property-related expenses. The rental assessment in our commercial valuation reports states whether the assessed market rent is GST-inclusive or GST-exclusive.
Rental income from inherited property
If you inherit a property and rent it out before selling, the rental income is assessable to you from the date you take ownership (or to the estate if the executor manages the rental during administration). The property’s cost base for CGT purposes depends on when the deceased acquired it and how it was used. A date-of-death valuation is often needed to establish the cost base, particularly for pre-CGT properties.
Rental income from a property transferred between family members
If you receive a property as a gift or below-market transfer from a family member and rent it out, the rental income is assessable to you as the new owner. Your cost base for CGT purposes is the market value at the date of transfer (not the discounted price you paid, if any). An independent valuation at the transfer date establishes both the CGT cost base and the stamp duty value.
Record-keeping requirements
The ATO requires you to keep records of all rental income received and all expenses claimed as deductions. Records must be kept for five years from the date you lodge your return. For property held long term, it is safest to keep records for the entire period of ownership, because CGT records are needed at the time of eventual sale, and the cost base calculation may depend on deductions claimed years earlier.
Key records to maintain include rental statements from your property manager, loan statements showing interest paid, receipts for repairs, maintenance, and improvements (distinguish clearly between the two), insurance policies and premium notices, council and water rate notices, body corporate statements, depreciation schedules, and, critically, property valuation reports obtained at any point during ownership.
Common mistakes
Not getting a valuation when converting from home to rental. This is the most expensive oversight in rental property taxation. Without the conversion-date valuation, your CGT cost base defaults to the original purchase price, and you pay CGT on gains that occurred while the property was your home. A $245 valuation can save tens of thousands in CGT.
Claiming improvements as repairs. A new kitchen is an improvement (capitalised). Replacing a broken tap is a repair (deductible). The ATO audits this distinction aggressively. If you are unsure, ask your accountant before claiming.
Not declaring all rental income. Bond money retained for damage, insurance payouts for lost rent, and reimbursements from tenants are all assessable. The ATO data-matches rental income from multiple sources.
Claiming deductions for periods the property was not available for rent. If the property was vacant and not genuinely available for rent (for example, you were renovating it for personal use), deductions for that period may be denied.
SMSF trustees charging below-market rent to their own business. This triggers NALI at 45% on the entire rental income. A $550 commercial valuation with rental assessment eliminates this risk.
Need a property valuation for your rental property?
Whether you are converting your home to a rental, need to establish a CGT cost base, or require a rental assessment for your SMSF commercial property. Residential $245 | Commercial $550 (includes rental assessment).
Order Your Valuation ReportFrequently asked questions
Yes. All rental income is assessable income and must be declared in your tax return. The tax rate depends on your ownership structure: marginal rates for individuals (up to 45% plus Medicare levy), 15% for SMSFs in accumulation phase, or 0% for SMSFs in pension phase.
Interest on loans, property management fees, council and water rates, insurance, repairs and maintenance (not improvements), depreciation, body corporate fees, advertising for tenants, and legal costs for lease preparation. Keep receipts and records for five years from lodgement.
Yes. Section 118-192 of the ITAA 1997 resets the CGT cost base to market value at the date of first income-producing use. Without a valuation at that date, you may overpay CGT by tens of thousands when you sell. If you missed the valuation, a retrospective valuation can establish the cost base now.
Yes. Rental income within an SMSF is taxed at 15% in accumulation phase, or 0% in pension phase. However, if the property is leased to a related party at below-market rent, the income may be classified as non-arm's length income and taxed at 45%.
No, the six-year rule only affects CGT, not income tax. You must declare and pay tax on rental income from the first day the property is rented, regardless of whether the six-year absence rule applies for CGT purposes.
No. Residential rental income is input taxed, meaning no GST applies. Commercial rental income is subject to GST at 10% if the landlord is GST-registered.
Negative gearing occurs when the expenses of owning a rental property (interest, rates, insurance, depreciation, management fees) exceed the rental income. The net loss can offset your other assessable income, reducing your overall tax liability. This benefit is available to individuals and trusts but not to companies or SMSFs in the same way.
The rental income is assessable to you from the date you take ownership. Your CGT cost base depends on when the deceased acquired the property. A date-of-death valuation may be needed to establish the cost base when you eventually sell.
