Property investment is one way to reduce assessable income through the range of tax deductions available to landlords. This year the ATO has flagged landlords among those it will be paying closer attention to at tax time.
Each year the Australian Taxation Offices announces a number of areas that they will be paying particular attention to at tax time. Included in their list for this year are investors, including investors with rental properties. The ATO tells us the reasons for their focus include the large number of new investors (the number of Australian tax payers owning rental properties has grown by 100,000 in the past 2 years to 1.6million) and the wide range of common mistakes made on claims.
What is the ATO looking for?
The ATO uses sophisticated software that identifies property investment claims that potentially contain patterns which suggest mistakes or deliberate deceptions in the tax returns. Tax payers identified in this process are then targeted for some form of follow up or audit. The characteristics of tax payer claims the ATO identifies as containing mistakes include:
- unusually high claims for rental deductions
- low rental income in relation to rental deductions
- high claims for interest expenses, and
- high claims for borrowing expenses.
The ATO lists some of the most common mistakes property investors make as:
- Claiming deductions for rental properties not genuinely available for rent.
- Not apportioning expense claims where the property is only available for rent part of the year, such as a holiday home.
- Overstating interest claims on loans taken out to purchase, renovate or maintain a rental property.
- Claiming the full cost of a visit to inspect a property when it is combined with a private purpose, like a holiday.
If you are looking for some deductions before the end of the financial year, at this stage you may be limited to repairs and maintenance, prepaid interest or insurance or body corporate charges.
Ensure that you differentiate between repairs & maintenance and construction & improvement costs. Repairs and maintenance can be claimed as a deduction in the year incurred, construction and improvement costs are classified as capital expenditure and depreciation expenses may be claimed over time. For example, replacing an entire fence would probably be considered to be capital expenditure, where as repairing a damaged section would be classified as repairs and maintenance.
Ensure the property you are claiming deductions for is a rental property – not your weekender. If you do use the property for some of the year and rent in out for the rest of the year, revenue and expenses must be apportioned between the two uses appropriately.
Make sure that interest on your property loan has been claimed correctly; e.g. if you have a loan that is for both personal and investment use, interest must be apportioned (or talk to Peach about restructuring your loan to make things simpler!).
The ATO plans to write to new entrants to the property market with some information on the dos and don’ts of investment property deductions to let them know where to obtain more information. The ATO also publishes a booklet called Rental properties providing a guide to tax obligations for property investors. The publication can be accessed through the ATO website at: //www.ato.gov.au.