Key takeaways
As tax time approaches, it's time to get your financial ducks in a row. The Australian Taxation Office is keeping a close eye on rental property owners who are making mistakes on their tax returns.
General repairs and maintenance on your rental property can be claimed as an immediate deduction, but capital in nature improvements are not deductible as repairs or maintenance.
Investors can claim the cost of repairs in the year they are incurred, whereas an improvement must be depreciated over its useful life. It is not always easy to ascertain whether a cost is a repair or improvement.
The ATO wants to make sure that any deductions claimed with respect to holiday homes rented out for part of the year are correctly apportioned. If you rent out a room or the total property on say Airbnb, you must also declare the income and any costs associated with the income.
As tax time is approaching it's time to get all your financial ducks in a row.
And this year, it’s more important than ever for property investors to get it right.
The Australian Taxation Office (ATO) has announced it will focus on three areas where people make the most mistakes on their tax return, and one of their focal areas is rental properties.
According to ATO Assistant Commissioner Rob Thomson, 9 out of 10 rental property owners are still getting their income tax returns wrong.
We often see landlords making mistakes when it comes to repairs and maintenance deductions on rental properties, so we’re keeping a close eye on this.
This year, we’re particularly focused on claims that may have been inflated to offset increases in rental income to get a greater tax benefit.
Rob Thomson, ATO Assistant Commissioner
Performing general repairs and maintenance on your rental property can be claimed as an immediate deduction.
However, expenses that are capital in nature (like initial repairs on a newly purchased property and any improvements during the time you hold the property) are not deductible as repairs or maintenance.
That means you can claim an investment property tax deduction for general repairs like replacing a damaged carpet or a broken window, but if you rip out an old kitchen and put in a new and improved one, this is a capital improvement and is only deductible over time as capital works.
Instead, the ATO encourages rental property owners to carefully review their records before lodging their return and take care to ensure they are claiming deductions correctly.
He also advises that given reporting rental income and deductions can be complex, individual rental owners should think about using a registered tax agent to help them prepare their income tax returns.
Ensuring you provide full and complete records to your registered tax agent allows them to prepare your tax return correctly, so you claim everything you’re entitled to and nothing that you’re not.
Rob Thomson, ATO Assistant Commissioner
Tax claims: What investors can and cannot claim
Here’s a few things that might flag with the ATO if you get it wrong:
1. Repairs vs. Maintenance
The cost of repairs can be claimed in full in the year they are incurred, whereas an improvement must be depreciated over its useful life.
It is not always easy to ascertain whether a cost is a repair or improvement or both, so you should obtain tax advice to clarify the situation.
For example, claims to immediately recoup repair costs on newly purchased rental properties rather than claiming them over a number of years (as is appropriate for tax deductions) will raise red flags.
2. Interest expenses
The deductibility of the loan will be determined by its purpose so, make sure your loans are correctly structured.
Keep good records i.e. you can demonstrate what investment asset each loan relates to. You also need to ensure the property ownership name and borrower are aligned.
3. Property divestments
If you sell an investment property you will need to calculate the capital gain (or loss).
This capital gain will be taxable, and if your property is owned for over 12 months, you will benefit from a 50% general discount if purchased with the intention to own the property as an investment.
However, if you purchased the property with the intention to sell it at a profit, you can’t claim this CGT discount. This discount is also not available if the ownership is by a company.
4. Personal expenses including holiday homes and room rentals
The ATO’s main concern is to make sure that any deductions claimed with respect to holiday homes rented out for part of the year are correctly apportioned.
If you rent out your holiday home, carefully apportion your expenses taking into account whether the property was rented at a rate below market (to friends or family), whether it was available for rent during peak periods, if the owners unreasonably refused tenants and whether the owners genuinely took steps to find tenants during periods it wasn’t occupied.
If you are renting part of your home, you must declare the income and any costs associated with the income are proportionally deductible. This could also reduce the free capital gains component on a future sale.
The renting of a room or the total property on say Airbnb must also be reported to the tax office.
Again, be wary of trying to claim borrowing costs on their family homes and rental properties.
Deduction claims on a jointly owned property should be claimed jointly by both property owners, not just the owner with the higher taxable income.
Tips: Substantiate your expenses with receipts.
The onus is on the taxpayer to prove a tax deduction is legitimate and in the absence of this proof, the ATO will simply deny the deduction.
The ATO found that many taxpayers failed to produce sufficient evidence of expenses claimed.
What else the ATO is keeping an eye on
Aside from property investors and their rental properties, the ATO is also zoning in on incorrect work-related expenses and taxpayers who submit their claims too early.
1. Work-related expenses
The ATO claims that more than 8 million people claimed a work-related deduction in 2023, and around half of those claimed a deduction related to working from home.
Last year, the ATO revised the fixed rate method of calculating a working-from-home deduction to broaden what is included, increase the rate, and adjust the records you need to keep and these changes are now in full effect.
“Copying and pasting” your working from home claim from last year may be tempting, but this will likely mean we will be contacting you for a ‘please explain’. Your deductions will be disallowed if you’re not eligible or you don’t keep the right records.
Rob Thomson, ATO Assistant Commissioner
2. Lodging too early
The ATO is also warning against rushing to lodge your tax return on 1st July.
Taxpayers need to wait until all their information is pre-filled in your tax return before lodging, especially if their income comes from a few sources.
We see lots of mistakes in July where people have forgotten to include interest from banks, dividend income, payments from other government agencies and private health insurers.
By lodging in early July, you are doubling your chances of having your tax return flagged as incorrect by the ATO.
Rob Thomson, ATO Assistant Commissioner
The bottom line for property investors…
The spotlight focus from the ATO underscores the importance of good record-keeping and staying informed about your tax obligations.
Tips: It’s important to get it right and get it right the first time.
And I’d also strongly recommend all property investors get a proficient team of wealth experts in their corner.
Our team at Metropole Wealth Advisory provides tailored strategic wealth advice for property investors and their families, professionals and business owners.
And we specialise in helping property investors set up the most appropriate entities for their needs.
