The Tax Office has property investors in its sights

The ATO is becoming more aggressive in its approach to collections of revenues and taxes and this year is targeting property investors.

Recently Ed Chan, director of Chan and Naylor accountants shared some useful tips for real estate investors to ensure they complied if they received the attention of the ATO.1. Chan suggested to get your property manager to pay for all expenses of your property investment from the rental it has collected and gave several reasons for this….

Firstly, you are already paying the agency a commission for handling the management, so you may as well make use of the service.

Secondly, you are working your money harder (rent sitting in the agency’s trust account).

Lastly, when its tax time you simply ask for a yearly summary of rents and expenses, and you give this to your accountant, which will save in accounting costs. Than all you need to do is provide your accountant with a list of other expenses that you have paid for out of your own pocket.

2. Ensure you have a quantity surveyor’s report to back up the depreciation claims. Any capital works can be claimed as depreciation over many years, and you need a quantity surveyors report to claim this back

3. Also, if you have renovated your investment property you can claim back the items that have been thrown out such as old kitchens and demolishing of walls and other structures. To get these as a tax deduction you will need to secure a scrapping schedule from a quantity surveyor.

4. Ask your bank to provide you with an annual loan interest summary that relates to each property so you claim the appropriate interest against the appropriate property.

5. If you have undertaken any major works to your investment property, Chan warns to be careful what you can claim as a repair vs a capital improvement. He explains this is an area the ATO likes to focus on as many people get it wrong because it is quite grey .

A repair is fixing something to bring it back into close to original workable condition, and a capital improvement is replacing it with something better.

To provide an example, if you had an oven and you just replaced the fans that is a repair, but purchasing a new oven  is a capital improvement. If you replace the roof tiles of the entire roof with new terracotta that is a capital investment, but if you replace a few broken slate tiles that is a repair.

A word of advice: if the amount is substantial this will more than likely trigger an audit, so seek professional advice beforehand or even go to the extent of contacting the ATO for a ruling.

6. Depending on the size of your investment property portfolio you are entitled to claim an apportionment of things like use of home computers and home office costs to manage the properties, travel to view the property if the sole intention is just that (however, if the intention is say 50% to view property and 50% to holiday you will need to keep a diary record and receipts to justify the apportionment of expenses including airfares and accommodation).

7. If you have purchased an investment property in the last financial year, prepare a purchase statement that includes the purchase price, legal costs, stamp duties, borrowing costs and other capital costs, which are not tax deductible but carried forward to form part of the cost base.

If and when you sell in the future you will have this information to help reduce the capital gain tax payable at that time.

8. Land tax paid by you for the property is tax deductible.

9. A word of warning: if you have incurred travel costs to inspect a property to purchase the cost is not deductible because it is part of the initial purchase cost, such as stamp duty.

10. Always seek professional advice if in doubt, as fees paid to professionals like your accountant are fully tax deductible.

11. Ed Chan also recommended obtaining audit insurance against the costs of having a professional represent your case on your behalf to the ATO.

Of course Ed also recommend investors seek professional advice when lodging their tax returns, explaining the tax-deductible fee paid to the accountant may be a lot cheaper exercise than getting it wrong and triggering an ATO audit.

Ed Chan is one of the founding partners in national accounting firm Chan & Naylor  


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'The Tax Office has property investors in its sights' have 2 comments


    April 3, 2012 Timothy Few

    Hi Michael,
    Just have to be careful with point 3 as the ATO have stated the property must have been rented out for a period of time (no definition around this) before they will allow items to be scrapped in a renovation i.e. you can’t buy a property and renovate it straight away then claim a scrapping amount on the items replaced.



    April 3, 2012 S

    Hi Michael,
    very useful article. however I am not sure about the first point where you’ve said “Secondly, you are working your money harder (rent sitting in the agency’s trust account).”

    Do you mean all th rent money sitting in offset account of investor or in agency’s trust account. If in agency’s account then how will it woerk in favour of investor.



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