An investment property for most Australians provides a healthy income supplement and substantial tax incentives; however the Australian Tax Office (ATO) says it continues to see a number of rental property owners understating rental income and over-claiming rental deductions.
With the recent surge in residential real estate sales and an emphasis on investment properties, it comes as no surprise that the ATO has taken a closer interest regarding the expense claims people make concerning their rental properties.
Whilst rental properties have always been watched closely by the ATO, it is still a major concern for the tax office and one that they intend on addressing continuously. The issues haven't changed greatly, but it seems taxpayers are still getting it wrong. As to why this is the case remains somewhat a mystery.
The ATO is now sending what it calls "re-designed" letters to taxpayers regarding reviews of rental, legal and/or borrowing expense claims. In those letters, the ATO says it will provide information on specific expense claims it is reviewing. It says the letters identify:
- the relevant tax return label where the expense is claimed and the amounts in question;
- the proposed ATO adjustments;
- what to do if there is a disagreement about what has been claimed; and
- where to find relevant information on the ATO website.
The ATO says it has also refined its case selection processes to minimise the likelihood of incorrectly selecting commercial properties.
Frequently claimed rental expense errors
Some of the common errors the ATO has identified include claiming as a legal and/or borrowing expense:
- stamp duty on the transfer of property;
- legal fees in relation to family divorce proceedings;
- borrowing expenses in a single year, instead of being spread over five years as the law requires. The five years runs from the date of the borrowing;
- borrowing expenses for personal loan protection insurance for injury, illness and loss of income;
- interest expenses incorrectly claimed at the borrowing expense label on the tax return;
- renovation costs as repairs and maintenance instead of being attributed to the capital cost of the property. This area causes confusion for many in determining for a start what is a repair versus what is a renovation. Structural improvements are unlikely to be categorised as repairs e.g. remodelling a bathroom or kitchen;
- solicitors fees for purchase of the property; and
- some expenses as legal instead of sundry expenses. For example, fire levy expenses and lease fees.
One of the ATO’s main concerns stems back to the number of taxpayers that understate rental income and over-claim rental deductions. The ATO says it will be expanding its focus to investigate issues such as the incorrect:
- apportionment of income and expenses based on ownership holdings;
- claiming of expenses for vacant land;
- apportionment of expenses for holiday homes. This may be done on the basis of the actual number of days the property is let at a commercial rent, although this will depend on the particular circumstances;
- claiming of interest expenses for private borrowings.
Another common issue to remember is that expenses which incur respect to an empty rental property will only be deductible if the property is available for rent and there are active and bona fide attempts to let the property. Therefore, expenses that are incurred during a period where the property owner is not actively seeking a tenant will not be deductible.
There are many rental property expenses that are tax deductible e.g. council and water rates, building insurance premiums, real estate agent management fees, advertising costs, travel costs to inspect the property, etc. However, as the Tax Office has clearly found, there are a number of areas where mistakes are being made. Rental property owners should take note of these.
For more information on what you can and can’t claim on your rental property, contact us on 02 9299 7044 or via email@example.com