27 September 2023

Tax Office advice as rental anything

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The Australian Taxation Office (ATO) has issued a list of taxation returns for the owners of rental property, reporting that nine out of 10 were getting their tax returns wrong.

Led by Assistant Commissioner Tim Loh, the ATO said landlords and their registered tax agents needed to take extra care when lodging this year.

“We often see rental income being left out, or mistakes being made with property related deductions, like overclaiming expenses or claiming for improvements to private properties,” Mr Loh said.

‘When you are overclaiming expenses or claiming for improvements to private properties, you are taking money from the Australian community,” he said, “money that could have been otherwise used to further increase funding for things like women’s sports, schools and hospitals.”

He said the ATO had a range of resources available on its website to help owners get their rental right including Top 10 Tips to avoid mistakes.

Rental income: “Income and deductions must be in line with a rental property owner’s ownership interest, which should generally mirror the legal documents.’ Mr Loh said.

Rental income must be reported in the year the tenant pays – not when your agent transfers it to you; and as the gross amount received, before property manager fees and other expenses your property manager pays on your behalf are taken out.

Rental expenses: Mr Loh said there were three categories of rental expenses:

* Expenses where you cannot claim deductions;
* Expenses where you can claim an immediate deduction in the income year you incur the expense; and
* Expenses where you can claim deductions over a number of income years.

“The ATO is particularly focused on interest expenses and ensuring rental property owners understand how to correctly apportion loan interest expenses where part of the loan was used for private purposes (or the loan was re-financed with some private purpose),” Mr Loh said.

“Around 80% of taxpayers with rental income claimed a deduction for interest on their loan, and this is where we’re seeing the biggest mistakes,” he said.

“You can only claim interest on a loan used to purchase a rental property to earn rental income.”

Repairs, maintenance, and improvements: ‘When you first acquire a rental property and it needs work done to get tenants in – for example, you need to fix a hole in the wall or some damaged floorboards – these are initial repairs.’ Mr Loh said.

He said initial repairs to rectify damage, defects or deterioration that existed at the time of purchasing a property can’t be claimed as an immediate deduction but may be claimed over a number of years as capital works deductions.

Short term rentals including holiday homes: ‘We know that many people who own a short-term rental property, like a holiday home, rent it out for most of the year and use it occasionally themselves.’ Mr Loh said.

He said they will need to apportion the deduction for rental expenses when the property (or part of it) is not being used to produce rental income.

‘You need to make sure you have the records to demonstrate you incurred expenses for your rental property and the extent they relate to producing rental income,” Mr Loh said.

‘This is an area that we are paying close attention to this year.”

Data matching: Mr Loh said the ATO had sophisticated data matching capabilities which included rental property-related data allowing it to paint a picture of what’s true and accurate in tax returns.

“We continue to expand our data-matching capability to ensure income and deductions are correctly reported,’ Mr Loh said.

He said more information about rental properties can be found at the ATO at ato.gov.au/rental.

The ATO’s Top 10 Tips to avoid mistakes can be accessed at this PS News link.

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