The Australian Taxation Office (ATO) is reminding property investors to beware of common tax traps that can delay refunds or lead to an audit costing taxpayers time and money.
In 2019-20, over 1.8 million Australians owned rental properties and claimed $38 billion in deductions.
Assistant Commissioner Tim Loh said that the most common mistake rental property and holiday homeowners make is neglecting to declare all their income. This includes failing to declare any capital gains from selling an investment property.
“To put it simply, you should expect tax consequences for any property that you earn income from that isn’t your main residence.”
“We are expanding the rental income data we receive directly from third-party sources such as sharing economy platforms, rental bond authorities, and property managers. We will contact taxpayers about income they’ve received but haven’t included in their tax return. This will mean they need to repay some of their refund. The ATO often allows taxpayers who have made genuine errors to amend their returns without penalty. But deliberate attempts to avoid tax on rental income will see the ATO take action,” Mr Loh said.
“People should remember that there’s no such thing as free real estate when it comes to their tax returns. Our data analytics scrutinise returns for rental deductions that seem unusually high. We will ask questions, and this may lead to a delay in processing your return.”
“So far we have adjusted more than 70% of the 2019-20 returns selected for a review of rental information.”
“Most people we contact about their rental deductions are able to justify their claims. However, there are instances where we have to knock back claims where taxpayers didn’t keep receipts, claimed for personal use, or claimed for ineligible deductions,” Mr Loh said.
We often reject claims for interest charges on personal loan amounts and immediate claims for the full amount for capital works (for example, a kitchen renovation), so it is vital that you have good records.
If you take out a loan to buy a rental property and rent it out at market rates, the interest on that loan is deductible. However, if you redraw money from that mortgage for personal use, such as buying a boat, or going on a holiday, you can’t claim the interest on that part of the loan.
We also see taxpayers claiming capital works, as a lump sum rather than spreading the cost over a number of years. Capital works include a new building or an extension, renovations or structural improvements.
The cost of repairs for wear and tear to the property are deductible immediately if they are to replace or fix existing items, such as curtains, without upgrading them. However, improvements or capital expenses, such as a kitchen renovation are not deductible immediately. The ATO has advice, guidance, and an online tool on our website to help taxpayers make these calculations. Taxpayers can also speak to a registered tax agent.
Reduced rent during COVID-19
We know that residential rental property owners may be unsure about how COVID-19 has impacted their tax return. For example, you may have negotiated (at arm’s length) reduced or deferred rent.
You only need to declare the rent you have received as income. If payments by your tenants are deferred until the next financial year, you do not need to include these payments until you receive them.
Back payments for deferred rent or insurance for lost rent should be declared as income in the financial year in which you receive the amounts.
While your rental income may be reduced, you can still claim normal expenses made on your property as long as the reduced rent is determined at arms’ length and considers current market conditions.
Travel restrictions may have also affected demand for short-term rental properties. Generally, if your plans to rent a property in 2020-21 were the same as previous years, but were disrupted by COVID-19, you will still be able to claim the same proportion of expenses.
This only applies where the property was not used privately. If you, your family or friends stayed at the property for free or at a reduced rate, you won’t be able to claim or will only be able to claim a portion of these expenses.