The Australian Tax Office (ATO), is cautioning rental property owners and their tax agents to be more vigilant when it comes to filing their tax returns to avoid penalties. This is due to an earlier review of tax returns indicating that as much as nine out of 10 rental property owner tax returns had errors. The tax authority found that there was often rental income that had been omitted and incidents of overclaiming on expenses.
ATO Assistant Commissioner, Tim Loh, expressed concern with the trend and noted that when expenses were overclaimed or claims were made against improvements on private properties, money was being taken out of the Australian community, terming the behaviour as “un-Australian”. He highlighted the various areas that would have benefitted from such funding including, schools, hospitals, and sporting activities. He also said that there were plenty of online resources available through the ATO website that could be used to help in getting these tax returns right.
Loh added that there would be special scrutiny given to rental property owners who claimed interest on property loans. He emphasised a need for property owners to be aware of how to correctly apportion loan interest if loans taken were partially used for private use.
80 per cent of taxpayers with rental incomes are said to claim a deduction for loan interest. Loh clarified that claiming interest on a loan should only happen where the loan taken was used to purchase a rental property that would generate rental income. He also said that if any part of an original or refinanced investment property loan was used to cover private expenses, an interest deduction could only be claimed for the portion of the loan related to generating rental income.
Other mistakes identified when reviewing previous filings included omitting some rental income. Those who engaged in short-term rental arrangements, renting out part of their homes, and other rent-related income generation such as retaining rental bond money and insurance payouts were put on notice. Loh warned that the ATO had adopted sophisticated data-matching capabilities that would enable them to identify tax dodgers.
Claims against expenses incurred in carrying out initial repairs on a property to rectify damage, deterioration, or defects that existed at the time of purchase were also identified as problematic. Loh confirmed that these could not be claimed as an immediate deduction, but rather should be claimed over several years as capital works deductions.
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