The Australian Taxation Office (ATO) has placed rental property owners in its crosshairs after discovering that nine out of ten tax returns involving rental income and deductions contain at least one error. This heightened scrutiny is due to the ATO estimating a shortfall of around $1.5 billion from over-claimed rental expenses and unreported rental income.
Rising Focus on Rental Property Taxation
With approximately 2.2 million Australians owning rental properties, the ATO has issued a stern warning to these taxpayers. Rental properties are frequently mishandled when it comes to tax reporting, making them a prime area for ATO attention. The ATO is urging landlords to meticulously review their records, ensuring they understand which income needs to be declared and which expenses can legitimately be claimed as deductions.
Reporting All Rental Income
The ATO now receives rental income data from various sources such as sharing economy platforms, rental bond authorities, property management software, and land title offices. This allows them to detect undeclared rental income. It is crucial for landlords to report all forms of rental income, whether from long-term tenants, short-term rentals, insurance payouts, or retained bond money.
Correctly Claiming Rental Expenses
Landlords can claim numerous expenses related to rental properties, but it is essential to adhere to tax regulations. Some expenses, like management fees, council rates, and insurance premiums, can be claimed immediately. Others, such as loan interest and capital works, need to be spread over time.
Major capital improvements, like replacing a roof or a kitchen, must be depreciated over several years. Similarly, depreciating assets like new appliances are claimed over their effective lifespan unless they cost under $300, in which case they can be deducted immediately.
Refinancing a rental property loan or using it for personal expenses disqualifies the interest on the personal portion from being deductible.
Managing Personal Use of Rental Properties
Extra caution is needed when a rental property is used for personal purposes or rented to family or friends at discounted rates. Deductions cannot be claimed for periods when the property is not used to generate income. Annual expenses must be adjusted to reflect these non-income periods. Additionally, landlords cannot claim deductions if the property is not genuinely available for rent or if unreasonable restrictions are placed on potential tenants.
Common Tax Mistakes
One of the most frequent errors landlords make is failing to correctly apportion expenses. Incorrectly splitting expenses can lead to ATO audits and adjustments. Another common mistake is claiming the full cost of purchasing a property as a deduction. Costs such as conveyancing fees and stamp duty are used to calculate the capital gains tax (CGT) liability, not as immediate deductions.
Repairs related to wear and tear or damage incurred while the property is rented can be deducted in the year the expense is incurred. However, initial repairs required at the time of purchase are not immediately deductible. Keeping detailed records of all income and expenses related to a rental property is essential, as the ATO requires records to be kept for five years from the date the tax return is lodged.
Additional Tax Considerations
While the ATO’s primary focus is on income and deductions, landlords must also consider other tax obligations. Selling a rental property may result in CGT liability, necessitating detailed records of all expenditures to accurately calculate the property’s cost base.
If a landlord is not registered for GST, or if the rental income comes from residential properties, GST can be included in rental expense claims. GST-registered landlords follow different rules. Additionally, landlords must make PAYG instalment payments if rental income exceeds $4,000 annually, with the ATO notifying them when this threshold is reached.
Navigating rental property tax rules can be complex. For assistance in ensuring compliance and maximizing your tax benefits, contact BOA & Co. Our team of specialists is ready to help you optimize your rental property tax strategy.
For expert guidance on managing your rental property taxes, contact BOA & Co. today at 1300 952 286 or email us at info@boanco.com.au. Visit our website at www.boanco.com.au to learn more about our services.