ATO warns property owners it will scrutinise claims closely

More than 1.8 million Aussies have been put on notice that their tax returns will be scrutinised for incorrect claims.

Aussie property investors have been warned by the Australian Taxation Office they will be under close scrutiny for any claims.

More than 1.8 million Australians owned rental properties in the 2019/2020 financial year and claimed $38 billion in deductions.

The most common mistake rental property and holiday homeowners make is neglecting to declare all their income, according to Assistant Tax Commissioner Tim Loh, adding this includes failing to declare any capital gains from selling an investment property.

To date, they have adjusted more than 70 per cent of the 2019–20 returns selected for a review of rental information, he added.

“To put it simply, you should expect tax consequences for any property that you earn income from that isn’t your main residence,” he warned.

“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.”

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The ATO have adjusted more than 70 per cent of the 2019–20 returns selected for a review of rental information. Picture: Getty Images

The ATO is stepping up its monitoring abilities too, expanding the rental income data it receives directly from third-party sources such as sharing economy platforms, rental bond authorities, and property managers, Mr Loh revealed.

“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,” he said.

“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.”

Claims have been knocked back 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,” he said.

“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.”

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The cost of an entire kitchen renovation can’t be claimed all in one financial year. Picture: News Regional Media

When it comes to the cost of repairs for wear and tear to the property, they are deductible immediately if they are to replace or fix existing items, such as curtains, without upgrading them.

Reduced rent during Covid-19

If rent has been deferred or reduced, you only need to report the rent you received in the financial year, Mr Loh explained.

“If payments by your tenants are deferred until the next financial year, you do not need to include these payments until you receive them,” he said.

“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.”

ATO assistant commissioner Tim Loh said people may be confused by rental income after Covid disruption. Picture: Supplied

Travel restrictions may have also affected demand for short-term rental properties, he said. “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,” he said.

“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.”

Originally published as ATO warns property owners it will scrutinise claims closely