How landlords can avoid the ATO’s tax traps this financial year

June 30 is near, which means it’s time to think about tax. The tax rates change on 1 July so, if appropriate, try to ensure expenditure is incurred before June 30 to maximise your tax deductions for the current year. Ways to do this include prepaying 12 months’ interest in advance on investment loans, and carrying out necessary repairs and maintenance sooner rather than later.

Expenditure on rental properties confuses many landlords and the tax office always keeps this area under the microscope. In fact, they now have supercomputers which can scan your claimed expenses and compare them to the norm. Any unusually large expenses are flagged for further investigation.

Landlords making improvements to a rental property should be careful what they then claim on tax.

The basic principle is that money spent to maintain a property in the condition it was when you acquired it is tax-deductible. If you spend money to make it better than that, it is a capital improvement.

For example, if the house needed painting when you bought it, the costs of re-painting it could not be deducted from that year’s taxable income.

The costs of repainting can be depreciated over 40 years at 2.5 per cent a year. Once you sell the property, any of the costs remaining unclaimed when you sell can be added to the cost base to reduce the capital gain. Later, if the paint starts to peel, you can do a re-paint and claim a tax deduction in the current year.

Be especially careful not to claim repairs when the repairs themselves are of a different nature to the original structure. If you replaced a metal roof with tiles, the whole cost would be a capital improvement, and you could not claim it as a tax deduction what it would have cost to repair the original metal roof.

However, as usual, there are anomalies. The tax office considered that underpinning a building due to subsidence was a capital improvement but pulling up the carpet and polishing the floorboards was an immediate deduction.

Fences can be a trap. If you make the mistake of trying to replace the whole fence in one go it will be treated as an improvement, and you won’t be able to claim a tax deduction. However, you can replace the entire fence over time and claim a tax deduction as long as you do it by a progression of small repairs.

You can claim the cost of removing trees if they become diseased or are causing damage to buildings or pipes, but you can’t claim for removing a tree with the potential to cause damage or because it is creating a hazard by dropping leaves.

Another danger is that our tax system works on self-assessment. This means the Tax Office no longer checks your return, but relies on your honesty. Now, instead of giving all tax returns a cursory check, they select a sample for a detailed audit every year.

Naturally, if any errors are found, you may be liable for back tax and penalties. The danger is that you may think you have got away with something when in reality you have not yet been chosen for the dreaded audit.

A reader once told me it was possible to claim the cost of building a carport on an investment home as a tax deduction. When I told her it wasn’t, she replied, “Well I put it on the tax return, and they passed it.” In reality, they hadn’t looked at her return – yet!

Noel Whittaker is the author of Wills, Death & Taxes Made Simple and numerous other books on personal finance. Email: [e-mail]

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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