Property investors are being warned to have sufficient and correct records when declaring rental income and deductions as the tax office is keeping a close eye on real estate claims once again.
More than 2.2 million Australians hold rental property investments, and they claim as much as $50 billion in deductions each year, which is more than the $48 billion reported in rental income, according to the latest 2018-19 taxation statistics from the Australian government.
The ATO has put property investors on notice that they will scrutinise rental income and deductions in particular at tax time this year.Credit: Rhett Wyman
The Australian Tax Office (ATO) says four key areas will come under particular scrutiny at tax time this year, including rental property income and deductions as well as record-keeping of all claims.
Elinor Kasapidis, senior manager of tax policy at CPA Australia, the country’s professional accounting body, said while these two areas have been on the ATO’s radar in the past, they have taken a renewed interest after they diverted their attention to other matters when the pandemic first hit two years ago.
“They will be scrutinising tax returns and the rental schedules. They’ll also be looking for things like undeclared income from renting out rooms or homes on a part-time basis,” Kasapidis said. “And that is because people have been over claiming or they’ve not been claiming correctly in the past.”
Expenses that property investors incur in owning their property are deductible against their income, Kasapidis said, which includes repairs and maintenance, and interest payments.
Experts are warning investors to keep sufficient and correct records and to not over claim deductions. Credit: Glen Hunt
She said tax returns can become complicated if investors reside in their secondary property for part of the year, such as holiday homes.
“Where sometimes landlords get into trouble, for example, is a holiday house where they or their close family might actually use it for parts of the year. So, the ATO is really big on landlords making sure that properties were genuinely available for rent, they were on the market, before people can start to claim those costs,” she said.
“People are claiming expenses for periods when they’re actually using their house for themselves, or their friends, or family are using the house. That’s not OK. So it really is about making sure that you’re only claiming the parts that are associated with any rent.”
Kasapidis said if investors received some form of relief in the form of grants or state government support, that is also taxable and should be declared as income as a general rule.
There are more than 2.2 million Australian who hold rental property invesments and claim over $50 billion in deductions each year, according to 2018-19 taxation statistics.Credit:
Property Tax Specialists founder and principal adviser Shukri Barbara said investors should also be wary of over claiming when they lease their property out to friends or family at below-market rents.
“Some people rent to relatives at lower than market value, and they want to claim the interest. That’s not acceptable if you claim less than market rent, then you can only claim up to the amount of rental income you receive,” Barbara said.
He said investors should also make sure to not mix up claims between repairs, which are deductible, and improvements, which claim depreciation over time.
“For example, if you’re fixing a paling on a fence, it’s a repair. But if you’re replacing the entire fence, then you claim depreciation on the improvement.
“A repair is something you can fix up, and you can get a full deduction for the service you paid for. But if it’s going towards a major item replacement such as roofs then it’s going to part of the improvement. Once you use new materials on a big job that is improvement.”
Barbara warned investors to be meticulous with their record-keeping as the ATO builds on its auditing capabilities.
“Each year they move a bit forward with the technical ability to chase up stuff. If the ATO calls you up and asks you a question, they already have the answer. Make sure your paperwork and your records match up with what you’re going to claim. The tax office already has all the answers.”
Barbara also said the ATO checks short-term letting platforms to confirm if they are genuinely rented out at reasonable rates, rather than inflated prices that leave the property vacant.
The Real Estate Institute of Australia president Hayden Groves said investors should be in good stead if their properties are managed by agents.
“Our members are real estate agents, and they run precise systems within their own agency to account for every dollar and cent that comes through,” Groves said.
Groves said that the ATO was paying particular attention to holiday rental incomes, warning investors to be vigilant and not to overstate deductions.
correction
An earlier version of this story said mortgage and interest repayments are tax-deductible for investors. Only the interest repayments are tax-deductible.