Each tax season, the Australian Tax Office (ATO) directs its attention to specific areas where taxpayers tend to make mistakes, whether inadvertently or intentionally.
Rental properties are under scrutiny this financial year-end with the ATO announcing that audits reveal errors in 90% of rental property-related tax returns, resulting in a collection shortfall of nearly $1.3 billion.
Some areas where inflated claims were found include exaggerated deductions, particularly for loan interest payments, insufficient documentation to substantiate claimed expenses, holiday homes not genuinely available for rent, and misapplication of Division 43 capital works claims on investment properties.
EXAGGERATED DEDUCTIONS ON INTEREST EXPENSE CLAIMS
The ATO will closely examine property owners who attempt to claim borrowing costs for both their primary residence and rental property. Such actions may lead to inflated deductions and possible penalties for failing to comply with tax regulations.
MISALLOCATION OF RENTAL INCOME AND EXPENSES
- Deductions related to jointly owned properties should align with each owner's share of ownership.
- Claiming larger deductions on one owner who may have a higher income, is fraudulent and will attract scrutiny.
- Incorrect allocation could result in tax liability discrepancies and draw attention during audits.
NON-GENUINE AVAILABILITY OF HOLIDAY HOMES FOR RENT
- Owners of rental properties should only seek deductions for periods when the property is genuinely available for rent.
- Trying to claim deductions during periods of personal use could invite scrutiny from the ATO and potential penalties.
- Verified evidence will be required for any periods during which renovations and maintenance are performed on a rental property.
INACCURATE CLAIMS FOR NEWLY ACQUIRED RENTAL PROPERTIES
• Immediate claims for repair or renovation expenses on newly acquired properties are not allowed.
• Certain claims need to be claimed over a period of time, as specified by the ATO.
With this focus on inflated property depreciation claims, property investors must take proactive steps to ensure compliance. Below we have listed some ways to avoid scrutiny from the ATO on your investment property claims.
1. MAINTAIN ACCURATE RECORDS
Keep detailed records of all expenses related to your rental property from the day of purchase, including receipts, invoices, and bank statements. This documentation will help substantiate your claims in case of an audit.
2. KEEP PERSONAL AND INVESTMENT EXPENSES SEPARATE
Avoid mixing personal expenses with investment property expenses. Maintain separate bank accounts and credit cards for your rental property to track income and expenses accurately.
3. ENSURE ACCURACY IN YOUR EXPENSE CLAIMS
Claim expenses only for periods directly linked to earning taxable income, ensuring that you divide claims considering:
• Non-rental use.
• Partial rental of the property • Personal use.
• Below market rental rates
• Report income and expenses proportionate to your investment share.
4. SEEK PROFESSIONAL ADVICE:
Consult with a qualified tax adviser or accountant who specialises in property tax matters. They can provide guidance on legitimate deductions, compliance with
tax 'laws, and strategies to optimise your tax position. Property investors can track income and expenses through the MyBMT
online portal at www.mybmt.bmtqs.com.au. This tracker from BMT Tax Depreciation simplifies expenditure with specific categories such as body corporate fees, cleaning costs, and insurance, aligned with the Australian Taxation Office and MyGov for consistency and ease of use. It calculates net rent, incorporates depreciation values, and shows total outlay, helping investors stay informed of their financial position. Weekly, fortnightly, or monthly email updates can be set up to monitor expenses. Once recorded, investors can download an annual report and share it with their accountant when completing tax returns.
Investing in real estate requires not only managing properties effectively but also managing your tax obligations strategically. By understanding the intricacies of property-related taxes and taking proactive steps to manage your tax affairs, you can significantly enhance your financial returns. Take the time to review your strategy, consult with professionals, and ensure you're positioned to make the most of the tax benefits available to property investors.
If you have more questions about your property and tax time, feel free to reach out to our team on (02) 4943 6333 or hello@c21newcastle.com.au, we are happy to help!