Rental Property Tax Compliance – Stay Off the ATO’s Radar

Do you own an investment property? In case you missed it, the Australian Taxation Office (ATO) is launching a campaign to target owners of rental properties who incorrectly report income and expenses. Data-matching efforts have revealed a tax gap of approximately $1 billion, and unsurprisingly, the ATO is aiming to recover these funds. Financial institutions are now obligated to share data with the ATO, and there are several common problematic areas that are under close scrutiny. If you own an investment property, continue reading to discover what the ATO is focusing on and how you can ensure compliance.

What is the ATO looking for?

The ATO has announced that banks and other financial institutions will need to provide residential investment loan data to the ATO for around 1.7 million rental property owners from the financial years 2021/22 to 2025/26, with the data including:

  • Identification details (name, address, phone number, date of birth, etc.)
  • Account details (account numbers, BSBs, balances, start and end dates, etc.)
  • Transaction details (transaction dates, transaction amounts, etc.)
  • Property details (addresses, etc.)

Key Focus Areas are as follows:-

Loan Interest Deductions: The data matching program is also scrutinising how rental property loan interest and borrowing expense deductions are being reported in rental property schedules. It’s important to note that while the interest component on your investment property loan is generally deductible, if you redraw from it for personal purposes, interest on that portion of the loan is not deductible. As such, interest expenses and repayments may need to be divided between deductible and non-deductible amounts.

Borrowing Costs: Deductions can also be claimed for borrowing costs (typically spread over five years) for things like application fees, mortgage registration and filing, broking fees, stamp duty, title searches, valuations, and mortgage insurance on the loan. However, it’s crucial to be aware that if the loan is repaid early or refinanced, the entire amount, including mortgage discharge expenses and penalty interest, is often deductible.

Repairs & Maintenance: The ATO often reviews deductions claimed for repairs and maintenance. Property owners often confuse the distinction between Repairs & Maintenance and Capital Improvements. In simple terms, repairs and maintenance can be claimed immediately, whereas capital improvements are typically spread over multiple years. Repairs must be directly related to wear and tear resulting from the property being leased to a tenant. This generally involves replacing or renewing a worn-out or broken component – for instance, replacing damaged tiles on a roof or repairing a broken oven.

The following expenses will not qualify as deductible repairs but are considered capital: Replacing an entire asset, such as a complete fence, a new hot water system, oven, or substituting a shower curtain with a glass wall; or enhancements and expansions to the home.

Other ATO Focus Areas for Rental Properties

Other areas of focus for the ATO encompass interest deductions; categorising capital works expenses as repairs; omitting income from accommodation sharing in returns; and incorrectly allocating expenses for holiday homes that also generate income. Another potential challenge for rental property owners arises from the 2019 rule changes concerning travel expenses. In general, travel expenses related to owning a rental property are no longer claimable.

The ATO’s ultimate goal is to maximise the collection of revenue to which they are entitled. One strategy they’re employing is to increase scrutiny on investment property owners to ensure compliance.

How to Ensure Compliance

The most critical step to stay off the ATO’s radar is to maintain well-organised documents. This applies to everything tax-related, but holds particular importance for rental properties now that they’re under heightened scrutiny. For all deductions you intend to claim, confirm first that you are eligible to claim them and then ensure you have the necessary paperwork to substantiate your claims. If the ATO comes knocking, they’ll be looking for evidence. Moreover, don’t hesitate to seek professional assistance – engaging a tax professional, like those at People + Partners, can help you make the most of your entitlements and reduce compliance errors. Prevention is indeed better than cure! Give us a call today on +61 2 9093 1311, or get in touch with us via our website.

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