This article is from the Australian Property Journal archive
THE Australia Taxation Office will probe property investors tax return this financial year after finding most rental owners made mistakes despite a staggering 86% using a registered tax agent.
ATO Assistant Commissioner Rob Thomson said the ATO receives data from a range of sources like banks, land title offices, insurance companies, property managers and sharing economy providers, and cross checks this data to determine the accuracy of tax returns lodged by rental property owners.
“If you use a tax agent, make sure you let them know all about your rental property, including full records of your expenses. If you have a nagging question or something doesn’t make sense, make sure you ask your agent when you’re working with them.
“Rental property investments and taxation can get tricky, so it pays to get the right advice from the very beginning. Don’t rely on things you hear at a Sunday afternoon barbeque,” said the assistant commissioner.
According to the ATO, the most common mistake is not understanding what expenses can be claimed and when. In particular, the difference between what can be claimed for repairs and maintenance versus capital expenses.
“Rental property owners can claim deductions only to the extent they’re incurred in producing income. This means any costs you incur in generating rental income each year, may be claimed for the same period. There are some exceptions.
“It’s normal for landlords to have to fix or replace damaged items in a rental property. But there is a bit of a myth that all expenses can be claimed immediately.
“A repair can usually be claimed straight away but capital items, think dishwashers, curtains or heaters, can only be claimed immediately if they cost $300 or less, otherwise they need to be claimed over time,” he added.
Also on the tax office’s radar are investors who overclaimed deductions and a lack of documentation to substantiate the expenses claimed.
“We sometimes see rental property owners ‘double dip’ on expenses that the property manager has arranged and included on the property’s income and expenses report for the year. Often, property managers will pay for expenses like repairs from the rent received. The amount they then remit to the property owner is net of these expenses. They will also send the property owner a copy of the invoice for their records,”
“Taxpayers are responsible for what they include in their tax return, even when using a registered tax agent. If you don’t have sufficient records, you can’t claim it,” Thomson said.
The most common deductions claimed by rental property owners is interest on mortgages. Based on previous years data, the ATO estimates incorrectly reporting interest expenses account for 42% of the $1.2 billion Individuals Not in Business tax gap associated with rental properties.
A common issue with interest deductions is where taxpayers are redrawing or refinancing a loan for their rental property and using the money to pay for private expenses like a new car, school fees or a holiday, then claim the whole amount of interest charged on the investment loan for the year as a deduction.
“For example, if you have an $800,000 mortgage for a rental property and then add $50,000 to the loan to upgrade your family car, you can only claim the interest on the initial $800,000, not the interest on $850,000.
“It’s also not a matter of simply paying back the private part of the loan and then claiming all interest as deductible. Payments must be apportioned between the private and investment components for the life of the loan,” Thomson said.
Costs relating to borrowing expenses, including loan establishment fees, lender’s mortgage insurance and title search fees, are also commonly being claimed incorrectly. These costs are generally claimed over a five-year period or the life of the loan, whichever is less. State or territory stamp duty can’t be claimed as a deduction while you rent the property (except in the Australian Capital Territory). You need to keep these records until you sell, when the amount will be added to your cost base to reduce any capital gain you may have on the sale.
Body corporate related claims
Meanwhile the ATO said certain body corporate levies are not deductible.
For example, a deduction can be claimed for levy payments to body corporate administration funds and general-purpose sinking funds at the time they are incurred, as long as the fees are used for routine maintenance of common property. However, if the body corporate requires payments to a special purpose fund to pay for a particular capital expenditure, like replacing the roof of an apartment building, these levies are not deductible until the capital works are complete and the expense has been billed to the body corporate.
Capital expense claims
The ATO is also warning rental property owners about incorrect claims for capital expenses.
Repairs such as fixing a dishwasher can generally be claimed immediately but buying a new dishwasher cannot.
Some expenses including improvements and capital works must be claimed over time, for example remodelling the bathroom in your rental property. In most circumstances, capital expenses are claimed at 2.5% over 40 years. Any unclaimed capital works expenses are added to the cost base of the property for capital gains tax purposes when you sell.
