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ATO warning: Millions of Aussie property owners fall into this trap

apartment block and young man on computer
Most people who own rental properties tend to make mistakes on their tax returns, according got the ATO. (Source: Getty)

The Australian Taxation Office (ATO) has warned rental property owners to take “extra care” when reporting rental income and deductions to the tax office.

The ATO said it was an area that was “easy to get wrong”, with nine in 10 tax returns reporting rental income and deductions containing at least one error, despite the bulk of these property owners using a tax agent.

“Registered tax agents can only work with the information they gather from their clients, and we know some clients won’t know everything they need to tell their agent,” assistant commissioner Tim Loh said.

“We don’t expect agents to be Sherlock Holmes but we do expect them to ask the right questions to ensure their client’s return is right.”

The tax office was concerned about people accidentally leaving out income, as well as intentionally over-claiming rental property deductions.

In the 2019/20 financial year, more than 1.8 million Australians owning rental properties claimed $38 billion in deductions.

The tax office urged rental property owners to include all sources of rental income, including short-term rental arrangements, renting part of a home, and other rental-related income, like insurance payouts and rental bond money, that had been retained.

“Income and deductions must be in line with a rental property owner’s ownership interest, which should generally mirror the legal documents,” Loh said.

He said the data the tax office could access grew every year, which was making it easier to spot any income charged to tenants that had not been declared.

“Getting it right the first time will ensure you receive the tax refund you are owed, and avoids us knocking on your front door down the track,” Loh said.

Expenses were another tricky area for rental property owners. The tax office said some expenses, such as rental management fees, repairs and council rates, could be claimed straight away.

Other expenses, such as borrowing expenses and capital works - such as a kitchen renovation - needed to be claimed over several years.

Any income from a rental property in a holiday location needed to be included in tax returns.

“You can claim expenses for the property to the extent that they are incurred for the purpose of producing rental income, not where your family and friends stayed in the property for a mini getaway at ‘mate’s rates’, you use it yourself, say at Christmas, or you stopped renting the property out,” Loh said.

Selling a rental property was another complex area. The ATO also said capital gains tax (CGT) needed to be considered and any capital gains or capital losses would need to be reported.

Keep good records

The tax office said records of rental income and expenses should be kept for five years from the date of tax return lodgments, or five years after the disposal of an asset, whichever was longer.

“Get your books in order and start keeping records as soon as you make the decision to earn rental income. It makes tax time so much easier for you and your registered tax agent,” Loh said.

“We can ask for proof of any claim that you make, so good record keeping is the only way to ensure you can claim everything you are entitled to.

“Remember, when your return is lodged, you are on the hook for the claims you are making, not the registered tax agent.”

Rental income and deductions were one of four areas on the ATO’s hit list for the 2021/2022 tax year.

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