Property investors watch out: ATO cracks down on rental claims

A recent ATO audit revealed 90 per cent of rental property expense claims contained errors. (Source: Getty) (Samantha Menzies)

The Australian Taxation Office (ATO) will focus on rental property expenses this tax time so, if you own a rental property, you need to be particularly careful not to understate your income or overclaim your expenses when you lodge your 2023 tax return.

The ATO recently announced that, in a series of audits, 90 per cent of the reviewed returns contained errors so, the tax office is cracking down to ensure property investors are meeting the criteria.

Also by Mark Chapman:

• Tax and your holiday home: Look out for these ATO traps

• 5 tax myths debunked – what’s true and what’s false

• Tax refunds to shrink: Here’s why and what to do about it

How the ATO will catch you out

The ATO is backing up its existing compliance focus on rental properties by entering into a “data-matching protocol” with mortgage lenders. The data-matching program will collect:

• Client identification details - names, addresses, phone numbers, dates of birth

• Loan account details - account numbers, BSBs, balances, total interest charges, total repayments, and commencement and end dates

• Transaction details - transaction dates, transaction amounts, and whether the transaction was a debit or credit on the account

• Property details - addresses of the loan asset

Therefore, the ATO will have an independent, third-party verification of tax-return information relating to the existence of rental properties and loan interest claims. This will help catch taxpayers who fail to declare that they own a rental property in their tax return and those property owners who have tried to claim borrowing costs on the family home as well as their rental property.

The ATO will collect information from 17 different financial institutions involved in the mortgage market, including the Big Four banks - CBA, Westpac, NAB and ANZ - as well as Macquarie, Bendigo Bank, Ubank and RAMS, and will receive the information for all tax years from 2021-22 to 2025-26.

But it’s not just mortgage-interest deductions the ATO is concentrating on. It will also focus on other property-related deductions where it believes taxpayers also routinely make mistakes, including:

• Incorrect apportionment of rental income and expenses between owners, such as where deductions on a jointly owned property are claimed by the owner with the higher taxable income, rather than jointly

• Holiday homes that are not genuinely available for rent - rental-property owners should only claim for the periods the property is rented out or is genuinely available for rent. Periods of personal use can’t be claimed

• Incorrect claims for newly purchased rental properties. The costs to repair damage and defects existing at the time of purchase or the costs of renovation cannot be claimed immediately. These costs are deductible instead over a number of years

How to stay out of trouble with the ATO

1. Be wary of claiming repairs and maintenance

Generally speaking, repairs and maintenance costs are allowable for tax but be very careful if you’re claiming costs that relate to an issue that arose before you purchased the property.

The ATO often seeks to deny instant deductions in this scenario on the basis that such “repairs” are often of a capital nature, being repairs done to rectify defects that existed when the property was acquired.

2. Low or no-rent leases will have restricted deductions

In order to claim deductions, you need to let the property on a commercial basis. If the property is being let rent-free (or at a non-commercial rate) to, say, friends or family, the amount of deductions you can claim will be limited to the amount of rental income you earned.

3. Always keep detailed records of all income and expenses

If the ATO reviews or audits your tax return, you will need your supporting documentation to justify your deduction claims. Normally, you need to keep records for five years from the date you lodged your tax return but, for capital-gains-tax purposes, you should keep purchase and sale documentation (together with details of any capital improvements) for at least five years from the date of lodging the return showing the disposal of the property.

Given that you may retain ownership of the property for a long period, that means your purchase documentation, in particular, will need to be stored safely for many years.

The key tip from H&R Block is to ensure that property owners keep good records. The golden rule is; if you can’t substantiate it, you can’t claim it, so it’s essential to keep invoices, receipts and bank statements for all property expenditure, as well as proof that your property was available for rent, such as rental listings.

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