The Australian Taxation Office (ATO) has reminded property investors to look out for common tax return mistakes that can delay refunds or lead to an audit, costing taxpayers’ time and money.
In the 2019-2020 financial year, over 1.8 million Australians owned rental properties and claimed $38 billion in deductions.
Assistant Commissioner Tim Loh said that the most common mistake rental property and holiday homeowners make is neglecting to declare all their income.
This includes failing to declare any capital gains from selling an investment property.
“To put it simply, you should expect tax consequences for any property that you earn income from that isn’t your main residence,” Mr Loh said.
“We are expanding the rental income data we receive directly from third-party sources such as sharing economy platforms, rental bond authorities, and property managers.
“We will contact taxpayers about income they’ve received but haven’t included in their tax return. This will mean they need to repay some of their refund.
“The ATO often allows taxpayers who have made genuine errors to amend their returns without penalty. But deliberate attempts to avoid tax on rental income will see the ATO take action.”
Mr Loh went on to explain the ATO’s analytical tools searched for rental deductions that appeared unusually high. More than 70 per cent of returns that were reviewed of rental information in the previous financial year were adjusted.
“Most people we contact about their rental deductions are able to justify their claims. However, there are instances where we have to knock back claims where taxpayers didn’t keep receipts, claimed for personal use, or claimed for ineligible deductions,” Mr Loh said.
“We often reject claims for interest charges on personal loan amounts and immediate claims for the full amount for capital works (for example, a kitchen renovation), so it is vital that you have good records.
“If you take out a loan to buy a rental property and rent it out at market rates, the interest on that loan is deductible. However, if you redraw money from that mortgage for personal use, such as buying a boat, or going on a holiday, you can’t claim the interest on that part of the loan.”
Mr Loh said they often saw taxpayers claiming capital works as a lump sum, rather than spreading the cost across a number of years. Capital works include a new building or extension, renovations or structural improvement.
The cost of repairs for wear and tear to the property are deductible immediately if they are to replace or fix existing items, such as curtains, without upgrading them.
However, improvements or capital expenses, such as a kitchen renovation are not deductible immediately.
The ATO has advice, guidance, and an online tool on their website to help taxpayers make these calculations. Taxpayers can also speak to a registered tax agent.
Reduced rent during COVID-19
Mr Loh noted that many residential rental property owners may be unsure about how COVID-19 has impacted their tax return.
For example, you may have negotiated reduced or deferred rent. You only need to declare the rent you have received as income.
If payments by your tenants are deferred until the next financial year, you do not need to include these payments until you receive them.
Back payments for deferred rent or insurance for lost rent should be declared as income in the financial year in which you receive the amounts.
While your rental income may be reduced, you can still claim normal expenses made on your property as long as the reduced rent is determined at arms’ length and considers current market conditions.
Travel restrictions may have also affected demand for short-term rental properties.
“Generally, if your plans to rent out a property in 2020-21 were the same as previous years, but were disrupted by COVID-19, you will still be able to claim the same proportion of expenses,” Mr Loh said.
He added that it only applies where the property was not used privately.
“If you, family or friends stayed at the property for free or at a reduced rate, you won’t be able to claim or will only be able to claim a portion of these expenses,” he said.
