About $45 billion in rental expenses were lodged to the ATO last financial year, pushing property investors’ compliance with tax laws to the top of the Tax Office’s agenda.
“It’s one of our main focus areas,” assistant commissioner at the ATO Karen Foat told Accountants Daily sister publication, Smart Property Investment.
There are some key danger zones the ATO has got its eye on this financial year which investors should be aware of, particularly given the significantly increased likelihood of being caught out.
As well as publicly available data, the ATO has access to data from a range of third parties – like banks and financial institutions – as well as information on rental bond data.
“We have and continue to have a large range of data to identify people who are failing to meet their tax obligations,” said Ms Foat.
Australian property investors are increasingly capitalising on the rise of the short-term rental market, popularised through the likes of Airbnb. Investors can demand a premium per week, and be flexible with when their property is vacant.
However, the Tax Office has spied taxpayers who are not property declaring their short-term rental income, and it’s a focus area for the regulator this financial year.
“There is no such thing as a rental hobby. All income from renting out all or part of a property needs to be declared as rental income,” said Ms Foat.
In order for a taxpayer to claim expenses on a holiday home, it needs to be genuinely available for rent, which is a key factor some property investors skip over.
“If you’ve refused tenants on an unreasonable basis [for example] then it starts to look a bit more like a private asset. If you’re waiting for the conditions to be just right for you rather than it being an investment property, it’s the same thing,” said Ms Foat.
Property investors should also be careful to separate personal use expenses from those they declare to the Tax Office.
“You also need to apportion your claims in relation to a holiday home. You can’t claim expenses for more than what you’ve charged, if you’ve rented the place out on mate’s rates,” said Ms Foat
“The thing that we’re concerned about there is creating an artificial situation – negative gearing that isn’t genuine,” she said.
“We are concerned by taxpayers claiming interest where a part of the loan was used for private purposes,” said Ms Foat.
“So they might first take out the loan to buy an investment property. But later they’ll refinance, go and buy a boat or go on holiday,” she said.
“You need to only be claiming the portion of the interest [that’s] related to the rental property itself,” she said.
Claiming immediate deduction
Taxpayers are entitled to claim the cost of repairs and maintenance immediately, but there are other adjustments to a property which are classified as ‘capital works’ and can only be claimed over a number of years.
“For example, if the guttering on your property is damaged in a storm, and you replace the part that is damaged, you can deduct that immediately,” said Ms Foat.
“However, if you replace the whole guttering, that’s a capital works, it’s a structural improvement. And you can claim that at a rate of 2.5 per cent for 40 years,” she said.