Earlier this month, Commissioner Chris Jordan revealed a $3.3 billion gap in rental deductions claimed against reported income, while noting that the ATO’s audits of over 300 rental property claims found errors in almost nine out of 10 returns reviewed.
“We’re seeing incorrect interest claims for the entire investment loan where it has been refinanced for private purposes, incorrect classification of capital works as repairs and maintenance, and taxpayers not apportioning deductions for holiday homes when they are not genuinely available for rent,” said Mr Jordan in an address to the Tax Institute’s national convention.
“And when you consider that rentals include over 2.1 million taxpayers claiming $47.4 billion in deductions, against $44.1 billion in reported income, you can get a sense of the potential revenue at risk.”
BDO tax partner Marcus Leonard said the commissioner’s comments were a clear warning ahead of tax time 2019 to property investors who are being either careless or deceptive with their rental deduction claims.
“It’s clear from the ATO’s comments that they’ll be going in hard to narrow this $3.3 billion gap,” he said.
Mr Leonard believes investors should pay particular attention to loan interests and to ensure that the loan was used to purchase, repair or improve the investment property or its contents.
“Just because the investment property is used as a mortgage for a loan does not mean you can claim the interest as deductible if the loan is used for some other purpose, [for example], buying personal use assets or the family home,” said Mr Leonard.
“Repairs to the building and contents are generally deductible but not if they amount to an improvement to the building or items. However, improvements can usually be added to the CGT cost base or depreciation balance of the property or items.”
New rules for properties acquired after 9 May 2017 that limit plant and equipment depreciation deductions for residential investment properties to new assets should also be carefully considered, said Mr Leonard.
With the ATO set to examine data from online rental platforms such as Airbnb, Mr Leonard also said home owners need to ensure they declare any income they receive from the rents as assessable income.