Earlier this year, commissioner Chris Jordan put the industry on alert when he said that a random audit of over 300 rental property claims found errors in almost nine out of 10 returns.
Mr Jordan also pointed out that 85 per cent of taxpayers with rental properties are represented by a tax agent.
Accordingly, the ATO is set to double the number of in-depth audits of rental claims to 4,500 this year, with a specific focus on overclaimed interest, capital works claimed as repairs, incorrect apportionment of expenses for holiday homes let out to others, and omitted income from accommodation sharing.
Craig Barry, director of tax services at William Buck, said he has seen an increased scrutiny on holiday house deductions where there was a period without tenants.
“Increased sophistication of data-matching means the ATO can compare your property against other holiday rentals in the area. If you fall out of their bell curve, you could be their primary target for a review or costly audit,” Mr Barry said.
“In particular, the ATO appears to be using data-matching statistics along pockets of coastal areas to predict genuine periods where rental income can be derived. If your holiday house doesn’t derive income during that period but you claim deductions for your expenses such as interest and rates, they may question why you didn’t earn rent during those times.
“All powers will be used to ensure the legitimacy of your records, including demanding access to bank account records for proof that all rental amounts received were declared as income.”
Last year, the Tax Office also said it would acquire new data from online rental platforms, giving it visibility over taxpayers not meeting their registration, reporting, lodgement or payment obligations.
“The ATO is interested in properties not ‘genuinely available for rent’, which makes for an interesting proposition — proving a negative. Sure, you can prove that the property was listed with letting agents, but how do you prove that no one was interested?” Mr Barry said.
“The onus of proof is on the taxpayer, so it isn’t too difficult to see a situation where a taxpayer may be denied deductions due to being unable to prove a negative.”