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Interest on property loans will come in for special attention this year while additional data matching systems will help snare the majority who get rental claims wrong.
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ATO escalates warnings over dodgy rental claims
05 September 2023
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11 minute read
Landlords who claim interest on property loans will come under special scrutiny by the ATO this year as it attempts to stamp out the high rate of errors in rental returns.
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ATO Assistant Commissioner Tim Loh about 80 per cent of taxpayers with rental income claimed a deduction for loan interest “and this is where we’re seeing the biggest mistakes”.
“You can only claim interest on a loan used to purchase a rental property to earn rental income,” he said. “If you’ve used any part of your original or refinanced investment property loan to cover private expenses, like buying a new car or renovating the home you live in, you can only claim an interest deduction for the portion relating to producing your rental income.”
Other common mistakes included omitting some rental income, overclaiming expenses or claiming for improvements to private properties.
Mr Loh said additional data matching systems, which this year captured information on residential investment property loans and landlord insurance for the first time, would be used to catch the nine out of 10 rental owners getting returns wrong.
“This new data provides us with crucial intelligence to paint a picture of what’s true and accurate in tax returns, and we continue to expand our data-matching capability to ensure income and deductions are correctly reported,” Mr Loh said.
The data-matching programs also hoovered up information on property management, transactions and rental bonds.
The ATO warned that income from short-term rental arrangements, renting out part of a home as well as insurance payouts and bond money were all reportable.
Rental income had to be reported in the year when the tenant paid, not when the landlord received it from an agent, and should be the gross figure before management fees and other expenses were taken out.
“Make sure you are declaring your gross income. We have seen some clients declaring their net rental income after the property manager has paid their expenses and then they have claimed deductions like rates and repairs all over again,” Mr Loh said.
Holiday homes were another focus area because these were often used by the owner, friends and family for part of the year and claims had to reflect this.
“You will need to apportion your deduction for rental expenses when the property (or part of it) is not being used to produce rental income, such as when you:
– Use it personally or reserve it for friends or family.
– When you place unreasonable conditions that restrict the likelihood of the property being rented (for example, excessive rates, requiring prospective tenants to give references for short holiday stays, or conditions like no children in a family-friendly destination).”
“You need to make sure you have the records to demonstrate you incurred expenses for your rental property and the extent they relate to producing rental income.”
“If you’ve charged a mates rate, you can only claim for expenses up to the amount of income you’ve received."
"This is an area that we are paying close attention to this year. If you’ve made genuine mistakes, we encourage you or your registered tax agent to fix any errors or omissions in your tax return as soon as you can. If you are deliberately overclaiming, it is un-Australian and penalties will apply.”
Claims for repairs, maintenance and improvements were another common area for mistakes.
Initial repairs to rectify damage, defects or deterioration that existed at the time of purchasing a property and prior to admitting tenants had to be claimed as capital works deductions over a number of years.
General repairs and maintenance on a property already owned were immediately deductible.
“You can claim an immediate deduction for general repairs like replacing a broken light globe or window. But if you rip out an old bathroom and put in a new and improved one, this is a capital improvement and is deductible over time as capital works.”
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