Rental property owners are being warned to ensure their claims are correct this tax time, as the Australian Taxation Office (ATO) announces it will double the number of audits scrutinising rental deductions.
In the 2017-18 financial year, more than 2.2 million Australians claimed over $47 billon in deductions.
Assistant Commissioner Gavin Siebert says that this year, the ATO has made rental deductions a top priority. "A random sample of returns with rental deductions found that nine out of 10 contained an error. We are concerned about the extent of non-compliance in this area and will be looking very closely at claims this year," he said.
When it comes to dodgy claims, the ATO's detection methods are becoming more advanced.
"We use a range of third party information including data from financial institutions, property transactions and rental bonds from all states and territories, and online accommodation booking platforms, in combination with sophisticated analytics to scrutinise every tax return," Mr Siebert said.
"Where we identify claims of concern, ATO staff will investigate and prompt taxpayers to amend unjustifiable claims. If necessary, we will commence audits," he said.
"Over-claiming robs the whole community of essential services and will not be tolerated by the Australian community. The Government recently allocated additional funds to the ATO to extend its program of audits and reviews of rental properties.
"We expect to more than double the number of in-depth audits we conduct this year to 4,500, with a specific focus on over-claimed interest, capital works claimed as repairs, incorrect apportionment of expenses for holiday homes let out to others, and omitted income from accommodation sharing," Mr Siebert said.
"Once our auditors begin, they may search through even more data including utilities, tolls, social media and other online content to determine whether the taxpayer was entitled to claims they've made," he said.
While no penalties will apply for taxpayers who amend their returns due to genuine mistakes, deliberate attempts to over-claim can attract penalties of up to 75% of the claim. In 2017-18, the ATO audited over 1,500 taxpayers with rental claims, and applied penalties totalling $1.3 million.
In one case, a taxpayer was penalised over $12,000 for over-claiming deductions for their holiday home when it was not made genuinely available for rent, including being blocked out over seasonal holiday periods. Another taxpayer had to pay back $5,500 because they had not apportioned their rental interest deduction to account for redraws on their investment loan to pay for living expenses.
"This tax time, our message to taxpayers is clear. If you are renting out a room or a property, any money you earn must be declared as income and any deductions you claim may need to be apportioned for private use," Mr Siebert said.
For more information on holiday homes, visit ato.gov.au/holidayhomes
For more information on renting out all or part of your home, visit ato.gov.au/sharingeconomy
For general information on rental properties, including a suite of educational videos, visit ato.gov.au/rental
Key issues the ATO is checking this tax time
Is loan interest being claimed correctly?
If you took out a loan to purchase a rental property, you can claim interest (or a portion of the interest) as a deduction. However, if you use some of the loan money for personal use such as paying for living expenses, buying a boat or going on a holiday, you can't claim the interest on that part of the loan. You can only claim the part of the interest that relates to the rental property.
Do you know the difference between capital works and repairs?
Repairs or maintenance to restore something that's broken, damaged or deteriorating are deductible immediately. Improvements or renovations are categorised as capital works and are deductible over a number of years.
Initial repairs for damage that existed when the property was purchased, such as replacing broken light fittings or repairing damaged floor boards, can't be claimed as an immediate deduction but may be claimed over a number of years as a capital works deduction.
Do you have a holiday home?
A holiday home is different to a rental investment property. A holiday home is generally a private asset you use for family holidays, for which you cannot claim expense deductions.
However if you let your property out at 'mates rates' (ie below market rates to family and friends) you can claim expenses up to the amount of income you receive. If your property is genuinely available for rent - which means making it available during key holiday periods, keeping it in a condition that people would want to rent it, and not unreasonably refusing tenants - it becomes more like a rental investment property and you can claim deductions for the days it is either rented or is genuinely available.
Have you kept records?
The number one cause of the ATO disallowing a claim is taxpayers being unable to produce receipts or other documents to support a claim. Furnishing fraudulent or doctored records will attract higher penalties and may also result in prosecution.
Dealing with disasters - Damaged or destroyed property
For taxpayers whose income-generating investment properties are damaged during a natural disaster, the ATO has a range of support, advice and guidance available.
If your personal assets - such as your home or household goods - are damaged or destroyed in a disaster, there will generally be no tax consequences if you receive an insurance payout.
However, if an income-producing asset, such as an investment property, is damaged or destroyed, you'll need to work out the correct tax treatment of insurance payouts you receive and your costs in rebuilding, repairing or replacing the assets.
The impacts of a natural disaster may affect the types of expenses you can claim and the income you need to declare for your rental property.
