- 9 in 10 rental property owners are getting their returns wrong.
- The ATO have expanded their data matching capabilities.
- Loh noted the difference between immediate deductions and capital gains deductions.
The Australian Taxation Office (ATO) has property investors under the microscope this tax season.
ATO assistant commissioner, Tim Loh, says that the ATO’s review of income tax returns revealed a whopping nine in 10 rental property owners are making false or misleading tax declarations.
“Landlords and their registered tax agents need to take extra care when lodging this year,” he said.
“We often see rental income being left out or mistakes being made with property related deductions – like overclaiming expenses or claiming for improvements to private properties.
“When you are overclaiming expenses or claiming for improvements to private properties, you are taking money from the Australian community; money that could have been otherwise used to further increase funding for things like women’s sports, schools and hospitals,” he said.
ATO’s data-matching capabilities
Two new data matching capabilities have been implemented: residential investment property loans (RIPL) and landlord insurance (LI) data matching programs.
“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,” said Loh.
They are part of a larger collection of programs that includes property management, rental bond, and property transaction data, which allows the ATO to address several taxation risks in the investment property market.
The biggest mistakes
According to Loh, around 80% of taxpayers with rental income claimed a deduction for interest on their loan, and that is where the ATO is 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.”
Immediate deductions vs capital gains deductions
Loh also noted distinctions between immediate deductions and capital gains deductions.
For example, initial repairs cannot be claimed as an immediate deduction.
“When you first acquire a rental property and it needs work done to get tenants in – for example, you need to fix a hole in the wall or some damaged floorboards – these are initial repairs,” said Loh.
Initial repairs to fix damage that existed at the time of purchasing a property cannot be claimed as an immediate deduction but may be claimed over a number of years as capital works deductions.
However, immediate deductions can be claimed 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,” said Loh.
According to the ATO website, a tax return must be lodged or you must engage with a tax agent by 31 October.