The Australian Taxation Office (ATO) has revealed it’s expanding the rental income data it receives from property managers and rental bond authorities to ensure property investors are doing the right thing at tax time.
It’s part of a warning delivered by the ATO to property investors this tax time, telling them to “beware of common tax traps that can delay refunds or lead to an audit, costing taxpayers time and money”.
According to assistant commissioner Tim Loh, the most common mistake rental property and holiday home owners make is neglecting to declare all their income, which includes failing to declare any capital gains from selling an investment property.
“To put it simply, you should expect tax consequences for any property that you earn income from that isn’t your main residence,” he said.
“We are expanding the rental income data we receive directly from third-party sources such as sharing economy platforms, rental bond authorities and property managers.” He added that taxpayers will be contacted regarding income they’ve received but haven’t included in their tax return.
While Mr Loh flagged that the ATO will allow taxpayers who have made genuine errors to amend their returns without penalty, he warned “deliberate attempts to avoid tax on rental income will see the ATO take action”.
“There’s no such thing as free real estate when it comes to their tax returns. Our data analytics scrutinise returns for rental deductions that seem unusually high. We will ask questions, and this may lead to a delay in processing your return.”
Last tax time, $38 billion worth of deductions was claimed by the 1.8 million Australians who owned investment properties.
“So far, we have adjusted more than 70 per cent of the 2019–20 returns selected for a review of rental information,” Mr Loh said.
“Most people we contact about their rental deductions are able to justify their claims. However, there are instances where we have to knock back claims where taxpayers didn’t keep receipts, claimed for personal use or claimed for ineligible deductions.”
All in all, it’s vital that investment property owners have good records: “We often reject claims for interest charges on personal loan amounts and immediate claims for the full amount for capital works (for example, a kitchen renovation).”
Acknowledging, too, that many residential rental property owners are unsure about the impact of COVID-19 on their tax return, Mr Loh said “you only need to declare the rent you have received as income. If payments by your tenants are deferred until the next financial year, you do not need to include these payments until you receive them.”
Back payments for deferred rent or insurance for lost rent should be declared as income in the financial year in which you receive the amounts, the ATO advised.
Even where rental income is reduced, “you can still claim normal expenses made on your property as long as the reduced rent is determined at arms’ length and considers current market conditions”.
The same can be said for short-term rentals where demand has been affected by COVID-19.
“Generally, if your plans to rent a property in 2020–21 were the same as previous years, but were disrupted by COVID-19, you will still be able to claim the same proportion of expenses.”
The importance of updated tax depreciation schedules
Following the ATO’s message, BMT Tax Depreciation has issued “a critical reminder” of its own to property investors.
BMT CEO Bradley Beer warned that “investors who have renovated and who fail to update their tax depreciation schedule before lodging their tax return risk both being out of pocket and facing the scrutiny of the ATO”.
He has noted “nuances when it comes to claiming work on investment properties, with differences between how a renovation and general maintenance is claimed at tax time”.
While some property alterations can be claimed immediately, others must be claimed using depreciation and pooling.
To get it wrong can be “both costly and unlawful”, the CEO stated.
He continued: “A rental property improvement is a renovation where something is improved beyond its original state. It must be claimed with depreciation.
“Because improvements are often required due to wear and tear or damage, investors mustn’t mistake them as repairs or maintenance, and should include them in their tax depreciation schedule.”
Clarifying further, he said: “An improvement is retiling a bathroom, while fixing cracked plaster is a repair and oiling a deck is maintenance.”
While it may be tempting to claim improvements as repairs or maintenance as the full amount can be claimed instantly rather than depreciated over time, Mr Beer warned: “There’s no doubt that an instant claim is more appealing, but it’s against taxation legislation and such a choice will come under harsh ATO scrutiny.”
Despite the nuances, he did add that just because it needs to be depreciated doesn’t mean it can’t be immediately deducted.
“Immediate deductions are available to certain assets that cost less than $300. For example, a ceiling fan worth $290 can be immediately deducted in the financial year of purchase,” he said.
With depreciation able to be claimed on some assets for up to 40 years, the CEO highlighted how “the small effort of updating the schedule now pays off throughout the lifetime of the investment”.