The Australian Taxation Office (ATO) has set out its list of targets with property investors due to the fact that about two million Australians now claim deductions on income coming from their rental properties.
About $45 billion in expenses for rental properties were lodged to the ATO last financial year. This, therefore, pushed property investors’ compliance with tax laws to the top of the ATO’s agenda.
The ATO has a large range of data to identify people who are failing to meet their tax commitments. Along with public data which is readily available to anyone, the ATO has access to information from a variety of third parties such as banks and financial institutions as well as access to rental bond data.
There are some key risk zones that the ATO has got its eye on this financial year which property investors should be aware of.
Rental properties that offer short-term rentals
Due to the popularity of Airbnb, more and more Australian property investors are capitalising on the rise of the short-term rental market. Those who offer short-term rentals on their rental properties can demand a premium each week as well as become flexible when their property is vacant.
Nevertheless, the ATO has actually spied taxpayers who are not properly declaring their short-term rental income and has become a focus area for them this financial year.
According to the assistant commissioner at the ATO, Karen Foat, “There is no such thing as a rental hobby. All income from renting out all or part of a property needs to be declared as rental income.”
Your holiday home as rental property
In order for a property investor to claim expenses on a holiday home, it needs to genuinely be available for rent – a crucial factor that a few investors skip over.
Ms Foat adds, “If you’ve refused tenants on an unreasonable basis [for example] then it starts to look a bit more like a private asset. If you’re waiting for the conditions to be just right for you rather than it being an investment property, it’s the same thing.”
In addition, real estate investors need to be careful to separate individual or personal use expenses from those they claim to the ATO.
Furthermore, owners of rental properties should apportion their claims in relation to the holiday home. It is unlikely that you would be able to claim expenses for more than what you’ve charged, if you’ve rented your home out on mate’s rates.
“The thing that we’re concerned about there is creating an artificial situation – negative gearing that isn’t genuine,” Ms Foat stated.
The ATO is also concerned by taxpayers claiming interest where a part of the loan was used for personal purposes. For example, a property investor might first take out a loan to buy property, but later, they’ll refinance then go on a holiday or buy a boat.
“You need to only be claiming the portion of the interest [that’s] related to the rental property itself,” Ms Foat advised.
Immediate deduction claims
Taxpayers are entitled to claim the cost of repair work and maintenance on their rental properties instantly. Nonetheless, there are other modifications to a home which are categorised as ‘capital works’ and can only be claimed over a number of years.
A good example coming from Ms Foat is if the guttering on your property is damaged in a storm, and you replace the part that’s damaged, you can deduct that immediately. However, replacing the whole guttering would be considered as ‘capital works’ since it’s a structural improvement. In this scenario, you will be able to claim that at a rate of 2.5% for 40 years.
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This article first appeared on Accountants Daily.