Tax office to double audits of 'dodgy' rental deductions
Rental property owners are being warned to ensure their claims are correct this tax time, as the ATO has announced it will double the number of audits scrutinising rental deductions, with a specific focus on:
capital works claimed as repairs;
incorrect apportionment of expenses for holiday homes let out to others; and
omitted income from accommodation sharing.
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.”
The Government recently allocated additional funds to the ATO to extend its program of audits and reviews of rental properties.
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.
“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 the 2017/18 financial year, more than 2.2 million Australians claimed over $47 billon in deductions.
The ATO audited over 1,500 taxpayers with rental claims, and applied penalties totaling $1.3 million; including the following:
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.
Key issues the ATO is checking this tax time
Is loan interest being claimed correctly?
If a taxpayer took out a loan to purchase a rental property, they can claim interest (or a portion of the interest) as a deduction. However, if they use some of the loan money for personal use, such as paying for
living expenses, buying a boat or going on a holiday, they cannot claim the interest on that part of the loan; they can only claim the part of the interest that relates to the rental property.
The difference between capital works and repairs
Repairs or maintenance to restore something that is 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, cannot be claimed as an immediate deduction, but may be claimed over a number of years as a capital works deduction.
Does the taxpayer have a holiday home?
A holiday home is different to a rental investment property – a holiday home is generally a private asset used for family holidays, for which the taxpayer cannot claim expense deductions. However if a taxpayer lets their property out at ‘mates rates’ (i.e., below market rates to family and friends), they can claim expenses up to the amount of income they receive.
If the 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 the taxpayer can claim deductions for the days it is either rented or is genuinely available.
Has the taxpayer 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 personal assets – such as a taxpayer's home or household goods – are damaged or destroyed in a disaster, there will generally be no tax consequences if they receive an insurance payout.
However, if an income-producing asset, such as an investment property, is damaged or destroyed, the taxpayer will need to work out the correct tax treatment of insurance payouts they receive and their costs in rebuilding, repairing or replacing the assets.
The impacts of a natural disaster may affect the types of expenses taxpayers can claim and the income they need to declare for their rental property.
Ref: ATO media release, 17 April 2019
**The above information has been supplied and reproduced with permission from the National Tax Agents Association. For further information please speak to your accountant at JPR Group