ATO Crackdown on property deductions

Investment Property Deductions Are on the ATO’s Radar 

Investment property deductions are often a grey area for some investors. Statistics recently published by the Australian Taxation Office (ATO) reveal the majority of property investors are aged 40 or older, and earn less than $80,000 per annum. If you’re a property investor then it’s important you take note!

In an ATO media release in April 2019, Assistant Commissioner Gavin Siebert said;

“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”.

This is not surprising given that 90 percent of a random sample of selected returns with rental deductions contained errors.

So, what will the ATO be focusing on and what does it all mean. Let’s take a look at a few of the key areas.

1. INTEREST

You can only claim the interest on a loan that you used to acquire an investment property as a tax deduction. Interest on additional funds drawn out of the loan and secured against the investment property to fund personal expenses or personal debt is not tax-deductible.

2. CAPITAL WORKS V REPAIRS

Repairs restore things that are broken or damaged to their original condition and may be immediately claimed as a tax deduction. Improvements or substantial renovations, alter or improve the condition of the property and may be tax-deductible over a number of years.

Items in need of repair at the time you purchase a property are referred to as ‘initial repairs’. Initial repairs are also tax-deductible over a number of years as opposed to being immediately tax-deductible.

3. HOLIDAY HOMES

You can only claim expenses (interest, repairs, insurance etc.) in relation to a holiday home as tax-deductible during the periods the property is rented or genuinely available for rent.

Furthermore, if the property is rented for less than market value to friends and family, then your tax deduction will be limited to the amount of rent received.

4. SHORT TERM LETTING OR SHARING

Income received from short term letting or renting part of a house or unit is assessable for income tax purposes and must be declared in your income tax return. This income may be reduced by any expenses  you’re entitled to claim whilst the property is being let.

Penalties for claiming the wrong property deductions

Penalties for non-compliance are significant and deliberate attempts to submit false claims in your income tax return can attract penalties of up to 75% as well as general interest charge for late payment. In 2017-18, the ATO applied penalties of $1.3 million to over 1,500 tax payers with rental claims!   

Property deduction errors are easier to detect with current technology

The evolution of technology has also meant that the ATO’s task of ensuring compliance is becoming easier. Assistant Commissioner Gavin Siebert says, “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.”

I am hopeful that you now have a greater understanding of where the ATO will be focusing their attention in relation to rental property investments. It is crucial that you are aware of this ATO crackdown and your obligations when it comes to tax.

Bishop Collins Chartered Accountants are specialists in the Real Estate Industry and a service member of the NREA, and experts in Property Investment tax.

If you need any questions answered in regards to this topic please contact our office on (02) 4353 2333, email us at [email protected]