ATO assistant commissioner Rob Thomson said the majority of rental property owners are making mistakes on their tax returns, with 86 per cent using a registered tax agent.
It was found that this confusion is often due to misunderstandings about how and when expenses can be claimed.
In an effort to reduce these errors, Thomson encouraged investors to provide complete records of their expenses to tax agents.
“If you use a tax agent, be sure to tell them everything about your rental property, including complete records of your expenses. If you have a lingering question or something doesn’t make sense, be sure to ask your agent when you work with them,” Thomson advised.
“Rental property investments and taxes can be complicated, so it pays to get the right advice from the start. Don’t trust the things you hear at a Sunday afternoon barbecue.”
Dubious deductions
Thomson established that rental property owners can only claim deductions to the extent that costs have been incurred to produce income.
While this means that any costs incurred in generating rental income in a year are claimable for that period, there are still exceptions.
“It is normal for landlords to have to repair or replace damaged items in a rental property. But there is a certain myth that all expenses can be claimed straight away,” Thomson said.
“A repair can usually be claimed straight away, but capital items such as a dishwasher, curtains or heaters can only be claimed straight away if they cost $300 or less; otherwise, they must be reclaimed over time.”
Correcting your capital expenditure claims
The ATO specifically warned rental property owners about making incorrect claims for capital expenditure, mentioning that while repairs such as a dishwasher repair can usually be claimed immediately, this in turn does not apply to the cost buying a new dishwasher.
Expenses such as home improvements and capital works must be claimed over time, and most of these costs can be claimed at 2.5 per cent over 40 years.
The deputy commissioner also warned that rental property owners can only claim for costs they personally incur.
The danger of ‘double dipping’
The deputy commissioner also shed light on the practice of investors “double-investing” on the expenses of their rental properties.
“Sometimes we see rental property owners experience a double drop in expenses that the property manager has arranged and included in the property’s income and expense report for the year,” Thomson said.
“Property managers often pay for expenses such as repairs with the rent received. The amount they then remit to the property owner is net of these expenses. They will also send the owner a copy of the invoice for their records.”
The ATO reminded investors that expenses can only be claimed once, and rental property owners can only claim amounts personally incurred even when they have a record of the expenses.
Interest-related issues
Interest-related deductions – one of the most common deductions claimed by rental property owners – were flagged by the ATO as another area where errors are frequently made.
Taxpayers who refinance a loan for a rental property and use this money to pay for private expenses such as a new car or a vacation and then incorrectly claim as a deduction the full amount of interest charged on this investment loan for the year, are in trouble. The sights of the ATO.
“For example, if you have an $800,000 mortgage on a rental property and then add $50,000 to the loan to upgrade your family car, you can only claim interest on the initial $800,000, not interest on the $850,000,” Thomson explained.
“Nor is it simply a matter of repaying the private part of the loan and then claiming all the interest as deductible. Payments must be prorated between the private and investment components over the life of the loan.”
Best practices with legal entities
One area where taxpayers can claim deductions is for tax payments to corporate management funds and general purpose sinking funds at the time they are incurred, provided these fees are used for routine maintenance of the property. common property.
However, the ATO clarified that payments made to a body corporate for capital expenditure, such as replacing the roof of an apartment building, are only deductible after the capital works are completed and the expenditure has been invoiced to the person. legal.
It is also noted that costs related to borrowing expenses, such as loan origination fees, title search fees, and lender mortgage insurance, are often incorrectly claimed.
The ATO said these expenses are generally claimed over the shorter period of the life of the loan in question or a five-year period.
Additionally, with the exception of properties within the ACT, state or territory stamp duty cannot be claimed as a deduction when renting a property.
Instead of claiming year after year, the ATO emphasized that stamp duty records should be retained until the sale of the respective property, at which point the amount will be added to your cost base to reduce any capital gains that may be present in a private sale.
Remember your records!
Lack of documentation to support expense claims and deductions was identified as another area where errors are commonly made.
“It is necessary to maintain detailed and complete records, including receipts, invoices and bank statements of interest expenses. You should also detail how you calculate your deductions and any distributions. This will allow you or your tax agent to correctly complete your tax return,” Thomson said.
With paper and electronic records accepted by the ATO, details should include:
- The date the document was produced.
- The nature of the goods or services acquired.
- The date the goods or services were purchased.
- The amount of the expense.
- The name, ABN number or company name of the supplier.
The ATO specified that any claim made for capital works should not be based on the purchase price of your property but rather on the construction cost when it was initially built.
To calculate these costs, a taxpayer can enlist the help of a professional surveyor or draw up a complete schedule of capital works deductions themselves.
“Taxpayers are responsible for what they include on their tax return, even when using a registered tax agent. If you don’t have enough records, you can’t claim it,” Thomson warned.
