Over 2.1 million people – or about 8% of the Australian population – own an investment property according to ATO figures. This boom in investment property ownership throws up particular challenges for the ATO, both in making sure that they know exactly who owns what and also in making sure that taxpayers aren’t rorting the system.
Launching a crackdown on dodgy claims, the Commissioner of Taxation recently flagged that in a series of random audits of investment property owners, ATO checkers found errors in almost nine out of 10 returns reviewed. So, property owners can expect their returns to be closely scrutinised this year, meaning it’s never been more important to get professional help to weed out claims that won’t stack up – as well as making sure that you have actually claimed for everything that’s legitimate.
So, if you own an investment property, what are the main pitfalls that can land you in trouble with the taxman?
- The ATO pays close attention to excessive interest expense claims, such as where property owners have tried to claim borrowing costs on the family home as well as their rental property.
- They also look closely at the incorrect split of rental income and expenses between owners, such as where deductions on a jointly owned property are claimed by the owner with the higher taxable income, rather than a straight 50:50 split.
- The ATO looks closely for evidence that investment properties are not genuinely available for rent. It’s essential that you only claim deductions for the periods the property is rented out or is genuinely available for rent. You can’t claim if you’re using the property yourself. This is particularly important for holiday homes, where the ATO regularly finds evidence of home-owners claiming deductions for their holiday pad on the grounds that it is being rented out, when in reality the only people using it are the owners, their family and friends, often rent-free. Recently the ATO issued a list of four questions holiday home owners should be asking themselves; consider your answers to these to determine if you have anything to be concerned about:
- How do you advertise your rental property?
If your property is advertised on a widely seen online site, that’s a good indication that the property is available for rent. If your only form of marketing is a tatty card in your front door window, you might need to be concerned!
- What location and condition is your rental property in?
- How do you advertise your rental property?
If your property is in good repair, tenants will want to rent it. If it’s a hovel, chances are tenants will give your property a wide berth, particularly if you are charging rent that’s on a par with much more desirable rentals in the same area.
- Do you have reasonable conditions for renting the property and charge market rate?
If you set conditions that will deter a reasonable potential tenant – such as rent significantly above market rates or clauses such as “no children”, your property may not be regarded as genuinely available for rent.
- Do you accept interested tenants, unless you have a good reason not to?
If you’re unreasonably fussy about who you rent to, the ATO might conclude that you don’t really want to rent to anybody and that your property isn’t actually available for rent.
- The ATO keeps a close eye on claims for repairs to newly purchased rental properties. The costs to repair damage and defects existing at the time of purchase – like leaky roofs or rotten window frames – or the costs of renovation cannot be claimed immediately. These costs are deductible instead over a number of years or are added to the cost base of the property for CGT purposes. Expect to see the ATO checking such claims and pushing back against claims which don’t stack up. And ignorance is no defence; just because you didn’t know the property had defects when you purchased it doesn’t change the ATO’s attitude to so-called “initial repairs”.
- If the property is rented out to friends or family at a discounted rate, this will be regarded as a non-commercial rental. The income will still be taxable but you’ll only be able to claim deductions up to the amount of rent you’ve received. You won’t be able to make a loss; if you were relying on negative gearing, that isn’t a desirable outcome!
Don’t forget, the ATO has access to numerous sources of third party data including access to popular property rental listing sites, so it is relatively easy for them to establish whether a claim that a property was “available for rent” is correct.
The ATO is now collaborating with state revenue agencies, the real estate sector and sharing economy platforms, like Airbnb, to get more detailed information about rentals. Earlier this year, they announced a program with the Real Estate Institute to obtain property management reports prepared by real estate agents for individuals who rent out their property. Such reports will not only provide independent verification of rents received but of commonly claimed deductions such as council rates and management fees.
The key tip from H&R Block is to ensure that you keep good records. The golden rule is; if you can’t substantiate it, you can’t claim it, so it’s essential to keep invoices, receipts and bank statements for all property expenditure, as well as proof that your property was available for rent, such as rental listings.