Investment Property Tax Returns to be scrutinised by the ATO
The ATO will be auditing 4,500 investment property tax returns this year that is considers high risk. The focus being on taxpayers that overclaim or not declare income. Rental property owners are being warned to ensure their claims correct this tax time with the ATO scrutinising rental deductions.
Last financial year, over 1500 taxpayers had their rental claims audited with the ATO applying penalties of $1.3 million with data matching becoming more sophisticated every day using a range of third party information from online booking accommodation platforms, financial institutions, property transactions and rental bonds from all states and territories to identify high risk taxpayers.
How can I avoid an audit on my rental property tax return?
Even if you do all the right things, it still may be unavoidable with the ATO recently increasing the number of random audits on property investor tax returns. However, by ensuring your declaring all of your rental income and claiming your expenses correctly you can avoid being red flagged by the ATO’s data analytic systems and added to the “high risk” list.
What key issues are the ATO checking?
When auditing a random sample of investment property tax returns, the ATO identified that 90% of them contained errors which could mostly be divided into three categories:
- Over-claiming interest repayments
- Confusing repairs and maintenance with capital improvements
- Incorrectly apportioning rental claims
Key Questions to ask to check if your tax return is being completed accurately
Are you claiming the loan interest correctly?
Ensure you are only claiming interest that relates to the investment. If you take out on a loan for your investment property, the interest that relates to this property is a tax deduction.
However, the ATO found a lot of errors with taxpayers claiming interest on part of the loan that related to personal use such as living expenses, holidays or buying a boat. The ATO only allows you to claim interest on the portion of your loan that is used to fund an investment property, regardless of whether equity in an investment property is used as security in that loan.
Do you know the difference between what is a repair and what is an improvement?
One of the most common errors that the ATO found, were taxpayers that were for example renovating a bathroom in their rental home and claiming the entire amount as an immediate deduction rather than correctly depreciating the cost at a rate of 2.5% over 40 years.
A repair is to “make good or remedy defects in, damage to or deterioration of the property.” For example: replacing part of the guttering or windows damaged in a storm. Repairs and maintenance can be claimed in the year they occurred.
An improvement is to provide something new, increase the income-producing ability or expected life of the property, changes the character of the item you have improved and goes beyond just restoring the efficient functioning of the property. Improvements must be claimed as capital works and depreciated over a number of years.
Are you apportioning rental deductions correctly when required?
You will need to apportion your expenses if any of the following apply to you:
Your property is available for rent for only part of the year
> your property is used for private purposes for part of the year
> only part of your property is used to earn rent
> you rent your property at non-commercial rates.
Are you keeping accurate records?
You must have evidence of your income and expenses so you can claim everything you are entitled to. The number one cause of the ATO disallowing a claim is taxpayers being unable to produce receipts or other documents to support a claim.
Check our video demonstration with Colleen showing you how to use the free ATO ‘mydeductions’ app to help with your record keeping.
To avoid unwanted ATO attention, keep good records and only claim what you can legitimately claim. If you can’t substantiate it, don’t claim it.
If you’re concerned about the possibility of an audit, audit insurance is available and needs to be purchased ahead of an audit being raised.
It’s never been more important to get professional help to weed out claims that won’t stack up. At Ashok Parekh & Co, we specialise in investment property tax returns and are happy to help. We also have a free handy Rental Property Checklist.
Contact us at any of our four locations below: