Rental property owners are now one of the ATO’s top targets.
The Australian Tax Office (ATO) has identified rental properties as a significant focus area, having found that nine out of ten tax returns related to rental income and deductions contain at least one error ¹.
‘Landlords and their registered tax agents need to take extra care when lodging this year. We often see rental income being left out, or mistakes being made with property related deductions – like overclaiming expenses or claiming for improvements to private properties.’
– ATO Assistant Commissioner Tim Loh
This persistent issue has resulted in an estimated revenue loss of approximately $1.5 billion, prompting the ATO to intensify its scrutiny of this sector.
The ATO has formally cautioned the estimated 2.2 million rental property investors about the necessity of meticulous attention to detail in declaring rental income and correctly claiming expenses. While landlords are entitled to claim a range of expenses related to their rental properties, adherence to the regulatory framework is imperative.
Importantly, the ATO now has access to numerous sources of third party data, including access to popular rental listing sites for both long term and holiday rentals, so it is relatively easy for them to establish whether a claim that a property was ‘available for rent is correct. The ATO can request bank statements from the start of the loan and if it is found that funds have been drawn for personal use, that portion of the interest would no longer be deductible.
ATO Rental Property Guide
To help rental property owners understand their tax obligations, the ATO has released a 2023 rental property guide. It contains detailed information on rental income and expenses, record keeping and other valuable information and resources to assist rental property owners.
This 2023 guide supports the ATO’s general residential rental property information.
Rental Income and Expenses
When it comes to rental properties, it is important to understand how to treat rental income and expenses for tax purposes.
Rental income encompasses all payments received from tenants, while rental expenses include costs incurred during the renting process. Landlords can claim various deductions, including immediate and long-term claims, for expenses such as repairs, maintenance, insurance, and interest on loans. They should maintain accurate records to ensure proper deduction claims and compliance with ATO regulations.
Rental income must be reported:
- in the year the tenant pays, rather than when the taxpayer’s agent transfers it to them
- as the gross amount received (i.e., before the property manager’s fees and other expenses they pay on the taxpayer’s behalf are taken out).
There are three categories of rental expenses:
- Expenses where taxpayers cannot claim deductions – e.g., expenses arising from a taxpayer’s personal use of their property, and expenses of a capital nature
- Expenses where taxpayers can claim an immediate deduction in the income year they incur the expense – e.g., interest on loans, council rates, general repairs and maintenance, and depreciating assets costing $300 or less
- Expenses where taxpayers can claim deductions over a number of income years – e.g., capital works and borrowing expenses.
Tax Deductions for Landlords
Landlords can claim deductions for expenses incurred in relation to their rental properties including advertising, agent fees, cleaning, gardening, council rates, and insurance premiums. However, personal expenses and certain capital expenses are not eligible for deductions. Deductions can only be claimed for periods when the property is genuinely available for rent.
Capital Gains Tax (CGT)
CGT applies when selling a rental property and is calculated based on the difference between the sale price and the cost base, including associated costs and property improvements. It is important to keep accurate records of any expenses related to the rental property, as these can be used to reduce the CGT liability.
The ATO stipulates that deductions for vacant land are only allowable if the land is genuinely available for rent. Deductions for expenses like council rates, loan interest, and maintenance are allowed, provided evidence is provided. However, if the land isn’t intended for rent or isn’t being marketed for rent, no deductions can be claimed. If a property is partly used for personal purposes, deductions are allowed only for the portion available for rent, contingent on demonstrating genuine efforts to rent it out.
Property owners can claim depreciation deductions for assets used in rental properties, including plant and equipment (removable items) and capital works (building construction costs). To claim these deductions, a depreciation schedule from a qualified quantity surveyor is required. It’s crucial to remember that depreciation deductions are applicable only for income-producing assets, not for personal use.
Negative gearing is a common strategy for offsetting rental income with property expenses. This approach helps reduce taxable income, benefiting individuals by offsetting losses against other income. However, it hinges on the assumption that the property will appreciate over time. Risks emerge if the property value doesn’t rise or declines, leading to potential overall financial losses.
Engage a Professional
Because of the complexities around tax returns for investment properties, approximately 87% of rental property owners engage an accountant or registered tax agent to lodge their return.
It is important that rental propery owners provide their registered tax agent with the right information to prepare their return correctly, and of course for accountants and registered tax agents to ask the right questions of their clients. Ultimately, property owners are responsible for what they include in their tax return, even when using a tax professional.
Dynamize is a Chartered Accounting firm based in the NSW Hunter Valley with significant experience assisting clients with rental and investment property tax returns. Reach out to us to arrange a meeting to discuss your particular situation.