The ATO has announced its focus on the scrutiny of 2019 tax returns, particularly those with rental property tax deductions.
It’s fair to say that the ATO’s decision to increase audit activity of rental property deductions has come about with justification. A random sample of tax returns, which included rental property tax deductions, revealed that 9 out of 10 contained at least one error.
Given the rate of error found in rental property tax returns, owners of rental properties are being warned by the Tax Office to ensure their claims are correct this tax time.
Which rental property tax deductions will the ATO focus on?
The government recently allocated additional funds to the ATO to extend its auditing activities and reviews of rental properties. With the help of this extra funding, the ATO plans to conduct detailed audits of around 4,500 this year. The audit focus will be on:
• Over-claimed interest on loans
• Capital works claimed as repairs
• Incorrect apportionment of expenses for holiday homes let out to others
• Omitted income from accommodation sharing and failure to apportion private use
• Attempts to claim travel to residential rental properties despite the rules changing in 2017
Which rental property tax deductions are no longer allowed?
Let’s recap the changes to rental property tax deductions that were effective from the 2017 and 2018 financial years:
Up until 30 June 2017, owners of rental properties were entitled to claim a tax deduction for travel expenses incurred in relation to inspecting, maintaining or collecting rent for a residential property. The ability to claim a tax deduction for travel expenses ended from 01 July 2017.
Depreciation deductions for plant and equipment in second-hand properties
If the residential rental property you purchased on or after 7:30pm on 9 May 2017 is second hand, you’re no longer entitled claim depreciation for previously used plant and equipment. This means that depreciation is not allowed on assets such as appliances, air-conditioning and floor coverings in existence within the property at the time of purchase.
The rules do not change depreciation claims allowed for a property you purchased prior to 9 May 2017 unless the property was held earlier but not rented until after 1 July 2017. This means that if you used the property as your primary place of residence and then decided to rent out the property after 1 July 2017, you cannot claim depreciation on plant and equipment that was already part of the property.
Essentially, the claim for depreciation on plant and equipment is now relegated to brand new properties and any plant and equipment that is newly installed whilst the property is available for rent.
It’s important to note that the new rules do not apply to capital works. ‘Capital works’ include the structural and fixed items within an investment property and this deduction is still allowed. Depending on the date of construction, capital works deductions of 2.5% or 4% per annum may apply for the construction cost of the property.
And, depending on the date of construction, we do recommend that you have a quantity surveyor prepare a tax depreciation report upon purchase of your investment property to determine the amount of allowable deductions.
What triggers an ATO audit of rental property tax deductions?
If you’re claiming rental property tax deductions in your 2019 tax return, you need to be very aware that the ATO’s detection methods and analytics are becoming more sophisticated, particularly in respect of rental property tax returns.
There are so many ways that the ATO can data match the information reported – or not reported – in a tax return. The ATO garner a range of data from third-party sources such as:
• financial institutions and banks
• property transactions and
• rental bonds from all states and territories
The ATO also communicates with online accommodation booking platforms such as AirBnb, in a bid to crackdown on overstated holiday rental tax deductions.
Once an audit is underway, the ATO can look even further than this. They can reference very ‘telling’ data such as social media and online content, as well as utility and toll records. This type of information will be used to further determine whether your rental property tax deductions are legitimate and reasonable.
What is the penalty for erroneous and overclaimed tax deductions?
Generally speaking, penalties won’t apply to you if you amend your tax returns due to the recognition of a genuine mistake.
If it’s found that you deliberately attempted to over-claim on tax deductions, you may attract penalties of up to 75 per cent of the claim. For example in 2017-18, the ATO audited over 1500 taxpayers with rental claims, and applied penalties totalling $1.3 million.
How can I ensure I am correctly claiming rental property tax deductions?
Although rental property tax deductions will be under the microscope in 2019, you can avoid being one of the audit statistics by taking the following steps:
- Maintain complete and tidy records. Our clients find our Rental Property Tax Checklist useful when preparing their tax records
- Use the services of an experienced, reputable Registered Tax Agent. Find out how we can help you.
- Take the time to familiarise and educate yourself about tax deductible expenses. One way of doing this is to seek advice from your Registered Tax Agent or accountant. The ATO’s website also has many useful resources about tax deductions and record keeping.
- Take advice from family and friends with a grain of salt. It seems everyone’s an ‘expert’ when it comes to tax advice, but well-meaning family and friends may just land you in hot water with the ATO!
As experienced Accountants in Melton, we can help guide you with rental property tax deductions. Our team of Melton Accountants can help prepare your rental property tax return. For further information or to book your tax return appointment, please contact our team of accountants on (03) 9746 6479.