ATO focus: rental properties – majority of landlords making tax mistakes

The ATO has indicated 90% of landlords are making mistakes when completing their FY22 tax returns. As a result of this the ATO will focus on reviewing rental property returns to make sure landlords are correctly including all rental income and correctly claiming expenses. The ATO will be using cross matching data from a variety of sources to assist with their review.

To assist landlords in completing their tax returns and minimising errors, the ATO has provided their top 10 tax tips:

  1. Correctly apportioning income and expenses – For taxpayers that are joint tenants in a rental property, income and expenses should be split 50/50. While tenants in common are split based on the particular ownership interest for each owner.
  2. Check the property genuinely available for rent – The ATO has reviewed a number of cases where the rental terms suggest that a property is not genuinely available for rent (e.g. unrealistically high rental charges not comparable to market or not genuinely advertised to the public). This can disqualify rental deductions available to the landlord.
  3. Initial repairs and structural improvements – Ongoing repairs are generally deductible but initial repairs to fix damaged items when a property is first purchased (e.g. fixing damaged floor boards) are generally capital in nature and must be depreciated. Replacing structures (e.g. an entire roof) are generally regarded as building costs and claimed at 2.5% per annum.
  4. Borrowing expenses – Borrowing expenses such as loan establishment fees are deductible over 5 years.
  5. Purchase costs – Costs associated with purchasing the property such as stamp duty and legal fees cannot be claimed but form part of the cost base of the property for capital gains tax purposes.
  6. Private expenses – This also relates to tip 2 above. If your rental property is not genuinely available for rent for the full income year then the landlord would only be allowed a deduction for the period it was genuinely available. Renting out to relatives and friends at “mates rates” is considered by the Tax Office as not genuine rental.
  7. Getting construction costs right – Building depreciation in the form of capital works can be claimed at rate of 2.5% per annum on the building’s construction cost which can also include capital improvements that are part of the building. However care is required when acquiring existing buildings as the capital work deductions will depend on an earlier construction cost and what has been claimed by the previous owners. Obtaining a quantity surveyor report can assist with claims in these situations.
  8. Claiming interest – Interest can only be claimed if the loan is for income producing purposes. If part of the loan is used for private purposes (e.g. the loan is re-drawn to buy a boat) then an apportionment of interest between a deductible and non-deductible component will be required.
  9. Keeping records – Landlords will need to keep records to support their claims. For capital gains tax purposes, landlords will need to keep their records for the entire period they hold the property plus 5 years from the year the property is sold. This could be a very long time!
  10. Calculating capital gains correctly – The cost base of the property may need to be reduced if certain deductions have already been claimed in respect of the property (e.g. capital works deductions claimed on buildings).

 

Click here for the ATO’s Tax Time Tool Kit which has additional information.

As always, please contact your local Bentleys adviser if you need any assistance with completing your FY22 return.

 

Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.