Issue Date: Mon 24-Jun-2019
Article Source: https://thewest.com.au/business/your-money/australian-taxation-office-to-run-the-rule...
Australian Taxation Office to run the ruler over your investment property claims
More than 2.1 million people ' or about 8 per cent of the Australian population ' own an investment property according to Australian Taxation Office figures.
This boom in investment property ownership throws up particular challenges for the tax office, both in making sure it knows 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, tax office 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.
It also looks 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 homeowners 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.
In a series of random audits of investment property owners, tax office checkers found errors in almost nine out of 10 returns reviewed.
Recently, the ATO issued a list of four questions holiday-homeowners 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? 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 bought rental properties. The costs to repair damage and defects existing at the time of purchase — such as 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 bought 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 will only be able to claim deductions up to the amount of rent you have 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 many 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 key tip 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.
WHAT YOU CAN CLAIM
You can claim a deduction for your related expenses for the period your property is rented or is available for rent:
Management and maintenance costs, including interest on loans, can generally be claimed immediately (that is, deducted against your current year's income).
Borrowing expenses, depreciation and capital works spending can be deducted over a number of years.
WHAT YOU CAN’T CLAIM
Expenses not actually paid by you, such as water or electricity charges paid by your tenants
Acquisition and disposal costs, including the purchase cost, conveyancing and advertising costs and stamp duty on the title transfer – instead, these are usually included in the property's cost base, which would reduce any capital gains tax when you sell the property
GST credits for anything you purchase to lease the premises – GST doesn't apply to residential rental properties. However, when claiming the expense as a deduction, you claim the total amount you've paid (inclusive of GST, if applicable).
Mark Chapman is director of tax communications at H&R Block
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