Australian investment property owners may be on a collision-course with the Australian Tax Office (ATO) in 2023, over incorrect claiming of tax deductions.
Along with the rising cost of living and borrowing rates in Australia, the estimated 1.7 million people who own a rental property will also have their investment property tax deductions put under the spotlight this year.
The ATO says they’ve identified an estimated $1 billion tax gap due to incorrect reporting by rental property owners. To bridge this gap, the ATO is implementing a data-matching program to carefully check all investment property tax deductions.
With so many Australians owning a rental property, it is hard for the ATO to keep track of who owns what, and to know if investors are following tax rules. However, this year they will implement new measures to check if property investors claim too much money back on their taxes. For example, the ATO will check whether property owners claim interest expenses and other costs that are really linked to private homes instead of rental property.
The ATO wants to make sure everyone is following the rules, so with their new investment property data-matching program, they will be looking closely at anyone who isn’t.
What is the ATO’s investment property data-matching program?
The ATO have introduced a program that matches data to make sure property investors are paying their taxes correctly and accurately. The program primarily investigates landlords’ data from banks, which helps the ATO to police the taxation of rental properties. The ATO calls the program ‘the residential investment property loan data-matching program’ and these are the ATO’s goals:
- First, the program aims to encourage people to follow the tax rules voluntarily and feel confident in the tax system.
- They want to find and ‘help’ any landlords who are bending the rules, by identifying and educating them to:
- Fill out their tax returns correctly.
- Report any rental property loan interest and borrowing expenses accurately.
- The program also wants to make sure people report any capital gains they made from their investment properties earning income.
- Lastly, the program will look at the data it collects to find ways to improve compliance with tax laws. It may use this information to come up with strategies to help people follow the rules better.
What investment property tax deductions are the ATO looking at?
According to the ATO, the most commonly fraudulent deduction made by investors involves claiming loan costs on their family home, as well as their rental property. If you’re a landlord; you can claim a tax deduction for the interest you pay on the mortgage for that rental property. But you can’t claim a deduction for interest on the home loan for the property you live in.
The ATO will also check that your rental income and expenses are divided correctly between co-owners of a property. If someone is trying to claim more than their fair share of the expenses, or claims are being doubled-up by co-owners, the ATO will investigate.
Looking at an example where a husband and wife own an investment property together, they should split the income and expenses evenly. If one partner tries to claim more than their fair share of the expenses, the ATO will look into it.
The ATO will also check if people who own rental properties are actually renting them out. It sounds obvious but owners should only claim tax deductions for the periods when the property is rented out or is truly available to rent. Property owners can’t claim tax deductions for periods when it was not available for rental because the owners, their family or friends were using the property.
Holiday homes are another common problem. Some suspicious owners claim tax deductions for renting out a family holiday home, but in reality, no one else stays there except family and friends. Fair warning: The ATO now has ways of finding out if this is happening, including cross-checking popular holiday rental websites against the claims lodged by property owners.
The ATO will also check claims for tax deductions on newly purchased rental properties. Owners can’t claim expenses for repairing pre-existing damage or issues present at the time of purchasing the property. The ATO considers these expenses as upgrades or capital works.
What tax deductions can I claim on an investment property?
To help ensure you are making correct investment property claims on your next tax return, we published this list of 27 Rental Property expenses for you to check before the end of the year.
It’s important to note, if you buy a rental property that needs repairs, the cost of those repairs is not immediately deductible for tax purposes. Instead, you add the cost to the price you paid for the property, impacting the amount of tax you will pay when you sell it in the future.
If you do renovations to your rental property, you may be able to deduct the cost over a number of years or add it to the cost of the property for tax purposes, depending on the type of work. However, investment property owners should never claim renovations as maintenance, since the ATO will closely scrutinise this in the future. Those who bend these rules will face backlash as the ATO remains vigilant in catching them.
Claim rental expenses the right way
To get what’s fair back from the ATO, and also avoid ATO trouble or the chance of an audit, investment property owners need to follow these basic rules:
- Always keep invoices, receipts, and bank statements for all rental property expenses.
- Keep evidence that shows when your investment property was available for rent, such as rental listings
- Don’t claim upgrades or capital investment as maintenance.
- Properly divide rental property expenses between co-owners (a tax agent like Etax can help with this)
- Don’t claim interest that really applies to a private residence – you will end up getting caught out
What do you need to claim your investment property tax deductions at Etax?
As with many investments, anyone involved in rental property investment needs to keep records and evidence of their transactions. Always remember; if you can’t prove a claim, you can’t get an investment property tax deduction for it.
The best way to prepare for claiming your deductions when using Etax is to educate yourself on what you can and can’t claim, plus when and how to claim investment property tax deductions.
If you need help with how to enter your investment property tax deductions while using Etax, you can watch our how-to videos and help pop-ups, as well as chat to a real accountant via live chat, all without leaving your tax return.
The ATO has become very good at finding gaps between what individuals claim and what is actually true. If they catch you, the experience can be both expensive and unpleasant.
It’s always best to seek the advice of a tax expert, like Etax to help you understand what records are necessary to keep throughout the financial year, and to get your tax return lodgement right.
Get in touch with our team of expert accountants today!
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