With the ATO cracking down on investment property expense claims, making sure you’re ‘tax smart’ and in control of your finances is more important than ever.
How do you keep your investment property expenses, taxes and finances in order? And how do you keep the ATO out of your hair?
It all starts with good habits and keeping things simple.
1. Are you heading for trouble with the ATO?
After a random check of property investor tax returns, the ATO found a staggering 9 out of 10 were incorrect!
As a consequence, the ATO has started a crackdown on property investors who try to claim expenses that are not legitimate tax deductions.
We use a range of third party information including data from financial institutions, property transactions and rental bonds from all states and territories, and online accommodation booking platforms, in combination with sophisticated analytics to scrutinise every tax return.Assistant Commissioner Gavin Siebert
If you make an honest mistake, that’s not likely to put you in hot water with the ATO. However, pleading ignorance is no excuse when dealing with the ATO.
Attempting fraudulent or inflated claims is VERY likely to land you in the middle of a tax audit. Once that ball starts rolling, look out. All sorts of information about you can be examined, including your social media and other online accounts, property listings, social posting, and anything that gives the ATO clues about your real income and lifestyle.
The solution is simple: Just do the right thing!
Just like every other type of fraud, tax fraud is a crime. And, with so much authority to access areas of our life we never thought the ATO could reach, it simply isn’t worth trying to pull it off.
Stick to these simple rules:
- If you are a shared owner of an investment property, only claim YOUR percentage of the expenses.
- Remember to only claim expenses that are legitimate and don’t inflate your claims.
- Educate yourself on what you can and can’t claim and when and how to claim investment property tax deductions.
- If you’re not sure about any aspect of your tax obligations, talk to a tax agent like Etax.
2. Stay on top of investment property tax records
If the car glove box, kitchen draw or bottom of a handbag are regular safe havens for your investment property tax receipts, you’re going to lose out in more ways than one.
If you’re not organised with your receipts, it’s very unlikely that you’re going to remember where you’ve stashed the receipt for the tap you bought last August or the repair receipt for your air conditioner in January. You may have a bank statement but the ATO and you tax agent may still want to see the receipt. No receipt, means no claim, which means you’ll be out of pocket, year after year.
Need to get up to speed on what to keep? Read our article: The key to a better tax refund: Easy record keeping
3. Getting it right
Do you know what investment expenses you can and can’t claim and how to claim them correctly? This is one of the biggest problems that property investors have. Get it wrong and it can cause you problems with the ATO.
Need to get up to speed on what you can claim, when you can claim it and how you can claim? Read our article: Rental property tax deductions made easy.
Our advice is to keep all your paper statements and bills in one spot, along with all your receipts, income and expense records. Dated folders, a filing cabinet or some other document filing system will keep everything easy to manage – and add to over the year.
TIP: Make sure you take a photo of every receipt as soon as you get it, retail receipts fade, fast. If a receipt is illegible you can’t claim the expense as a tax deduction.
Scan or photograph statements too so you have an electronic copy for when you do your tax return. This makes it far easier to provide everything to your tax agent, or the ATO. Remember, never email your personal information or documents. Email isn’t secure so it’s simple to intercept. Always use a secure online tax agent like the etax.com.au tax return for directly uploading documents and information. Or provide documentation in person to a high street tax agent.
Why do I need to provide expense receipts when I do my tax return if I have a bank statement that shows everything?
A bank statement doesn’t provide enough information about the expense you want to claim as a tax deduction. It shows the price and who it was paid to but not what the purchase actually was. These days, the ATO often want to see actual expense receipts to prove your claims.
4. Single out your investment property finances
When you own an investment property, a lot of income and expenses come in and go out over the course of each year. So how do you keep track without spending hours doing so?
The easiest way is to open a bank account solely for all the income and expenses related to that property. It’s easy to know exactly where you stand financially when everything is channeled in and out of one point. Plus, at tax time, you can simply export a bank statement and separate out income, basic expenses, interest and mortgage payments, repairs and maintenance and any renovations or large purchases.
The same bank account for all your property income and expenses helps you keep your investment property tax deductions and your investment finances in check.
TIP: Try not to use your investment property bank account for anything other than your investment property finances. If you do need to use some cash from that account for something else, don’t worry. Make sure you create an ‘Unrelated expense’ column in your spreadsheet so it doesn’t cause confusion for you down the track.
Need some help?
At Etax, we help tens of thousands of property investors to stay on track with their taxes every year. So, if you have questions about your investment property tax obligations, or how to make sure you’re claim everything you’re entitled to claim, get in touch for a chat.