The common mistakes property investors make when filing tax returns
Many property owners miss out on potential tax deductions. Here are the common mistakes investors make when filing their tax return, writes Mark Chapman.
What’s the most important thing property investors have to know about their taxes as we approach EOFY?
The key tip is to ensure that property owners 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. Take time between now and EOFY to ensure that all your records are available and in good shape. Track down copies of missing invoices.
Also, be aware that both your income and expenses may look very different to normal because of the impact of COVID-19.
How will the COVID-19 outbreak affect the claims and returns property investors can make?
In many cases, COVID-19 has affected the amount of rent that landlords receive while expenses continue at broadly the same level as before. If tenants have not been meeting their payment obligations under the lease agreement due to COVID-19, or you have mutually agreed to reduce their rent because of the crisis, and you continue to incur normal expenses on your property, then you will still be able to claim these expenses in your tax return.
If you later receive back-payments of rent after the crisis has passed, these amounts will be taxable when received.
If your bank has deferred loan repayments because of COVID-19, the expense is still regarded as incurred by the landlord and therefore a deduction can still be claimed for the interest element.
Are there any tricks on getting the best tax returns?
Check with your tax agent that you are claiming everything that you are entitled to.
You may not know that you can claim for the following:
- Prepaid expenses. If you pay an item of expenditure this year that wholly or partly relates to next year, you can a claim a deduction for the full amount this year. This is particularly useful with expenses that straddle the tax year, such as insurance policies or subscriptions.
- If you use your home phone, computer or internet services, or your mobile phone as part of the management of your investment property, you can claim an appropriate proportion as a tax deduction.
It can also be worthwhile getting a quantity surveyor to quantify the depreciation claims that you are entitled to. Depreciation is generally one of the larger deductions. It is difficult to correctly work out and many home owners miss out on potential deductions by incorrectly claiming.
What are some mistakes investors make when claiming tax deductions?
- Claiming excessive interest expenses, such as where property owners have tried to claim borrowing costs on the family home as well as their rental property.
- Incorrectly apportioning 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 jointly.
- Claiming deductions for investment properties that are not genuinely available for rent. Rental property owners should only claim for the periods the property is rented out or is genuinely available for rent. Periods of personal use can’t be claimed. This is particularly important for holiday homes, where the ATO regularly finds evidence of home owners 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. Recently, the ATO issued a list of four questions holiday home owners 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.
- Claiming repairs for newly purchased rental properties. The costs to repair damage and defects existing at the time of purchase 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.
- Incorrectly treating properties that are 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’ll only be able to claim deductions up to the amount of rent you’ve received. You won’t be able to make a loss; if you were relying on negative gearing, that isn’t a desirable outcome!
Mark Chapman, director of tax communications at H&R Block Australia