ATO warns landlords against common tax return mistakes

This confusion was found to most commonly stem from misunderstandings around how and when expenses are able to be claimed.

In an effort to reduce these mistakes, Thomson encouraged investors to provide comprehensive records of their expenses to tax agents.

“If you use a tax agent, make sure you let them know all about your rental property, including full records of your expenses. If you have a nagging question or something doesn’t make sense, make sure you ask your agent when you’re working with them,” Thomson advised.

“Rental property investments and taxation can get tricky, so it pays to get the right advice from the very beginning. Don’t rely on things you hear at a Sunday afternoon barbecue.”

Dubious deductions

Thomson established that rental property owners are only able to claim deductions to the extent that costs have been incurred in producing income.

While this means that any costs incurred while generating rental income in a year are then claimable for that period, exceptions still exist.

“It’s normal for landlords to have to fix or replace damaged items in a rental property. But there is a bit of a myth that all expenses can be claimed immediately,” Thomson stated.

“A repair can usually be claimed straight away but capital items, think dishwashers, curtains or heaters, can only be claimed immediately if they cost $300 or less, otherwise they need to be claimed over time.”

Correcting your capital expense claims

The ATO specifically cautioned rental property owners about lodging incorrect claims for capital expenses, mentioning that while repairs such as fixing a dishwasher can usually be claimed immediately, this does not in turn apply to the cost of buying a new dishwasher.

Expenses such as home improvements and capital works have to be claimed over time, with most of these costs claimable at 2.5 per cent over a span of 40 years.

The assistant commissioner also warned that rental property owners are only able to claim costs that they personally incur.

The danger of ‘double dipping’

The assistant commissioner also shed light on the practice of investors who are “double dipping” on their rental properties expenses.

“We sometimes see rental property owners ‘double dip’ on expenses that the property manager has arranged and included on the property’s income and expenses report for the year,” said Thomson.

“Often, property managers will pay for expenses like repairs from the rent received. The amount they then remit to the property owner is net of these expenses. They will also send the property owner a copy of the invoice for their records.”

The ATO reminded investors that expenses can only be claimed once, with rental property owners only able to claim on amounts personally incurred even where they possess a record of the expenses.

Interest-related issues

Deductions surrounding interest – one of the most common deductions claimed by rental property owners – were singled out by the ATO as another area in which mistakes are frequently made.

Taxpayers who are refinancing a loan for a rental property and use this money to pay for private expenses such as a new car or a holiday and then incorrectly claim the whole amount of interest charged on this investment loan for the year as a deduction are in the ATO’s sights.

“For example, if you have an $800,000 mortgage for a rental property and then add $50,000 to the loan to upgrade your family car, you can only claim the interest on the initial $800,000, not the interest on $850,000,” Thomson explained.

“It’s also not a matter of simply paying back the private part of the loan and then claiming all interest as deductible. Payments must be apportioned between the private and investment components for the life of the loan.”

The best practice with body corporates

One area where taxpayers can claim deductions is for levy payments to body corporate administration funds and general-purpose sinking funds at the time they are incurred, provided that these fees are being used for routine maintenance of common property.

But, the ATO clarified that payments made to a body corporate for capital expenditure such as replacing the roof of an apartment building, are only deductible after the capital works are complete and the expense has been billed to the body corporate.

Costs surrounding borrowing expenses such as loan establishment fees, title search fees and lender’s mortgage insurance are also noted as being often claimed incorrectly.

The ATO said these expenses are generally claimed over whichever period is shorter out of the life of the loan in question or a five-year period.

Moreover, with the exception of properties inside the ACT, state or territory stamp duty is not claimable as a deduction while renting out a property.

Instead of claiming year-to-year, the ATO stressed that stamp duty records need to be kept until the sale of the respective property, upon which the amount will be added onto your cost base to reduce any capital gain that may be present on an individual’s sale.

Remember your records!

A lack of documentation supporting expense claims and deductions was identified as another area in which mistakes are commonly made.

“You need to keep detailed and complete records, including receipts, invoices and bank statements for interest expenses. You should also detail how you calculate your deductions and any apportionments. This will allow you or your tax agent to correctly complete your tax return,” Thomson said.

With paper and electronic records both accepted by the ATO, details must include:

• The date that the document was produced.
• The nature of the goods or services purchased.
• The date the goods or services were purchased.
• The amount of the expense.
• The name, ABN number or business name of the supplier.

The ATO specified that any claims made for capital works should not be based on the purchase price of your property but rather the construction cost when it was initially built.

To work out these costs, a taxpayer can either solicit the help of a professional surveyor or compose a comprehensive capital works deduction schedule themself.

“Taxpayers are responsible for what they include in their tax return, even when using a registered tax agent. If you don’t have sufficient records, you can’t claim it,” Thomson warned.