ATO warns rental property owners to claim deductions correctly or face scrutiny

The Australian Taxation Office (ATO) has warned rental property owners that their tax returns are under the spotlight this tax time, with the majority making errors despite using registered tax agents.

ATO Assistant Commissioner Rob Thomson said the most common mistake was not understanding what expenses could be claimed and when, particularly the difference between repairs and maintenance versus capital expenses.

“We understand rental property owners may already have long lists of things to fix in their properties. But by getting your tax return right the first time, you’ll avoid having to add ‘fix up tax return’ to your to-do list down the track,” Mr Thomson said.

The ATO receives data from various sources and cross-checks it to determine the accuracy of tax returns lodged by rental property owners.

Mr Thomson advised rental property owners to provide their tax agents with full records of their expenses and to ask questions if something doesn’t make sense.

“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 barbeque,” he said.

Rental property owners can only claim deductions to the extent they’re incurred in producing income, with some exceptions.

“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,” Mr Thomson explained.

The ATO also warned against “double dipping” on expenses that property managers have already included in income and expense reports.

One of the most common deductions claimed by rental property owners is interest on mortgages, with incorrectly reporting interest expenses accounting for an estimated 42% of the $1.2 billion Individuals Not in Business tax gap associated with rental properties.

Mr Thomson said a common issue was when taxpayers redraw or refinance a loan for their rental property and use the money for private expenses, then claim the whole amount of interest charged for the year as a deduction.

“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,” he said.

A lack of documentation to substantiate claims is another leading cause of errors, with Mr Thomson stressing the need for detailed and complete records.

The ATO also warned about incorrect claims for capital expenses, with repairs generally claimable immediately but improvements and capital works needing to be claimed over time.

“Spending money to fix something could be a repair, initial repair, capital works, or a depreciating asset. Our Investor toolkit can help you to understand the difference, as the amount you can claim as a deduction this tax time will depend on which category it falls into,” Mr Thomson said.