Statistics recently published by the Australian Taxation Office (ATO) reveal that the vast majority of property investors are aged 40 years or older and they earn less than $80,000 per annum. If this sounds like one of your clients, then it’s important to take note!

In an ATO media release in April 2019, Assistant Commissioner Gavin Siebert was quoted as saying “We expect to more than double the number of in-depth audits we conduct this year to 4,500, with a specific focus on over-claimed interest, capital works claimed as repairs, incorrect apportionment of expenses for holiday homes let out to others, and omitted income from accommodation sharing”. This is not surprising given that 90 percent of a random sample of selected returns with rental deductions contained errors.

So what will the ATO be focusing on and what does it all mean. Let’s take a look at a few of the key areas.

1. Interest

You can only claim the interest on a loan that you used to acquire an investment property as a tax deduction. Interest on additional funds drawn out of the loan and secured against the investment property to fund personal expenses or personal debt is not tax deductible.

2. Capital works v repairs

Repairs restore things that are broken or damaged to their original condition and may be immediately claimed as a tax deduction. Improvements or substantial renovations alter or improve the condition of the property and may be tax deductible over a number of years. Items in need of repair at the time that you purchase a property are referred to as ‘initial repairs’. Initial repairs are also tax deductible over a number of years as opposed to being immediately tax deductible.

3. Holiday homes

You can only claim expenses (interest, repairs, insurance etc.) in relation to a holiday home as tax deductible during the periods that the property is rented or genuinely available for rent. Furthermore, if the property is rented for less than market value to friends and family, then your tax deduction will be limited to the amount of rent received.

4. Short term letting or sharing

Income received from short term letting or renting part of a house or unit is assessable for income tax purposes and must be declared in your income tax return. This income may be reduced by any expenses that you are entitled to claim whilst the property is being let.

Penalties for non-compliance are significant and deliberate attempts to submit false claims in your income tax return can attract penalties of up to 75% as well as general interest charge for late payment. In 2017-18, the ATO applied penalties of $1.3 million to over 1,500 tax payers with rental claims!

The evolution or technology has also meant that the ATO’s task of ensuring compliance is becoming easier. Assistant Commissioner Gavin Siebert says, “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.”

I am hopeful that you now have a greater understanding of where the ATO will be focusing their attention in relation to rental property investments. Whilst I appreciate that you are often referring your clients to their tax agent for specific advice, agents play an important role in the property investment landscape and it’s important to be aware of your clients obligations when it comes to tax.

Bishop Collins Chartered Accountants are specialists in the Real Estate Industry and a service member of the NREA.

If you need any questions answered in regards to this topic please contact our office on (02) 4353 2333, email us at phillipkeenan@bishopcollins.com.au or visit our website www.bishopcollins.com.au

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