The Australian Taxation Office (ATO), after an audit of investment property owners from the previous financial years, found that nine out ten of them made errors in their rental property claims. This demonstrates how confusing and confusing tax returns filing can be.
According to the ATO’s website, among the common errors made by rental property owners “that concern us” were:
- For properties not actually available for rent, claim deductions
- If a portion was used for private purposes, claim deductions from loan interest expenses
- Incorrect categorisation capital works and capital allowances
- Insufficient records to support income received or deductions claimed
- Incorrectly allocated claims for interest deductions
The ATO, however, believes that many of these errors were “simple mistakes” and resulted from the failure of property owners to disclose information to accountants at tax time. Still, the agency indicated that it would be stricter in auditing tax returns from rental properties, which it singled out as a “top priority.”
Lloyd Edge, director of Aus Property Professionals, is the author of Positively Geared. He has witnessed first-hand how his clients struggle to navigate the tax benefits and deductibles that must be included in their tax returns.
“The ATO has indicated that it will be cracking down on rental, holiday, and investment properties, among other verticals, in 2021 tax returns,” he says. “They’ve outlined excessive expense claims and incorrectly appointing rental income and expenses between owners will be under the microscope. So, it’s important to be fully equipped with the right information and tools.”
Edge has five tips for landlords and property investors to avoid making the same mistakes on their 2021 tax returns.
1. Co-owned properties are subject to equal expenses and income.
The ATO states that rental income and expenses from the property must be divided among the co-owners according to their “legal interest in the property,” meaning these must split equally.
“This is despite any written or oral agreement between the co-owners stating otherwise, for example, agreeing that one owner can claim 100% for tax purposes – you simply cannot do that,” Edge says.
2. You should keep all records right from the beginning.
“If you invest in a rental property or rent it out, you’ll need to keep records right from the start so you can work out what expenses you can claim as deductions and ensure you declare all your rental-related income in your tax return,” Edge says.
These “proofs of expenses” can include receipts, and bank and credit card statements.
“You will also need the records of the date and costs of buying the property, so you can work any capital gain (or loss) when you dispose of it,” he adds.
3. Declare all rental-related income
Edge advises landlords to declare all rental income. Rent bond money is used to cover the cost of maintenance, rent defaults, insurance payouts, letting fees, and booking fees.
“It’s important to note, however, that [good and services tax] GST doesn’t apply to rent on residential premises – you’re not liable for GST on the rent you charge,” he says.
4. Know what you can claim and what you cannot.
The ATO stresses that investors can only claim deductions on a rental property during periods when it was tenanted or “genuinely available for rent.” Additionally, investors can only claim a deduction for the portion an expense that was used to generate income and they must present records to prove these expenses.
Edge lists some expenses investors can deduct from tax bills.
- Repairs and maintenance, including funds to replace electrical appliances or paint a rental property.
- You will be charged interest on any loan that you use to buy a rental property, or depreciating asset (e.g. air conditioner). However, you can’t claim interest on the portion of the loan you use for private purposes or on a loan that you used to buy a new home if it doesn’t produce income.
- Legal expenses include funds for the eviction of a tenant who is not paying rent or to defend damages claims.
- Borrowing costs include loan establishment fees, title searches fees, and the cost of preparing mortgage documents and filing them. You cannot claim the loan balances or stamp duty on the transfer of the property.
- Carpet, ovens cooktops, stoves, dishwashers and heaters are all depreciating assets. Blinds, curtains, blinds, and carpet are just a few examples. It doesn’t matter if the depreciating asset installed was new or used, or if the property was new or not.
5. You can avoid capital gain tax (CGT), when you sell an investment property
“A capital gain, or loss, is the difference between what it cost you to obtain and improve the property (the cost base), and what you receive when you dispose it,” Edge says. “Amounts that you’ve claimed as a tax deduction, or that you can claim, are excluded from the property’s cost base. Even if you have an investment property that isn’t rented out such as a holiday home, the property is subject to CGT in the same way as a rental property.”
Edge suggests that landlords speak with a registered tax agent in order to better understand what claims they may include in their tax statements.
“I do encourage investors to use a registered tax agent as they can provide you with consumer protection,” he says. They’re also up-to-date with any changes to taxation legislation, so they can help maximise your return.”