Your Money

Property investors are big targets for the tax office this year

- June 21, 2024 3 MIN READ
Investment property and tax

The Australian Taxation Office (ATO) is warning rental property owners that their tax returns are in the spotlight this tax time.

That’s because the ATO has found the majority of rental property owners are making errors in their tax returns, despite 86 per cent using a registered tax agent.

The most common mistake is not understanding what expenses can be claimed and when. In particular, the difference between what can be claimed for repairs and maintenance versus capital expenses.

Other mistakes on the ATO’s radar include overclaimed deductions and a lack of documentation to substantiate the expenses claimed.

The ATO receives data from a range of sources like banks, land title offices, insurance companies, property managers and sharing economy providers (like Airbnb), and cross checks this data to determine the accuracy of tax returns lodged by rental property owners.

Rental property owners can claim deductions only to the extent they’re incurred in producing income. This means any costs you incur in generating rental income each year, may be claimed for the same period. There are some exceptions.

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

Double check claiming your interest on mortgages

One of the most common deductions claimed by rental property owners is interest on mortgages. Based on previous years data, the ATO estimates incorrectly reporting interest expenses account for 42 per cent of the $1.2 billion tax gap associated with rental properties.

A common issue with interest deductions is where taxpayers are redrawing or refinancing a loan for their rental property and using the extra money to pay for private expenses like a new car, school fees or a holiday, then claim the whole amount of interest charged on the investment loan 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.

A deduction can be claimed for levy payments to body corporate administration funds and general-purpose sinking funds at the time they are incurred, as long as the fees are used for routine maintenance of common property. However, if the body corporate requires payments to a special purpose fund to pay for a particular capital expenditure, like replacing the roof of an apartment building, these levies are not deductible until the capital works are complete and the expense has been billed to the body corporate.

Borrowing expenses can also be a red flag

Costs relating to borrowing expenses, including loan establishment fees, lender’s mortgage insurance and title search fees, are also commonly being claimed incorrectly. These costs are generally claimed over a five-year period or the life of the loan, whichever is less. State or territory stamp duty can’t be claimed as a deduction while you rent the property (except in the Australian Capital Territory).

You need to keep these records until you sell, when the amount will be added to your cost base to reduce any capital gain you may have on the sale.

The ATO is also warning rental property owners about incorrect claims for capital expenses.

Repairs such as fixing a dishwasher can generally be claimed immediately but buying a new dishwasher cannot.

Some expenses including improvements and capital works must be claimed over time, for example remodelling the bathroom in your rental property. In most circumstances, capital expenses are claimed at 2.5 per cent over 40 years.

The ATO has an investor toolkit on their website which is a great resource.

4 tax benefits you can unlock as a landlord

There are a range of deductions that you can unlock as a landlord, but here are just four short-term expenses that you can claim immediately.

1. Advertising for tenants

While there are a lot of ‘no-brainer’ tax deductions, advertising expenses are often forgotten about.

Advertising for tenants is necessary to keep your property leased and generating rental income, so it’s therefore a deductible expense.

2. Utilities, insurance and operational costs

Every landlord handles utilities differently, but generally they are a tax deductible expense. You can claim deductions on utility bills including water, electricity, gas and internet service.

3. Upkeep and repairs

These expenses are costs you incur for keeping your property in a tenantable condition.

You can claim repairs and maintenance in the same income year, but these must be a direct result of wear and tear. Think broken roof tiles that need replacing, carpets wearing out, or maybe even a tired appliance.

4. Interest on your mortgage

If you take out a loan to purchase a rental property, you can claim a deduction on the interest you pay on your loan. Make sure you’re also claiming things like service fees or annual charges to service your loan. For example, if you incur $12,000 interest on your loan per financial year and $800 in loan fees, you can claim this on your personal tax return.

There are many caveats on all four of these tax breaks, so do your research and talk to a financial adviser before you lodge your return.