Property investors will be in the Australian Taxation Office’s cross hairs this year, but it’s not the first time – and nothing to panic, according to the experts.
The ATO announced its four key focus areas are record keeping and rental property income and deductions, along with work-related expenses and capital gains from crypto assets, property, and shares.
Elinor Kasapidis, senior manager of tax policy at CPA Australia, said property investors claim more than $50 billion in deductions each year, so unsurprisingly, rental properties are always on the ATO’s radar.
“But that doesn’t mean landlords need to be worried,” Ms Kasapidis said.
“Provided you declare your rental income in full and make sure you have good records to back up any rental deductions, you won’t fall afoul of the tax office.”
Keeping good records is key
Property investors should always maintain thorough record keeping to manage their tax and maximize deductions.
“It’s all about the records – if you can’t prove it, you can’t claim it,” Ms Kasapidis said. “Make sure you keep evidence of each deduction you intend to claim.
“This could be in the form of invoices, receipts, bank and credit card statements, lease agreements, or other suitable documentation.”
The complexity of property deductions makes it easy for property investors to make mistakes, Washington Brown Quantity Surveyors CEO Tyron Hyde said, which is why the ATO has a vested interest in making sure investors claim only what they’re entitled to.
Despite having seen a few “concerning scenarios” where the records provided were either flat out false or in disarray, Mr Hyde said the majority of investors have everything in order.
He advises investors to keep a spreadsheet of all relevant expenses, filled in as you go.
“This will save you so much time and stress leading up to tax time.
“If spreadsheets aren’t your thing, there are some great online property record keeping portals available for landlords.”
Property investors should keep clear and extensive records about all income and expenses related to their rental. Picture: Getty
If investors only rent out their property for part of the year, they need to keep records to show when it’s genuinely available for lease, Ms Kasapidis said.
“Advertising your property via word of mouth only won’t cut it, nor will advertising it above the market rate,” she said.
“The ATO keeps a watchful eye out for people who try to obtain rental tax deductions for periods when a property is only available for personal use and targets postcodes where holiday homes are located.”
Know what you can and can’t claim
Generally, expenses associated with a rental property can be claimed as a tax deduction against the income.
These costs include interest on mortgage repayments, repairs and maintenance, property management fees, insurances, utility bills, council rates, and strata fees.
You can also claim depreciation as a deduction.
Mr Hyde said property investors were potentially missing out on thousands of dollars in deductions by not investigating whether there were any depreciation benefits available to them.
He recommends investors check to see if a tax depreciation schedule is of benefit for their property and don’t leave it too late in having one prepared if it is. This should be given to a tax agent to calculate the claim each year.
Depreciation rules have changed, so investors buying established property can no longer claim deductions on existing plant and equipment items, such as carpet and appliances.
However, there are still significant building allowance deductions available for properties built after 1987 and/or where improvements have been made by the new or previous owner, Mr Hyde said.
Plant and equipment depreciation deductions apply to brand-new properties, but if the owner moves in for any time after settlement before renting it out, those items are viewed as previously used, so there won’t be any deductions available.
There are a number of genuine deductions landlords can make, but they should know what is and isn’t allowed. Picture: Getty
Mr Hyde said investors should purchase brand-new items rather than second hand, as it will translate to more depreciation deductions.
“Individual items under $300 can be written off immediately if purchased new, resulting in more deductions sooner,” he said.
Ms Kasapidis said it’s important to be aware that there is a difference between costs that can be deducted in full straight away, such as repairs, and those which need to be depreciated over time, such as borrowing costs, replacing your kitchen, or adding fixed assets like split systems.
What not to do
The ATO is looking to close the estimated $1.5 billion tax gap associated with rental properties, so over-claiming deductions is the number one ‘no’, Ms Kasapidis said.
She said common mistakes made by property investors include claiming deductions when the property isn’t genuinely available for rent, incorrectly calculating interest deductions, claiming deductions for assets that were in the property at the time of purchase, incorrectly allocating income to owners, and not having proper records.
The ATO has access to huge volumes of property data that they use to gather information about rental properties, so property investors will be caught out, Ms Kasapidis added.
“Make sure to declare all your rental income to avoid potentially hefty penalties and interest later.”
Landlords who try to dud the ATO have a high chance of being caught. Picture: Getty
Mr Hyde said property investors should avoid attempting to claim deductions for their own labour, submitting expenses incurred at an inflated rate, and trying to claim for expenses they have not incurred.
“Do not claim your flight to the Gold Coast or other leisure destination under the guise of inspecting your property,” he said. “The ATO put a stop to this travel a long time ago.”
DIY versus a professional
Getting a tax professional to help with a property investor’s tax return can ensure total compliance, as well as making sure maximum deductions are achieved, Mr Hyde said.
“From my experience the fee paid is often way less than the extra deductions.”
While many Australians have relatively simple tax returns, once you add rental properties into the equation, things become a bit more difficult, Ms Kasapidis said.
“Because the tax rules are complex, particularly around deductions, there’s a higher chance of getting something wrong if you do it yourself,” she said.
“Registered tax agents can make sure claims are correct, as well as help owners understand the income that must be reported and what records need to be kept.
“You can cut your own hair, but you’ll get a better result if you see a professional. It’s the same with completing your tax return.”
For investors doing their own return, extra caution is advised. Picture: Getty
Ms Kasapidis warns property investors against taking tax advice from family and friends.
“Most people aren’t across the tax rules for investment properties and are likely to steer you wrong.”
And it’s important to make sure your tax agent is registered with the Tax Practitioners Board, she added.
“At tax time there’s always an upsurge in non-registered agents spruiking their services via word of mouth or social media.
“Seeing one of them could cost you dearly – in wrong claims, missed deductions, or worse.”