There are three golden rules to claiming deductions on tax, and the Australian Taxation Office (ATO) has reason to believe thousands of investors are breaking them.
The ATO recently announced it would undertake 4,500 audits of taxpayers it believed had either claimed too many expenses or failed to declare some of their income. Picture: Tom Rumble/Unsplash
Last month, ATO Commissioner Chris Jordan told The Tax Institute conference in Hobart that the ATO had randomly reviewed 300 rental property claims and found errors in almost nine out of 10. Soon after, the ATO announced it would undertake 4,500 audits of taxpayers its data analytics systems had identified as “high risk” – roughly 3,000 more than it undertook last year.
Using data from accommodation sharing platforms, rental property bonds and property sales records, these systems flagged instances in which taxpayers were likely to have either over-claimed deductions or under-declared rental income. The ATO then contacted these taxpayers to offer them the opportunity to make appropriate adjustments to their returns – either through letters or via real-time “nudges” on the web-based platform myTax.
“We really want to help people get it right in the first instance, so that we don’t have to go down the audit pathway,” ATO Assistant Commissioner Gavin Siebert tells realestate.com.au.
“If the claims raised by the data analytics systems aren’t amended or advised, then that’s when we do the reviews. And if we get to the end, that’s when we need to do the audits.”
Siebert says the ATO’s enforcement gave taxpayers the benefit of the doubt and that there were a lot of “genuine mistakes”, which could generally be split into one of three categories – over-claiming interest repayments; confusing repairs and maintenance; and incorrectly apportioning rental claims.
Nerida’s 2019 property predictionsPlay Video
Over-claiming interest repayments
According to Siebert, the most common errors were related to incorrectly claiming interest repayments.
Current legislation allows investors to offset interest paid on the loan they used to buy an investment property against their assessable income, but Siebert said many investors were continuing to claim interest repayments on the entire loan even when they had refinanced a portion of it for private purposes, which contravenes the law.
The ATO only allows you to claim interest on the portion of your loan that is used to fund an investment property, regardless of whether equity in an investment property is used as security in that loan.
Confusing repairs and maintenance
The second most common mistake was the conflation of capital works and repairs. While the latter can be claimed immediately, in the income year in which the expense occurred, the former must be depreciated over a long period of time.
“For example, let’s say you renovate the bathroom in your rental home. Many investors are claiming the entire cost of that renovation in that one income year, but you need to depreciate that at a rate of 2.5% over 40 years,” says Siebert.
Ben Kingsley, co-host of the Property Couch and chairman of the Property Investors Council of Australia, says investors also often incorrectly claimed immediate deductions when they replaced fixtures and fittings.
“Great examples are things like fences, washing machines, carpets, curtains. When people replace rather than repair them, they need to write them off over a period of time, not as a complete one-off claim,” he says, in reference to the ATO’s rule that only repairs directly related to wear and tear can be claimed as an immediate deduction.
Recent change to the laws around depreciation, however, mean that investors who bought a property after 9 May 2017 can only claim depreciation on an asset if the asset was brand-new, the property was newly built, or the property had been substantially renovated and no-one had previously claimed any depreciation deductions on the asset.
2/56 St David Street
Investors often claim interest on an entire loan amount even when they have refinanced a portion of it for private purposes. Picture: realestate.com.au/buy
Incorrectly apportioning rental claims
Just as some investors are claiming interest payments for loans used for private purposes, Siebert says many are also claiming interest repayments during untenanted periods.
“You should only be claiming interest for the periods the property was rented out, or genuinely available for rent,” he says.
Travel expenses no longer claimable
Finally, Kingsley says taxpayers were still attempting to claim deductions for the cost of travel incurred while visiting their investment property on official business.
Investors were able to do this up until 1 July 2017, but changes to the law have since stripped them of this right. Now, only excluded entities or those who are carrying on a business of property investing can claim these expenses.
“The vast majority of investors are doing the right thing most of the time,” says Kingsley. “But there are some real complexities to some of the details in the tax legislation, so I would always advocate seeking out a professional tax agent who specialises in residential property investment.”
Correction: 5 April 2019
An earlier version of this article incorrectly stated that this year the ATO was planning to undertake roughly 2,000 more audits than it undertook last year. In fact, the ATO plans to undertake 3,000 audits more than it did last year.