ATO Rental Property Area of Interest
The Australian Taxation Office (“ATO”) has enhanced its focus on rental property owners who incorrectly report income and expenses.
It is the ATO’s view that there is a tax gap of around $1 billion from the incorrect reporting of rental property income and expenses and, they’re to ensure these lodgements are correct.
Due to this enhance focus, banks and other financial institutions will be required to hand the ATO residential investment loan data on an estimated 1.7 million rental property owners for the period from 2021-22 through to 2025-26.
The data collected will include:
- identification details;
- account details;
- transaction details; and
- property details.
In addition to identifying whether landlords are declaring their residential investment property income at all, the data matching program is looking specifically at how rental property loan interest and borrowing expense deductions have been reported in the rental property schedules, and whether net capital gains have been declared for property used to generate income.
Banks will not be the only source of data. In a complimentary program issue by the ATO, they have advised that they will be targeting rental property management software. In recent years, the financial management of residential rental property has moved online, facilitated by various platform providers. As a result, the ATO will require these rental property software providers to provide details of property owners including their bank details, income, expenses and the amount of those expenses, and details of their associated rental properties and agents. Importantly, the data collection of the estimated 1.6 million individuals in this data program will cover the period from 2018-19 to 2022-23.
Some of the common areas where taxpayers typically slip up are as follows:
Claiming interest and redrawing on the loan
The interest component of your investment property loan is generally deductible. However, if you redraw on your invest loan for personal purposes, interest on this portion of the loan will not be deductible. This means that interest expenses will need to be apportioned into deductible and non-deductible parts and repayments will often need to be apportioned too. If the redrawn funds are used to produce investment income, then the interest on this portion of the loan should be deductible.
You can claim a deduction for borrowing costs (typically over five years) such as application fees, mortgage registration and filing, mortgage broker fees, stamp duty on mortgage, title search fee, valuation fee, mortgage insurance and legals on the loan. Life insurance to pay the loan on death is not deductible even if taking out the insurance was a requirement to get finance. If the loan is repaid early or refinanced, the whole amount including mortgage discharge expenses and penalty interest can often be deductible.
Repairs or maintenance
Deductions claimed for repairs and maintenance is an area that the Tax Office always looks closely at so it is important to understand the rules. An area of major confusion is the difference between repairs and maintenance, and capital works. While repairs and maintenance can be claimed immediately, the deduction for capital works is generally spread over several years.
Importantly, repairs must relate directly to the wear and tear resulting from the property being rented out. This generally involves a replacement or renewal of a worn out or broken part – for example, replacing damaged palings of a fence or fixing a broken toilet.
The following expenses will not qualify as deductible repairs, but are capital:
- Replacement of an entire asset (for example, a complete fence, a new hot water system, oven, replacing a shower curtain with a glass wall, etc.)
- Improvements and extensions.
It is worth noting that any repairs and maintenance undertaken to fix problems that existed at the time the property was purchased are not deductible.
If you have any questions about the ATO’s Rental Property Area of Interest, please do not hesitate to contact Nick Stevenson on (03) 9069 7700 or firstname.lastname@example.org