• ATO increases focus on rental property deductions

    The ATO will have an increased focus on rental property deductions this tax time and is encouraging rental owners to double-check their claims are correct before lodging their tax return.

    In particular, the ATO is paying close attention to:

    • excessive deductions claimed for holiday homes,
    • husbands and wives splitting rental income and deductions for jointly owned properties that is not supported,
    • claims for repairs and maintenance shortly after the property was purchased, and
    • interest deductions claimed for the private proportion of loans.

    While the ATO will be paying closer attention to these issues in 2015, it will also be actively educating rental property owners about what they can and cannot claim.

    For example, the ATO will be writing to rental property owners in popular holiday locations, reminding them to only claim the deductions they are entitled to, for the periods the property is rented out or is genuinely available for rent.

    Getting rental property deductions right

    There are a few simple rules rental property owners should follow to avoid making mistakes on their tax return.

    First, it is important for all property owners to keep accurate records. This helps to ensure they declare the right amount of rental income and they have evidence for claims made.

    Secondly, rental property owners should only claim deductions for the periods the property is rented out or is genuinely available for rent. If a property is rented at below market rates, for example to family or friends, deduction claims must be limited to the income earned while rented.

    Finally, costs to repair damage, defects or deterioration existing on purchase, or renovation costs, can’t be claimed as an immediate deduction. These costs are deductible over a number of years.

    Case studies

    Holiday homes

    The ATO recently amended a taxpayer's return to disallow deductions claimed for a holiday home after discovering that:

    The taxpayer rented the home to family and friends during the year at less than market rate.

    Besides a brochure which was only available at the taxpayers’ business premises, there were no realistic efforts to let the property.

    The nightly rent advertised was much higher than that of surrounding properties.

    The pattern of income did not match the advertised rate, or the requirement for a five-night minimum stay.

    The ATO ruled that the property was mainly used for the taxpayer’s personal use, and deductions were limited to the amount earned from family and friends. The end result was that the taxpayer had to pay more tax and a penalty was imposed.

    Husband and wives

    The ATO has seen instances where a husband and wife jointly own a property but split the income and deductions unequally to get a tax advantage for the highest income earner. Some people have even included the income in the low income earner's returns and the deductions in the high income earner's returns. These types of arrangements attract higher penalties where we believe they have been done deliberately.

    Refinancing

    The ATO recently addressed a situation where a property was refinanced by a taxpayer to pay for their daughters’ wedding and an overseas holiday. The taxpayer claimed the whole interest amount, but should have only claimed the portion of interest that relates to the rental property.

    Repairs and maintenance

    A taxpayer recently claimed repairs and maintenance for a newly acquired rental property which was significantly improved upon purchase. The taxpayer provided an invoice from an interior developer for the “refurbishment” of the property. Further documentation detailed the scope of the refurbishment which included completely stripping the property and replacing old fixtures and fittings with new. The large repairs and maintenance claim was disallowed because initial repairs and improvements to a property are not deductible.

    Rebuilding

    A husband and wife demolished their existing rental property and built a new dwelling. In their income tax return they claimed an immediate deduction for their share of the entire cost of the building as repairs and maintenance. While the cost of constructing the new dwelling for rental purposes is permitted, the correct treatment is to spread the cost over 40 years, claiming 2.5 per cent of eligible construction costs as a capital works deduction. The repairs and maintenance claim was disallowed.

    For more information

    There are a range of videos available to help rental property owners correctly claim rental deductions at: ato.gov.au/General/Property/In-detail/Rental-properties/Rental-Property-video-series/

    For more information on holiday homes, go to: ato.gov.au/general/property/in-detail/holiday-homes/

    Last modified: 28 Apr 2015QC 45300