Investment properties: tax return errors that trigger ATO follow-up

Owning an investment property can be tax-effective, but it’s also one of the ATO’s most closely monitored areas, so getting your tax return right is critical. Each year the ATO uses third-party data and targeted reviews to identify common mistakes made by landlords. Here are five errors that most often trigger ATO follow-up, and the related areas to keep in mind.  

Over-claiming repairs that should be capital works

Look out for issues like:

• confusing immediate repairs with improvements; and

• incorrectly claiming kitchen, bathroom or structural upgrades.

Repairs and maintenance can be claimed for work that remedies or prevents defects, damage or deterioration arising from using the property to earn income. These expenses are generally deductible in the year they are incurred.

By contrast, capital works are structural improvements, alterations or extensions that go beyond merely fixing wear and tear. If the work improves the function or value of the property, it is likely to be capital in nature. Capital works are usually claimed at 2.5% over 40 years (subject to specific exceptions).

Claiming incorrect interest deductions

Look out for issues like:

• not apportioning interest where loans are partly private; and

• claiming 100% interest after personal redraws.

If a loan’s used for both private purposes and rental property expenses, the interest must be apportioned. You can only claim the portion that relates to the rental property.

This applies whether the mixed use occurs when the loan is first taken out, or arises later through refinancing or redraws. Apportioning of interest must continue over the life of the loan, and interest on amounts used for private purposes is never deductible.

Claiming deductions during private use periods

Look out for issues like:

• private use of holiday homes or mixed-use properties; and

• your property not being genuinely available for rent.

You can’t claim deductions for interest or other expenses for periods when a holiday home or mixed-use property is used privately, even if the private use is brief.

To legitimately claim deductions, the property must be rented or genuinely available for rent. A property may not be considered genuinely available if it’s advertised only through limited channels, offered only during periods of very low demand, or subject to unreasonable conditions such as above-market rent or overly restrictive tenant requirements. Repeatedly refusing suitable tenants without valid reasons can also indicate the property is being held for personal use rather than income producing purposes.

Poor record keeping and lack of substantiation

Look out for issues like:

• missing invoices or relying on estimates; and

• lack of evidence ro support apportionment calculations.

You must keep records of your rental income and expenses for at least five years from the date you lodge your tax return. If a dispute with the ATO arises during that period, you must retain relevant records until the dispute is resolved.

Not reporting all rental related income

Look out for issues like:

• insurance payouts, letting fees or short-term rental income; and

• the ATO’s data-matching arrangements with banks and property platforms.

Rental-related income includes more than just rent. It can also include bond money retained for unpaid rent or damage, letting or booking fees from cancelled reservations, and insurance payouts, whether for property damage or loss of rent. Disaster relief payments received in relation to a rental property may also be assessable.

The ATO now cross-checks data from banks, state land registries, insurers, rental bond authorities and digital platforms, making errors easier to detect than ever.

Source: www.ato.gov.au/individuals-and-families/investments-and-assets/property-and-land/residential-rental-properties