The Australian Taxation Office (ATO) issued a reminder this week to property investors to beware of common tax traps that can delay refunds or lead to an audit.
In 2019–20, over 1.8 million Australians owned rental properties and claimed $38 billion in deductions.
Assistant Commissioner Tim Loh said that the most common mistake rental property and holiday homeowners make is neglecting to declare all their income. This includes failing to declare any capital gains from selling an investment property.
“To put it simply, you should expect tax consequences for any property that you earn income from that isn’t your main residence”, he said.
“Most people we contact about their rental deductions are able to justify their claims. However, there are instances where we have to knock back claims where taxpayers didn’t keep receipts, claimed for personal use, or claimed for ineligible deductions”, Loh said.
Claims that are likely to be rejected include interest charges on personal loan amounts and immediate claims for the full amount for capital works (for example, a kitchen renovation), so it is vital that you have good records.
The cost of repairs for wear and tear to the property are deductible immediately if they are to replace or fix existing items, such as curtains, without upgrading them. However, improvements or capital expenses, such as a kitchen renovation, are not deductible immediately.
Did you negotiate reduced or deferred rent for your tenants over the year? The ATO advises that you only need to declare the rent you have received as income. If payments by your tenants are deferred until the next financial year, you do not need to include these payments until you receive them.
Back payments for deferred rent or insurance for lost rent should be declared as income in the financial year in which you receive the amounts.
While your rental income might be reduced, you can still claim normal expenses made on your property as long as the reduced rent is determined at arms’ length and considers current market conditions.
For more information on rentals, the ATO website offers advice, guidance, and an online tool on its website to help taxpayers make these calculations, but advises consulting a registered tax agent.
