The Australian Taxation Office (ATO) is reminding rental property owners to take care when lodging their return this tax time.
ATO Assistant Commissioner Tim Loh explained that a recent review of income tax returns show 9 in 10 rental property owners are getting their return wrong.
“We often see rental income being left out, or mistakes being made with property related deductions – like overclaiming expenses or claiming for improvements to private properties”, Loh said.
“When preparing your tax return, make sure all rental income is included, including income from short-term rental arrangements, renting part of a home, and other rental-related income like insurance payouts and rental bond money retained.
‘Income and deductions must be in line with a rental property owner’s ownership interest, which should generally mirror the legal documents”, he added.
Rental income must be reported:
– in the year the tenant pays – not when your agent transfers it to you; and
– as the gross amount received (before property manager fees and other expenses your property manager pays on your behalf are taken out).
“Make sure you are declaring your gross income” Loh said. “We have seen some clients declaring their net rental income after the property manager has paid their expenses and then they have claimed deductions like rates and repairs all over again.”
On the rental expenses side, there are 3 categories:
1. Expenses where you cannot claim deductions, such as personal expenses, including expenses arising from your personal use of the property and expenses of a capital nature, such as second-hand depreciating assets.
2. Expenses where you can claim an immediate deduction in the income year you incur the expense – for example, interest on loans, council rates, repairs and maintenance and depreciating assets costing $300 or less.
3. Expenses where you can claim deductions over a number of income years, such as capital works, borrowing expenses and the decline in value of depreciating assets (if specific criteria are met).
The ATO is particularly focused on interest expenses this year, and making sure rental property owners understand how to correctly apportion loan interest expenses where part of the loan was used for private purposes (or the loan was re-financed with some private purpose).
“Around 80 per cent of taxpayers with rental income claimed a deduction for interest on their loan, and this is where we’re seeing the biggest mistakes”, Loh noted, adding that interest can only be claimed on a loan used to purchase a rental property to earn rental income.
“If you’ve used any part of your original or refinanced investment property loan to cover private expenses, like buying a new car or renovating the home you live in, you can only claim an interest deduction for the portion relating to producing your rental income”, he said.
On expenses relating to repairs, maintenance, and improvements, Loh says it is important to understand how to claim deductions.
‘When you first acquire a rental property and it needs work done to get tenants in – for example, you need to fix a hole in the wall or some damaged floorboards – these are initial repairs’, he explained.
Initial repairs to rectify damage, defects or deterioration that existed at the time of purchasing a property can’t be claimed as an immediate deduction but may be claimed over a number of years as capital works deductions.
“If you have owned your rental property for a number of years and perform general repairs and maintenance, these repairs are immediately deductible.
“You can claim an immediate deduction for general repairs like replacing a broken light globe or window. But if you rip out an old bathroom and put in a new and improved one, this is a capital improvement and is deductible over time as capital works”, Loh concluded.
Visit the ATO website to take advantage of a range of resources to help you get your rental returns right this tax time, including their top 10 tips for avoiding mistakes.
