This tax season will see the ATO specifically targeting extreme or inappropriate deductions made by rental property owners.
While it is not uncommon to make some mistakes when claiming rental deductions, it is necessary for taxpayers with rental property interests to get their deductions and expense claims right to avoid facing harsh and costly penalties. Last year, the ATO contacted more than 350,000 taxpayers about omissions and errors in their returns.
This 2015-16 financial year will see the ATO increasing its focus on four main problem areas where rental property owners are incorrectly, whether by error or design, claiming deductions that don’t necessarily suit their circumstances. These include:
Claiming excessive deductions
The ATO recently amended deductions claimed for a holiday home. Deductions may only be claimed for the periods when the holiday house property was rented out, or when it was genuinely available for rent. Deductions should also be limited to the amount of income earned by the property owner when the property is rented out below the market rate to family or friends.
Partners splitting income and deductions
Husbands and wives who own property together, but divide the income and deductions unequally to receive a tax advantage for the higher income earner, will be heavily penalised by the tax office. These kinds of arrangements will attract higher penalties if the ATO believes that they are carried out deliberately.
Repairs or maintenance claims
The ATO will carefully examine any repair and maintenance costs incurred by a property owner after a property is bought. These ‘initial repairs and improvements’ costs to a property are generally not deductible, but can be added to the capital cost of the property.
Claiming for interest deductions
Interest expenses incurred for a rental property are only deductible when the property is used to produce rental income. For example, those who own a two-storey house and live privately in the bottom storey but lease out the top storey can only claim 50% of the interest expenses. Property owners must be aware that any interest expense incurred from the private use of a property is non-deductible.