With the end of financial year fast approaching taxpayers will slowly be gathering their tax documentation to lodge their 2019 tax returns. An area that has gained elevated attention from the Australian Tax Office (ATO) in the 2018 financial year are residential investments / AirBnB’s and the extent to which taxpayers are claiming deductions against these properties. The ATO plans to ramp up the intent to closely audit rental property claims in the upcoming financial year.
Background on Rental Properties
Investing in a rental property can be a sound investment, individuals can deduct any losses they make including the mortgage interest from their overall income when calculating their tax liability. However, it is important we declare all income and claim deductions appropriately.
Rental income outlined by the ATO we must declare:
- Rental income received from tenants or agents
- Rental bond money you become entitled to
- Insurance payouts
- Letting or booking fees
- Associated payments you received or become entitled too
- Reimbursements or recoupment of deductible expenses
Rental expenses outlined by the ATO we can deduct:
- Advertising costs
- Body corporate fees
- Water charges
- Council rates
- Land tax
- Interest expense
- Legal expenses
- Repairs and maintenance
- Capital allowances and works
Australian Tax Office 2018 Financial Year Recap
Recent surveys from the ATO has announced that more than $47 billion in rental deductions were claimed whilst $44.1 billion in income was declared in the 2017-18 financial year by almost 2.2 million Australians. The ATO audited more then 1500 taxpayers making incorrect rental claims, applying up to $1.3 million in penalties. This is including AirBnB properties claiming deductions for a holiday homes that were not available to rent. The ATO expects to double the number of in-depth audits on rental properties this upcoming financial year to 4,500. The primary areas of focus will circulate:
- Over-claiming interest
- Claiming capital works as repairs and maintenance
- Incorrectly claiming holiday home expenses
- Omitting income from shared accommodations
How can you properly prepare?
Claim the interest on your loan correctly
If you take out a loan to purchase a rental property, you are entitled to any interest expense you incur bearing in mind there is no personal drawbacks. If there are personal loan draw backs that increase your debt owing to the bank you will need to correctly apportion out the interest in terms of the rental property investment and personal drawbacks. As only the interest relating to the rental property is deductible.
Knowing the difference between capital works and repairs
Repairs or maintenance restores the function of an asset and does not improve it. Meaning it does not add or change the character or the asset, it simply renews or replaces part of the asset. Repairs are deductible immediately and are not to be confused with capital works. Capital works are forms of improvement or renovations that are depreciated over several years. Therefore, an immediate deduction is not available.
Do you have a holiday home?
A holiday home is not to be confused with a rental investment. Holiday homes are private in nature as they are used for family holidays meaning the rental expenses outlined earlier in this newsletter are not deductible. However, if your holiday home is rented out below market value to say family or friends, you are entitled to claim expenses up to the amount of income you received. If the property is genuinely available for rent, keeping it at condition where individuals would want to rent it out and not unreasonably refusing these tenants, the nature shifts from a holiday home to a residential investment property.
Have you kept records?
The number one reason the ATO has disallowed many deductions is due to the fact taxpayers cannot supply valid documentation to support their claims. Keeping all your records secure and ready for tax time will ensure your deduction claim is valid.