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Another ATO Rental Property Crackdown

Just as they did in 2019, the ATO are launching a campaign to target rental property owners who incorrectly report income and expenses. Data-matching efforts have identified a tax gap of approximately $1 billion, and unsurprising are looking to recoup those funds. Financial institutions are now obliged to share data with the ATO, and there are a few common problem areas that are being scrutinised closely. If you own an investment property, read on to find out what the ATO is looking for, and how you can stay in their good books.

What are the ATO Looking For?

It has been announced that banks and other financial institutions will be required to hand over to the ATO residential investment loan data, on approximately 1.7 million rental property owners from the 2021/22 to the 2025/26 financial years. The data they’re collecting includes:

• identification details (names, addresses, phone numbers, dates of birth, etc.)
• account details (account numbers, BSB’s, balances, commencement and end dates, etc.)
• transaction details (transaction date, transaction amount etc.)
• property details (addresses etc.)

Important Focus Areas are as follows:

Loan Interest Deductions: The data matching program is also looking at how rental property loan interest and borrowing expense deductions have been reported in rental property schedules. Also note that while the interest component on your investment property loan is generally deductible, if you redraw on it for personal purposes, interest on that portion of the loan will not be deductible. This means interest expenses and repayments may need to be apportioned between deductible and non-deductible.

Borrowing Costs: You can also claim a deduction for borrowing costs (typically over five years) for things like application fees, mortgage registration and filing, broking fees, stamp duty, title searches, valuations, and mortgage insurance on the loan. However, it’s important to note that if the loan is repaid early or refinanced, the whole amount including mortgage discharge expenses and penalty interest can often be deductible.

Repairs & Maintenance: The ATO often scrutinises deductions claimed for repairs and maintenance. Often, investment property owners are confused by the difference between Repairs & Maintenance and Capital Improvements (see our article from July 2022 on this). Put simply, though, repairs and maintenance can be claimed immediately, while deduction for capital works is typically spread over several years. Repairs must relate directly to wear and tear resulting from the property being rented out. This generally involves a replacement or renewal of a worn out or broken part – for example, replacing damaged tiles on a roof or repairing a broken oven.

The following expenses will not qualify as deductible repairs, but are capital: Replacing a whole asset, e.g. a whole fence, new hot water system, oven, replacing a shower curtain with a glass wall; or improvements and extensions to the home.

Other ATO Rental Property Focus Areas

Other focus areas for the ATO include interest deductions; capital works expenditure being classified as repairs; accommodation sharing income being left out of returns; and the incorrect apportionment of expenses in relation to holiday homes that are also used to produce income. Another potential stumbling block for rental property owners comes in the form of 2019 rule changes regarding travel expenses. Generally speaking, you can no longer claim travel expenses in relation to owning a rental property.

The end game for the ATO is ensuring that they get as close as possible to collecting all the revenue to which they are entitled, and one place for them to go is to tighten the screw on investment property owners to ensure they’re compliant.

How to Remain Compliant

The most important thing you can do to stay off the ATO’s radar is to keep your documents in order. This applies broadly to all tax matters, but particularly with rental properties now that it’s in the spotlight. For all the deductions you wish to claim, ensure first of all that you are entitled to claim it, and then ensure that you have the paperwork to back it up. After all, if the ATO comes knocking on your door, it’s substantiation they’ll be looking for. Beyond this, don’t feel like you need to go it alone. Engaging the services of a tax professional can help you make the most of what you’re entitled to, and ensure that you aren’t slipping up anywhere. Prevention is better than cure!

How Can MP+ Help?

Our property, tax, and accounting teams have years of experience working with rental properties, and know how to navigate Australia’s complicated tax system. From maximising your deductions to setting up the right structures for property ownership, we have the people and the knowledge to help you make the right choices. Give us a call today on 08 9301 2200 or visit www.mckinleyplowman.com.au to get more information or to book a free, no-obligation consultation.

Sources: Knowledge Shop – Your Knowledge May 2023

written by:

McKinley Plowman