Rental property owners, the ATO is watching you!

9 out of 10 property owners are making errors in their tax returns, according to the ATO. What does that mean? It means more ATO audits and more compliance challenges.

So how can you the property owners avoid the ATO’s knocking at your doors? Make sure you get the deductions right for your rental properties, especially on the following ATO targeted areas:

Repairs and Maintenance vs Initial Repairs and Capital Improvement

Repairs - generally involve a replacement or renewal of a worn out or broken part, for example, 

• replacing broken windows 

• changing the locks  

• repairing electrical appliances etc

Maintenance - generally involves keeping the property in a tenantable condition, for example, 

• repainting faded or damaged interior walls

• maintaining plumbing

• oiling a deck or cleaning a pool 

These expenses can be claimed if they relate directly to wear and tear or other damage that occurred as a result of your renting out the property.

Initial Repairs - involve expenses on remedying defects, damage or deterioration that existed when you acquired the property, ie., before you rented out the property.

Capital Improvement - involves replacement of an entire structure or unit of property, such as 

• a complete fence or building 

• a stove or kitchen cupboards 

• renovations, extension  

• landscaping

• insulating the house

These expenses are not deductible as repairs and maintenance.   You may be able to claim some as depreciation.

• Interest deduction

If you take out a loan to purchase a rental property, you can claim the interest charged on that loan as a deduction. However, to the extent that the loan is used or refinanced for a private purpose, you must apportion the interest expense to account for the private use.  You can only claim a deduction for interest expenses to the extent that it relates to the producing of the rental income. 

• Loan Application

ATO has started new residential investment property loans data matching programme (from 2022 to 2026). ATO has been collecting data of residential investment property loans and property details held by individuals  from Financial Institutions, to identify taxation risk and to address compliance of taxation law. Watch out if income reported in your loan application and income declared in your tax return are different.           

Do not overclaim interest on the loan !

Do not over estimate your income for your loan application!      

The ATO will be watching you!