ATO Crackdown on Rental Property Owners: Are You at Risk?

Posted by Gavin Chau

It’s nearly tax time again. For most property investors, these are happy days, with a typical $650,000 investment property generating a tax credit of around $13,000 for an investor on a $100,000 income. For accountants, it’s a horror show, though, with the amount of work piling up! There are a few things to keep in mind to stay on the good side of the Australian Taxation Office (ATO) this tax season. The ATO is cracking down on rental property owners who are filing their tax returns incorrectly. The ATO estimates that nine in 10 landlords are under-reporting their income or over-claiming deductions, which is costing the government $1.3 billion in lost revenue. This amounts to about $400 per investment property.

As part of the crackdown, the ATO is collecting data from lenders and property managers to help corroborate property use, income, and expenses. The ATO is also matching this data with its own records to ensure that tax returns are being lodged correctly.

There are three key areas that the ATO is focusing on:

Using investment loans for private purposes. This includes using loan proceeds to buy luxury cars or pay school fees.
Claiming costs for repairs rather than capital works. Repair costs can be offset against rental income, but capital works expenses cannot.
Claiming expenses for private use of the property. For example, Airbnb hosts who use their property for holidays cannot claim expenses for the days that they are using it for personal reasons.

The ATO is warning landlords that they need to be careful about how they claim deductions. If the ATO finds that a landlord has made a mistake, they could be liable for penalties of up to 75% of the tax shortfall.

Here are some tips for landlords to avoid making mistakes on their tax returns:

Keep accurate records of all income and expenses related to your rental property.
Make sure you understand the difference between repairs and capital works.
Only claim deductions for the days that your property is used for generating income.
If you are unsure about whether you can claim a deduction, seek professional advice.

The ATO crackdown is a reminder to all rental property owners that they need to be careful about how they claim deductions. By following the tips above, you can help to ensure that you are filing your tax returns correctly and avoiding penalties.

In addition to the above, here are some other things to keep in mind:

The ATO may also ask you to provide evidence to support your claims. This could include receipts, invoices, or bank statements.
If you are audited by the ATO, you will need to be able to provide them with all of the relevant documentation.
The ATO can impose penalties for failing to comply with their requirements. These penalties can be significant, so it is important to make sure that you are doing everything correctly.

By following these tips, you can help to ensure that you are filing your tax returns correctly and avoiding penalties.

Posted by Gavin Chau, on 26th Jun 2023