Landlords to be targeted by ATO over rental property claims

The Australian Taxation Office (ATO) has identified three common errors it will be targeting as tax time approaches, and landlords’ ears should be burning.

Inflated claims for rental properties are in the ATO’s crosshairs, as the tax collector bristles at data showing 90 per cent of rental property owners are getting their income tax returns wrong.

ATO Assistant Commissioner Rob Thomson said rental properties, work-related expenses, and a failure to declare income were the priorities being put under the microscope in 2024.

“We often see landlords making mistakes when it comes to repairs and maintenance deductions on rental properties, so we’re keeping a close eye on this.

“This year, we’re particularly focused on claims that may have been inflated to offset increases in rental income to get a greater tax benefit,” Mr Thomson said.

He added that landlords were frequently making mistakes when it comes to repairs and maintenance deductions on rental properties, so the ATO was keeping a close eye on this.

General repairs and maintenance on a rental home can be claimed as a deduction, however, the ATO draws a line at expenses that are “capital in nature” like improvements you make on the property.

“You can claim an immediate deduction for general repairs like replacing damaged carpet or a broken window but if you rip out an old kitchen and put in a new and improved one, this is a capital improvement and is only deductible over time as capital works,” he said.

The ATO admitted its reporting obligations in this area were complicated.

“As reporting rental income and deductions can be complex, many individual rental owners choose to use a registered tax agent to help them prepare their income tax returns.

“Ensuring you provide full and complete records to your registered tax agent allows them to prepare your tax return correctly, so you claim everything you’re entitled to and nothing that you’re not,” Mr Thomson said.

Potential pitfalls for landlords to avoid

Speaking to API Magazine, Ravin Chatlani, Director of Taxation, Australasian Taxation Services (ATS), said rental claims presented ample room for confusion around the nature of claims.

“There can be some grey areas around what constitutes a capital improvement and what is a repair, and around the timing of the incursion of expenses in relation to tenancy periods.”

Mr Chatlani said ATS worked with clients through a checklist of potential pitfalls awaiting taxpayers with an investment property.

“Repairs generally involve a replacement or renewal of a worn out or broken part, for example, replacing worn or damaged curtains, blinds or carpets between tenants.

“Maintenance generally involves keeping the property in a tenantable condition, for example repainting faded or damaged interior walls.

“Expenses that are capital, or of a capital nature, are not deductible as repairs or maintenance,” he explained.

These are some expenses that are capital, or of a capital nature: replacement of an entire structure or unit of property (such as a complete fence or building, a stove, kitchen cupboards or refrigerator); improvements, renovations, extensions and alterations; and initial repairs, for example, in remedying defects, damage or deterioration that existed at the date you acquired the property.

What else is the ATO targeting?

The explosion in the proportion of income earners working from home has also created a headache for taxpayers and the ATO alike.

In 2023 more than 8 million people claimed a work-related deduction, and around half of those claimed a deduction related to working from home.

Last year, the ATO revised the fixed rate method of calculating a working from home deduction to broaden what is included, increased the rate, and adjusted the records that need to be kept.

These detailed changes are now in full effect this financial year, meaning you must have comprehensive records to substantiate claims as would be done for any other deduction.

The three rules the ATO was focusing on being adhered to were that you must have spent the money yourself and weren’t reimbursed; the expense must directly relate to earning your income; and, you must have a record (usually a receipt) to prove it.

While filing a tax return early might seem like an efficiency, taxpayers might be better advised to hold off until after July.

“By lodging in early July, you are doubling your chances of having your tax return flagged as incorrect by the ATO,” Mr Thomson said.

“We know some prefer to tick their tax return off the to-do list early and not have to think about it for another 12 months, but the best way to ensure you get it right is to wait for just a few weeks to lodge.”

The ATO isn’t condoning tardiness but says income received from multiple sources is often omitted as people file returns early before waiting until this income is pre-filled in tax returns before lodgement.

“We see lots of mistakes in July where people have forgotten to include interest from banks, dividend income, payments from other government agencies and private health insurers,” Mr Thomson said.

“For most people, this information will be automatically pre-filled in their tax return by the end of July and this will make the tax return process smoother, save you time, and help you get your tax return right.”