ATO Focuses on Rental Property Deductions
The ATO have said they will be paying close attention this year to deductions claimed by rental property owners including:
- Excessive interest expense where the claim is not properly apportioned for any private use of the loan funds.
- Holiday homes that are not genuinely available for rent.
- Incorrect claims for newly purchased rental properties.
According to the ATO, their ability to identify incorrect rental property claims is becoming more sophisticated due to enhancements in technology and the extensive use of data.
The following case studies are provided by the ATO:
Holiday home not genuinely available for rent
John has a newly purchased rental property that had not returned any rental income. He told the ATO that the property was occasionally advertised on community noticeboards and websites. John was unable to prove there was a genuine arrangement in which he actively sought tenants, or had taken sufficient steps to genuinely advertise the property for rent.
A rental loss of almost $60,000 was disallowed and penalties were applied.
Rental property owner Sarah reported high rental interest claims and was required to provide bank statements as evidence to the ATO. The statements showed borrowings well in excess of the purchase price of the rental property. The interest charges relating to the private part of the loan were disallowed.
Sarah was required to pay more than $15,000 back to the ATO.
Incorrect claims for a newly purchased rental property and false claims
Nancy recently purchased a rental property and had her tax return amended by the ATO to remove deductions for repairs, capital works and incorrectly apportioned borrowing expenses. Nancy had inappropriately claimed a deduction for repairs to defects present in a newly purchased property and the capital works and borrowing expenses should have been spread over several years. Nancy also provided false receipts for property management fees undertaken by a family member.
Nancy was required to pay more than $57,000 back to the ATO as well as over $10,000 in penalties for making a false statement in her tax return.
Ethan was required to provide evidence to the ATO to show that their property was genuinely rented at market rates. Ethan was unable to provide any documentation to show that a rental arrangement was in place.
All rental income and expenses were removed from his tax return and he received a tax bill of more than $12,000.
Apportioning expenses between joint owners of a property
A rental property claim was investigated by the ATO where the rental expenses had not been apportioned correctly. The property was jointly owned by a couple but the higher income earner claimed the larger proportion of the expenses.
The expenses were adjusted to reflect the ownership interest and the higher earner had to pay back more than $8,000 in tax.
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