ATO Offers tax time tips for rentals

The Australian Taxation Office (ATO) has sought to assist rental property owners with clear guidelines on what to do this tax time, including what they can and cannot claim.

Noting the ATO was aware residential rental property owners might be concerned about how COVID-19, floods, or bushfires had reduced their income, Assistant Commissioner Karen Foat explained whatever the circumstances, the most important first step was to keep records of all expenses.

“Without good records, you will find it difficult to declare all your rental-related income in your tax return and work out what expenses you can claim as deductions.”

Reduced rental income

The ATO acknowledged COVID-19 had impacted both property owners and tenants due to unforeseen circumstances.

“Many tenants are paying reduced rent or have ceased paying because their income has been adversely affected by COVID-19,” they said.

“You should include rent as income at the time it is paid, so you only need to declare the rent you have received as income. If payments by your tenants are deferred until the next financial year you do not need to include these payments until you receive them.”

While rental income may be reduced, owners will continue to incur normal expenses on their rental property and will still be able to claim these expenses in their tax return as long as the reduced rent charged is determined at arms’ length, having regard to the current market conditions.

This applies whether the reduction in rent was initiated by the tenants or the owner.

“Some owners may have rental insurance that covers a loss of income. It is important to remember that any payouts from these types of policies are assessable income and must be included in tax returns,” the ATO said.

Many banks have moved to defer loan repayments for stressed mortgagees. In these circumstances, rental property owners are still able to claim interest being charged on the loan as a deduction- even if the bank defers the repayments.

Common mistakes

The ATO has also outlined the common mistakes people make and the misconceptions many have about what can and can’t be claimed. This includes travel expenditure, loan interest, and capital works.

Travel to rental properties

“Last year, we also saw a number of taxpayers make simple mistakes such as claiming deductions for travel to inspect their rental properties,” Ms Foat said.

The ATO notes residential property owners can’t claim any deductions for costs incurred in travelling to residential rental property unless they are in the rare situation of being in the business of letting rental properties.

Incorrectly claiming loan interest

Taxpayers that take out a loan to purchase a rental property can claim interest (or a portion of the interest) as a tax deduction. However, directing some of the loan money to personal use, such as paying for living expenses, buying a boat, or going on a holiday is not deductible use.

The ATO uses data and analytics look closely to ensure that deductions are only claimed on the portion of the loan that relates directly to the rental property.

Capital works and repairs

“Each year, some taxpayers claim capital works as a lump sum rather than spreading the cost over a number of years. Others claim the initial work needed to get a property ready for rent immediately instead of spreading the cost over a number of years,” Ms Foat said.

Repairs or maintenance to restore something that’s broken, damaged or deteriorating in a property you already rent out are deductible immediately. Improvements or renovations are categorised as capital works and are deductible over a number of years.

Initial repairs for damage that existed when the property was purchased can’t be claimed as an immediate deduction but may be claimed over a number of years as a capital works deduction.

Poor record keeping

The number one cause of the ATO disallowing a claim is taxpayers being unable to produce receipts or other documents to support a claim. Furnishing fraudulent or doctored records will attract higher penalties and may also result in prosecution.

Source: Elite Agent