The ATO is prioritising investigations into rental deductions this year. With double the number of in-depth audits planned, the ATO will address unjustifiable claims and prompt taxpayers to amend their returns, with over-claiming attracting penalties of up to 75% of the claim.
In 2017-2018 the ATO applied penalties totaling $1.3 million to taxpayers with unjustifiable rental claims. Key issues the ATO will look at this tax time include:
Is loan interest being claimed correctly?
– If you took out a loan to purchase a rental property, you can claim interest (or a portion of the interest) as a deduction. However, if you use some of the loan money for personal use such as paying for living expenses, buying a boat or going on a holiday, you can’t claim the interest on that part of the loan. You can only claim the part of the interest that relates to the rental property.
Appropriate claims for repairs and maintenance vs capital works
– Repairs or maintenance to restore something that’s broken, damaged or deteriorating can be deducted 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, such as replacing broken light fittings or repairing damaged floor boards, can’t be claimed as an immediate deduction but may be claimed over a number of years as a capital works deduction.
Claims for holiday home expenses
– A holiday home is different to a rental investment property. A holiday home is generally a private asset you use for family holidays, and you cannot claim expenses for a holiday home.
– However if you let your property out at ‘mates rates’ (ie below market rates to family and friends) you can claim expenses up to the amount of income you receive. If your property is genuinely available for rent – which means making it available during key holiday periods, keeping it in a condition that people would want to rent it, and not unreasonably refusing tenants – it becomes more like a rental investment property and you can claim deductions for the days it is either rented or is genuinely available.
Maintaining proper records
The number one factor where the ATO disallows claims is the inability of taxpayers 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.
For more information on what you can and cannot claim this tax time, contact Shane and Make Cents Accounting for more information.
