24/09/2015

The Australian Tax Office is targeting the 1.8 million people – or about 8% of the population – who own an investment property in 2015. The boom in investment property ownership throws up particular challenges for the ATO, both in making sure that they know exactly who owns what and also in making sure that taxpayers aren’t rorting the system.

The latest ATO figures reveal that investment property owners claim on average $25,717 in deductions covering interest on loans, the write off capital works and other items. In over two-thirds of cases, that’s enough to produce a net loss which taxpayers are then offsetting against their other income. Now the ATO has signalled a big push to check that people aren’t over-claiming tax deductions. At the forefront of the campaign, the ATO has stated that it is writing to taxpayers in 500 postcodes across Australia who own properties in popular holiday areas to remind them to claim only the deductions to which they are entitled.

Rental property owners should only claim for the periods the property is rented out or is genuinely available for rent. Periods of personal use can not be claimed. This is particularly important for holiday homes, where the ATO regularly finds evidence of home-owners claiming deductions for their holiday pad on the grounds that it is being rented out, when in reality the only people using it are the owners, their family and friends, often rent-free.

Also, the costs to repair damage and defects existing at the time of purchase or the costs of renovation cannot be claimed immediately. These costs are deductible instead over a number of years. Expect to see the ATO checking such claims and pushing back against claims which do not stack up.

Finally, the ATO is concerned that husbands and wives are in some cases splitting income and deductions so that the bulk of the tax benefit goes to the higher earning spouse, even though the property is actually owned 50:50.

Importantly, the ATO now has access to numerous sources of third party data, including access to popular rental listing sites for both long term and holiday rentals, so it is relatively easy for them to establish whether a claim that a property was ‘available for rent’ is correct.
In all cases, H&R Block is advising taxpayers to be careful – don’t claim what you’re not entitled to and make sure you have records to support and justify every item. Tread carefully this year – as the ATO is watching you!