ATO shines spotlight on rental deductions

ATO shines spotlight on rental deductions
28Jul2020

Last year we saw the ATO crackdown on rental deductions made in tax returns after finding that nine out of ten returns in 2017-18 contained an error*, and they will continue this focus this year.

Our qualified accountants can help you navigate this complicated and often confusing process, but there are steps you can take to make the process smooth. Here are our top five areas for you to consider. 

  1. Is your property genuinely available for rent?
    To be able to make a tax deduction on your rental property, you will need to prove that it’s actually available to rent. This means you must: 
    • be able to show a clear intention to rent the property 
    • advertising the property so it’s visible to a possible tenant and set the rent at a rate similar to other properties in the areaa
    • ​avoid unreasonable rental conditions.
    While the short-term rental market slowed down, there are still deductions available provided the property was genuinely available for rent. This means if you moved into the property, or offered it to your family or friends for free then deductions can’t be claimed for that period. 

    While many landlords are looking to sell their rental properties, this will limit the deductions available to you, if your property is vacant. Your rental must be available for rent, so you must be actively seeking a tenant if the property is vacant, to be able to claim deductions.  
  2. Claim the correct amount of rental income  
    A number of property owners offered rent deferrals or payment plans as a result of the pandemic and natural disasters. Rental income can only be included at the time it’s paid, so if a rental deferral sees the rental income paid in the next financial year then you don't include it in your 2019-20 return.
     If you tenant reimburses you for any expenditure, such as water usage, you must include this as income in your return.  

  3. Claiming construction costs correctly 
    Certain building costs such as extensions, alterations and structural improvements can be claimed as capital works deductions. A general rule is that you can claim 2.5% of the construction cost for 40 years from the date the construction was completed. For those whose properties were owned by someone else previously who claimed capital works deductions already, you will need to get the details to ensure you calculate the correct deduction for your return. In the case of being unable to get these details, there are qualified professionals who can estimate previous construction costs. 

  4. Ensuring you keep the right records 
    Keeping records is a vital part of your tax return process. In order to claim what you’re entitled to, you must have evidence of your income and expenses. When you sell your rental property, capital gains tax may apply so keep records during the period you are the owner and for five years after the sell date. 

  5. Repairs and Maintenance  
    The ATO is focused on repairs and maintenance this year so you need to ensure that you get this right. There can be a difference on whether your expenditure is classified as a repair or if it needs to be capitalised as an asset. Repairing general wear and tear can be deductible as long as you have replaced with a similar item.  

These are just five of the many things property owners need to consider when doing their tax return, so this gives great insight into why it’s beneficial for you to work with a qualified Carbon Accountant for your return. With their full understanding of the process and implications we will experience when completing our tax returns this year, they will help you ensure you avoid tax mistakes. 

Get in touch with us today for qualified advice you can trust. 

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*Source: Accountants Daily 14 March 2019, Errors in 9 out of 10 rental claims prompt new compliance blitz 

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