Got a holiday home and claiming the interest rate payments on tax? The ATO is watching you

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  • The ATO is analysing tax deductions claimed for holiday rental properties, looking for dodgy claims.
  • The investigators are looking for those who claim full interest payments on the investment loan as a cost, but who like to stay in the property themselves.
  • They are also digging out those who don’t declare all the rental income they get.

A holiday home can be great fun, especially if it’s used to entertain family and friends, and even better if it’s rented out for part of the year to help cover the cost of interest payments on the mortgage.

However, the ATO (Australian Taxation Office) is setting its sights on false deductions made by rental property owners who use their own property for personal holidays.

Among an arsenal of analytical tools being used by the ATO to identify unusual claims is data matching. The ATO is scrutinising deductions and also checking against market conditions to ensure all rental income is declared.

The ATO argues that the tax system shouldn’t be used to help someone pay for an asset that is essentially used for personal holidays.

If you are using the holiday home yourself or letting family and mates stay there for free or on the cheap, then the full amount interest paid each year on servicing the loan taken out to buy the property can’t be claimed as a tax deduction.

Mates’ rates

“As Australians enjoy the Easter break, they should be aware that the ATO is focusing on taxpayers who claim deductions for holiday homes that are not actually available for rent or only available to friends and family,” says Assistant Commissioner Kath Anderson.

“While private use by family and friends of a holiday home is entirely legitimate, it does reduce your ability to earn income from the property. This in turn impacts the deductions you can claim.

“You can only claim deductions for your holiday home if your property is genuinely available for rent. You cannot claim for times when you were using it for your own personal holidays or letting friends and family stay rent-free. It’s not ok to expect everyone else to pay for your holiday.”

The ATO says holiday home owners also need to remember that if their property is rented to friends and family at mates’ rates, they can only claim deductions for expenses up to the amount of the income received.

Some taxpayers claim their property is available for rent but when the ATO investigates it is clear they have little intention of renting it out.

The owners sometimes put unreasonable conditions on prospective renters, set rental rates set above the local market or just don’t advertise a holiday home in a way that targets people who would be interested in it.

A red flag

Then they claim, falsely, that the property was available for rent and therefore the costs, such as interest payments, are a legitimate deduction.

“Incorrect rental property claims will not go unnoticed,” says Anderson.

“Whether it is a genuine mistake or a deliberate attempt to over-claim, new technology, data matching and other systems allow the ATO to identify unusual claims.

“Where something raises a red flag, it will be investigated. Property owners whose claims are disproportionate to the income received can expect scrutiny from the ATO.”

The ATO says owners should ensure they declare all rental income and only claim deductions for periods that the property is rented or was genuinely available for rent at market rates.

keep accurate records of income from the rental property, expenses incurred, and evidence of the property being rented or genuinely available for rent at market rates.

“You should also records of who stayed at the holiday home and when, including the time you and your family stay at the property,” says Anderson.