With just four weeks left to the end of the financial year, the Australia Tax Office (ATO) is flagging areas it’s planning to take a closer look at when the returns start rolling in and rental property deductions are on the hit list.
The ATO says there are four key aspects they’ll be checking:
- excessive deductions claimed for holiday homes,
- husbands and wives splitting rental income and deductions for jointly owned properties that is not supported,
- claims for repairs and maintenance shortly after the property was purchased, and
- interest deductions claimed for the private proportion of loans.
The warning shots across the bow include the taxman writing to rental property owners in popular holiday locations about issues such as only claiming deductions for the periods the property is rented out or is genuinely available for rent. If it’s rented at mate’s rates, the ATO says be careful to only claim deductions limited to the income earned while rented. And accurate records are a must. Their other sticking point is you can’t claim for repairs or renovations straight after buying a place.
To emphasise those points, the taxman has released some case studies that demonstrate how you can end up in trouble with the ATO.
Here they are:
The ATO recently amended a taxpayer’s return to disallow deductions claimed for a holiday home after discovering that:
The taxpayer rented the home to family and friends during the year at less than market rate.
Besides a brochure which was only available at the taxpayers’ business premises, there were no realistic efforts to let the property.
The nightly rent advertised was much higher than that of surrounding properties.
The pattern of income did not match the advertised rate, or the requirement for a five-night minimum stay.
The ATO ruled that the property was mainly used for the taxpayer’s personal use, and deductions were limited to the amount earned from family and friends. The end result was that the taxpayer had to pay more tax and a penalty was imposed.
Husband and wives
The ATO has seen instances where a husband and wife jointly own a property, but split the income and deductions unequally to get a tax advantage for the highest income earner. Some people have even included the income in the low income earner’s returns and the deductions in the high income earner’s returns. These types of arrangements attract higher penalties where we believe they have been done deliberately.
The ATO recently addressed a situation where a property was refinanced by a taxpayer to pay for their daughters’ wedding and an overseas holiday. The taxpayer claimed the whole interest amount, but should have only claimed the portion of interest that relates to the rental property.
Repairs and maintenance
A taxpayer recently claimed repairs and maintenance for a newly acquired rental property which was significantly improved upon purchase. The taxpayer provided an invoice from an interior developer for the “refurbishment” of the property. Further documentation detailed the scope of the refurbishment which included completely stripping the property and replacing old fixtures and fittings with new. The large repairs and maintenance claim was disallowed because initial repairs and improvements to a property are not deductible.
A husband and wife demolished their existing rental property and built a new dwelling. In their income tax return they claimed an immediate deduction for their share of the entire cost of the building as repairs and maintenance. While the cost of constructing the new dwelling for rental purposes is permitted, the correct treatment is to spread the cost over 40 years, claiming 2.5% of eligible construction costs as a capital works deduction. The repairs and maintenance claim was disallowed.
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