With the latest ATO whip cracking focused on landlords, the ABN steps in with practical advice to help navigate the Australian rental property tax system and minimise the rental property errors being reported in mainstream press.
With End-Of-Financial-Year prompting the ATO to focus on landlord tax returns, the Australian Bookkeepers Network (ABN) has stepped in with advice to minimise the confusion around rental properties.
The ATO’s renewed focus comes following their reports that around 90% of landlords are getting their tax returns wrong, despite nearly all those being lodged with tax professionals.
ATO crackdown makes more work for industry
ABN Director, Peter Thorp, says those figures indicate that improvements to landlord support services are necessary to improve compliance, though in the shorter term the industry can focus on key hot spots where errors more commonly occur.
“In the longer term it’s clear the system needs an overhaul to make it clearer how to lodge tax returns correctly,” said Peter. “In the meantime, the ATO is scrutinising landlord tax returns more than ever, which requires? yet more work ahead to support their clients who are landlords.”
6 ‘Big Ticket’ mistakes that need addressing
The ABN offers their advice on six of the most significant areas to be aware of that can cause large errors in a landlord’s tax return.
- Interest Claims: Interest is deductible when it meets the “purpose test”. This asks whether the purpose to which the borrowed money was applied is connected to the rental property purchase, improvements or incidental costs? If so, it’s likely to be deductible. If the rental property was simply used as security or a redraw on a rental property loan for private purposes, then interest is not deductible. Where a dual-purpose loan exists then interest may need to be apportioned.
- Share economy rentals: Short term rental apps such as Airbnb provide generous rentals. A common misconception is that a landlord can claim all of the property’s expenses where that property is not fully available for rental (e.g. used in part for private purposes). Deductions need to be apportioned.
- Repairs Vs capital costs: An often-misunderstood principle is that of ‘Improvement Vs Repair’. Repairs are claimed immediately whereas improvements may be claimed over time. An expense that restores ‘like with like’ functionality (e.g. patching a hole in a wall) is likely to be deemed a repair and be tax deductible. An expense that has the characteristic of an improvement (e.g. a whole new wall) is likely to be deemed an improvement and claimed as a deduction over time.
- Private-use apportionment: Where a rental property is not fully available for rental (e.g. a holiday home) then the expenses relating to that property need to be apportioned. That is, they’re not wholly tax deductible.
- Non-commercial rental arrangements: Rental at less than commercial value (typically to friends/family) does not automatically give rise to a claim for all expenses of the property, and an apportionment may be necessary.
- Record keeping failings: Record keeping is much more than keeping a bunch of receipts. Good record keeping extends to monitoring the days a property is truly available for rent, the nature of expenses, any changes to borrowings as well as the basics of good recording of income and expenses. Care needs to be taken not to ‘double dip’ (e.g. where a property manager incurs costs on a rental property and deducts it from rent). Be careful not to claim the deduction for the agent-incurred expenses as well as reducing the rent. Your tax agent can assist with record-keeping guidance. Importantly, take care not to mix personal expenses with rental property expenses.
The most important things landlords can do
The ABN recommends these four things for landlords to keep in mind this tax season:
- Appoint a tax agent
- Understand the rental property rules
- Don’t push the envelope
- Keep good records
To align your bookkeeping business with one of Australia’s largest bookkeeper and BAS Agent industry support, the ABN invites you to become a member today.
