Rental property owners and their tax agents under ATO scrutiny

This article was current at the time of publication.

The Australian Taxation Office (ATO) has found most rental property owners are making errors in their tax returns, despite 86 per cent using a registered tax agent, says Assistant Commissioner Rob Thomson. 

This lands landlords firmly on the ATO’s radar. 

The regulator uses data from a variety of sources like banks, land title offices, insurance companies, property managers and sharing economy providers, and cross checks this data to determine the accuracy of tax returns lodged by rental property owners.

These cross-checks have discovered common mistakes across the board. 

Number one error

The most common error comes from a misunderstanding of which expenses can be claimed and when. In particular, the difference between what can be claimed for repairs and maintenance versus capital expenses.

Other typical mistakes include:

• Overclaimed deductions and a lack of documentation to substantiate the expenses claimed.
• Interest deductions, including interest for loans (from redrawing or refinance), used for private expenses (such as an upgrade on the family car, school fees or a holiday).
• Costs relating to borrowing expenses, including loan establishment fees, lender's mortgage insurance and title search fees. These are generally claimed over a five-year period or the life of the loan, whichever is less, but some owners are claiming the expense upfront.
• Claiming State or Territory stamp duty as a deduction. This is incorrect as deductions relating to rental property can only be claimed in the ACT. These can, however, be added to the cost base to reduce capital gains upon sale.

Interest on mortgages

The ATO notes that one of the most common deductions rental property owners claim is interest on mortgages. Based on data from previous years, the regulator estimates that incorrect reporting of interest rate expenses accounts for 42 per cent of the $1.2 billion tax gap associated with rental properties. 

The right advice

Rob Thomson advises taxpayers to seek professional advice and to let their tax agents know the full extent of their rental property interests. 

“If you use a tax agent, make sure you let them know all about your rental property, including full records of your expenses. If you have a nagging question or something doesn’t make sense, make sure you ask your agent when you’re working with them.

“Rental property investments and taxation can get tricky, so it pays to get the right advice from the very beginning. Don’t rely on things you hear at a Sunday afternoon barbeque.”