Are Your Rental Property Tax Returns Accurate?

The Australian Taxation Office (ATO) has identified numerous errors in tax returns filed by rental property owners, even though the majority are prepared by registered tax agents. Consequently, landlords are now facing closer examination from the ATO. Here’s what you need to be aware of to make sure your returns are correct.

Common Errors in Rental Property Tax Returns

The most frequent mistake arises from confusion over which expenses are deductible and at what time. Specifically, many are unsure about the distinction between deductible repairs and maintenance versus capital expenses that need to be capitalized.

Other typical issues examined by ATO include:

Claiming Expenses Incorrectly

• Repairs and Maintenance vs. Capital Expenses: Misunderstanding which expenses are immediately deductible and which must be capitalized.

Overclaimed Deductions

• Insufficient documentation to support the expenses being claimed.

Interest Deductions

• Incorrectly claiming interest on loans used for private expenses (e.g., upgrading the family car, school fees, holidays).

Borrowing Costs

• Incorrectly claiming borrowing expenses such as loan establishment fees, lender's mortgage insurance, and title search fees upfront instead of over five years or the life of the loan, whichever is less.

Stamp Duty Claims

• Incorrectly claiming State or Territory stamp duty as a deduction, except in the ACT. These costs should be added to the cost base to reduce capital gains upon sale.

Interest on Mortgages

Interest deductions on mortgages are commonly claimed by rental property owners. However, the ATO has found that misreporting these interest expenses accounts for 42% of the $1.2 billion tax shortfall associated with rental properties.

Get the Right Advice

We recommend that all clients obtain professional advice and maintain detailed records of their rental property expenses. Should you have any questions or doubts, do not hesitate to contact us. Grasping the intricacies of rental property taxation is crucial to avoiding errors and potential fines.

"Managing rental property investments and understanding their tax implications can be intricate. Therefore, it’s essential to seek expert advice from the outset. Avoid relying on casual advice; always consult with your tax professional."