An audit conducted by the Australian Taxation Office (ATO) from the previous financial year has found that nine out of 10 investment property owners made mistakes in their rental property claims, reflecting how confusing the process of filing out tax returns could be.

According to the ATO’s website, among the common errors made by rental property owners “that concern us” were:

  • Claiming deductions for properties that are not genuinely available for rent
  • Claiming deductions for loan interest expenses when a portion of the loan was used for private purposes
  • Incorrect categorisation of capital works and capital allowances
  • Not having records to substantiate income received and deductions claimed
  • Incorrectly apportioned claims for interest deductions

The ATO, however, believes that many of these errors were “simple mistakes” and resulted from the failure of property owners to disclose information to accountants at tax time. Still, the agency indicated that it would be stricter in auditing tax returns from rental properties, which it singled out as a “top priority.”

Lloyd Edge, director of Aus Property Professionals and author of Positively Geared, has seen first-hand how some of his clients are finding it difficult to navigate through the various deductibles, depreciation, and tax benefits to be included in their tax returns.

“The ATO has indicated that it will be cracking down on rental, holiday, and investment properties, among other verticals, in 2021 tax returns,” he says. “They’ve outlined excessive expense claims and incorrectly appointing rental income and expenses between owners will be under the microscope. So, it’s important to be fully equipped with the right information and tools.”

To help landlords and other property investors avoid committing the same mistakes in their 2021 tax returns, Edge shares these five tips:

1. Expenses and income for co-owned properties must be split equally

The ATO states that rental income and expenses from the property must be divided among the co-owners according to their “legal interest in the property,” meaning these must split equally.

“This is despite any written or oral agreement between the co-owners stating otherwise, for example, agreeing that one owner can claim 100% for tax purposes – you simply cannot do that,” Edge says.

2. Ensure you keep records from the very beginning.

“If you invest in a rental property or rent it out, you’ll need to keep records right from the start so you can work out what expenses you can claim as deductions and ensure you declare all your rental-related income in your tax return,” Edge says.

These “proofs of expenses” can include receipts, and bank and credit card statements.

“You will also need the records of the date and costs of buying the property, so you can work any capital gain (or loss) when you dispose of it,” he adds.

3. Declare all rental-related income

Apart from the full rental amount, Edge says landlords must declare all rental-related income, including those from profit-generating activities and reimbursements for deductible expenditure. Among these are rental bond money from when a tenant defaults on rent, maintenance costs, insurance payouts, and letting and booking fees. 

“It’s important to note, however, that [good and services tax] GST doesn’t apply to rent on residential premises – you’re not liable for GST on the rent you charge,” he says.

4. Understand what you can and cannot claim

The ATO stresses that investors can only claim deductions on a rental property during periods when it was tenanted or “genuinely available for rent.” Additionally, investors can only claim a deduction for the portion an expense that was used to generate income and they must present records to prove these expenses.

Here are some expenses that investors can deduct from their tax bills, according to Edge:

  • Repairs and maintenance costs, including funds used for replacing electrical appliances or painting a rental property.
  • Interest charged on the loan you used to purchase a rental property or a depreciating asset (e.g. air conditioner). However, you can’t claim interest on the portion of the loan you use for private purposes or on a loan that you used to buy a new home if it doesn’t produce income.
  • Legal expenses, including funds used for evicting a non-paying tenant or defending damages claim.
  • Borrowing expenses, including loan establishment fees, title search fees, and cost of preparing and filing mortgage documents. However, you cannot claim on the loan balances for the property or stamp duty charged on the transfer of the property title.
  • Depreciating assets, including carpet, ovens, cooktops, dishwashers, heaters, blinds and curtains, and other items that have declined in value over time. It doesn’t matter if the depreciating asset installed was new or used, or if the property was new or not.

5. Navigate capital gain tax (CGT) when you sell your investment property

“A capital gain, or loss, is the difference between what it cost you to obtain and improve the property (the cost base), and what you receive when you dispose it,” Edge says. “Amounts that you’ve claimed as a tax deduction, or that you can claim, are excluded from the property’s cost base. Even if you have an investment property that isn’t rented out such as a holiday home, the property is subject to CGT in the same way as a rental property.”

Edge also recommends landlords to consult with a registered tax agent to have a better understanding on what claims they can include in their tax statements.

“I do encourage investors to use a registered tax agent as they can provide you with consumer protection,” he says. They’re also up-to-date with any changes to taxation legislation, so they can help maximise your return.”