Rental Property Owners: ATO Targets in 2024

20 September 2024

The ATO recently announced that they will be directing resources towards reviewing rental property related claims for the 2024 year. 

With their enhanced data matching capabilities, it has become easier for the ATO to identify when mistakes have been made. Furthermore, changes to the tax rules dealing with rental properties over the last few years have also increased the level of risk in this area.

This article, the first in a series of newsletters covering tax related matters when investing in property, discusses these key risk areas.

The ATO had also indicated that capital gains tax will be an area of focus. One of the specific examples provided by the ATO was properties that have been used as a main residence by the owner, and that have also generated income from short term rental activities.

These factors signal that the ATO will be actively monitoring taxpayers whose returns raise red flags, ensuring any discrepancies are promptly addressed.

Under ATO scrutiny are the following expenses:

  • Repairs and Maintenance v New Assets
  • Interest deductions
  • Double dipping claims
  • Second-hand depreciating assets
  • Holiday Homes
  • Rental properties and travel expenses

Repairs and Maintenance v New assets

Whilst the ATO recognises that landlords need to fix broken items in a rental property, a common misunderstanding is that all expenses are outright deductible.

The ATO is targeting “careless capital expense claims”.

  • Repairs and Maintenance: These expenses are deductible when they restore an item to its original condition.
  • New Assets: Items such as dishwashers, ovens, or fridges need to be claimed over their effective life.

If you are replacing an item because it was irreparably broken or chose not to repair it, this expense would not qualify for an outright deduction.

When using a rental agent, it’s common for new asset purchases to be classified as repairs and maintenance, so we will often check these are accurately treated when preparing your tax return.

In general, costs incurred by landlords are considered capital in nature and not deductible if:

  • The extent of the work carried out represents a replacement, renewal or reconstruction of the entirety of an asset.
  • The work results in a greater efficiency of function in the property, therefore representing an ‘improvement’ rather than a ‘repair’; or
  • The work is an initial repair (meaning it addresses damage that existed at the time of property purchase).

Interest Deductions

Be cautious not to mix the purpose of your loans.

The ATO provides an example where taxpayers refinanced or redrew a loan on their rental property, used the funds to upgrade their personal vehicle, and then claimed the full interest charged on the investment loan for the year as a rental interest deduction.

In cases where part of the loan was used for private purposes, the interest must be apportioned and only the portion related to the rental property can be claimed as a deduction.

“Double dipping” Claims

Rental agents often pay expenses directly to suppliers (e.g. plumbers), deducting these costs from the amount remitted to the property owner, while also providing the owner with a copy of the invoice.

The ATO have announced that they will be acquiring property management data for 2018–19 through to 2025–26. This will arm the ATO with information to data-match to taxpayer’s income tax return disclosures and ensure not only that assessable income derived from rental properties and CGT on disposals of properties are correctly reported but also associated rental deductions are correct.

Be careful not to claim expenses that are already included in property agent’s summary reports, as this could lead to double claiming.

However, if you personally pay for any rental property expenses that are not captured in the rental agent’s statement, be sure to include these additional expenses in your tax return.

Second-hand depreciating assets

Second-hand depreciating assets for residential rental properties are depreciating items that have been previously used or installed ready for use by you or another entity. In most cases, they are assets that were existing in either:

  • a property when you purchased it, or
  • your private residence that you later rent out.

In these scenarios, depreciation on second-hand assets is not deductible to individual and discretionary trust entities.

Holiday homes

This a reminder that where your rental property is not “genuinely available for rent” to the public, the expenses should be reduced to reflect any private use of the property.

Where your property is only returning minimal income, the Commissioner would be looking for evidence that:

  • The property was actively being advertised where it was not being rented out, and
  • The property is being advertised for realistic rates with no unrealistic restrictions that could hinder it’s availability for rent.

Rental properties and travel expenses

Generally, where you are an individual or trust you can’t claim any deductions for the cost of travel you incur relating to your residential rental property.

Travel expenses include the costs you incur on car expenses, airfare, taxi, hire car, public transport, accommodation and meals to:

  • Inspect, maintain or collect rent for a rental property you own or have an ownership interest in.
  • Travel to any other place if it is associated with earning rental income from your existing rental property (for example, visiting your real estate agent to discuss your current rental property).

Next Steps

Maintaining thorough and accurate records is essential for managing your rental property’s tax compliance.

Ensure you keep detailed documentation of all income and expenses related to the property, including receipts, invoices, and bank statements. Record the purpose of each expense and retain evidence of any repairs, maintenance, and asset purchases.

If using a rental agent, keep copies of their statements and any additional invoices you receive directly. Proper record-keeping not only supports accurate tax reporting but also provides evidence in case you fall under ATO scrutiny.

Stay tuned for our next two newsletters which will be issues over the coming weeks;

  • Recent Tax Updates Related to Property Investments
  • Commercial Property and Tax Considerations

If you would like further information about the contents of this newsletter, please contact your Cooper Partners engagement team on 08 6311 6900.

This newsletter is current as of 20 September 2024, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Before acting upon the content of this newsletter, please contact us to discuss how the above applies to your specific circumstances.

This information is general advice only and neither purports, nor is intended to be advice on any particular matter.
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