Over 1.8 million people – or about 8% of the Australian population – own an investment property according to ATO figures and with interest rates at a record low, all the evidence suggests that the current boom in property investment – particularly in Sydney and Melbourne – isn’t about to end any time soon.
This boom in investment property ownership throws up particular challenges for the ATO, both in making sure that they know exactly who owns what and also in making sure that taxpayers aren’t rorting the system. Each year, the ATO highlights those areas it will be devoting significant compliance resources to policing and whilst some of those focus areas change year to year, residential investment properties are on the list every year.
So, if you own an investment property, what are the main pitfalls that can land you in trouble with the taxman?
- The ATO pays close attention to excessive interest expense claims, such as where property owners have tried to claim borrowing costs on the family home as well as their rental property.
- They also look closely at the incorrect apportionment of rental income and expenses between owners, such as where deductions on a jointly owned property are claimed by the owner with the higher taxable income, rather than jointly.
- The ATO looks closely for evidence that investment properties are not genuinely available for rent. Rental property owners should only claim for the periods the property is rented out or is genuinely available for rent. Periods of personal use can’t be claimed. This is particularly important for holiday homes, where the ATO regularly finds evidence of home-owners claiming deductions for their holiday pad on the grounds that it is being rented out, when in reality the only people using it are the owners, their family and friends, often rent-free. Recently the ATO issued a list of four questions holiday home owners should be asking themselves; consider your answers to these to determine if you have anything to be concerned about:
- How do you advertise your rental property?
If your property is advertised on a widely seen online site, that’s a good indication that the property is available for rent. If your only form of marketing is a tatty card in your front door window, you might need to be concerned!
- What location and condition is your rental property in?
- How do you advertise your rental property?
If your property is in good repair, tenants will want to rent it. If it’s a hovel, chances are tenants will give your property a wide berth, particularly if you are charging rent that’s on a par with much more desirable rentals in the same area.
- Do you have reasonable conditions for renting the property and charge market rate?
If you set conditions that will deter a reasonable potential tenant – such as rent significantly above market rates or clauses such as “no children”, your property may not be regarded as genuinely available for rent.
- Do you accept interested tenants, unless you have a good reason not to?
If you’re unreasonably fussy about who you rent to, the ATO might conclude that you don’t really want to rent to anybody and that your property isn’t actually available for rent.
- The ATO keeps a close eye on incorrect claims for newly purchased rental properties. The costs to repair damage and defects existing at the time of purchase or the costs of renovation cannot be claimed immediately. These costs are deductible instead over a number of years or are added to the cost base of the property for CGT purposes. Expect to see the ATO checking such claims and pushing back against claims which don’t stack up.
- If the property is rented out to friends or family at a discounted rate, this will be regarded as a non-commercial rental. The income will still be taxable but you’ll only be able to claim deductions up to the amount of rent you’ve received. You won’t be able to make a loss; if you were relying on negative gearing, that isn’t a desirable outcome!
Don’t forget, the ATO has access to numerous sources of third party data including access to popular property rental listing sites, so it is relatively easy for them to establish whether a claim that a property was “available for rent” is correct.
The key tip from H&R Block is to ensure that property owners keep good records. The golden rule is; if you can’t substantiate it, you can’t claim it, so it’s essential to keep invoices, receipts and bank statements for all property expenditure, as well as proof that your property was available for rent, such as rental listings.