ATO to target rental property owners

Based on previous data matching programs, the ATO estimates that there is a tax gap of around $1 billion from incorrect reporting of rental property income and expenses.

The ATO is working closely with banks and other financial institutions to obtain residential investment loan data on an estimated 1.7 million rental property owners for the period from 2021-22 through to 2025-26.

The data collected will include:

· Identification details (names, addresses, phone numbers, dates of birth, etc.)

· Account details (account numbers, BSB's, balances, commencement and end dates, etc.)

· Transaction details (transaction date, transaction amount etc.)

· Property details (addresses, etc.)

In addition to identifying whether landlords are declaring their residential investment property income, the data matching program is looking specifically at how rental property loan interest and borrowing expense deductions have been reported in the rental property schedules, and whether net capital gains have been declared for property used to generate income.

The ATO is also targeting rental property management software to provide details of property owners including their bank details, income, expenses and the amount of those expenses, and details of their associated rental properties and agents. Data collection of the estimated 1.6 million individuals in this data program will cover the period from 2018-19 to 2022-23.

The following areas will be closely considered by the ATO:

Deductions for repairs and maintenance

Deductions claimed for repairs and maintenance is an area that the Tax Office always looks closely at so it’s important to make sure you understand the rules, in particular the difference between repairs and maintenance, and capital works. While repairs and maintenance can be claimed immediately, the deduction for capital works is generally spread over a number of years.

Deductions for repairs must relate directly to the wear and tear resulting from the property being rented out. So, this might include a replacement or renewal of a worn out or broken part – for example, replacing part of a damaged fence or fixing a broken toilet. The following expenses would not qualify as deductible repairs, but are capital:

· Replacement of an entire asset (for example, a whole new fence, a new hot water system, an oven, replacing a shower curtain with a glass wall, etc.)

· Improvements and extensions.

Remember that any repairs and maintenance which were undertaken to fix problems that existed at the time the property was purchased, are not deductible.

Claiming interest and redrawing on the loan for rental properties

The interest component of an investment property loan is generally deductible but if you redraw on your invest loan for personal purposes, then interest on this portion of the loan will not be deductible.

Interest expenses need to be apportioned into deductible and non-deductible parts and repayments will often need to be apportioned too. If the redrawn funds are used to produce investment income, then the interest on this portion of the loan should be deductible.

Borrowing costs for a rental property

You can claim a deduction for borrowing costs such as application fees, mortgage registration and filing, mortgage broker fees, stamp duty on mortgage, title search fee, valuation fee, mortgage insurance and legal fees on the loan.

Get rental property advice and support from TaxAssist Accountants

At TaxAssist Accountants we can offer an extensive range of property tax advice specifically for landlords or those with second properties.

To find out more and to book a free consultation, call 08 6245 7506 or fill in our enquiry form here.

Date published 24 May 2023 | Last updated 25 May 2023