ATO Audits: Are You Prepared? A Guide for Property Investors
Rental properties have been under the spotlight this financial year-end with the ATO recently announcing that, after a series of audits, they found errors in 90% of rental property related returns, amounting to a shortfall of close to $1.3 billion between the amount collected and the amount owing.
Some of the areas where inflated claims were found, included exaggerated deductions, particularly regarding interest payments, insufficient documentation to substantiate claimed expenses, holiday homes that were not genuinely available for rent and misapplication of Division 43 capital works claims on investment properties.
Exaggerated deductions on interest expense claims.
- The ATO will closely examine property owners who attempt to claim borrowing costs for both their primary residence and rental property.
- Such actions may lead to inflated deductions and possible penalties for failing to comply with tax regulations.
Misallocation of rental income and expenses.
- Deductions related to jointly owned properties should align with each owner's share of ownership.
- Claiming larger deductions on one owner who may have a higher income, is fraudulent and will attract scrutiny.
- Incorrect allocation could result in tax liability discrepancies and draw attention during audits.
Non-genuine availability of holiday homes for rent.
- Owners of rental properties should only seek deductions for periods when the property is genuinely available for rental.
- Trying to claim deductions during periods of personal use could invite scrutiny from the ATO and potential penalties.
- Verified evidence will be required for any periods during which renovations and maintenance are performed on a rental property.
Inaccurate claims for newly acquired rental properties.
- Immediate claims for repair or renovation expenses on newly acquired properties are not allowed.
- These expenses should be spread out over a specified timeframe, following tax regulations.
- Certain claims need to be claimed over a period of time, as specified by the ATO.
Proactive steps to ensure compliance.
With this focus on inflated property depreciation claims, property investors must take proactive steps to ensure compliance. Below we have listed some ways to avoid scrutiny from the ATO on your investment property claims:
Keep personal and investment expenses separate.
Avoid mixing personal expenses with investment property expenses. Maintain separate bank accounts and credit cards for your rental property to track income and expenses accurately.
Ensure accuracy in your expense claims.
Claim expenses only for periods directly linked to earning taxable income, ensuring that you divide claims considering:
- Non-rental use or vacancy periods.
- Partial rental of the property.
- Personal use or vacancy.
- Below or above-market rental rates.
- Report income and expenses proportionate to your investment share.
Maintain accurate records.
Keep detailed records of all expenses related to your rental property from the day of purchase, including receipts, invoices, and bank statements. This documentation will help substantiate your claims in case of an audit.
Seek professional advice.
Consult with a qualified tax advisor or accountant who specialises in property tax matters. They can provide guidance on legitimate deductions, compliance with tax laws, and strategies to optimise your tax position.
Property depreciation is the second-largest tax deduction available to property investors. To maximise these deductions on your investment property, consult a Quantity Surveyor, like BMT Tax Depreciation.
A property depreciation specialist will conduct a site inspection to ensure no potential claims are overlooked and that your depreciation claim complies fully with ATO regulations. You will then receive an ATO-compliant depreciation schedule, leading to significant tax deductions that will enhance your cash flow.
Written by the experts at BMT Tax Depreciation
BMT Tax Depreciation is Australia's leading provider of residential and commercial tax depreciation schedules. Our team of qualified professionals has extensive experience in helping property investors maximize their tax deductions.
Disclaimer: The information provided in this article is of a general nature only and should not be considered as professional advice. It is recommended that you consult with a qualified tax advisor or accountant before making any financial decisions. BMT Tax Depreciation is not responsible for any losses or damages arising from reliance on the information contained in this article.
