A landlords’ guide to avoiding a knock at the door this tax season

This article has been republished from the June 2023 edition of Your Investment Property Magazine.

Tax can be a complicated mess for the average punter, let alone a landlord with multiple investment properties. That said, there is a difference between completing a tax return incorrectly and simply hiding income and expenses from the eyes of the Australian Tax Office. In fact, landlords have come under fire in recent times for continued issues of non-compliance with false claims resulting in inflated tax returns.

H&R Block Director of Tax Communications Mark Chapman said one of the ATO’s main focuses this year will be on people who make deduction claims in relation to investment properties and holiday homes.

“The ATO recently announced that in a series of audits, they found errors in 90% of returns reviewed,” Mr Chapman told Your Investment Property Magazine.

So, this year, expect them to focus on the following:

1. Claiming excessive interest expenses, such as where property owners have tried to claim borrowing costs on the family home as well as their rental property.
2. Incorrectly apportioning 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.
3. Claiming deductions for investment properties that are not genuinely available for rent.
4. Claiming repairs 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.
5. Incorrectly treating properties that are 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!

Carbon Accounting and Tax Partner Michelle Maynard noted some landlords and property investors will receive ‘please explain’ letters from the ATO within weeks of returns being lodged.

“When the ATO reviews your claims, at this time they can ask for receipts and explanations,” Ms Maynard told Your Investment Property Magazine.

“If they determine that you have incorrectly claimed a deduction, or not included the correct amount of income, there are three things that will happen.

“The tax payable will be assessed and will be backdated to the original due date; interest will be payable from that initial due date; there may be a penalty of up to 75% of the shortfall tax if the ATO can prove you intentionally disregarded the law.”

What can landlords claim this tax season? 

Mr Chapman says of the various items of expenditure that you might incur in running a rental property, probably the most significant is the amount you pay on your mortgage. 

“The interest element of your mortgage repayment is deductible for tax purposes,” Mr Chapman said.

“In addition to interest relating to the property acquisition, you can also claim a deduction for interest on loans taken out to: carry out renovations; purchase depreciating assets (for example, furniture); make repairs or carry out maintenance.” 

Mark Chapman’s list of items to claim in your 2022-2023 tax return 

There are a number of items you can claim in your tax return, some more obscure than others. If any of these apply to you, make sure you include them in your tax return:

• Advertising for tenants, including costs passed on by letting agents
• Cleaning at the end of a tenancy (including removal of rubbish)
• Estate and letting agents (including management fees)
• Gardening and lawn mowing (including felling or pruning trees)
• Secretary and bookkeeping fees associated with the collection of rent and payment of property expenses
• Bank charges on the account used to receive rent and pay expenses
• Council rates and land tax
• Insurance (building, contents, or public liability)
• Credit checks
• Pest control
• Bank or solicitor fees for keeping title documents safe
• Taxation advice relating to the property
• Legal expenses to eject a tenant for non-payment of rent
• Hiring a debt collector to collect rent arrears
• Getting new keys cut
• Servicing items such as hot water heaters, smoke alarms, air-conditioning systems and garage door mechanisms
• Water supply charges (to the extent that they aren’t paid by the tenant)
• Quantity surveyor
• Security patrols
• Security system monitoring and maintenance

Avoid making these common mistakes

Carbon’s Michelle Maynard identified some of the common mistakes landlords will make at tax time. 

Don’t get caught out making these mistakes

• Not having receipts - Once your total rental deductions exceed $300 per owner, you must have receipts for all items. If you don’t have receipts (not bank statements or credit card statements, actual receipts), you can’t claim the deduction.
• Claiming personal items - Putting through a Bunnings receipt that you spent on your own home, claiming interest on a portion of a loan that you used for personal purposes – the ATO is very strict on this. You can only claim items that relate to the rental property. This also relates to short-stay accommodation – if you use the property personally, or allow family and friends to use it at a discounted rate, you can’t claim 100% of all expenses. You must apportion for private use.
• Claiming improvements as repairs and maintenance - There are many rules to navigate when performing work on your rental property to ensure you claim the deduction correctly. Getting your property ready to rent, making initial repairs shortly after purchasing a rental property, or once your tenants have vacated if you are putting the property up for sale are generally improvements and must be depreciated over several years (or added to the cost base for capital gains tax calculations). Repairs are where there has been genuine wear and tear or damage to an item as a result of renting out the property (fixing leaking taps, or fences that have been damaged in a storm). If you replace the item with a similar item, you can claim this amount outright. Maintenance is the prevention or fixing of the deterioration of an item (i.e. painting faded interior walls or re-oiling a deck). Again this can be claimed outright. However, if you go beyond repair or maintenance, it is more likely to become an improvement. Examples include – replacing an entire fence, not just the damaged section, or installing a new kitchen rather than replacing a damaged benchtop.

To avoid making these mistakes, Michelle Maynard says it’s important to take the necessary steps.

“Keep all your receipts! You don’t have to keep physical copies – scan them and save them online so they don’t fade or get lost,” she says. 

“Get advice before you claim anything you aren’t sure about – especially repairs and maintenance. Look at getting a depreciation report (if you don’t have one already) or if you have performed substantial work on your rental property.

“Structure your loans correctly – if you refinance, keep the loan that relates to the original purchase price of the rental, separate from any other borrowings. Don’t have a redraw account on a rental property account, because once you have paid ahead, if you redraw those funds the ATO deems that is for private use and you will then have to start apportioning interest.”

Associate Director of dmca Advisory Mark Gellert says to assist with interpreting the r

“This covers many of the income and expenses a person may encounter and how to deal with these appropriately,” Mr Gellert told Your Investment Property Magazine. 

“The guide also has recommendations on what records you should be keeping.

“However, this may not cover all your questions, so engaging an accountant who has experience in dealing with investment property (commercial and/or residential) will provide answers for items that aren’t covered by the ATO guide. 

“For example, where you have some private use or the property was not considered available for rent, you may need some assistance in calculating what should be claimed.” 

Tips to ensure your tax return is completed correctly

To ensure a successful tax return that is completed correctly, Michelle Maynard says to first educate yourself on what you can and can’t claim so you are doing the right thing.

“The ATO has some great free guides on their website. If you do your taxes yourself, make sure you lodge them by 31 October. If you use an accountant or tax agent, you get a longer lodgement time,” she said.

“Know that the ATO is focused on this area so be prepared to have your returns checked. Keep all your receipts or documents for up to five years after you lodge.

“Use technology to your advantage – start an online folder so everything is saved in one place.”

Echoing this sentiment, dmca Advisory’s Mark Gellert says to always ensure you have the right records to substantiate the expenses you are claiming in your return.

“If the ATO reviews your claims and you can’t substantiate this, they will disallow the expense,” he said.

“Where there has been an unusually tough year for income and expenses, make sure everything is documented. The ATO in deciding what to audit has high-tech systems that check for returns that are unusual.

“Keep on top of your record keeping. If you leave it to the end of the year and try to track down your expenses, remembering what happened earlier in the year or what was spent on what property can be a lot harder than it needs to be.”

ules and including the many items associated with your property, the ATO releases an extensive Rental Properties Guide each year.