Owners of rental properties may need to exercise greater prudence when it comes to assessment of rental incomes and tax expense claims in 2015.
The Australian Tax Office (ATO) has indicated that it will expand the scope of its investigations of the rental incomes and expense claims of owners of residential properties this year as part of efforts to ensure that taxpayers pay the appropriate amounts.
According to the ATO, it still faces an ongoing problem with taxpayers making errors with respect to either assessment rental revenues or deductions for rent – an issue that has become more salient following the recent surge in sales of residential investment properties.
While many rental property expenses are legitimately tax deductible, such as council and water rates, real estate management fees, advertising costs and travel costs for property inspections, the ATO has found that property owners are making incorrect deductions in a multitude of other areas.
Errors made by rental property owners while lodging expense claims frequently relate to stamp duties on the transfer of property, legal costs arising from family divorce proceedings, borrowing expenses confined to a single year (as opposed to those spread over five years as required by law,) the inclusion of renovation costs as repairs and maintenance instead of as part of the capital cost of the property, and solicitors fees for property purchases.
Another common problem relates to empty rental properties that are left idle. According to the ATO, expenses arising in relation to rental properties that are vacant are only considered deductible if such property is both available for rent and owners are actively searching for tenants.
The ATO says it will expand its investigations to include issues such as the improper apportionment of income and expenses based on ownership holdings, the apportionment of expenses for holiday homes, the claiming of expenses for vacant land, as well as the claiming of interest expenses for private borrowings.
The ATO will also send what it refers to as “re-designed” letters to taxpayers containing information on rental, legal and/or borrowing expense claims that the department is currently reviewing, including proposed adjustments and how to handle disagreements over claims.