This financial year, the Australian Taxation Office (ATO) has plans to crack down on rental property expenses and tax deduction errors. More than 70% of tax deductions lodged with rental property expense in 2021 were wrongly declared and required adjustments.
The ATO’s sophisticated data matching programs mean that expenses wrongly reported are red-flagged. When that happens, your name is highlighted for a delay in processing times at best, and fines, penalties and audits at the worst.
Of course, it’s best to avoid mistakes altogether when it comes to the ATO. Understanding what to do and how to report properly will save you time and money. Here, we share the top mistakes rental property owners often make.
Wear and Tear, and Repair
No matter if your rental property is an Airbnb, an ongoing rental or a room for hire, ongoing repairs and maintenance are a must if you want to keep your rental property in good condition, for example the need to repair a hot water system or part of a damaged roof. Repairs you’ve incurred as a direct result of rental damage or upkeep may be fully claimed in the same financial year in which you incurred the expense in some situations.
Pro Tax Tip: Costs over $300 on items that are detachable from the house will need to be depreciated over a number of years.
Some expenses will need to be depreciated over a period of years. The time and rate of depreciation is determined by the ATO, and may include repairs made to the property that existed when the property was purchased. Other items that are connected with the building are categorised as capital works, rather than repairs. These items will either be claimed over a longer period of time than normal depreciation or in some circumstances will need to be calculated as part of a capital gain or loss upon sale of the property.
Some deductions that may be depreciated include:
- Hot water systems
Pro Tax Tip: Construction costs are not depreciated.
Other repairs that might be mistaken as normal expenses, but rather are defined as capital costs, are items such as repairing an entire structure such as a roof, even if only part of it is damaged, or renovating a bathroom. This is because the repairs are classed as improvements and not a repair and as such, is not immediately deductible. These building costs on residential properties can be claimed at 2.5% each year over a period of 40 years from the date of completion.
Pro Tax Tip: The cost of purchasing your property can’t be claimed. These costs include conveyance fees and stamp duty. When you sell, these costs are used when working out your capital gains or losses.
If you take out a loan on your property, the bank interest you incur is tax deductible. Bank interest of parts of a loan used for personal use cannot be claimed, for example if you used the money to go on a holiday or to buy a boat. Only the interest related to the rental or property-related portion can be claimed.
Borrowing expenses, such as loan establishment fees, title search fees and cost of preparing and filing mortgage documents can be claimed in the full amount in the year in which they were incurred if the costs are $100 or less. If these costs are over $100, you’ll need to spread the costs over 5 years.
As well as repairing and maintaining your property, you might engage in some construction works. These types of works include extensions, alterations and structural improvements to your property. These will be classified as capital works deductions.
Capital works deductions can be claimed at a rate of 2.5% of the construction cost for 40 years from the date of completion.
Pro Tax Tip: For properties owned by someone else, ask for their capital works details so you can correctly calculate the deduction. A qualified quantity surveyor can inspect your property and supply this information for a fee if you’re unable to get it yourself.
Claiming the rental times only
Many rental property owners make the mistake of thinking that they can claim running costs on their rental properties all year round, when in fact only claims can be made for the time your rental has been rented or available for rent. Tax deductions can only be made on actual income earned.
Pro Tax Tip: Deductions can’t be claimed when friends or family stay in your rental for free, nor can periods of personal use.
You’ll need to apportion your expenses if your property is genuinely only available to be rented for part of the year, or your property is partly used privately, or only part of your property is available for rent and you rent your property non-commercially.
Pro Tax Tip: Some expenses can be claimed, even when your property is not genuinely available for rent. These costs include agent fees, accounting and bookkeeping fees.
Types Of Rental Deductions
Tax deductions can only be claimed when the expense has already been incurred, the expense must be rental-related and you must have the records to prove the cost.
There are a range of tax deductions for which you’re entitled to claim as a legitimate expense in the year in which you incur the expense. These include:
- advertising for tenants
- bank charges
- body corporate fees and charges if not paid by the tenant
- council rates
- electricity and gas– annual power guarantee fees
- gardening and lawn mowing
- in-house audio and video service charges
- insurance (building, content, public liability)
- interest on loans
- land tax
- lease document expenses (preparation, registration, stamp duty)
- legal expenses (excluding acquisition costs and borrowing costs)
- mortgage discharge expenses
- pest control
- property agent’s fees and commissions (including prior to the property being available to rent)
- quantity surveyor’s fees
- costs incurred in relocating tenants into temporary accommodation if the property is unfit to occupy for a period of time n repairs and maintenance (cost of a defective building works report in connection to repairs and maintenance conducted)
- secretarial and bookkeeping fees
- security patrol fees
- servicing costs
- telephone calls and rental
- tax-related expense
- travel and car expenses to the extent that they are deductible
- water charges.
Pro Tax Tip: Some legal expenses can be claimed as a tax deduction. These legal expenses include evicting a non-paying tenant, taking court action, defending damages. Most legal fees are capital expenses because they are considered part of purchasing or selling the property and will form the cost base of your property for capital gains tax purposes.
Claiming tax deduction on your rental property may not be as straightforward as you may think. There are many variables and capital gains rules which many people misunderstand and report incorrectly when they lodge their tax return. A tax agent is well versed in rental property tax deductions and help you not only claim all of your eligible tax deductions, but help you navigate the various rules and regulations that may land you in hot water. Phone 1800 367 487 and chat with a friendly professional today.