Data program to shine light on multibillion-dollar shortfall
The Australian Tax Office has launched a new program to stamp out the number of landlords incorrectly claiming tax deductions on rental properties.
It comes as the ATO estimates a $1.3 billion tax gap, having noted a series of frequently made errors around adjustments to rental items on tax returns.
The ATO has developed a residential investment property loan data-matching program, under which it will collect data from 17 banks for all financial years from 2021-22 through to the 2025-26. The data is collected annually, following the end of each financial year.
BMT Tax Depreciation chief executive officer Bradley Beer (pictured above left) said earlier this month that the ATO residential investment property loan data-matching program was aimed at preventing landlords from incorrectly claiming tax deductions and failing to declare rental income and pay capital gains tax.
When landlords claimed work completed on investment properties, Beer said that there were a few “nuances”, around how a renovation and general maintenance should be claimed at tax time.
“We know that two thirds of investment properties have undergone some form of qualifying renovation or addition completed,” Beer said. “This reinforces the importance of having a thorough tax depreciation schedule prepared by a specialist quantity surveyor.”
Beer reminded landlords lodging tax returns in coming months to ensure that any rental property improvements made over the last financial year are captured in an updated tax depreciation schedule. He also reinforced the importance of conducting a thorough site inspection as part of the process.
“Investors who have renovated and who fail to update their tax depreciation schedule before lodging their tax return risk both being out-of-pocket and facing the scrutiny of the tax office,” Beer said.
ATO clarifies program, common errors
In response to questions from MPA, ATO assistant commissioner Tim Loh (pictured above right) confirmed that the ATO regularly reviewed returns where the income and deductions for landlords of rental properties were “out of pattern”.
Loh said that the data collection process was aimed at helping individual taxpayers “get their tax return right in the first place”, and better target individuals who “may be under-reporting their income or overclaiming deductions”.
Common errors on rental property tax returns
Loh said that ATO observations showed three common reasons for adjustments to rental items on a tax return. They are:
- No or incorrect apportionment of the loan interest costs where the loan was refinanced for private purposes
- Claiming renovation costs as repairs rather than a capital works deduction
- Not apportioning expenses for private use of the property.
The data matching program is part of a broader suite of data-matching programs that includes property management and landlord insurance, allowing the ATO to address a number of taxation risks in the investment property market, he said.
The data gathered would be used by the ATO to undertake compliance activities, gain insights around strategies to improve voluntary compliance, strengthen community confidence and create a level playing field, Loh said.
Echoing Beer’s comments regarding updated tax depreciation schedules, co-founder and director of buyer’s agency Tailored Property Group Nicole Kowalczyk (pictured above centre) said categorisation of investment property costs was often a grey area for investors.
She noted that many investors were simply unaware or uneducated on what was classified as a repair, maintenance or improvement.
“The key factor to consider is whether the expense restores the property to its original condition or goes beyond that by enhancing it,” Kowalczyk said. “Property investors should maintain detailed records, including invoices and receipts, to substantiate their claims and provide evidence.”
As an investor and buyer's agent, Kowalczyk said it was crucial that investors accurately classified expenses and updated their tax depreciation schedules to avoid inaccurate or reduced claims.
To assist property investors lodging tax returns over coming months, Loh confirmed that capital expenses (also referred to as “capital works”) include structural improvements, such as an extension, new kitchen, bathroom or roof replacement. Repairs to damage or deterioration that existed when a property was purchased are also capital in nature, Loh said.
Capital works are generally depreciated over a number of years and can’t be claimed until construction is complete, he said.
Tax depreciation schedules
Commenting on tax depreciation schedules, Loh said that a depreciating asset (or plant) included items such as flooring, window coverings, air conditioners and swimming pool pumps.
“Each depreciating asset has a set life span, where it can be depreciated each year over its effective life – referred to as the ‘decline in value’,” he said.
Loh also clarified rules around depreciation of assets, confirming that from July 1, 2017, landlords were unable to claim the decline in value of second-hand depreciating assets unless the property was used for carrying on a business (or was an excluded entity). New builds and substantially renovated properties were generally exempt from the change, although conditions apply.
What do taxpayers need to do to comply?
Loh suggested that taxpayers ensure they have records to back up their claims and give complete and correct information to their registered tax agent (if they use one).
“Ultimately, it’s the responsibility of the taxpayer to ensure their tax return (and other tax forms) are correct and comply with the taxation law,” Loh said.
“Taxpayers that realise they have made a mistake can fix errors or omissions in their tax return through the ATO online amendment process. This can be accessed via myGov or by speaking to a registered tax agent.”
What are your thoughts on the ATO’s crackdown on miscalculation of tax deductions for investment properties? Share your view in the comments section below.
