Landlords are especially prone to making mistakes on their returns, tax office says
As Australia's tax season approaches, the Australian Tax Office (ATO) is focusing its attention on landlords, a group it says is prone to making errors on their returns.
Recent ATO findings indicate that nine out of 10 landlords have been making mistakes, according to a report by the Property Investment Professionals of Australia (PIPA). This could potentially cost the nation $1.2 billion in tax revenue due to errors such as "double dipping" on expenses.
ATO assistant commissioner Rob Thomson said that while some mistakes are unintentional, others involve deliberate attempts to evade taxes by inflating expenses. Common errors include overclaiming deductions, insufficient documentation to substantiate expenses, and incorrectly claiming capital works as repairs.
“For example, where the investor makes a capital improvement, such as building a new patio or remodelling their kitchen, they attempt to claim it as a repair in the year they incur the expense,” Thomson told PIPA. “In most circumstances, this should be claimed at 2.5% over 40 years.”
Another frequent error involves claiming interest expenses on portions of loans used for personal purposes rather than for the investment property, PIPA reported. The $1.2 billion potential tax loss estimate stems from an analysis of incorrect landlord tax returns for the 2020-21 tax year.
While some landlords might be facing increased financial pressure due to higher interest rates and taxes, Thomson refrained from commenting on whether these pressures have led to more tax evasion attempts.
Brisbane-based landlord Merwyn Machado, who has sold two of his three rental properties since 2022, argued that many landlords are unintentionally making errors. He told PIPA that managing investment properties involves complex tax arrangements, often leading to different interpretations by landlords, tax agents, and the ATO. Machado, who uses a tax agent and has not faced issues with errors, sold his properties due to financial strain and changing market conditions.
Leo Patterson Ross, CEO of the Tenants’ Union of New South Wales, stated that the recurring warnings from the ATO indicate a systemic issue within the landlord community. He criticised the current tax system for incentivizing landlords to seek loopholes and minimise their tax liabilities. Patterson Ross emphasised the need for landlords to view their tax obligations as part of running a business.
PIPA chair Nicola McDougall expressed scepticism about the high error rate cited by the ATO, noting that most landlords use tax agents for their returns. Tony Greco, general manager of technical policy at the Institute of Public Accountants (IPA), acknowledged the high error rates but attributed them to landlords not providing accurate information rather than malicious intent. He stressed that tax agents must exercise "reasonable care" in verifying claims, especially significant ones like repairs.
To combat these errors, the ATO has updated its Investor Toolkit and increased the data sources used for identifying and educating those failing to meet their obligations. This includes income data from banks, state revenue offices, land titles offices, and other entities.
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