ATO to crack down on false property claims

The ATO’s review of income tax returns showed 9 in 10 rental property owners were getting their tax return wrong, and often see rental income being left out, or mistakes being made with property-related deductions, such as overclaiming expenses or claiming for improvements to private properties.

Assistant commissioner Tim Loh said the ATO was “particularly focused” on areas where it continues to find mistakes.

Given 87 per cent of individual rental owners use a registered tax agent to prepare their income tax returns, Mr Loh encouraged accountants to take “extra care this tax time and review their lodgings”, as well as property owners.

It comes following increased funding in the federal budget for 2023–24, which allocated an additional $89.6 million to the ATO to extend the Personal Income Tax Compliance Program, two years from 1 July 2025 and expand its scope from 1 July 2023.

The move would address “key areas of non-compliance” to address emerging areas of risk, such as “deductions relating to short-term rental properties to ensure they are genuinely available to rent”.

The ATO is particularly focused on interest expenses and ensuring rental property owners understand how to correctly apportion loan interest expenses where part of the loan was used for private purposes (or the loan was re-financed with some private purpose).

“You can only claim interest on a loan used to purchase a rental property to earn rental income – don’t forget, if your loan also includes a private expense, such as for a new car or a trip to Bali, you can only claim an interest deduction for the portion relating to producing your rental income,” Mr Loh said.

Mr Loh said the ATO had a data matching program, which included rental property-related data and residential investment property loans.

The data-matching programs aim to identify and educate individuals who may be failing to meet their reporting or lodgment obligations and help them lodge their tax returns correctly.

For example, “if you have an investment property that isn’t rented or available for rent, such as a holiday home, then you generally can’t claim deductions because it doesn’t generate rental income,” the ATO explains.

“This is just one example of the work we are doing to help you get your return right and make sure people are claiming expenses correctly,” Mr Loh explained.

Capital gain tax considerations

Capital gains tax (CGT) comes into effect when you dispose of assets such as shares, crypto, managed investments or properties.
Investment property owners need to calculate a capital gain or capital loss for each asset disposed of unless an exemption applies.

“Generally, your main residence is exempt from CGT, however if you have used your home to produce income, such as renting out all or part of it through the sharing economy, for example Airbnb or Stayz, or running a business from home, then CGT may apply,” Mr Loh said.

As the ATO begins to crackdown on investment properties, it is reminding taxpayers to keep records of the income-producing period and the portion of the property used to produce income to calculate your capital gain.

“If you used your property to earn income, and qualify for an exemption, make the selection in your tax return,” Mr Loh continued.

“Don’t fall into the trap of thinking we won’t notice if you sell an asset for a gain and don’t declare it.”

[Related: Is HECS debt still ‘good debt’?]