ATO to Target Rental Properties

Rental income and expenses claims will again be high on the Australian Tax Office agenda when it looks at this year’s tax returns. Due to an increase of around 7% recorded in rental income and an increase of 12% deductions in 2004/05, the ATO will be carefully scrutinising the deductions rental property owners are making in their annual returns.

Other concerns from an ATO perspective are that the percentage of taxpayers recording losses on rental properties continues to rise and around 100,000 taxpayers entered the rental market for the first time in the last 12 months.

It is important that rental property owners ensure that their records are up to date and their claims are correct. Common costs that an owner can claim on rental properties include the following:

• Advertising for tenants
• Bank Charges
• Body Corporate Fees
• Cleaning, repairs and maintenance
• Council rates
• Electricity and gas
• Gardening and lawn mowing service costs
• Insurance
• Interest on loans
• Land tax

Claiming deductions where property partly rented for the year

Deductions are only available for certain expenses if they incurred for the period the property is rented at commercial rates or is genuinely available for rent.
The ATO has found that deductions are not being apportioned in relation to a rental property that is only rented and/or available for rent for part of the income year.

Rental property owners also need to be aware that certain costs incurred can be claimed as a deduction in the year incurred, whereas some other expenses, such as the decline in value of depreciation assets or borrowing costs, must be claimed over a number of income years.

Claiming interest deductions in relation to a rental property

The ATO has identified that errors are being made when claiming interest deductions in relation to a rental property, resulting in overstated interest claims. For example, interest deductions have included amounts relating to borrowing costs (which should have been claimed over 5 years) and interest deductions have been claimed on loans which are partly used for private purposes.

New data matching program for property sales

The ATO is still concerned that many individuals have sold property in the last few years and either not declared any capital gain or have not declared the right amount of capital gain. To identify these types of cases, the ATO has recently commenced a large scale data matching program which involves matching property sales data from the Land Tax and Revenue offices of every state and territory against information provided in tax returns. This data matching exercise will involve trying to identify those taxpayers who have sold property which was previously used for income-earning purposes, without any capital gain having been declared on the tax return.

If you have any queries or require further information please contact Alexanders on (02) 9438 3233. or email info@alexanders.net.au