Thousands of property investors set for tax audit

“A random sample of returns with rental deductions found that nine out of 10 contained an error,” Mr Siebert said.

“We are concerned about the extent of non-compliance in this area and will be looking very closely at claims this year.

“Where we identify claims of concern, ATO staff will investigate and prompt taxpayers to amend unjustifiable claims. If necessary, we will commence audits,” he said.

The increase in audits is being supplemented through additional funding to the ATO by the Australian government, with the number of in-depth audits doubling.

“We expect to more than double the number of in-depth audits we conduct this year to 4,500, with a specific focus on over-claimed interest, capital works claimed as repairs, incorrect apportionment of expenses for holiday homes let out to others, and omitted income from accommodation sharing,” Mr Siebert said.

“Once our auditors begin, they may search through even more data, including utilities, tolls, social media and other online content to determine whether the taxpayer was entitled to claims they’ve made.

“This tax time, our message to taxpayers is clear. If you are renting out a room or a property, any money you earn must be declared as income and any deductions you claim may need to be apportioned for private use.”

The methods used to conduct the audits, according to Mr Siebert, include a range of third-party information: financial institution data, property purchases and rental bonds from all states and territories, and online accommodation booking platforms, which is all scrutinised by “sophisticated analytics”.

What key issues are the ATO checking?

Loan interest

The interest on loans to purchase rental properties can be claimed as a deduction, but using the loan money for anything else other than the loan’s intended purpose means that the interest on that part of the loan cannot be claimed.

Capital works and repairs

Repairing or maintaining something that is broken, damaged or deteriorating can be deducted immediately, but improvements or renovations, which include damage that existed at the time of purchase, count as capital works and can be deducted over a number of years.

Holiday homes

Holiday homes are considered to be different to rental investment properties; the ATO considers them to be a private asset used for family holidays and cannot have expense deductions claimed.

By letting the property out, however, at below market rates to friends and family, expenses can be claimed up to the amount of income received.

If the property is genuinely available for rent (is made available during holidays, kept in a rentable condition and tenants are not unreasonably refused), it leans more towards a rental investment property, which means deductions can be claimed on the days it is made available to rent or is rented out.

Records

The ATO’s number one cause of claim refusal is a lack of records being kept, such as receipts and other documents to back up claims being made.

By trying to make fake records, this can result in higher penalties and even prosecution.

What are the penalties?

Investors who deliberately over-claim can see penalties of up to 75 per cent of the claim, according to the ATO.

Financial year 2017-18 saw more than 1,500 audits of rental claims, and handed out a total of $1.3 million in penalties.

Two examples provided by the ATO included a holiday home owner being penalised for $12,000 when it was not genuinely made available for rent, and a landlord being penalised $5,500 due to not apportioning rental interest deductions to take into considerations redraws on their investment loan to pay for living expenses.