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With the Australian Taxation Office (ATO) reiterating its focus on rental property income and tax deductions this tax time, investors are being advised to take extra care when lodging.
According to the ATO Random Enquiry Program, nine out of 10 tax returns that reported rental income and deductions contain at least one error — even though most property owners have been assisted by a registered tax agent.
In light of this statistic, the Tax Office is urging rental property owners to ensure “they carefully review their records before declaring income or claiming deductions this tax time”.
ATO Assistant Commissioner Tim Loh is urging investors to ensure they are aware of what income they need to declare and what can be claimed as a deduction, stating: “We are concerned about mistakes, and in particular, leaving out income or deliberate over-claiming of rental property deductions this year.
“Getting it right the first time, will ensure you receive the tax refund you are owed, and avoids us knocking on your front door down the track.”
The ATO receives rental income data from a range of sources: sharing economy platforms, rental bond authorities, property management software providers, and state and territory revenue and land title authorities.
According to the Assistant Commissioner, the amount of data the ATO is able to access is growing each year, “making it easier and faster for us to spot any rental income that you have charged your tenants, but haven’t declared”.
All rental income must be included — such as short-term rental arrangements, renting part of a home, and other income from insurance payouts or retainment of rental bond money.
Mr Loh explained: “Income and deductions must be in line with a rental property owner’s ownership interest, which should generally mirror the legal documents.”
As well as including all rental income, the ATO has stressed the importance of getting expenses right.
“Not all expenses are the same — some can be claimed straight away, such as rental management fees, council rates, repairs, interest on loans and insurance premiums,” the Tax Office outlined.
On the other hand, expenses such as borrowing expenses and capital works need to be claimed over a number of years.
This includes capital works and depreciating assets.
Investors were reminded that refinancing or redrawing on a rental property loan for private expenses, such as holidays or a new car, means that the amount of interest relating to the loan for the private expense can’t be claimed as a deduction.
“You can claim expenses for the property to the extent that they are incurred for the purpose of producing rental income, not where your family and friends stayed in the property for a mini getaway at mate’s rates, you use it yourself, say at Christmas, or you stopped renting the property out,” Mr Loh said.
He also warned investors that they could not claim for deductions where they pretend a property is available for rent when really it isn’t — “for example, you advertise significantly above a reasonable market rate compared to similar properties or you place unreasonable restrictions on potential tenants”.
When it comes to sale of a rental property, the ATO has reminded owners that capital gains tax (CGT) must be considered — with capital gains or capital losses requiring reporting.
The ATO has stated that for investors who are calculating a gain or a loss, “it’s important to get the cost base calculation right”, which is “usually the cost of the property when purchased and any costs associated with acquiring or selling it”.
This cost base includes things such as stamp duty, legal fees, valuations and real estate sales fees, with any capital works claimed as deductions likely needing to be subtracted from the cost base.
According to Mr Loh, “if you’ve sold a rental property that was once your home, you may be entitled to partially claim the main residence exemption. You will need to claim this exemption in your tax return when you lodge.”
Above all, the ATO has stressed that records of all income and expenses relating to rental properties, including purchase and sale records, must be kept to ensure all eligible deductions are captured.
It was also highlighted that when selling any property for more than $750,000, vendors must have a clearance certificate; otherwise, 12.5 per cent will be withheld.
And with clearance certificate applications taking up to 28 days to process, the ATO is urging sellers to apply “as early as practical”.
The ATO has also advised investors of the importance of good record keeping, noting that records of rental income and expenses should be kept for five years from the date of tax return lodgments or five years after the disposal of an asset, whichever is longer.
Mr Loh has told investors to get their books in order now: “Start keeping records as soon as you make the decision to earn rental income.”
From his perspective, “it makes tax time so much easier for you and your registered tax agent”.
He instructed that adequate records should demonstrate how the expense was incurred for the rental property and the extent they relate to producing rental income.
This means they should include: the name of the supplier, the amount of the expense, the nature of the goods or services, the date the expense was incurred, and the date of the document.
“We can ask for proof of any claim that you make, so good record keeping is the only way to ensure you can claim everything you are entitled to,” Mr Loh said.
“Remember, when your return is lodged, you are on the hook for the claims.”