ATO flags top problem areas for rental property deductions

Investors incorrectly apportioning interest from investment loans and confusion between repairs and improvements are some of the main issues, says the ATO.


The ATO has warned tax practitioners on some of the common errors and mistakes it’s seeing with claims for property deductions as time time 2024 approaches.

As previously outlined, the Tax Office warned that rental property deductions will again be a significant compliance focus for the ATO this year.

In a recent Ignition webcast, ATO assistant commissioner Robert Thomson said interest deductions for rental investment properties continue to be a large driver of the tax gap.

“People aren’t apportioning correctly between interest relating to private use and the interest that relates to the income they’re generating from their investment property,” said Thomson.


“That is contributing around $1.2 billion to the tax gap.”

Thomson said the ATO also continues to see a lot of confusion around repairs and maintenance deductions for rental properties.

“There is some confusion around what is considered an initial repair versus what might be capital in nature or an improvement,” he said.

“We’re focused on making sure people understand the difference here.”

“We see a lot of people where they’re going to repair something but instead of deciding to just fix the cracked windows, [for example], they replace the whole window frame. That then moves it from a repair to an improvement. They will then be able to claim the decline in value for that improvement over the effective life of the asset.

“We really want to make sure that people understand those differences when they outlay any expenditure on their property.”

Thomson said it is also important clients understand that any initial repairs or costs outlaid before tenants start renting the property actually aren’t considered initial repairs which means they can’t claim the whole amount on their tax return on that year.

“That’s another area where we are seeing a lot of confusion,” he said.

Thomson said tax practitioners should also ensure that clients understand that where they replace depreciating assets such as air conditions, furniture, window coverings and removable flooring like carpet, they can only claim an immediate deduction on the individual item if it’s less than $300.

“Otherwise, they need to claim up over the effective life of the asset,” he said.

“Depending on the date at which you purchased your rental property, this will impact whether you can claim the effective life of depreciating assets on new or new and secondhand assets.”

The ATO recently revealed that its data indicates that 9 out of ten rental property owners are still getting their income tax returns wrong.

“Ensuring you provide full and complete records to your registered tax agent allows them to prepare your tax return correctly, so you claim everything you’re entitled to and nothing that you’re not,” he said.

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