Tax Time Advisory for Strata Landlords: A Call to Action from the ATO

The Australian Tax Office (ATO) has issued a critical reminder to ensure accuracy during tax return submissions. Alarmingly, recent data reveals that nine out of every ten rental property owners are making errors in their tax returns.

In a recent announcement, the ATO highlighted its primary focus areas for this tax year, specifically targeting landlords who incorrectly claim expenses. Assistant Commissioner Rob Thomson emphasised the importance of correct reporting, particularly regarding repairs and maintenance deductions.

“We frequently observe landlords making mistakes with deductions for repairs and maintenance on rental properties,” said Thomson. “This year, we’re scrutinising claims that appear to be inflated to offset increased rental income for greater tax benefits.”

Key Guidelines for Landlords

Immediate vs. Capital Improvements: Landlords must distinguish between immediate deductions for repairs and capital improvements, which can only be claimed over time. For instance:

  • Eligible Immediate Deductions: Replacing damaged carpet or repairing a broken window.
  • Capital Improvements: Installing a new kitchen, which must be depreciated over several years as capital works.

 

Thomson advised, “We encourage rental property owners to carefully review their records before lodging their return to ensure they are claiming deductions correctly.”

Best Practices with Body Corporates

Landlords can claim deductions for levy payments to body corporate administration funds and general-purpose sinking funds at the time they are incurred, provided these fees are used for routine maintenance of common property.

However, the ATO clarified that payments made to a body corporate for capital expenditure, such as replacing the roof of an apartment building, are only deductible after the capital works are complete and the expense has been billed to the body corporate.

Borrowing Expenses and Stamp Duty

Costs surrounding borrowing expenses, such as loan establishment fees, title search fees, and lender’s mortgage insurance, are also frequently claimed incorrectly. These expenses are generally claimed over the shorter period of the life of the loan or five years.

State or territory stamp duty, with the exception of properties inside the ACT, is not deductible while renting out a property. Instead, stamp duty records should be kept until the sale of the property, where the amount will be added to your cost base to reduce any capital gain on the sale.

Documentation is Crucial

A lack of documentation supporting expense claims and deductions was identified as another common error. Thomson emphasised, “You need to keep detailed and complete records, including receipts, invoices, and bank statements for interest expenses. You should also detail how you calculate your deductions and any apportionments. This will allow you or your tax agent to correctly complete your tax return.”

Record-Keeping Requirements

Both paper and electronic records are accepted by the ATO and must include:

  • The date the document was produced.
  • The nature of the goods or services purchased.
  • The date the goods or services were purchased.
  • The amount of the expense.
  • The name, ABN number, or business name of the supplier.

 

Claims for capital works should be based on the construction cost when initially built, not the purchase price of the property. Taxpayers can seek the help of a professional surveyor or create a comprehensive capital works deduction schedule themselves.

“Taxpayers are responsible for what they include in their tax return, even when using a registered tax agent. If you don’t have sufficient records, you can’t claim it,” Thomson warned.

By adhering to these guidelines and being vigilant with tax return details, landlords can avoid potential penalties and ensure compliance with ATO regulations.

 

Additional Areas of Concern

Beyond rental property deductions, the ATO is also focusing on:

  1. Work-from-Home Expenses: Ensuring accurate claims.
  2. Complete Income Reporting: Avoiding omissions of income such as bank interest, dividends, and government payments.

 

Thomson noted a common issue where early submissions in July often lead to errors due to incomplete pre-filled information. “Submitting your return in early July can increase the chances of missing key income details, leading to an incorrect tax return.”

 

Preventing Errors

While many of these errors are unintentional, Thomson pointed out that some individuals knowingly claim ineligible expenses. The ATO urges all landlords to take the time to ensure their tax returns are accurate.

“These areas are prone to mistakes, and while often genuine, some errors are deliberate,” Thomson said. “It is crucial to take the necessary time to get your return right.”

By adhering to these guidelines and being vigilant with tax return details, landlords can avoid potential penalties and ensure compliance with ATO regulations.

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