Why the ATO has its eye on property investors

The Australian Taxation Office (ATO) has flagged three key areas of concern at tax time – one of which is tax returns by property investors.

The reason the ATO is focusing on investors is because, in previous years, 90% of investors have made mistakes on their tax returns.

“This year, we’re particularly focused on claims that may have been inflated to offset increases in rental income to get a greater tax benefit,” ATO Assistant Commissioner Rob Thomson said.

“We often see landlords making mistakes when it comes to repairs and maintenance deductions on rental properties, so we’re keeping a close eye on this.”

There are tax implications when major renovations are incorrectly reported as minor repairs, because general repairs and maintenance can be claimed as an immediate deduction, whereas expenses that are capital in nature can only be claimed over time.

“You can claim an immediate deduction for general repairs like replacing damaged carpet or a broken window. But if you rip out an old kitchen and put in a new and improved one, this is a capital improvement and is only deductible over time as capital works,” Mr Thomson said.

“We encourage rental property owners to carefully review their records before lodging their return and take care to ensure they are claiming deductions correctly.”

Don’t rush to lodge, says ATO

The ATO’s second area of concern is taxpayers failing to include all income when filling in their tax return.

This can happen when people rush to lodge on 1 July, before all their sources of income have been pre-filled in their tax return.

“We see lots of mistakes in July where people have forgotten to include interest from banks, dividend income, payments from other government agencies and private health insurers,” Mr Thomson said.

For most people, these income payments will be pre-filled by the end of July.

“By lodging in early July, you are doubling your chances of having your tax return flagged as incorrect by the ATO.”

Remember the three golden rules for work deductions

The ATO’s third focus area is the incorrect claiming of work-related expenses.

The ATO has three golden rules for claiming a deduction for work-related expenses:

  1. You must have spent the money yourself and weren’t reimbursed.
  2. The expense must directly relate to earning your income.
  3. You must have a record (usually a receipt) to prove it.

“Copying and pasting your working-from-home claim from last year may be tempting, but this will likely mean we will be contacting you for a ‘please explain’. Your deductions will be disallowed if you’re not eligible or you don’t keep the right records,” Mr Thomson said.

Reach out to your Loan Market broker if you would like to review your investment home loan.

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