Tax Time Fy 2023

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Rental property deductions under the spotlight

25 July 2023

Tax return errors common says ATO

According to the Australian Tax Office (ATO), rental properties have been identified as one of its three focus areas for FY2023.

The ATO says mistakes in this area are what it calls “common”, and rental property deductions have moved to the top of its list for closer scrutiny. The two other areas earmarked for more attention are working from home claims and investor returns.

“Within these areas, we have identified common mistakes and are particularly focused on addressing these and supporting taxpayers and registered tax agents to get their claims right this year,” says ATO assistant commissioner Tim Loh.

“We expect fewer people will receive a refund or may receive smaller refunds than they were expecting, and more may have tax debts to manage.”

Mr Loh went on to say that nine out of ten rental property owners are getting their returns wrong. The most common errors include omitting rental income, overclaiming expenses or claiming for improvements to what are in essence private properties.

The ATO says 87 per cent of landlords use a tax agent to file their returns and explained its analytics systems could now highlight residential property loans and other rental data.

“We encourage rental property owners and their registered tax agents to take extra care this tax time and review their records before lodging their return,” Mr Loh said.

The correct apportioning of loan interest expenses where part of the loan was used for other purposes is a particular focal point.

“You can only claim interest on a loan used to purchase a rental property to earn rental income,” Mr Loh explained. “If your loan also includes a private expense, such as a new car or a trip to Bali, you can only claim an interest deduction for the portion relating to producing your rental income.”

Capital gains tax (CGT) events are also under the magnifying glass this year. The ATO reminding taxpayers that CGT should be applied to the disposal of properties, shares, managed investments and crypto currencies.

The ATO reminding people that to meet their tax obligations and pay the correct amount, taxpayers need to calculate a capital gain or capital loss for each asset they dispose of unless an exemption applies.

Main residences are generally exempt unless, as Mr Loh points out, the home has been used to produce income, such as renting out all or part of it through a supplier like Airbnb. The same goes for running a business from the home.

Taxpayers must keep a record of the income-producing periods and the portion of the property that was used to produce income, so they can accurately calculate their capital gains tax.

The final word goes to Mr Loh, “Don’t fall into the trap of thinking we won’t notice if you sell an asset for a gain and don’t declare it.”