Spotlight is on Rental Property Owners
If you’re a rental property owner you’ll be well aware to the current debate in the Federal Election surrounding some proposals to change the way negative gearing works into the future… but we’ll cross that bridge when and if it comes to it…
From a different angle, the ATO has ramped up their talk on rental property owners and their explicit intention to cast a watchful eye over rental property owners this financial year. Investing in a rental property means that right from the start, you need to keep accurate records and be aware of the obligations you need to be met and that you get your claims right.
SO, where are they focusing?
One focus will be claims on excessive interest expense together with the incorrect apportionment of rental income and expenses between owners.
In addition, if you’ve got a holiday home that is ‘not genuinely available to rent’, then they will be clamping down on expenses claimed if they are not legitimate. For the expense to be relevant, you must have been renting out the property at the time the expense was incurred.
You generally cannot claim income tax deduction on the costs associated with owning the property because it doesn’t generate rental income.
For more information on holiday homes; we recommend and the ATO recommend familiarising yourself with the rules on their website: www.ato.gov.au/rental.
Here are a few examples to help you:
Mischievous Matt and his Holiday Home:
Matt had a newly purchased rental property that had not returned any rental income. He told the ATO that the property was ‘occasionally advertised on community noticeboards and websites.’ Mischievous Matt was unable to PROVE there was a genuine arrangement in which he actively sought tenants, or had taken sufficient steps to genuinely advertise the property for rent.
A rental loss of almost $60,000 was disallowed and penalties were applied. You don’t want to be like Mischievous Matt.
Silly Sally and her Interest:
Rental property owner Sally reported high rental interest claims and was required to provide bank statements as evidence to the ATO. The statements showed borrowings well in excess of the purchase price of the rental property. The interest charges relating to the private part of the loan were disallowed. Silly Sally forgot to separate her private from her investment property. You don’t want to be silly like Sally!
Sorry Sally was required to pay more than $15,000 back to the ATO.
Forgetful Frank and his Record Keeping:
Frank was required to provide evidence to the ATO to show that her property was genuinely rented at market rates. Forgetful Frank was unable to provide any documentation to show that a rental arrangement was in place. Don’t forget to keep your receipts like Forgetful Frank!
All rental income and expenses were removed from Forgetful Frank’s tax return and he received a tax bill of more than $12,000! No thank-you!
Naughty Nancy and her Incorrect Claims and False Claims:
Naughty Nancy recently purchased a rental property and had her tax return amended by the ATO to remove deductions for repairs, capital works and incorrectly apportioned borrowing expenses. Nancy had inappropriately claimed a deduction for repairs to defects present in a newly purchased property and the capital works and borrowing expenses should have been spread over several years. Nancy also provided false receipts for property management fees undertaken by a family member.
Naughty Nancy was required to pay more than $57,000 back to the ATO as well as over $10,000 in penalties for making a false statement in her tax return. No one wants to be this naughty, remember the ATO is no fool!
Everyone LOVES a Checklist!
- Is your property ‘genuinely available for rent’?
- Have you considered private use component?
- Were the expenses incurred whilst the property was being rented?
- Have you reported all the income your property earned?
- Have you got records to substantiate your claims?
Need more information?
Don’t just sit there in the DARK hoping not to be found out.
KMT know that tax time is tricky, so shine a little LIGHT on your property so you can avoid the ATO SPOTLIGHT this Financial Year!
Contact Us NOW!
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