The Australian Taxation Office has warned that it will pay close attention to deductions for rental property costs this year, after identifying a large number of mistakes in claims last year.
ATO assistant commissioner Kath Anderson says people are claiming deductions for holiday homes, even when the property is not being rented genuinely or is not actually available for rent.
Anderson says: “There’s no problem with people using their rental property for a holiday. But holiday home owners need to remember that they can only claim tax deductions for expenses made during a period when the property is rented out or genuinely available for rent.”
Claims for expenses must be based on the proportion of the income year the property was rented or was genuinely available for rent.
Anderson says property owners also need to understand that if they rent their property at a discounted rate, or “mates’ rates”, they can only claim deductions equal to the amount of rent charged.
“One taxpayer had to repay more than $45,000 in tax from deduction claims made for a holiday home they were renting out to friends and family below the market rate,” she says.
“Property owners should be aware that incorrect rental property claims will not go unnoticed. They should make sure that have accurate records of expenses and strong evidence of the property being rented or genuinely available for rent at market rates.”
The ATO says the property must be advertised in a way that maximises exposure. If it is advertised in ways that limit exposure to potential tenants, such as by word of mouth or in the workplace, the ATO may rule that it is not genuinely available for rent.
The ATO will also consider the location and condition of the property. If it is in poor condition or in a remote area it will be deemed unlikely to be genuinely available for rent.
If there are unreasonable rental conditions, the property may be deemed to be not genuinely available for rent.
Expenses that owners can claim include management and maintenance costs, borrowing costs, interest on loans, depreciation and capital works spending.
Specific items include advertising for tenants, body corporate fees and charges, council rates, water charges, land tax, cleaning, gardening, pest control, building and contents insurance, property agent’s fees and some legal expenses.
When claiming for repairs and maintenance, work to remedy defects or damage, or to prevent deterioration, can be claimed in the year the costs are incurred.
Repairs that do not relate directly to wear and tear are classified as capital expenses and must be claimed over a number of years. The same applies to improvements, such as a new bathroom.
Acquisition and disposal costs, such as advertising costs and stamp duty, cannot be claimed. They are usually added to the cost base for capital gains tax calculation.