The ATO has announced that inflated rental property claims will be a primary focus for Tax Time 2024. Despite 86% of rental property owners using registered tax agents, the ATO finds that 9 out of 10 are still making mistakes on their tax returns. The most common issues include not knowing which expenses can be claimed and when, overclaiming deductions, and lacking proper documentation to support their claims.

Common Mistakes in Rental Property Claims

ATO Assistant Commissioner Rob Thomson advises, “Rental property investments and taxation can get tricky, so it pays to get the right advice from the very beginning. Don’t rely on things you hear at a Sunday afternoon barbeque.”

To ensure tax returns are accurate, the ATO cross-checks data from various sources such as banks, land title offices, insurance companies, property managers, and sharing economy providers. Common errors include incomplete documentation and the inability to substantiate claims for expenses and deductions. Rental property owners should keep detailed records, including receipts, invoices, bank statements, and calculations of deductions and any apportionments. It’s also important to inform your tax agent about all relevant details of your rental property.

Understanding Claimable Expenses

The most frequent mistake is not understanding what expenses can be claimed and when, especially the difference between repairs or maintenance and capital expenditure. Deductions can only be claimed for expenses incurred in producing rental income. For example:

• Repairs: Fixing a broken window can usually be claimed immediately.
• Capital Items: Items costing $300 or less can be claimed immediately. More expensive items, like a new dishwasher or oven, or major renovations, must be claimed over time. Generally, capital works expenses are claimed at 2.5% per year over 40 years. Unclaimed capital works expenses are added to the property’s cost base for Capital Gains Tax (CGT) purposes when the property is sold.

Other Commonly Misclaimed Deductions

• Interest Deductions: Interest on loans used for both private and investment purposes must be apportioned correctly.
• Body Corporate Fees: Routine maintenance fees can be claimed as a deduction, but payments to special purpose funds for specific capital expenses are not deductible until the work is completed and billed by the body corporate.
• Borrowing Costs: Expenses like loan establishment fees, lender’s mortgage insurance, and title search fees are generally claimed over a 5-year period or the loan’s life, whichever is shorter.
• Stamp Duty: In most states and territories, stamp duty on a rental property can’t be claimed as a deduction, except in the ACT. It can be added to the cost base to reduce capital gains upon sale.

By understanding these rules and keeping accurate records, rental property owners can avoid common mistakes and ensure their tax returns are correct.