Every tax year, the ATO outlines areas they want to focus their compliance resources on. And drumroll please… Rental properties have made that list yet again, with ATO data showing that 9 out of 10 rental schedules are incorrect. Yikes!
What common mistakes are rental property owners making?
Here are some of the common slip-ups the ATO has noticed:
- Not Reporting AirBnb Income:
Think you can sneakily rent out a room or your entire property on platforms like AirBnB or Booking.com without reporting it? Think again! This is considered rental income and needs to be reported to the ATO as taxable income.
- Incorrectly Claiming Improvements and New Assets as Repairs:
Got a dishwasher that needs fixing and decide to replace it instead? Hold up! You can’t claim the full cost of the new item as a repair—it must be depreciated over its expected useful life.
- Claiming Non-Deductible Expenses:
Legal fees, stamp duty, and inspection fees when purchasing a rental property can’t be deducted from rental income. These are capital costs and add to the cost base of the property to reduce any possible capital gain in the future.
Plus, you can’t claim expenses not actually paid by you as the landlord, like utility and water charges paid by the tenant.
- Interest Deductions Being Claimed Incorrectly
If 100% of the borrowing is used to purchase the rental property, you can claim a deduction for all the interest and bank fees charged on the loan.
But, if you re-draw or refinance the loan and use some of the money for personal expenses, you need to apportion the interest based on the amounts used for private expenses versus the rental.
How does the ATO know?
It’s all thanks to the Rental Matching Program.
To ensure rental properties are being reported correctly, the ATO requires various third parties to report data confirming rental income and expenses for the year.
These sources include banks, the State Revenue Office, insurers, real estate agencies, and platforms like AirBnB and Booking.com.
With this in mind, it’s crucial to get your rental income and expenses right when you first lodge to avoid the potential costs of dealing with an ATO review or audit later on.
What should I do to keep the ATO happy?
To keep the ATO happy and avoid any issues with your rental, here’s what we recommend:
- Keep detailed records of all income and expenses related to the rental property.
- Review deductions to ensure they relate to the rental property and haven’t been paid directly by the tenant. For example, don’t try to claim a deduction for water and electricity charges that the tenant pays directly.
- Ensure any replacement assets or improvements are not claimed as repairs.
- Avoid re-drawing or refinancing your property investment loan for private expenses like holidays or a new car.
- Make sure all rental income is reported, including rent from sources such as AirBnB , Stayz, and Booking.com
- Reach out to an accountant, like us, to assist with preparing your tax return and ensure everything is in order.
Have a question or comment?
If you have any questions or comments relating to this article (or any other accounting matter) please get in touch with us at [email protected] and we’ll be happy to assist you.