What Property Deductions Will Be Targeted By The ATO this year
Chris Jordan from the ATO recently announced that property investors and their deductions were next in his sights after the success of his crackdown on work-related expense.
Apparently, in a test audit of 300 property investors, 90% made errors. With a success rate like that, it’s no surprise the ATO are keen to roll their sleeves up and tackle investors seriously. Read the full article by Jessica Irvine published in The Sydney Morning Herald below:
The $47 billion in deductions claimed against rental income every year will face tougher scrutiny from the Australian Taxation Office after more than 300 audits of investor returns revealed errors in nearly 90 per cent of cases. More than 2.1 million Australian taxpayers declare rental income to the Tax Office each year, but a check of returns has unearthed widespread errors in the popular tax deduction.
“A lot of people are getting things a little bit wrong, which adds up to a lot,” Tax Office commissioner Chris Jordan told The Tax Institute’s national convention in Hobart on Thursday.
Mr Jordan warned that property investors were now his “next focus”, following a successful crackdown on inappropriate work-related expenses, which has yielded $600 million in extra tax revenue. For the first time in nearly a quarter of a century, the average work-related expense claim fell by, on average, about $130 a year for the past two years.
They will look at interest wrongly attributed and erroneous claims on holiday houses
Property owners can now expect to receive the same attention from the Tax Office.
“Our next focus is rental income and deductions,” Mr Jordan said, revealing the random audits had unearthed myriad errors by property investors.
“We’re seeing incorrect interest claims for the entire investment loan where it has been refinanced for private purposes, incorrect classification of capital works as repairs and maintenance, and taxpayers not apportioning deductions for holiday homes when they are not genuinely available for rent.”
Property owners declare about $44 billion in rental income and $47 billion in costs associated with property ownership – including interest on loans – meaning the nation’s landlords are, on average, “negatively geared”, with expenses exceeding rental income. These rental losses can then be used to reduce tax payable on other income.
“And when you consider that rentals include over 2.1 million taxpayers claiming $47.4 billion in deductions, against $44.1 billion in reported income, you can get a sense of the potential revenue at risk,” Mr Jordan said.
Of the nearly 2.1 million taxpayers who declared an interest in a rental property in 2015-16 – the latest year for which statistics are available publicly – 1.3 million reported a net rental loss for the year. Just over 800,000 were “positively geared”, with rental income exceeding expenses.
The ranks of positively geared investors swelled over the first five financial years of this decade, the figures show, thanks to a combination of falling interest rates and higher rents.
Declared rental income rose sharply, from about $34 billion to almost $42 billion. Declared interest expenses fell from about $24 billion to $22 billion over the five years.
But “other rental deductions” rose sharply, from $15 billion a year to $20 billion, and it is these deductions that are now in the ATO’s firing line.
In the May 2017 budget, the Turnbull government cracked down on the ability of landlords to claim the cost of travel to their rental properties as legitimate deductions, yielding half a billion dollars in revenue over four years.
Property investors also face a further tax crackdown under a Labor government, which has promised, if elected, to stop the landlords of newly purchased, established dwellings from being able to claim net rental losses against their other assessable income. Property investors who buy newly built properties will still be allowed to negatively gear them.
Labor’s changes would be grandfathered, so that all owners of existing investment properties will be able to continue to tax deduct net rental losses until they dispose of the property.
As this article demonstrates, the ATO are keen to ensure property investors are only claiming deductions that they’re entitled to under the current regulations. It’s likely incorrectly claimed Depreciation deductions may also dray attention.
The treatment of second-hand Assets in residential properties will be a special focus – remember, commercial properties were not affected by the 2017 changes.
It has been almost 2 years since the changes to the treatment of Assets were announced and some Depreciation Schedule providers are still getting it wrong. There are thousands of incorrect Depreciation Schedules out there and they will be landing on accountant desks this tax season.
Another deduction easy to target is the treatment of Special Levies. Too many people just claim Special Levies in the way they claim other strata fees.
Broadly speaking, the purpose of the Special Levy and the length of time someone has owned a property dictate the treatment of a Special Levy. Your accountant will be able to advise the correct treatment.