July 2025
The answer to the first part of that question is a given.
But the second part is arguably more important.
Managing risk when it comes to the ATO means understanding the rules and working within them.
We had a client recently who came to us for a backdated Depreciation Schedule. They had been doing their own tax and putting in some ambitious figures for depreciation.
Clearly too ambitious, because it triggered a query from the ATO. And the ATO is now rolling up their collective cardigan sleeves and going back a few years.
And while they are there, they will inevitably have a poke around and look at some other deductions, assuming that it might not have just been depreciation the taxpayer was playing fast and loose with.
If only they had used a Depreciation Schedule from the start.
Do you need a Depreciation Schedule for a recently purchased property? You can make an enquiry here.
How else can you walk that fine line between maximising benefit and minimising risk?
Key points:
- 1. Claiming a special levy depends on the nature of the work, i.e. if the work is a repair or an improvement.
- 2. Be sure not to claim improvements as repairs.
- 3. Don’t use short stay rentals for private purposes to claim depreciation on any new Assets.
- 4. Update your current Depreciation Schedule with improvements to maximise your deductions.
Claim your Special Levy correctly
Knowing when to expense and when to not expense a Special Levy is important.
We would get asked about this daily by clients and accountants alike and we occasionally write about it – most recently here.
The default position of most investors is that Special Levies get expensed i.e. claimed immediately. It’s understandable given they’re just another charge, like contributions to the admin and sinking funds, imposed by the strata manager.
And if it’s only a couple of thousand dollars, they probably skate through. ‘Who’s going to know’, some people would think.
The ATO know more than you think.
Given the increasing sophistication of the ATO’s data matching efforts, it’s surprising they have not turned their attention to Special Levies.
If you have only been renting out a property for a year or two and you get hit with a Special Levy, there is a good chance you will not be able to expense it and will instead need to claim it at 2.5% over 40 years.
It will depend on the nature of the work being funded by the Special Levy. Fixing a failing retaining wall may be a repair if it failed while you were renting out the property. Putting in a community BBQ is always going to be an improvement.
If in doubt, ask your accountant or us.
Depreciate improvements to your property
As with Special Levies, it’s tempting to expense i.e. claim immediately, all repair work on a property. But that can end in tears if you get it wrong and the ATO finds out.
Just as with Special Levies, the timing and nature of the work determine whether work you do to a property is expensed as repairs, or whether it needs to be claimed slowly as ‘improvements’. We last wrote about repairs vs improvements here.
Given repairs and maintenance are really just line items on a tax return, how would the ATO know if you have made an innocent mistake and incorrectly expensed work?
They’ll know.
Or suspect, at least.
Their suspicions will be aroused if a significant repair claim is put through not long after somebody has started to rent out a property. Of course, the claim could be legitimate, but you will have to justify it.
It’s not all uncommon for people to get quizzed on repair claims and be required to prove they were legitimate.
We always tell clients that what they need to do is have photos of a property when they started to rent it out and photos of the problem they need to deal with. And they should keep all relevant correspondence.
Just in case.
It’s not the end of the world if a repair claim is disallowed, but nobody wants to attract the attention of the ATO lest they decide to take a closer look elsewhere.
Avoid short term stay errors
Renting out a property on the short stay market can be very lucrative. Airbnb in particular has transformed many towns and suburbs – and not always for the better.
But there are some things to be wary of.
First of all, you need to be aware that the ATO knows exactly how much income you are getting from your property because the short stay rental platforms report that directly to the ATO. We’ve written about this previously.
But that’s been happening for a couple of years now, so it shouldn’t surprise anyone.
And declaring the income means you get to claim tax deductions against it.
Like depreciation.
But it’s important to understand how private use of a property can affect the tax treatment of the Assets in the property, things like appliances, air con, hot water. And furniture, of course.
Once you stay in the property yourself i.e. private use, depreciation on the Assets can no longer be claimed. Now you are allowed to visit a property periodically to check on it and perhaps stay the odd night while you are doing maintenance, but be careful – and keep records.
Staying in the property over Christmas and Easter and other school holidays definitely means you won’t be able to depreciate the Assets.
Keep your Depreciation Schedule up to date
Updating your Depreciation Schedule is another way to maximise your deductions.
Did you know we do free updates?
As often as you need them done?
All we need to know is what you have added to the property and when you added it – don’t email receipts.
And if you want to have a chat about whether some of what you want to add can be expensed as repairs instead, we’re all ears. Give us a call on 1300660033.
Do you have a residential or commercial property you would like us to help you claim depreciation for? Or a question about depreciation?
Order online now or call us on 1300 660 033 and rely on our 20-plus years of experience in estimating depreciation returns.
