With the end of financial year fast approaching, the ATO has again released the areas it will be focusing on in tax time 2023. As with previous years, it will be prioritising areas where the most mistakes are being made, being rental property deductions, work-related expenses, and capital gains tax (CGT). The ATO has identified common mistakes in those areas, to assist taxpayers in avoiding pitfalls and potential compliance activity.

In relation to rental properties, a recent ATO review indicated that 9 out of 10 rental property owners are getting their returns wrong, so it is no surprise that this area remains as one of the main tax time targets. Common mistakes of taxpayers include rental income not being reported, overclaiming expenses, or claiming improvements to private properties. However, this tax time, the ATO is particularly focused on interest expenses.

The ATO stresses that rental property owners need to correctly apportion any loan interest expenses where a part of the loan was used for private purposes, or where the loan was refinanced with some private purpose. For example, if you use a part of your rental property loan to buy a car or go on a holiday, the only interest deduction that can be claimed is the portion related to producing the rental income.

Further, for those not doing the right thing, the ATO has reminded taxpayers of the recent commencement of the residential investment property loan data matching program that spans the income years of 2021-22 to 2025-26. Data obtained such as amount of interest charged and loan repayments from various financial institutions (including the big four banks and their subsidiaries) will be used to identify discrepancies in returns lodged.

The other focus area the ATO will be enforcing is work-related expenses. It reminds taxpayers that there have been changes to the methods to work out working from home deductions from 1 July 2022. From that date, the taxpayers can either choose the actual cost method or the fixed rate method, with the shortcut method no longer being available. To use either of the methods, taxpayers will need to keep appropriate records, including total number of hours worked from home.

“…[Y]ou can’t claim for things like coffee, tea, milk and other general household items, even if your employer may provide these kinds of things for you at work.” – ATO Assistant Commissioner Tim Loh

The last area of focus for tax time 2023 is CGT. In addition to the usual disposal of assets such as shares, crypto-assets, managed investments and properties, the ATO will also be looking at situations where a main residence or part of a main residence is used to produce income and is then subsequently sold. This applies where taxpayers have rented out all or part of their main residence through traditional means or through the sharing economy (ie Airbnb, Stayz, etc), or where a business is run from home.

Overall this tax time, the ATO expects fewer individuals to receive refunds or to receive smaller refunds, and more individuals perhaps with tax debts. Taxpayers getting behind on their tax debts are encouraged to contact the ATO as early as possible to work out potential solutions and access appropriate support.