The ATO has flagged inflated rental property claims as one of its primary focus areas for Tax Time 2024. According to the ATO, despite 86% of property owners using a registered tax agent, 9 out of 10 rental property owners are still making mistakes in their income tax returns. The ATO has highlighted some of the mistakes rental property owners are making – most commonly not understanding which expenses can be claimed and when; overclaiming deductions; and not having the documentation to substantiate the expenses being claimed.

“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.” – ATO Assistant Commissioner Rob Thomson

To determine the accuracy of tax returns lodged by rental property owners, the ATO cross-checks data from a range of sources including banks, land title offices, insurance companies, property managers and sharing economy providers. Incomplete documentation and an inability to substantiate claims for expenses and deduction are major causes of errors. Records should include receipts, invoices, bank statements; and details of the calculation of deductions and any apportionments. Rental property owners need to make sure that they are keeping accurate records and are letting their tax agents (where they have them) know what is going on with their rental property so their return can be prepared correctly.

Not understanding what expenses can be claimed and when, particularly the difference between what can be claimed for repairs or maintenance versus capital expenditure is the most common mistake rental property owners make on their returns. Deductions can be claimed only to the extent that they are incurred in producing income – which means costs incurred in generating their rental income annually may be claimed for that period. But there are some exceptions.

For example, repairs (eg fixing a broken window) can usually be claimed straight away while capital items can only be claimed immediately if they cost $300 or less. Expenses such as improvements and capital items or works, like buying a new dishwasher or oven, or remodelling a bathroom, must be claimed over time. In most cases, capital works expenses are claimed at 2.5% over 40 years. Unclaimed capital works expenses are added to the cost base of the property for CGT purposes when the property is sold.

Other common deductions that rental property owners often claim incorrectly, or overclaim, are:

• interest deductions that include interest for loans (from redrawing or refinance) that are used for private purposes – interest payments must be apportioned between the private and investment components over the life of the loan;
• levy payments to body corporate administration and general-purpose sinking funds for routine maintenance of common property can be claimed as a deduction when incurred, but payments to special purpose funds for a particular capital expense are not deductible until the works are complete and the body corporate billed;
• costs relating to borrowing expenses, including loan establishment fees, lender’s mortgage insurance and title search fees – these expenses are generally claimed over a 5-year period or the life of the loan, whichever is less; and
• state or territory stamp duty can’t be claimed as a deduction if it relates to a rental property (except in the ACT). It can be added to the cost base to reduce capital gains upon sale.