This tax season the Tax Office is targeting Property Investors tax deductions - know the key areas
With 1 in 479 rental property owners likely to be subject to Tax office audits of their rental property deductions, and 9 out of 10 times they find adjustments to the claims, now is a good time to check that you are claiming things correctly.
The items we often bring up with our clients are the common errors the Tax Office finds and these are:
Apportionment of Interest – Between deductible and non-deductible uses. The best way to avoid this is to separate your investment income producing finance from personal non-deductible finance. Once these are combined, the interest has to be apportioned between the deductible/investment income claim and the non-deductible private items. Often taxpayers’ think the entire amount is claimable.
Initial Repairs – This is where you purchase an investment property which is in need of repairs, such as painting and cleaning up the outside. Where these are done before the property is rented, they are classified as initial repairs and the Tax Office requires these to be added to the cost base of the property, as they have occurred too soon before rental income is derived. They are not immediately able to be claimed as a tax deduction.
Property Renovations – Such as a new bathroom, kitchen or living areas, most of these renovations are capital improvements and are claimable at 2.5% over 40 years. They are not immediate write offs. Where depreciable assets such as stoves, dishwashers, rangehoods, blinds, carpets, fans are purchased, if these cost less than $300 individually then they can be claimed immediately as a tax deduction, otherwise they need to be depreciated over the Tax Office low value pool rates for items < $1,000 and at the assets estimated useful life as determined by the Tax Office for items over $1,000 each.
Holiday Homes – Where these are not available for rent but personal use, the expenses that can be claimed have to be apportioned by the actual days it was used or advertised solely for rent to people at market rental rates over the total days in the year. The private usage percentage of ownership and running costs are not claimable, so interest, council and water rates, electricity, internet, maintenance, etc must be apportioned and only then can these apportioned expenses reduce the rental income earned.
Short-term & Long-term rentals of parts of your home – The income net of related expenses is required to be included in your taxable income. Once again, apportionment of the expenses must be made between the areas used solely for rental and a reasonable split between rental use and personal use of the common areas, such as the kitchen, living areas, etc. Note that renting out a section of your home for income, means that you reduce the available main residence exemption when you sell your home, on that portion of the home that derives income for the period of ownership that this occurred.
Unfortunately with our complicated tax system, the devil is in the detail and with the data matching, reporting and inspection capabilities of the Tax Office, it is important to know the rules to reduce the risk of penalties for errors made.