Property investor crackdown: The dodgy deductions the tax office is targeting this financial year

The Australia Tax Office is cracking down on property investors this year, and dodgy deductions are firmly in the sights of the taxman.

Rental property owners who intentionally claim excessive deductions are being targeted, with the ATO doubling the number of in-depth audits this year to more than 4500.

There are 2,156,319 individual property investors in Australia, according to figures released by the ATO this year. 

Although this means the chance of being audited is roughly one in 479, odds are that an error will be found.

“A random sample of returns with rental deductions found that nine out of 10 contained an error,” ATO assistant commissioner Karen Foat said.

“There was a mix of people making mistakes, as well as those who intentionally over-claimed deductions.

“We are concerned about the extent of non-compliance in this area and will be looking very closely at claims this year.”

Foat said this year the ATO was specifically focusing on inaccurate interest claims, capital works claimed as repairs, incorrect holiday home expenses and omitted income from accommodation sharing.

What are the most common tax mistakes investors make?

Investors who have refinanced their home loan to purchase private assets such as cars or boats, or use the money for personal living expenses, often claimed too much interest, Foat said.

In these instances, investors can only claim interest on the portion of the loan used to buy the rental property, not the personal items.

Another common mistake was claiming capital works as repairs. Capital works involve improving, replacing or extending a structure or part of a property, and can only be claimed over an extended period of time. 

Repairs, on the other hand, must relate directly to wear and can be claimed in the financial year the repairs occurred.

“One example is where a taxpayer has renovated the bathroom in their rental property and claims the entire cost in the same year,” Foat said. “The taxpayer should instead claim 2.5 per cent of the cost per year over 40 years.”

Mistakes often arise when repairs are made immediately after purchase but before tenants move in, according to H&R Block director of tax communication Mark Chapman.

“The ATO has quite strict rules about claiming repairs when you’ve just acquired a property,” he said. “They believe that kind of repair cost should actually be added to the cost base of the property for capital gains tax situations.”

Do home owners need to declare income from Airbnb?

The main mistake people made with short-term letting was not realising they had to declare the income at all, according to Foat.

“If you rent out a room, a unit or a whole house on an occasional basis through the sharing economy, for tax purposes you need to keep records of all income earned and declare it in your income tax return,” she said.

Chapman said this was a major issue. “It’s surprising how many people go into renting out their property and don’t even have that basic understanding.”

Other holiday home mistakes include claiming deductions for expenses incurred during private use or when the property was not genuinely available for rent.

Airbnb head of public policy ANZ Brent Thomas said many hosts reported that they found tax time challenging and time-consuming, so the company has taken steps to make reporting income more straightforward.

“This year we’re making it even easier for our hosts by providing a yearly earnings statement, useful tax tips and access to discounted tax services,” Thomas said.

What expenses can owners of short-term rental properties claim?

Short-term rental hosts can claim the same deductions as typical rental property investors, according to Chapman. But there are additional deductions including letting fees charged by the platform.

Holiday rentals are usually furnished, meaning owners may be able to claim the cost of newly purchased furniture and appliances.

Even the cost of decorative items such as artworks could be deducted to lower hosts’ tax bills, Chapman said, as these features could potentially increase income.

“You’re creating what’s called the ambiance of the property,” he said. “You’re making it a nice place to rent, you’re making it more likely someone would rent the property and you might be able to charge a bit more rent.”

But items solely for personal use must be excluded. “You could only claim it if it’s actually in the rented part of the house,” Chapman said.

Hosts need to divide expenses based on the time the property was rented and the portion of the property being occupied, according to Foat.

“Whether all or part of your expenses can be claimed will depend on the number of days you rent the house or property during the year, the proportion of the property you have rented out – for example a room or the whole property – and where the property is not your home, whether you use all or part of the property for personal use when it’s not rented out.”

Home owners who lease rooms to long-term tenants also need to declare the income, and may not be entitled to the full main residence exemption from capital gains tax.

However, according to the ATO, they can claim relevant expenses based on the amount of floor area solely occupied by the renter, and a “reasonable amount” based on their access to common areas.

How to minimise your property tax bill before the end of the financial year

Investors should ensure they are aware of the various ways to minimise their tax bill, paying particular attention to depreciation and capital works allowances. An accountant experienced with rental properties is well worth their fee, and may be able to provide assistance.

One of the easiest ways to maximise deductions before the end of the financial year is to replace low value items now, as the cost can be claimed immediately.

“If you’re spending less than $300 per item you don’t have to depreciate the item over the respective life, which is what you have to do for more expensive things like washing machines,” Chapman said. “For things like kettles and toasters – those smaller items – that’s quite a useful tax break.”

Attempting to dodge tax with incorrect claims will result in heavy fines that exceed expected savings if the investor is caught, but it’s not too late to correct past inaccuracies.

“We understand that people make mistakes,” Foat said. “If you have, lodge an amendment either through myTax or your agent.

“Deliberate non-compliance may attract penalties.”