Property investors in the crosshairs as ATO clamps down on deductions

Almost nine in 10 property investors who claim tax deductions on their rentals are making errors, new research shows.

Investors are in the crosshairs of the Australian Taxation Office, which is turning its focus to the incorrect property claims made at tax time.

More than 2.1 million taxpayers are claiming $47.4 billion in deductions against $44.1 billion in reported income, tax commissioner Chris Jordan said in a speech in Hobart on Thursday.

Looking at the scale of deductions claimed, “you can get a sense of the potential revenue at risk”, he said.

The warning comes as property investment is set to be a key issue at the upcoming federal election.

While the federal opposition plans to limit tax deductions for negatively geared properties to new housing only, and grandfather existing investments, the Coalition has said it will keep the status quo.

Any changes to negative gearing are being considered against the backdrop of a weakening housing market, with prices falling in Australia’s two largest cities amid a clampdown on bank lending.

Mr Jordan told a conference of tax agents that the ATO had been making random inquiries about tax returns.

“Our auditors have now completed over 300 audits on rental property claims and found errors in almost nine out of 10 returns reviewed,” he said.

“We’re seeing incorrect interest claims for the entire investment loan where it has been refinanced for private purposes, incorrect classification of capital works as repairs and maintenance, and taxpayers not apportioning deductions for holiday homes when they are not genuinely available for rent.”

As some 85 per cent of taxpayers with rental properties have help with their tax returns, Mr Jordan said agents could reduce the incorrect claims.

The ATO has made a guide for agents covering how to deal with rental properties.

Earlier, the tax office cracked down on work-related expenses, which have fallen per claim by about $130 on average over the past two years – leading to an estimated revenue gain of $600 million for the same period.

It has also been focusing on foreign-owned multinationals and wealthy individuals.