rental-property

Ensuring Tax Compliance for Your Rental Property

by Advice

Be prepared come tax time so you don’t fall on the side of the ATO’s auditing targets.

‍Perhaps you’ve heard the news about the Australian Taxation Office (ATO)  announcing its efforts to target landlords who are over-claiming tax deductions and failing to report income. According to data, it estimates, approximately 9 our out 10 of landlords are inaccurately reporting their net income from rental properties. This misreporting has resulted in a significant shortfall of around $1.3 billion, highlighting the discrepancy between the amount collected and the amount that should have been paid.

As a property owner and rental provider, it is crucial to be aware of your income tax reporting obligations and ensure compliance. Don’t fret, though. This article is here to help and remind you about your income tax reporting obligations as well as share some handy insights on ATO deductions.

What’s the situation and how can you prepare for it?

The ATO has advised that some landlords tend to leave out rental income or make mistakes when claiming property-related deductions and they want to tackle this issue head-on. This year they have pinpointed three main concerns related to landlord tax compliance. These include the misuse of investment loans for personal expenses, incorrectly categorising repair costs as capital works, and claiming expenses for personal use of the property.

Being on top of your tax game is simpler than it seems. Here are two things that you can do to help avoid issues:

  1. File Correct and Honest Tax Returns: It’s stating the obvious, but ensure you accurately report your rental income and claim deductions that you’re entitled to. Honesty is key when meeting your tax obligations.
  2. ‍Seek Professional Guidance: Don’t be afraid to reach out to a tax professional or accountant who specialises in property taxation (*us*). They can offer expert advice on which deductions you can claim and guide you through the ins and outs of rental property taxation.‍

What Can Landlords Claim?

By understanding what you can claim, you can maximise your deductions and minimise any risk of non-compliance. Here are a few things you may be able to claim:

Mortgage Interest: Ah, the sweet relief of claiming the interest you pay on your mortgage as a deduction. Just make sure you accurately apportion it if you use the property for personal purposes too.

Utilities, Insurance, and Operational Costs: If you foot the bill for these expenses, you can claim them as deductions. Just keep those receipts handy!

Property Maintenance and Repairs: Any costs incurred to keep your property in tip-top shape for tenants, such as fixing leaky pipes or giving the place a fresh coat of paint, can be claimed as deductions. That’s some good news for your wallet!

What can you do to prepare for an audit?

‍In light of the ATO’s scrutiny, it is essential for landlords to ensure that their tax returns accurately reflect their rental property income and expenses.

We don’t want you stressing over a potential audit, but it’s always wise to be prepared, just in case.

Stay organised and maintain detailed records of all income and expenses related to your rental property. This includes rental income, receipts, invoices, and documentation for all claimed deductions. A little extra effort now can save you headaches later.

If a discrepancy or error is detected during the lodgement of a tax return, the ATO temporarily halts the processing and contacts the taxpayer to request an explanation. In some cases, the ATO may conduct further investigations after the return has been processed and ask taxpayers to review and make any necessary amendments to their return.

Time to review your records system?

A property records system is a tool that allows you to keep track of all the details related to your rental property in one place. You have a couple of options.  It might be in the form of excel spreadsheets and folders on drive or cloud, or it might be a software packagehelps you maintain your records.  Either way we suggest your system covers the following areas:

  • Tenant and lease information/documentation
  • Property condition reports
  • Bond collection
  • Maintenance requests and work orders
  • Financial records such as rent payments and expenses
  • Reports and analytics

‍‍A property records system allows you to keep everything in one place and easily accessible, so you can always stay organised and on top of things.

By keeping a good system in place to manage things, understanding the deductions you can claim and seeking professional guidance when needed you’ll be well-prepared to navigate the ATO’s watchful eye. Remember, there’s no need to panic. With a little organisation and the help of Activ8, you can be prepared and stay ahead!

rental-property

What Are The Tax Consequences of Rental Properties ?

by Advice

If you own a rental property or are thinking of buying one, it’s a great idea for you to understand the tax consequences. Here is a summary of how rental properties’ income and expenses can affect your tax return, including what deductions you can claim and the records you need to maintain.

Rental Income

The income received during a Financial Year must be included on your tax return.  Rental income and expenses are attributed to each co-owner according to their legal interest in the property.

If your property is rented to family members or friends at below market rate, you can only claim deductions up to the amount of rent charged.  The property cannot be negatively geared.

If you use a Property Manager, they usually provide you with an Annual Summary showing the amount of rent earned during the year and any expenses they have paid on your behalf such as any repairs and maintenance, letting fees, advertising and property management fees.

Rental Expenses

There are three categories of rental expenses:

  • Expenses that are not deductible
  • Expenses that you can claim an immediate deduction in the income year you incur the expense
  • Expenses that can be claimed over several income years.

Non-Deductible Expenses

These include:

  • acquisition and disposal costs of the property. These are added to the cost base of the property
  • expenses not actually incurred by you, such as water or electricity usage charges paid by your tenants
  • expenses associated with periods where your property (including your holiday home) was not genuinely available for rent
  • expenses that are not related to the rental of a property
  • travel expenses

Deductible Expenses

To claim deductions against your rental income, your property must be genuinely available for rent. This means that the property is advertised giving it broad exposure to potential tenants and those tenants are reasonably likely to rent it.  Word of mouth, limiting the time the property can be rented or you place unreasonable restrictions on the property would indicate the property is not genuinely available for rent.

You will need to apportion your expenses if any of the following apply to you:

  • your property is genuinely available for rent for only part of the year
  • your property is used for private purposes for part of the year
  • only part of your property is used to earn rent
  • you rent your property at non-commercial rates

Interest

Interest is the biggest deduction.  Interest paid on the loan used to purchase the property is deductible, provided that all the money borrowed was used to purchase the property.

For line of credit accounts that are used privately as well, the interest claim must be apportioned for the private portion.

Repairs and Maintenance

Repairs made to the property during the period it is rented are deductible.

Repairs must relate directly to wear and tear or other damage that occurred as a result of your renting out the property.  Repairs generally involve a replacement or renewal of a worn out or broken part, for example, replacing worn or damaged curtains, blinds or carpets between tenants.

Maintenance generally involves keeping the property in a tenantable condition, for example repainting faded or damaged interior walls.

Initial repairs are not deductible. Initial repairs include repairing defects, damage or deterioration that existed at the date you acquired the property. These can be used to reduce a capital gain on disposal.

Improvements

Improvements you make to the property are not deductible in full. They need to be depreciated and claimed over their effective life.  Examples of improvements include:

  • Landscaping
  • Insulation
  • Adding on another room
  • Extensions
  • Replacement of an entire structure such as a complete fence, stove, kitchen cupboards or fridge

Other deductible expenses can include:

  • advertising for tenants
  • bank charges
  • body corporate fees
  • cleaning
  • council rates
  • electricity and gas
  • gardening and lawn mowing
  • insurance
  • land tax
  • legal expenses re leases agreements.
  • lease costs
  • pest control
  • property agent’s fees
  • letting fees
  • quantity surveyor’s fees
  • security
  • stationery
  • postage
  • telephone
  • internet
  • water rates

Expenses deductible over several years:

  • Borrowing expenses – these are written off over the term of the loan or 5 years whichever is less
  • Depreciation for capital assets
  • Capital works deductions

Capital Works Deductions

If the building is under 25 years old you will be entitled to claim a deduction of 2.5% per year of the original cost of construction of the building for up to 40 years from the original date of construction.

If you do not know the building cost you can contract a quantity surveyor to determine the building costs and prepare the depreciation schedules for the property and determine what can be claimed.  The fee is tax deductible.

If the previous owner was allowed capital works deductions, earned assessable income from the property and the capital works started after 26 February 1992, they are required to give you, as the new owner, information that will enable you to calculate those deductions going forward.

Records you need to maintain

You should keep records of your rental income and expenses for five years from 31 October or, if you lodge later, for five years from the date you lodge your tax return.  If at the end of this period you are in a dispute with the ATO that relates to your rental property, you should keep the relevant records until the dispute is resolved.

Records of expenses must include the name of the supplier, amount, nature of the expense, and the date.