The ATO is targeting landlords who make false rental investment claims by inflating their expenses

https://www.ato.gov.au/media-centre/in-the-ato-s-sights-this-tax-time

Generally, the ATO will send you a letter advising that they are ‘reviewing’ your rental property expenses and request some preliminary information, typically the lease agreement, support for bank account interest, depreciation and repairs and maintenance costs claimed and a broad explanation of the rental arrangement.

Depending on your responses, the ATO will then either cease the ‘review’ or undertake further investigation.

Evidence

Make sure you can support all expense deductions claimed with written evidence (for example, invoices, receipts, bank statements etc.).

COMMON ERRORS:

Repairs v capital expenditure

You cannot immediately claim for expenses such as “repairs” when they are more appropriately classified as depreciable improvements to the property or complete replacements of depreciating assets.

Holiday homes

You can use your investment property for private holidays. BUT, you must apportion your expenses between the days you occupied the property and the days you did not.

Renting to a relative

When renting to a relative you should charge market value.  The ATO does not specify a minimum rent amount, but it does expect the rent to be at a market rate if you want to claim tax deductions like you would for a non-relative tenant.

Charging below market rate could classify the rental as a “non-commercial rental,” which may limit your tax benefits, particularly in terms of negative gearing.

If you decide to charge below market rate, be prepared to only claim deductions equivalent to the amount of rent received. For example, if you charge 50% of the market rate, you might only be able to claim 50% of the property expenses as deductions.

This is an example provided by the ATO:

Mr and Mrs Hitchman were charging their previous Queensland tenants the normal commercial rate of $180 per week. They allowed their son, Tim, to live in the property at a nominal rent of $40 per week.

Although Tim was paying rent to the Hitchmans, the arrangement was not based on normal commercial rates.

As a result, the Hitchmans cannot claim a deduction for the total rental property expenses for the period Tim was living in the property.

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Don’t get caught:  make an immediate voluntary disclosure.  If you do you will incur minimal, if any, penalties.  If you think you have overclaimed rental expenses you should take immediate steps.

If the ATO has contacted you for a review or audit, act immediately.

Waterhouse Lawyers can help with our tax expertise.  Contact us now