The ATO has issued a warning to property investors this tax time following rental income and deduction errors found in over 70 per cent of tax returns audited last financial year.

The ATO stated that Australia’s 1.8 million rental property investors claimed a total of $38 billion in deductions for the 2019–20 financial year.

It was found that more than 70 per cent of the tax returns selected for an audit in the 2019-20 year required adjustments.

The ATO advised that it’s vital for investors to remember that there is no such thing as free real estate when it comes to their tax returns. The tax office data analytics team examine and will ask questions regarding returns for rental deductions that seem unusually high this can lead to a delay in the processing a return.

Frequent mistakes people seem to make include failing to declare all rental income or any capital gains from selling an investment property. The ATO have a better handle on this via data matching.

The tax office is improving the rental income data they receive directly from third-party sources such as sharing economy platforms, rental bond authorities and property managers.

In the past they have often allowed taxpayers who have made genuine errors to amend their returns without penalty. Going forward any deliberate attempts investors make to avoid tax on rental income will see the ATO take action.

The ATO also commonly see other errors including investors incorrectly claiming capital works, for instance immediately claiming the full amount for a kitchen renovation, instead of spreading it over several years.

Some investors have also made the mistake of claiming deductions on redrawn mortgage loans used for personal expenses, such as buying a boat or going on a holiday.

The majority of investors that the ATO contact about their rental deductions are able to justify their claims. However, there have been cases where claims have been rejected due to taxpayers claiming for personal use, claiming ineligible deductions, or not keeping receipts.

The ATO have advised that owners who have arranged a reduced or deferred rent don’t need to declare payments until they are received. Back payments for deferred rent, or insurance payments received to cover lost rent, should only be declared in the financial year within which they were obtained. If rent is reduced, normal expenses can still be claimed, so long as the reduced rent is established taking current market conditions into consideration.

This also applies to those whose income was affected by the Covid-19 travel restrictions. As specified by the Tax Office, if a home owner intended to rent a property in 2020–21, but those plans were blocked by restrictions, they can still claim the same proportion of expenses if the property was not used privately.

Should you have any queries about any of the above information, please contact our Tax Champions on: (03) 8393 1000.