The Australian Taxation Office (ATO) has announced income and tax deductions from rental properties is one of the four key areas they are focusing on during tax season.

The ATO acknowledges it’s an area of tax assessment that’s easy to get wrong and needs extra care when preparing your income tax return.

According to ATO’s Random Enquiry Program, nine out of ten tax returns reporting rental income and deductions contained at least one error.

Therefore, the ATO is urging rental property owners to carefully review their records before declaring income or claiming deductions.

In order to protect the interests of our clients, we, as registered tax agents and property specialists, may ask a few extra questions.

As tax agents can only work with the information we gather from our clients, and we know some clients of our rely on as your agent.

We always try and ask the right questions to ensure our client’s returns are right.

We are concerned about mistakes, and, leaving out income or deliberate overclaiming of rental property deductions this year.

Getting it right the first time, will ensure you receive the tax refund you are owed, and avoids us knocking on your front door down the track.

1. Include all rental income

The ATO receives rental income data from a range of sources This including sharing economy platforms, rental bond authorities, property management software providers, and State and Territory revenue and land title authorities.

The amount of data the ATO access grows each year. Therefore making it easier and faster for them to spot any rental income that you have charged your tenants, but haven’t declared.

When preparing tax returns, make sure all rental income is included. This can be things such as from short-term rental arrangements, renting part of a home, and other rental-related income like insurance payouts and rental bond money retained.

2. Get your expenses right

Not all expenses are the same – some can be claimed straight away. Such as rental management fees, council and water rates, repairs, interest on loans and insurance premiums.

Other expenses such as borrowing expenses and capital works need to be claimed over a number of years.

What Capital works can include replacing a roof, or a new kitchen renovation and depreciating assets. They are such as a new dishwasher or new oven costing more than $300 are also claimed over their effective life.

Refinancing or redrawing on a rental property loan for private expenses. These could be holidays or a new car, means that the amount of interest relating to the loan for the private expense can’t be claimed as a deduction.

If income from a rental property in a holiday location is earnt, it needs to be included in your tax return.

3. Selling a rental property

When selling a rental property, capital gains tax (CGT) needs to be considered and any capital gains or capital losses need to be reported.

When calculating a capital gain or capital loss, it’s important to get the cost base calculation right.

Cost base is usually the cost of the property when purchased, plus any costs associated with acquiring or selling it.

These can be things such as stamp duty, legal fees, valuations, and real estate sales/commission fees.

Any capital works claimed as deductions may also need to be subtracted from the cost base of the property.

Note, if you’ve sold a rental property that was once your private residence, you may be entitled to partially claim the main residence exemption. You will need to claim this exemption in your tax return when you lodge.

Records of all income and expenses relating to rental properties, including purchase and sale records, must be kept.

This ensures all eligible deductions are captured when preparing tax returns and capital gains tax can be calculated correctly when the property is sold.

It’s also important to note that when selling any property for more than $750,000, vendors/sellers must have a clearance certificate, otherwise 12.5 per cent will be withheld. Your solicitor/conveyancer will assist with this.

4. Keep good records to prove it all

Records of rental income and expenses should be kept for five years from the date of tax return lodgments, or five years after the disposal of an asset, whichever is longer.

Get your books in order and start keeping records as soon as you make the decision to earn rental income.

It makes tax time so much easier for you, and for us as your registered tax agent.

Adequate records should demonstrate how the expense was incurred for the rental property and the extent they relate to producing rental income.

They must include the name of the supplier, amount of the expense, the nature of the goods or services, the date the expense was incurred, and the date of the document.

Since the ATO is focusing on rental property tax income

We have complied a list of rental expenses you can claim now and the the most out of your rental properties. For a more in-depth discussion contact Financailly Sorted on (03) 9888 3175 or on [email protected]