ATO sets sights on rental properties

As always, the ATO has several focus areas when it comes to tax time – and this year, one of them is rental properties. Read on to find out what the ATO is looking out for before you lodge your FY24 tax return.

As 30 June looms, the Australian Taxation Office (ATO) lets taxpayers know its key priorities when assessing returns for the financial year. In FY24, the ATO is paying particular attention to incorrectly claiming work-related expenses; inflating claims for rental properties; and failing to include all income when lodging.

As a landlord insurance provider, we are going to delve into what this means for investment property owners and provide some guidance on what you can claim for…

Rental properties

Rental properties have been in the ATO’s sights for the last few years – and this hasn’t changed in FY24.

ATO data shows nine out of 10 rental property owners get their income tax returns wrong, with the most common issue being incorrect repairs and maintenance claims.

“This year, we’re particularly focused on claims that may have been inflated to offset increases in rental income to get a greater tax benefit,” said ATO Assistant Commissioner Rob Thomson.

Performing general repairs and maintenance on a rental property can be claimed as an immediate deduction. However, expenses which are capital in nature (like initial repairs on a newly purchased property and any improvements during the time the property is held) are not deductible as repairs or maintenance.

Mr Thomson explained: “You can claim an immediate deduction for general repairs like replacing damaged carpet or a broken window. But if you rip out an old kitchen and put in a new and improved one, this is a capital improvement and is only deductible over time as capital works.

“We see a lot of people where they’re going to repair something but instead of deciding to just fix the cracked window, they replace the whole window frame. That then moves it from a repair to an improvement. They will then be able to claim the decline in value for that improvement over the effective life of the asset.

Mr Thomson also said another area of confusion was in respect to repairs or costs outlaid before tenants start renting the property. These aren’t considered initial repairs which means the landlord can’t claim the whole amount on their tax return in that year.

The ATO cautioned taxpayers to carefully review their records before lodging a return to ensure they were claiming deductions correctly or use a registered tax agent to help with preparing income tax returns.

Heads up! Beware of ‘double dipping’ – this is where you make a claim with your insurer and also claim the expense (loss) as a property-related tax deduction. For example, you claim the cost of repairing the roof after it’s damaged by a storm on your insurance, then also claim the cost of the same repair as a tax deduction. It’s a big no-no!

Sources of income

As a landlord, you’re probably receiving income from more than one source, for example, rent and salary. You need to include income from all these sources, and any others, in your tax return.

Sources that the ATO has flagged as being under particular scrutiny include income from the sharing economy and capital gains from crypto assets, shares and property.

When it comes to the share economy, this includes income from renting a home or rooms in a home on platforms like Airbnb. The ATO wants to ensure that any deductions claimed with respect to holiday homes rented out for part of the year are correctly apportioned. The tax office is also looking to ensure that the holiday home is genuinely available for rent if expenses are being claimed.

The ATO has data-matching software that identifies numerous sources of income, including rental income. It collects residential investment property loan data along with data from property managers, landlord insurance providers, residential bond authorities, short-stay provider records, crypto exchanges and financial institutions.

From an income perspective, it’s important to note that insurance payouts are considered taxable income. Say, for example, you made a claim for damage sustained from a natural disaster (e.g. bushfire, flood or cyclone) and your insurer provided a ‘cash settlement’, or you received reimbursement for loss of rent – then this income must be declared.

What you can claim for

Many property investors will use a tax accountant to help them prepare their tax returns. Even so, it’s a good idea to consult the ATO website about what expenses you may be able to legitimately claim as a deduction and what income you must declare.

You will need evidence to back up your claim, so make sure you have your paperwork organised and ready.

Your accountant and the ATO offer detailed guidance but, in general, the costs landlords may be able to claim include expenses such as:

• advertising for tenants;
• body corporate fees and charges;
• council rates, water charges and land tax;
• cleaning, gardening and lawn mowing;
• pest control;
• interest expenses; 
• pre-paid expenses;
• property agent's fees and commission;
• repairs and maintenance;
• some legal expenses;
• borrowing expenses;
• depreciation; and
• capital works expenditure.

Bottom line for property investors

The ATO’s continued focus on rental properties underlines the importance of good record-keeping and staying informed about any changes to rental property laws, regulations and taxation policies that may impact your investment or your obligations.

No-one likes the thought of a tax audit and, if you are audited, you want your claims to be in order. Landlords should check with their accountants about what can and can’t be legitimately claimed. Heads up: Landlords covered by an EBM RentCover policy can claim up to $1,000 to cover costs of a tax audit in connection with the ownership of the insured property.

For information on our suite of landlord insurance policies, please get in touch with a member of our Expert Care team – 1800 661 662.