Tax office to target landlords rorting the system

With interest rates soaring, Australia's 1.8 million property investors want to make the most of their tax deductions, and the Australian Tax Office (ATO) is cracking down.

This boom in investment property ownership throws up particular challenges for the ATO, making sure that they know exactly who owns what and that taxpayers aren't rorting the system.

As it gears up to put property investors under the compliance spotlight this year, the tax office will be paying close attention to excessive interest expense claims, such as where property owners have tried to claim borrowing costs on the family home as well as their rental property.

As a general guide, you can claim a deduction for mortgage interest on an investment property but not for interest on your main residence; try to avoid loan facilities that blur the line between the two.

They will also be looking at the incorrect apportionment of rental income and expenses between owners, such as where deductions on a jointly owned property are claimed by the owner with the higher taxable income, rather than jointly.

For husband and wife property owners, there is a presupposition that all income and expenses will be split 50:50, so any attempt to steer deductions toward the higher-earning partner will be challenged.

In addition, the ATO will be looking at rental properties that are not genuinely available for rent. Rental property owners should only claim for the periods the property is rented out or is genuinely available for rent. Periods of personal use can't be claimed.

This is particularly important for holiday homes, where the ATO regularly finds evidence of home-owners claiming deductions for their holiday pad on the grounds that it is being rented out, when in reality the only people using it are the owners, their family and friends, often rent-free.

Don't forget, the ATO has access to numerous sources of third-party data including access to popular holiday rental listing sites, so it is relatively easy for them to establish whether a claim that a property was "available for rent" is correct.

Finally, the ATO will be keeping a close eye on incorrect claims for tax deductions relating to newly purchased rental properties. The costs to repair damage and defects existing at the time of purchase cannot be claimed immediately.

These costs are instead added to the cost base of the property for capital gain tax (CGT) purposes because there is a presupposition that the purchase price will have been reduced to take into account pre-existing repairs.

Property renovations are either added to the cost base of the property for CGT purposes or are deductible instead over a number of years, depending on the nature of the work done. Expect to see the ATO checking such claims and pushing back against claims which don't stack up.

The key tip is to ensure that property owners keep good records. The golden rule is; if you can't substantiate it, you can't claim it, so it's essential to keep invoices, receipts and bank statements for all property expenditure, as well as proof that your property was available for rent, such as rental listings.

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