Investment Properties: Tax Return Errors That Can Trigger ATO Scrutiny
While investment properties can offer valuable tax advantages, they’re also a major focus area for the ATO. Certain mistakes regularly attract follow‑up activity. Below are five of the most common errors, along with key points to be aware of.
1. Over‑claiming repairs that should be treated as capital works
Repairs and maintenance are deductible when they fix or prevent defects, damage, or deterioration that arise from earning rental income. These costs are generally claimable in the year they’re incurred.
However, work that improves the property’s value, functionality, or structure—such as renovations, extensions, or significant upgrades—is considered capital works. These expenses are typically claimed at 2.5% per year over 40 years, subject to specific exceptions.
2. Claiming incorrect interest deductions
Where a loan is used partly for private purposes and partly for a rental property, the interest must be apportioned. Only the portion relating to the rental property is deductible.
This rule applies whether the mixed use exists from the outset or arises later through refinancing or redraws. Apportionment must continue for the life of the loan, and interest on private use amounts is never deductible.
3. Claiming deductions during periods of private use
You can’t claim deductions for any period when you use a holiday home or mixed‑use property for private purposes, even for short stays. To claim expenses, you must rent the property or make it genuinely available for rent.
The ATO may decide the property isn’t genuinely available if you advertise it through limited channels, offer it only during low‑demand periods, or impose unreasonable conditions such as above‑market rent or overly restrictive tenant requirements. Repeatedly rejecting suitable tenants without valid reasons can also indicate you hold the property for personal use rather than to produce income.
4. Poor record‑keeping and lack of substantiation
Rental income and expense records must be kept for at least five years from the date your tax return is lodged. If the ATO raises a dispute within that period, you must retain relevant records until the matter is resolved.
5. Failing to report all rental‑related income
Rental income isn’t limited to rent alone. It can also include retained bond amounts, cancellation or booking fees, insurance payouts for damage or lost rent, and some disaster relief payments.
The ATO now cross‑checks information from banks, insurers, state land registries, rental bond authorities, and digital platforms, making omissions and errors easier to identify than ever.
Important: Clients should not act solely on the basis of the material contained here. Items herein are general comments only and do not constitute or convey advice per se. Also, changes in legislation may occur quickly. We, therefore, recommend that our formal advice be sought before acting in any of the areas.
