Tax time 2021: Rental Property Pitfalls

This tax time, the ATO is again closely monitoring claims in relation to rental properties. As with previous years, it’s on the lookout for rental property owners who do not declare all their income and capital gains from selling property. Other areas of concern include claims for interest charges on personal loans, and deductions for capital works.

The ATO has data-matching programs in place that collect detailed information about properties and owners for income years all the way from 2018–2019 to the 2022–2023. These programs expand the rental income data collected directly from third-party sources, including sharing economy platforms, rental bond authorities and property managers.

“People should remember that there’s no such thing as free real estate when it comes to their tax returns”, Assistant Commissioner Tim Loh has said. “Our data analytics scrutinise returns for rental deductions that seem unusually high. We will ask questions, and this may lead to a delay in processing your return.”

According to the ATO, in the 2019–2020 financial year over 1.8 million taxpayers owned rental properties and claimed $38 billion in deductions. While the ATO acknowledges that most taxpayers do the right thing and are able to justify their claims, it notes that over 70% of the 2019–2020 returns selected for review of rental information have subsequently had adjustments made.

The most common mistake that rental property owners and holiday homeowners make is not declaring all their income and capital gains from selling the property. This shortfall will obviously be tackled with information obtained from data-matching programs, but also sophisticated data analytics which will single out tax returns with unusually high rental deductions.

Another area of concern this tax time includes claims for interest charges on personal loans. For example, if you take out a loan to buy a rental property and rent it out at market rates, the interest on the loan is deductible. However, if you redraw money from that mortgage for personal use (eg to buy a car, pay off the mortgage of the house you’re living in etc), then you cannot claim interest on that part of the loan.

Taxpayers should also be careful when claiming deductions for capital works. While the cost of repairs for wear and tear to the property are immediately deductible if they’re replacing or fixing an existing item (eg a broken toilet or showerhead), the cost of upgrading the property or areas of the property (eg a kitchen or bathroom renovation) would be considered capital works and any deduction needs to be spread over a number of years.

For short-term stay property owners who have been affected by COVID-19 and travel restrictions, the ATO notes that if your plans to rent out the property in 2020–2021 were the same as in previous years, you will be able to claim the same proportion of expenses, although taxpayers can only do this if the property was not used privately. For example, if you, your family members, or friends have stayed at the property for free or at a reduced rate, you will not be able to claim some or all of the expenses relating to that period.

Rental property owners who have provided rental concessions to their tenants in the form of either reduced or deferred rent due to COVID-19 impacts will only need to declare the rent that has been received. Normal expenses can still be claimed on the property as long as the reduced rent was determined at arms’ length and in line with current market conditions.

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.