‘Excessive’ rental property deductions in ATO sights

Rental income from property is a source of income for a large number of Australians. In fact, the most recent statistics show that, in 2012-13, almost 2 million Australians returned rental income (or losses) in their tax returns.

Naturally enough, the tax law has provisions which govern the return of rental income and the deductions that can be claimed.

This tax time, the ATO says it is increasing its focus on rental property deductions and is encouraging all rental owners to double-check their claims before lodging their tax returns. The ATO said it was paying particular attention to excessive deductions claimed for rental properties, especially those located in popular holiday destinations around Australia.

Assistant Deputy Commissioner Adam Kendrick said the ATO has identified a number of instances where taxpayers are claiming rental deductions for holiday homes that appear to be higher than expected when compared to the rental income being reported.

The ATO said it will be sending letters to taxpayers in approximately 500 postcodes across Australia, reminding them to only claim the deductions they are entitled to, for the periods the holiday home is rented out or is genuinely available for rent.

Factors the ATO considers may indicate a property is not genuinely available for rent include:

if it is advertised in ways that limit its exposure to potential tenants – for example, the property is only advertised: (i) at the owner’s workplace; (ii) by word of mouth; (iii) outside annual holiday periods when the likelihood of it being rented out is very low. Of course, these factors don’t mean the ATO won’t accept the property as being available for rent, but they are indicators;
the location, condition of the property, or accessibility to the property, mean that it is unlikely tenants will seek to rent it – this will be a question of fact;
the owner places unreasonable or stringent conditions on renting out the property that restrict the likelihood of the property being rented out – such as:

setting the rent above the rate of comparable properties in the area – again, this is only a guide factor, and the facts and circumstances of each case will be important;
placing a combination of restrictions on renting out the property – such as requiring prospective tenants to provide references for short holiday stays and having conditions like “no children” and “no pets” – however, the facts and circumstances of each case will be important;

a property owner refuses to rent out the property to interested people without adequate reasons.

Other issues

If a property is rented at below market rates, for example to family or friends, deduction claims must be limited to the income earned while rented. The ATO has also reminded taxpayers to keep accurate records and evidence of claims.

Whether a property is a holiday home or not, the owner can claim reasonable costs that relate to them inspecting the property, maintaining it and making repairs to the property.

Where a holiday home, or any property for that matter, is rented out for only part of the year, costs such as repairs and maintenance can only be claimed based on the proportion of the income year the property was rented out or was genuinely available for rent.

Other ATO focus areas concerning rental properties include:

husbands and wives splitting rental income and deductions for jointly owned properties that is not supported;
claims for repairs and maintenance shortly after the property was purchased;
costs to repair damage, defects or deterioration existing on purchase, or renovation costs, can’t be claimed as an immediate deduction. These costs are deductible over a number of years; and
interest deductions claimed for the private proportion of loans.

There is a large amount of information about tax and rental properties on the ATO website and it is also explained in detail in the Thomson Reuters Australian Tax Handbook – Tax Return Edition 2015 and the Australian Financial Planning Handbook 2015-16.

Terry Hayes is the editor-in-chief of tax news reporting at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.