Mind The Gap: Property Investors in the sights of the ATO to plug a $3.3million tax gap

25 March 2019

BDO Australia has signalled an amber warning light to property investors as the ATO looks to crackdown on rental deductions, after identifying a $3.3 billion gap in rental deductions claimed against reported income.

Chris Jordan, Commissioner of Taxation, spoke earlier this month at a Tax Institute conference in Hobart and said that “more than two million taxpayers were claiming $47.4 billion in rental deductions, against $44.1 billion in reported income.”1

BDO Tax Partner, Marcus Leonard said the Commissioner’s comments were a clear warning to property investors who are being either careless or deceptive with their rental deduction claims.

“It’s clear from the ATO’s comments last week that they’ll be going in hard to narrow this $3.3billion gap.”

The ATO crackdown will see the agency join forces with state revenue agencies, the real estate sector and sharing economy platforms, such as Airbnb and StayZ, to uncover more detailed information about rental property income.

Marcus said: “the key actions property investors should take to avoid non-compliance are:

  • Loan Interest- make sure the loan money was used to purchase, repair or improve the investment property or its contents.  For example, just because the investment property is used as a mortgage for a loan does not mean you can claim the interest as deductible if the loan is used for some other purpose e.g. buying personal use assets or the family home.
  • You can claim browning costs on a loan for the rental property over five years or the period of the loan if shorter.  This includes mortgage fees, valuation fees for loan approval and stamp duty on the mortgage.
  • Under new rules for properties acquired after 9 May 2017, only new items purchased for the rental property can be depreciated i.e. if you purchased the property with the contents you cannot claim depreciation for those items, they are added to the CGT cost base of the property.
  • Home owners who rent their properties on Airbnb or StayZ or take in boarders need to declare the income they receive from this ‘rent’ as assessable income (there is an exception for family members paying board that is just a contribution for expenses).

Repairs to the building and contents are generally deductible but not if they amount to an improvement to the building or items.  However, improvements can usually be added to the CGT cost base or depreciation balance of the property or items.

1ABC report : https://mobile.abc.net.au/news/2019-03-20/ato-ramps-up-its-focus-on-rental-properties/10918172