ATO auditors have recently completed over 300 audits on rental property claims and “found errors in almost 9 out of 10 tax returns reviewed”. He said the most common errors the ATO is seeing are:
- incorrect interest claims for the entire investment loan where it has been refinanced for private purposes
- incorrect classification of capital works as repairs and maintenance, and
- taxpayers not apportioning deductions for holiday homes when they are not genuinely available for rent.
Regarding the first category of incorrect claims, interest can still be claimed where a loan has been refinanced. However, the borrowed funds must still be used for a deductible purpose (i.e. in relation to the rental property). Where the refinanced amount is used for a non-deductible purposes (for example, to buy a boat or car, or to make repayments towards the family home), the interest that relates to that portion of the refinanced amount will no longer be deductible. In respect of repairs and maintenance, in a rental property context, repairs generally involve a replacement or renewal of a worn out or broken part, for example, replacing worn or damaged curtains, blinds or carpets. Maintenance generally involves keeping the property in a tenantable condition, for example repainting faded or damaged interior walls. By contrast examples of capital expenditure include:
- replacing an entire structure or unit of the property (e.g. an entire fence, kitchen cupboards, stove etc.)
- improvements, renovations, extensions
- initial repairs to defects that existed when you first purchased the property.
These types of capital expenses are not immediately deductible, but rather must be claimed over a number of years. The finally category of mistakes, involves claiming a deduction for expenditure relating to the property, even though it is not being rented out, or it is not genuinely available for rent. During these periods, expenses cannot be claimed. To be clear, expenses may be deductible for periods when the property has no tenants and you are not occupying it, providing it is genuinely available for rent. To evidence this, you would need to show that it is being given broad exposure to potential tenants, such as online or newspapers advertisements etc.