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The Australian Tax Office will crack down on landlords’ dodgy deductions, after a review found nearly nine out of 10 landlords made mistakes on their annual returns and incorrectly claimed expenses.
People claiming tax deductions for working from home will also come under the microscope, as will people who earn income by putting their homes on short-term rental websites like Airbnb or Stayz, or who run a business from home, but then dodge paying capital gains tax when they sell.
The Australian Tax Office has landlords, people who work from home and capital gains tax deductions in their sights.Credit: Josh Robenstone
The ATO received $89.6 million in last week’s budget to implement the new crackdown, which is expected to increase Tax Office receipts by $474.9 million over five years.
The Tax Office has estimated that in 2019-20 there was a tax gap of about $9 billion as taxpayers paid 94.4 per cent of the total theoretically owed to the Commonwealth. Deductions for rental property expenses – such as people incorrectly claiming negative gearing deductions – contributed $1.3 billion to that gap.
Assistant tax commissioner Tim Loh said the Tax Office was targeting areas where people often made mistakes on their returns by, for example, leaving out rental income, overclaiming expenses or claiming for an improvement to their home – even though 87 per cent of individual rental owners use a registered tax agent to prepare their income tax return.
“We encourage rental property owners and their registered tax agents to take extra care this tax time and review their records before lodging their return,” Loh said.
“You can only claim interest on a loan used to purchase a rental property to earn rental income – don’t forget, if your loan also includes a private expense, such as for a new car or a trip to Bali, you can only claim an interest deduction for the portion relating to producing your rental income.”
ATO assistant commissioner Tim Loh.
And as Australians return to working from the office for at least part of each week, Loh warned taxpayers not to simply “copy and paste your prior year’s claims. We know a lot of people are working back in the office more compared to last year.”
The method used to calculate people’s working from home expenses has changed and people can either deduct the actual cost, or use a fixed-rate method offered by the Tax Office – with proper record keeping required in both cases.
Loh said while the family home was exempt from capital gains tax, it was vital that people kept records of any period in which their property was used to produce income because of the tax implications when it came time to sell.
“Generally, your main residence is exempt from CGT, however, if you have used your home to produce income, such as renting out all or part of it through the sharing economy, for example Airbnb or Stayz, or running a business from home, then CGT may apply,” he said.
“Don’t fall into the trap of thinking we won’t notice if you sell an asset for a gain and don’t declare it.”
Real Estate Institute of Australia vice president Leanne Pilkington said the finding that nearly 90 per cent of landlords had made mistakes on their returns seemed high and “it would be hard to do”.
“At the end of a financial year your property manager sends you a detailed report of all of the income the property has generated and all of the expenses. All you need to do is forward that to your tax agent, including the interest you pay on your investment loan and that’s it,” she said.
“This is certainly something that I will be talking to our property managers about to see what their take on this is.”
Michael Croker, the tax lead for Chartered Accountants Australia New Zealand said it was “clear that self-preparers [of tax] and tax agents need to be hyper-vigilant this year”.
“The particular focus on rental properties shows they are a tempting area to guild the lily. Over time, you can build up equity [in an investment property] and you know, you have equity in your loan, so you draw down and buy your air tickets for a holiday,” he said.
“Don’t mix up your borrowing – keep it separate for your investment property.”
On the move targeting people not properly paying capital gains tax, Croker warned people the ATO could access data from companies such as Airbnb to check against people’s returns.
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