What Can Landlords Claim on Tax? A Warning From the ATO

They say rent money is dead money.

The Australian Taxation Office (ATO) says rent money is its money. 

Recent ATO assessments indicate that there is an estimated $1 billion tax gap that’s resulted from incorrect reporting of rental property income and expenses. 

Yep—$1 billion.

So, not surprisingly, the peak revenue collection agency is determined to claw back this cash.

As part of the fallout, banks and other financial institutions will be instructed to hand over residential investment loan data relating to roughly 1.7 million rental property owners. The data grab will cover a timeframe from 2021-22 to 2025-26.

What is the ATO going to do exactly? What can landlords claim on tax? Let’s dive into the details…

Are Landlords Really Declaring Income?

In this battle, the tax office is aiming to identify relevant individuals and scrutinise their bank account, transaction, and property details.

Its first priority will be to determine whether landlords are actually declaring their residential investment property income.

Beyond that, the data-matching exercise will delve into how rental property loan interest and borrowing expense deductions have been reported in the rental property schedules and whether net capital gains have been divulged for property used to create income.

It’s not just banks that will be central to the collection of data—the ATO has its eyes on rental property management software providers, too. 

This is in response to financial management of residential rental properties shifting online en masse in the past decade or so, as assisted by numerous software providers.

Accordingly, the ATO will request that these platforms divulge information relating to property owners, including bank details, income, expenses, and other particulars associated with their rental properties and agents. 

This additional data-collection exercise is expected to impact 1.6 million individuals, covering the period from 2018-19 to 2022-23.

What Does This All Mean for Rental Property Owners? 

Where is the ATO going to focus its attention? Where is the heat most likely to be applied? 

Well, there are three distinct areas that tax collectors will primarily be concerned with. They are: 

1. Repairs or Maintenance

The ATO has a habit of scrutinising deductions claimed for repairs and maintenance as it is; with the added attention, understanding the rules in this area is more essential than ever.

A recurring challenge for many landlords is identifying the difference between repairs and maintenance and capital works. 

Firstly, while repairs and maintenance can be claimed immediately, the deduction for capital works is usually spread over several years.

Additionally, repairs must relate directly to wear and tear that results from the property being rented out. This typically involves replacement or renewal of a worn out or broken element—for example, replacing damaged timber boards on a deck or fixing a burst pipe. 

However, the following expenses will not qualify as deductible repairs, but are regarded as capital works:

• Replacement of an entire asset—for example, a complete deck, a new hot water system or dishwasher, or replacing a shower curtain with a glass wall
• Improvements and extensions

Also, bear in mind that any repairs and maintenance carried out to fix problems that existed at the time the property was purchased are not deductible.

2. Claiming Interest and Redrawing on the Loan

Generally speaking, the interest component of an investment property loan is deductible. But if a landlord redraws on their investment loan for personal purposes, interest on this portion of the loan is not deductible. 

This means that interest expenses are required to be apportioned into deductible and non-deductible ‘buckets’—and repayments usually need to be apportioned, too. 

If the redrawn funds are used to create investment income, the interest on this portion of the loan should be deductible.

3. Borrowing Costs

Rental property owners are entitled to claim a deduction for borrowing costs—typically over five years—that includes such expenses as:

• Application fees
• Mortgage registration and filing
• Stamp duty on mortgage
• Mortgage broker fees
• Valuation fees
• Title search fees 
• Mortgage insurance
• Legals on the loan

Moreover, life insurance to pay the loan on death is not deductible even if taking out the insurance was a requirement to achieve finance. 

Lastly, if the loan is repaid early or refinanced, the whole amount is often deductible. This includes mortgage discharge expenses and penalty interest.

Those who require more info to answer the question ‘what can landlords claim on tax?’ will be pleased to know that the ATO provides a thorough rundown of applicable rental expenses to declare. Take a peek here.

Where to Now…

If you are concerned about any of the elements raised in this article or require clarity about your tax responsibilities as a rental property owner, PrimeAdvisory is ready to help. Email [email protected] to start the conversation.

Gearing up for the EOFY? Maximise the savings with the aid of our comprehensive tax-planning guide for both individuals and small business owners. Download here.