Income and tax deductions from rental properties is without doubt one of the 4 key areas the Australian Taxation Office (ATO) is focusing on this tax time. It’s an space that’s straightforward to get improper, and wants further care when lodging. The ATO Random Enquiry Program has discovered that 9 out of ten tax returns that reported rental income and deductions include a minimum of one error, regardless that most of these property house owners had been assisted by a registered tax agent.
The ATO is subsequently urging rental property house owners to make sure they fastidiously assessment their data earlier than declaring income or claiming deductions this tax time, and for registered tax brokers to ask a number of further questions of their shoppers.
Assistant Commissioner Tim Loh defined “Registered tax agents can only work with the information they gather from their clients, and we know some clients won’t know everything they need to tell their agent. We don’t expect agents to be Sherlock Holmes, but we do expect them to ask the right questions to ensure their client’s return is right.”
Mr Loh stated that rental property house owners are urged to make sure they know what income they should declare and what might be claimed as a deduction.
“We are concerned about mistakes, and in particular, leaving out income or deliberate over-claiming of rental property deductions this year.”
“Getting it right the first time, will ensure you receive the tax refund you are owed, and avoids us knocking on your front door down the track.”
Include all rental income
The ATO receives rental income knowledge from a variety of sources together with sharing financial system platforms, rental bond authorities, property administration software program suppliers, and state and territory income and land title authorities.
“The amount of data we access grows each year, making it easier and faster for us to spot any rental income that you have charged your tenants, but haven’t declared,” Mr Loh stated.
When getting ready tax returns, ensure that all rental income is included, corresponding to from short-term rental preparations, renting a part of a house, and different rental-related income like insurance coverage payouts and rental bond cash retained.
“Income and deductions must be in line with a rental property owner’s ownership interest, which should generally mirror the legal documents.”
Get your bills proper
Not all bills are the identical – some might be claimed immediately, corresponding to rental administration charges, council charges, repairs, curiosity on loans and insurance coverage premiums. Other bills corresponding to borrowing bills and capital works should be claimed over a lot of years. Capital works can embrace changing a roof, or a brand new kitchen renovation. Depreciating belongings corresponding to a brand new dishwasher or new oven costing over $300 are additionally claimed over their efficient life.
Refinancing or redrawing on a rental property mortgage for personal bills corresponding to holidays or a brand new automotive, signifies that the quantity of curiosity regarding the mortgage for the non-public expense can’t be claimed as a deduction.
If income from a rental property in a vacation location is earnt, it must be included in tax returns.
“You can claim expenses for the property to the extent that they are incurred for the purpose of producing rental income, not where your family and friends stayed in the property for a mini getaway at mate’s rates, you use it yourself, say at Christmas, or you stopped renting the property out,” Mr Loh stated.
“Other circumstances where deductions cannot be claimed include pretending that your property is available for rent when it really isn’t, for example you advertise significantly above a reasonable market rate compared to similar properties or you place unreasonable restrictions on potential tenants.”
“Our 2022 Tax Time Toolkit for Investors also contains a number of fact sheets for landlords, including Top 10 tips to help landlords avoid common tax mistakes. These tips will help you avoid common mistakes and save you time and money.”
Selling a rental property
When promoting a rental property, capital beneficial properties tax (CGT) must be thought-about and any capital beneficial properties or capital losses should be reported.
When calculating a capital acquire or capital loss, it’s necessary to get the price base calculation proper. Cost base is often the price of the property when bought and any prices related to buying or promoting it. These might be issues like stamp responsibility, authorized charges, valuations and actual property gross sales charges. Any capital works claimed as deductions might also should be subtracted from the price base.
“If you’ve sold a rental property that was once your home, you may be entitled to partially claim the main residence exemption. You will need to claim this exemption in your tax return when you lodge.” Mr Loh stated.
Records of all income and bills regarding rental properties, together with buy and sale data, have to be stored. This ensures all eligible deductions are captured when getting ready tax returns and capital beneficial properties tax might be calculated appropriately when the property is offered.
“It’s also important to note that when selling any property for more than $750,000, vendors / sellers must have a clearance certificate otherwise 12.5% will be withheld.” Mr Loh stated.
Clearance certificates purposes can take as much as 28 days to course of so to keep away from delays, sellers ought to apply as early as sensible utilizing the web kind. Having tax affairs updated, together with all lodgments, helps pace up the evaluation of an utility and a certificates being issued. The certificates final for 12 months and if promoting a couple of property within the yr, it may be used for a number of gross sales. Foreign residents are typically not eligible for a clearance certificates however could apply to fluctuate the withholding quantity.
Apply for a certificates and discover out extra at ato.gov.au/FRCGWcertificate
Keep good data to show all of it
Records of rental income and bills ought to be stored for 5 years from the date of tax return lodgments or 5 years after the disposal of an asset, whichever is longer.
“Get your books in order and start keeping records as soon as you make the decision to earn rental income. It makes tax time so much easier for you and your registered tax agent” Mr Loh stated.
Adequate data ought to show how the expense was incurred for the rental property and the extent they relate to producing rental income. They should embrace the identify of the provider, quantity of the expense, the character of the products or providers, the date the expense was incurred, and the date of the doc.
“We can ask for proof of any claim that you make, so good record keeping is the only way to ensure you can claim everything you are entitled to.”
“Remember, when your return is lodged, you are on the hook for the claims you are making, not the registered tax agent.”