If you are one of the more than 1.8 million Australians owning investment rental properties then this month’s column will be of interest to you.
Assistant Commissioner Tim Loh recently reminded property investors to take more care when submitting their tax returns as the ATO had to adjust more than 70% of 2020 tax returns that were selected for a review of their rental information.
Accordingly this month I will draw your attention to the more common mistakes rental property and holiday homeowners are likely to make when submitting their own tax returns or providing information to their tax agents.
1) Failing to declare or incorrectly calculating the capital gain from selling an investment property, omitting to declare income from insurance claims or under declaring rental income received in cash. Rental income must be declared in the financial year in which it is received, regardless of how it is impacted upon during COVID-19 including rent relief grants paid to landlords.
2) Claiming rental property expenses for the whole year when the owner(s) used the property for part of the year as a holiday home for family or friends or other times when the property was not available for rent due to COVID lock- downs, undertaking repairs or improvements to the property.
3) It is important to set the rent at market rates and ideally advertise the property for rent through an estate agent and not just rely on face book advertising. If you rent out at mates rates that are well below market rates you can only claim expenses totaling up to the amount of the discounted rental income.
4) A common problem can emerge when the loan facility used to finance the rental property is redrawn upon from time to time to fund personal use assets such as the family motor vehicle, expenses relating to your primary residence or even school fees.
Only the proportion relating to the rental property component of the loan is deductible which necessitates the loan being split into two separate loans and interest charges and principal repayments apportioned accordingly. If you are using a tax agent, this time consuming analysis can be costly.
5) Be sure to apportion both rental income and deductible expenses between owners in proportion to their ownership percentage. If you have purchased the property in joint names the split must be 50/50 and not some other percentage that favours the highest income earner if the property is negatively geared. If the ownership is in the form of tenancy in common the ownership proportions may not be 50% in which case both income and expenses must be apportioned in accordance with the ownership percentages.
6) Since 1st July 2017 travel expenses relating to residential rental properties have no longer been deductible regardless of the purpose of the trip. This change does not apply to commercial rental properties such as shops and factories.
7) Record keeping is an essential component of managing your rental property which ideally should be in digital format to avoid deterioration and backed up regularly. If you are using the services of a tax agent and unable to visit in person, digital records rather than a shoebox full of invoices and receipts makes a lot of sense.
Of equal importance is ensuring you comply with the time period required for retaining supporting records. Generally speaking you must keep written evidence of records supporting your tax return for five years from the date you lodge your tax return.
If you are claiming a deduction for the decline in value of depreciating assets you will be required to keep records for the five years from the date of your last claim for the decline in value.
In my October column I will cover the tips and traps associated with incurring expenditure on repairs and improvements and the costs that are taken up in determining the capital gain/loss on sale of a rental property.
Disclaimer:
The content of this article is not intended to be relied upon as professional advice and should not be used as such. If you have any questions you should consult a registered tax agent.
Brian Spurrell FCPA, CTA, Registered Tax Agent.
Director, Personalised Taxation & Accounting Services Pty Ltd
PO Box 143 Warrandyte 3113 Ph: 0412 011 946
Web: www.ptasaccountants .com.au