After Commissioner Chris Jordan revealed earlier this month that there was a massive $3.3 billion gap found in rental property deductions and reported incomes, it was also found that out of over 300 rental property claim audits conducted by the ATO, almost nine out of 10 returns had errors.
Mr Jordan had much to say in his address at the Tax Institute’s national convention.
“We’re seeing 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.”
“And when you consider that rentals include over 2.1 million taxpayers claiming $47.4 billion in deductions, against $44.1 billion in reported income, you can get a sense of the potential revenue at risk.”
The commissioner’s comments were taken as a clear warning for property investors ahead of the 2019 tax season, to avoid being careless or deceptive with their rental deductions.
“It’s clear from the ATO’s comments that they’ll be going in hard to narrow this $3.3 billion gap,” he said.
Narrowing this gap will see a stricter overview of the loan process for property investors. Mr Leonard says that investors should double check loan interests and be aware that the loan is used for purchasing, repairing or improving the investment property.
“Just because the investment property is used as a mortgage for a loan does not mean you can claim the interest as deductible if the loan is used for some other purpose, [for example], buying personal use assets or the family home,” said Mr Leonard.
“Repairs to the building and contents are generally deductible but not if they amount to an improvement to the building or items. However, improvements can usually be added to the CGT cost base or depreciation balance of the property or items.”
New rules for properties acquired after 9 May 2017 that limit plant and equipment depreciation deductions for residential investment properties to new assets should also be carefully considered, said Mr Leonard.
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