Rental property deductionsThis tax season will see rental property deduction changes as the ATO specifically targets extreme or inappropriate rental deductions made by rental property owners.

While it is not uncommon to make some mistakes when claiming rental deductions, it is necessary for taxpayers with rental property interests to get their deductions and expense claims right to avoid facing harsh and costly penalties. Last year, the ATO contacted more than 350,000 taxpayers about omissions and errors in their returns.

This 2015-16 financial year will see the ATO increasing its focus on four main problem areas where rental property owners are incorrectly, whether by error or design claiming deductions that don’t necessarily suit their circumstances. These four rental property deduction changes will have significant impact to property investors Australia wide.

Rental Property Deduction Changes

Claiming excessive deductions

One of the pillars of rental property deduction changes that the ATO has made relate to holiday homes. Deductions may only be claimed for the periods when the holiday house property was rented out, or when it was genuinely available for rent. Deductions should also be limited to the amount of income earned by the property owner when the property is rented out below the market rate to family or friends.

Partners splitting income and deductions

Husbands and wives who own property together but divide the income and deductions unequally to receive a tax advantage for the higher income earner, will be heavily penalised by the tax office. These kinds of arrangements will attract higher penalties if the ATO believes that they are carried out deliberately.

Repairs or maintenance claims

The ATO will carefully examine any repair and maintenance costs incurred by a property owner after a property is bought. These ‘initial repairs and improvements’ costs to a property are generally not deductible but can be added to the capital cost of the property.

Claiming for interest deductions

Interest expenses incurred for a rental property are only deductible when the property is used to produce rental income. For example, those who own a two-storey house and live privately in the bottom storey but lease out the top storey can only claim 50% of the interest expenses. Property owners must be aware that any interest expense incurred from the private use of a property is non-deductible.

How will these rental property deduction changes affect the way you claim your deductions this year? Speak to a tax financial advisor from Taggart & Partners today to stay abreast of the changing rental deduction landscape.

Updated 29th February 2020

*** This publication is for guidance only, and professional advice should be obtained before acting on any information contained herein. Neither the publishers nor the distributors can accept any responsibility for loss occasioned to any person as a result of action taken or refrained from in consequence of the contents of this publication. Publication date August 2015