End of Financial Year 2019

END OF FINANCIAL YEAR!!

This month we will be looking at rental properties and personal deductions, two areas the ATO has flagged as being high on their radar. In fact they will be doubling their audit activity to ensure that the issues they had last year do not occur again. A sample of investment property tax returns in 2018 found that 9 out of 10 contained at least one error. While penalties won’t apply for genuine mistakes, deliberate over claiming can attract penalties of up to 75% of the deduction.

“Dodgy” Rental Deductions

• Loan Interest – The interest portion of a loan taken out for the sole purpose of purchasing a property or doing repairs or renovations is a valid rental property deduction. However if a portion of the loan is used for personal purposes i.e. living expenses, holidays or buying a boat, then the interest on that part of the loan cannot be claimed.
• Capital Works vs Repairs & Maintenance – This is always an area that confuses many people. The cost of repairs or maintenance to restore something that is broken, damaged or deteriorating can be claimed in full immediately. Improvements and renovations are usually categorised as capital works and are deductible over the estimated life of the asset. In addition, any initial repairs prior to renting out a property are also classed as capital works and cannot be claimed immediately. If in doubt please ask us for advice.
• Holiday Homes – A holiday home is different to a rental investment property. A holiday home is generally a private asset used for family holidays, for which the taxpayer cannot claim expense deductions.  However, if the taxpayer rents their property out at “mates rates” they can claim expenses up to the amount of income they receive. A holiday house can become more like a rental property, and more deductions can therefore be claimed, if it is genuinely available for rent i.e. making it available during key holiday periods, keeping it in a condition that people would want to rent it, and not unreasonably refusing tenants.

Individual Audit Targets

• Claims for “standard deductions” – The ATO will be paying greater attention to individuals using substantiation exceptions to claim “standard deductions”.  These include claims for work expenses not exceeding $300, laundry expenses not exceeding $150 and car expense claims under the ‘cents per km’ method. It is important to understand that in order to claim a deduction for a ‘work expense’ the following requirements must be satisfied:
  • The expense must firstly be incurred, and incurred in the course of earning your income.
  • You must have written evidence of the expense e.g. name of supplier, the amount of the expense and what the expense was for.
  • In respect to claiming for your car, you are required to have adequate explanations available about how the kilometres were calculated for the nature of the trips taken. Therefore it is important to keep reasonable diary records of both regular and irregular trips taken during the year, such as the nature of each trip and the distance travelled.
• Claims for home office expenses – Due to the increase in people working partly or fully from home, a record number are claiming deductions for home office expenses.  Once again it is best to keep a diary record of the average time you spend working from home, say on a weekly basis to substantiate your claim. The ATO will be paying closer attention to these claims in the 2019 year.