Rental Property Issues 2023

Recent proposed changes to superannuation highlight a hidden message and that is that the Federal Government is short of revenue. To generate revenue, the Government either creates new taxes or forces compliance to existing to tax rules. No doubt the deductions surrounding rental properties will again be a key focus of the ATO compliance machine. The ATO have a history of reviewing rental property statements attached to Individual Income tax returns and 2023 will be no different.

The ATO expects all rental property owners to understand the revenue and expenditure issues associated with their rental property statement. The ATO conducts a number of random audits associated with rental property statements, and often find errors which result in an increased tax liability for taxpayers.

Such reviews are a fertile fishing ground for the ATO and their compliance teams.

A Rental Statement is a simple form represented by the following formula:

Assessable Rental Income less Allowable deductions

Assessable Income

Assessable Rental Income comes in many forms such as:

• Standard lease contracts, managed by an agent or by the taxpayer;
• Airbnb rental amounts;
• Insurance payouts (which is topical now with recent flood and fire events);
• Rental bond money kept to meet repair costs;
• Partial rental of property; and
• Lease of vacant land etc.

Big brother is very good at cross referencing your declarations with data available from Land Titles offices to name a few.

Further they have a good understanding of the rental rates in various postcodes, the rental demand in those areas and yield on investment.

The ATO use this information and skillset when reviewing your rental property statement, so it is important that you declare all assessable income related to the rental property.

Allowable Deductions

Just because you pay funds out and they relate to the rental property ownership, does not mean they are automatically classified as a deduction.

You need to distinguish if the sum is on “capital” account or “revenue” account as each has a different tax treatment.

Items on revenue account are often claimed in the year incurred while items on capital account are claimed over a number of future years or at the time of sale of the property.

Common expense items that are able to be fully claimed in the year in which they are incurred include:

• Advertising for Rental;
• Bank fees;
• Yard maintenance;
• Administration / Real Estate agent fees;
• Council rates;
• Letting fees;
• Repairs;
• Landlord Insurance;
• Building Insurance;
• Interest on loans;
• Water Rates;

All costs must be supported by source documentation and if those costs include a “private” use element, the claim must be reduced accordingly. Currently, as interest rates increase, more taxpayers will be looking to re-finance their borrowings. Please ensure that you are aware as to how these borrowings should be structured and how any costs associated with the changes are claimed.

Capital works expenses, commonly known as Capital Improvements, are items that must be claimed on “Capital” account.

This means that the deduction will be claimed over an extended period of time depending on the definition of the costs incurred. The area that causes the most headaches for landlords is the distinction between repairs and improvements. This will be relevant this year given the amount of damage resulting from recent natural disaster events.

Ensure that you understand the definitions here prior to lodging your rental property statement with the ATO.

The ATO wishes to ensure that all transactions are conducted at market rates so expenses can only be claimed if the property is genuinely available for rental. This will often be a matter of fact that the ATO can easily check.

Capital Gains Tax and Rental Property

Like all investments, there may come a time when the Rental Property is sold. Selling your rental property triggers a Capital Gains Tax event. The amount of tax you pay because of the transaction will depend on a number of factors including but not limited to:

• The size of the gains;
• Your marginal tax rate;
• Your period of ownership;
• When you purchased the property; and
• The effectiveness of your “Tax Planning” advice.

Given the surge in property prices in recent years, it is important you consider the “What If”calculation associated with any potential Capital Gains Tax event prior to signing a contractof sale.

Ask for Guidance

The taxation rules and regulations surrounding Rental Property Investments are never far from the ATO gaze, so to keep yourself on the right side of the ATO’s compliance team, and seek advice before you act.

A simple phone call can wisen you up to potential pitfalls.

That’s were Poole Group comes in … we are here to help.