man using a calculatorClaytons’ rentals

The ATO has warned landlords that it is focussing on deductions made for properties that are not actually available to rent.

Holiday homes that are only available for family and friends, and other investment properties that are not rented or genuinely available for rent, are in the sights of the ATO this financial year.

The tax office has announced it is clamping down on the large number of mistakes, errors and false claims made to it by rental property owners who use their own property for personal holidays.

Private use by family and friends of a holiday home is entirely legitimate, but it does reduce the owners’ ability to earn income from the property which in turn impacts the deductions that can be claimed.

“You cannot claim for times when you were using it [your holiday home] for your own personal holiday or letting friends and family stay rent-free”, said ATO assistant commissioner Kath Anderson.

“Holiday home owners also need to remember that if their property is rented to friends and family at mates’ rates, they can only claim deductions for expenses up to the amount of the income received.”

More than one million Australians claim deductions on rental properties each year. There are a number of possible expenses that investment property owners can potentially claim against income generated from leasing out the property, such as mortgage interest, repairs and maintenance costs, depreciation, capital works, property management fees, advertising charges and the cost of insurance policies. However, deductions can only be claimed for times when the property is rented or genuinely available for rent (and expenses may need to be apportioned).

According to the ATO, while some investors claim their property is available for lease and therefore qualifies for tax deductions, investigation often reveals that the owner has little intention of actually renting it out. Red flags include:

  • Placing unreasonable conditions on prospective renters
  • Setting above-market rental rates
  • Failing to advertise a rental in a way that targets people who would be interested in it
  • Failing to keep the property in good condition
  • Refusing to rent out the property to interested people without adequate reasons

Where a taxpayer’s claimed deductions are disproportionate to the income received from the property, this is likely to trigger investigation activity, the ATO warned. Taxpayers should also be aware that different rules around tax deductions apply when renting out a private residence, for example on Airbnb.

The ATO announcement serves as a timely reminder for landlords and their agents to maintain sufficient records – expenses, all income and the efforts taken to rent a property, plus accurate records of the times when the property is used personally by the taxpayer or their family/friends. Deductions should only be claimed for periods that the property was rented or was genuinely available for rent at market rates.

Remember: landlords can usually claim the cost of their RentCover insurance policies as a legitimate tax deduction (check with your tax accountant).

Note for our Millennial readers: Claytons was a non-alcoholic drink available in the 70s and 80s which had the slogan “The drink you have when you are not having a drink”. The use of the word “Claytons” to describe something that was but wasn’t really (i.e. not the real thing) has been part of the Aussie vernacular ever since.