Dot the i’s and cross the t’s
With EOFY fast-approaching, the ATO is reminding property investors about recent changes to deductions.
Yay, it’s tax time!… said no one, ever (okay the tax accountants love it but the rest of us, not so much). While the thought of having to gather up all that paperwork might fill you with dread, it’s important to remember the changes to deductions that property investors can now claim.
A ban on travel-related tax deductions for most real estate investors, and restrictions on claiming depreciation deductions for second-hand items in properties, have both become law and apply this financial year.
The ATO has warned that its “sophisticated systems and analytics” would be checking claims this year to ensure people followed the new rules.
“We will be monitoring returns to identify people who continue to claim these deductions by placing them at different labels,” said ATO assistant commissioner Kath Anderson.
“If something doesn’t look quite right, it will send up a red flag and we’ll investigate further. So it is better to make sure you get it right the first time.”
Travel deductions for all individuals apart from those in the business of property investing have been scrapped. This means landlords cannot claim the cost of travelling to their rental to complete maintenance or property inspections. The ATO notes that owning one or several rental properties is not considered being in the business of rental properties and the number of people who are still able to claim this deduction is very small. However, the travel expenses option remains open in the ATO’s myTax online lodgement system because of the handful of investors still able to claim, which may lull other property investors into making an incorrect claim.
Investors can only claim deductions related to plant and equipment (dishwashers, ovens, ceiling fans, hot water systems etc.) that they incurred directly (i.e. bought themselves). Depreciating appliances and utilities purchased by previous owners or installed in recent builds is no longer allowed. The depreciation deduction ban only applies to second-hand items bought for an investment property after 9 May 2017. Items purchased before that date can be depreciated as previously. New items bought for older investment properties can also be depreciated.
Despite these new laws, many landlords can continue to claim a range of deductions related to their investment property. But, as always, check with an accountant or taxation specialist about the landlord’s specific situation and what supporting documentation would be required.
In FY16, 2.087 million property investors claimed gross rental income of $42.139 billion, and $45.696 billion in deductions, according to statistics from the ATO. The deductions comprised of $21.749 billion in rental interest, $3.271 billion in capital works and $20.676 billion in other rental deductions.
Of the approx. 2.1 million investors, around 1.3 million negatively gear their properties. In Victoria alone, almost 60 per cent of rentals are negatively geared, with landlords claiming an average loss of $6,464 each year.
In FY16, 740,000 rental property schedules from Victorians were filed with the ATO, with 435,000 of these running at a loss. Landlord expenses included:
- $4.2 billion in interest on loans
- $398 million in council rates
- $376 million in maintenance and repairs
- $228 million in body corporate fees
- $100 million in land tax
- $30 million in gardening costs
- $18.8 million for advertising for new tenants
- $7.9 million in stationery, telephone and postage costs
One frequently overlooked legitimate expense deduction is landlord insurance. For most investors, the landlord insurance premiums paid are tax deductible, so make sure the landlord’s tax agent is given the property’s RentCover policy documents. And for added peace of mind, all RentCover landlord policies provide up to $1,000 cover for professional fees incurred due to a tax audit in respect of income from the rental property.