This is according to the ATO. Now, I don’t always believe the ATO, and I know that many tax returns relating to landlords are completed by tax agents, including myself, so I don’t like being accused of falsifying legal documents.
Nevertheless, landlords have been warned that the ATO is being vigilant when it comes to rental properties.
Over the last 3 years or so, the tax office has told us that they believe landlord tax returns are incorrect. This year, they announced its three “focus areas,” pointing the finger squarely at landlords claiming expenses they aren’t entitled to.
But this is where I think the language can be improved. For one minute, they use the word “falsifying” and then say that mistakes are being made. Well, it can’t be both.
They are either saying tax returns are being falsified or that taxpayers are making mistakes. One shows intent to break the law, whereas the other suggests a lack of knowledge or education.
Anyway, I have many medical professionals who love property, and so they have investment properties. Most have one or two, but some have several. So, when it comes to property taxes, this should interest them.
The ATO feels that taxpayers’ “expenses may have been inflated to offset increases in rental income to get a greater tax benefit.”
They believe claims are being made for repairs when they are, in fact, improvements that cannot be claimed.
For example, you replace the old kitchen with a new and improved one. You cannot claim this in the year, but you may be able to claim it as a capital improvement, which is only deductible over time as capital works.
Then there is interest on loans. We all know that if a property is purchased and a loan is taken out to buy it, that loan can be claimed as a deduction. But if there is a refinancing later or additional amounts taken out as loans, it depends on what the additional amount is used for.
Let’s take an example.
You take out a loan for $500,000 to buy a property for $600,000. After four years, the loan has been reduced to $480,000, but the property’s value goes up by $250,000 to $850,000, so you increase the loan to $600,000.
The interest can only be claimed if it is being used to generate income. For example, the additional $120,000 is used to buy shares, buy another property, or spend on the existing property. If you used it for a six-month cruise around the world, you cannot claim a cent of the interest. And this is what the ATO is getting excited about.
If you have an investment property, just be aware that the ATO will likely look at these two areas in particular. I don’t think landlords are purposely trying to beat the tax system, but there may be justification that they need a bit more education.
Paying the correct amount of taxes is Step 3 of our 9 steps to working less, earning more, and building awesome wealth. If you want to know more, contact hitesh@medisuccess.com.au or call 07 3172 0819.
