Work Related Expenses & Rental Property Claims Under Scrutiny

Around 12 million Australians lodge a tax return every year. The Tax Office contacted around 350,000 of those taxpayers last year about errors or omissions on their returns, and they expect similar statistics this year.

Around half of those contacted last year were due to basic errors such as misspelt names or addresses, spouse details not included, incorrect bank account details or birth dates. In addition, some errors were attributable to the taxpayers lodging their return before third party pre-filled data was available. The remaining 170,000 taxpayers were contacted by the ATO because they had claims deliberately omitted or misreported income.

Each year the ATO routinely cross-checks taxpayer returns with the 600 million pieces of data they receive from third parties including banks, employers, health insurers, state and federal agencies plus overseas treaty partners. This year the ATO is paying particular attention to work-related claims as well as rental property deductions.

WORK-RELATED CLAIMS

The ATO revealed in July that it intended to pay particular attention to work-related expense claims across all industries, and will be monitoring:

  1. Double-dipping - claiming work-related expenses where the employer has already reimbursed the claim.
  2. Excessive work-related claims such as claiming 100% of the mobile or internet bill when only 20% is work-related.
  3. Private expenses such as travel from home to work.

To claim a work-related expense, the expense must have been paid for by the individual, must be related to your employment and you must have kept a record of the expense. In relation to home to work travel, a normal trip cannot be claimed unless:

  • Your vehicle is used to carry bulky tools or equipment necessary for your work and you cannot leave them at the work site,
  • Your home is your employment base, or
  • You regularly work at multiple job sites each day.

RENTAL PROPERTY DEDUCTIONS

This year, the ATO will be paying close attention to:

  • Excessive deductions claimed for holiday homes
  • Rental income split between husbands and wives
  • Deductions to be apportioned for the period when the property was rented out or is genuinely available for rent
  • Claiming the cost of repairs and maintenance made shortly after the purchase of the property
  • Interest deductions claimed for the private proportion of loans.

Investment property owners need to follow some simple rules to ensure they get their tax return right:

  1. Accurate records are crucial to ensure the correct amount of rental income is declared and that there is supporting evidence of claims made.
  2. You can only claim deductions for the periods when the property is rented out, or is genuinely available for rental. Where properties are rented out at below market rates (e.g. to family and friends) claims must be limited to the amount of income earned while rented. For example, a taxpayer claimed deductions for a holiday home, but the taxpayer rented the house to family and friends at less than market rate. Apart from a brochure at the taxpayers’ business premises, no other effort was made to rent the property out. The advertised rent was much higher than surrounding properties and the ATO disallowed the claim deeming the property was mainly for personal use with deductions limited to the amount of rent received.
  3. Costs for damage repair, renovation, defects or deterioration which existed at the time of purchase cannot be claimed as an immediate deduction. These ‘initial’ repairs and improvements to a property are not deductible.
  4. Taxpayers claiming interest must only claim the portion that relates to the rental property. The ATO adjusted the tax return of a taxpayer where a property had been refinanced to pay for their daughter’s wedding and an overseas holiday. The taxpayer claimed the whole amount of interest, not just the portion related to the rental property, so it was disallowed.
  5. Husbands and wives jointly owning a rental property need to ensure that they do not split the income unequally to gain a tax advantage. Instances have occurred where people have included the income in the low income earner’s return and the expenses in the high income earner’s return. The Tax Office takes a dim view of these arrangements and imposes higher penalties where they believe there is an element of fraud.

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