Each tax season, the Australian Tax Office (ATO) focuses on areas where taxpayers commonly make errors, both accidental and deliberate. This year, rental properties have been a key focus.  

The ATO says rental property expenses are a key contributor to tax gaps, with the rental component of the net tax gap estimated at $1.3 billion. 

Exaggerated deductions for interest expenses have been a frequent issue. The ATO is targeting property owners who claim borrowing costs for both a primary residence and a rental property. Such claims can inflate deductions and lead to penalties. 

Holiday homes claimed as rentals but not genuinely available for rent have also been targeted. Deductions for these properties can only apply to periods when they are actively listed for rental. Attempts to claim for personal use periods or while undertaking renovations could result in penalties. 

Inaccurate claims for newly purchased rental properties have been identified, particularly with repair or renovation expenses. These costs cannot be immediately deducted and must be spread over time. The ATO has provided this helpful guide on what you can and cannot claim.  

Another concern is the misallocation of rental income and expenses. For jointly owned properties, deductions must reflect each owner’s share of ownership. Claims that favour one owner, particularly one with a higher income, are considered fraudulent and will attract scrutiny. 

Steps to avoid ATO scrutiny

To minimise the risk of errors and penalties, property investors should focus on maintaining accurate and thorough records. All expenses related to rental properties should be documented with receipts, invoices, and bank statements. 

Separating personal and investment finances is crucial. Using dedicated bank accounts and credit cards for rental properties helps ensure accurate tracking of income and expenses. 

When making claims, only include expenses directly related to generating taxable income. Adjustments must account for non-rental periods, partial rentals, personal use, and any below-market rental arrangements. 

With the ATO’s heightened focus on rental property claims, careful record-keeping and compliance are essential for property investors to avoid audits and penalties. 

It’s also important to stay up to date with changes, such as the Updates to Vacant Residential Land Tax in Victoria and Victoria’s Short Stay Levy and new regulations on short-term rentals. 

Speak with an AFS accountant today to understand legitimate deductions, regulatory requirements, and strategies to optimise your tax outcome, while staying compliant.