ATO crackdown on rental properties, holiday homes

Australians who rent out their holiday homes for just a few weeks a year, but try to claim full-year deductions on their tax returns have come under fire from the Australian Taxation Office.

The ATO is stepping up its focus on rental property owners, in particular holiday home owners, and will soon write to 1000 owners who may have incorrectly claimed deductions for initial repairs to recently acquired rental properties.

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ATO to focus on holiday house claims

The ATO is set to target holiday home owners who incorrectly claim deductions reports BusinessDay Deputy Editor Nassim Khadem.

The ATO told Fairfax Media that last year it had sent out letters to 500 postcodes across Australia, reminding people to only claim the deductions - including maintenance and mortgage interest -  they are entitled to, for the periods the holiday home was rented out or was genuinely available for rent.

A spokeswoman said most taxpayers that received these letters have subsequently reduced their claims.

The sunshine should make for perfect beach weather in Sydney today.
The sunshine should make for perfect beach weather in Sydney today. Photo: Leigh Henningham

A key concern in regard to holiday home owners, is when people make claims for expenses when the property was not genuinely available for rent. 

Stuart Wagschall, of Thomas Davis & Co, Accountants in Sydney said: "Holiday home investors should be aware that the ATO appears to be taking a broad approach in monitoring rental deductions."

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"Where relevant, it may be prudent for holiday home investors to take this opportunity to review the rules surrounding holiday home tax deductions to ensure that any risks or issues are addressed in a timely manner. It may also be a good idea to review records now so that you are prepared should the taxman come knocking."

Deducting repairs

But it's not just holiday homes that are under focus. "We are also commencing some work to address rental property owners incorrectly claiming deductions as well," the ATO spokeswoman said.

The ATO will contact 1000 owners who may have incorrectly claimed rental deductions.
The ATO will contact 1000 owners who may have incorrectly claimed rental deductions. Photo: Jessica Shapiro

The ATO's taxation statistics for 2012-13 show that 1.26 million people deducted losses made on investments (including mortgage interest) from their overall income, from a total of 12.77 million individual tax returns lodged for the period.

A common mistake for rental property owners was claiming deductions for initial repairs to rectify damage, defects or deterioration that existed at the time of purchasing a property, the ATO said.

It may be a good idea to review records now so that you are prepared should the taxman come knocking.
It may be a good idea to review records now so that you are prepared should the taxman come knocking. Photo: Gabriele Charlotte

"It's important for taxpayers to understand they are not entitled to claim a deduction for repairs to their rental property for issues that existed when they purchased it, even if they carried out these repairs to make the property suitable for rent," she said.

"The cost of these repairs is instead used to work out any profit, or capital gain, when the property is sold."

Holiday house owner Derryn Timms, who rents out her four-bedroom house "Char-ree-leera" in the coastal town of Eden, halfway between Melbourne and Sydney, is determined not to become alarmed. 

"We'll be handing on their letter to our tax accountant," said the 59-year old callisthenics teacher. "We won't think about it. It's something we don't want to know about; let the experts sort it out."

There are likely to be plenty of other owners, however, who will be panicking. It's an industry for both holiday and short-term rentals that, in a 2014 BIS Shrapnel report, was said to generate an estimated $31 billion in economic activity and support 238,000 jobs.  

Property Owners Association of Australia NSW president John Gilmovich says that at a time when there's talk about tax reform for property owners, there's bound to be plenty of confusion about the rules. "I think there would be certain property owners who'll fall into that category," he said. 

"There's also confusion about the whole Airbnb debacle and tax too, and we've been lobbying for regulation on that market, like the regulation that exists for other property investors. But it will be difficult as there are no central registers."

-with Sue Williams 

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