The Australian Taxation Office (ATO) is turning their attention to the significant number of errors and false claims being made by rental property owners who use their property for personal holidays or where the property is otherwise not genuinely available for rent for the full year.
The ATO has also announced that it will focus on disproportionate interest expense claims and incorrect apportionment of rental income and expenses between rental property owners. It will also look at holiday homes that are not genuinely available for rent and incorrect claims for newly purchased rental properties.
The ATO wants to remind taxpayers that when claiming deductions for their rental property to include all the rental income and make sure that their property was genuinely available for rent when the expense was incurred. Taxpayers must also make sure to apportion any deductions to take into account for any private usage and must have records for the claims they make.
What to consider
Assistant Commissioner Kath Anderson has reminded taxpayers that deductions can only be claimed against the rental property to the degree that the property is genuinely being rented out or is available for rent. While private use by family and friends of a holiday home is entirely legitimate, it does reduce the ability to earn income from the property and this in turn impacts the deductions you can claim for the rental property. You can only claim deductions for your rental property if your property is genuinely available for rent. You cannot claim for times when you were using it for your own personal holidays or letting friends and family stay rent-free. Also, if the property is rented to friends and family at “mate’s rates”, you can only claim deductions for expenses up to the amount of the income received.
The ATO is also focusing on other times when a property is not rented or genuinely available for rent. The ATO has had numerous cases where a taxpayer claims that their property is available for rent, but when the ATO investigates, it is clear they have little or no intention of renting it out. Some of these case have included situations where unreasonable conditions have been placed on prospective renters, rental rates have been set well above market rates, or failing to advertise a holiday home in a way that targets people who would genuinely be interested in it.
New technology, data matching and other systems allow the ATO to identify unusual claims and property owners whose claims are disproportionate to the income received can expect additional scrutiny from the ATO. The ATO has emphasised the importance of keeping accurate records of income and expenses, evidence of the property being rented or genuinely available for rent at market rates, and who stayed at the rental property and when, including the time when the property is used for personal purposes.
Below are some guidelines from the ATO for you to determine if your property is genuinely available for rent:
1) Advertise your property: Advertise your property to a large audience. Advertising through only a real-estate agent or an online site is not always enough evidence to show that a property is genuinely available for rent, and neither is only advertising locally or by word of mouth.
2) Ensure your property is in good condition: The property must be located and in a condition that will mean tenants want to rent it. If your property in a remote location or is run-down, it may not be realistic to expect that your property will appeal to anyone.
3) Charge market rates: Charging rent that is above-market rates to deter tenants from applying may mean your property is considered to not be genuinely available for rent. Likewise, if you, your friends or your family stay for free, the property will not meet the criteria during that time period. If your property is being tenanted at a discounted rate then the allowable deductions are limited to the amount of rent charged, not the market rates.
4) Accept tenants: If you refuse to rent out the property to interested potential tenants without good reason, this indicates that you may not have a genuine intent to make income from this property and could be reserving the property for private use. In this case, the property would not meet the criteria for being genuinely available for rent.
Source: Australian Taxation Office