1. Excessive Holiday Home Claims
Deductions are only applicable for actual periods that the property was successfully rented out, or had availability. It is also important to bear in mind that rentals to family and friends at rates below the prevailing market, will be subject to deductions not exceeding the actual rental amounts received. Landlords risk rejection of their claims if they fail to comply. A case study depicts a situation where a property owner who made his property available to family and friends at reduced rates. His brochure advertised rates that were exorbitant compared to comparable local properties and further investigation into his rental pattern revealed that the income did not match the advertised rate and rental periods did not comply with the minimum stay of five consecutive nights. The result was that the taxpayer’s deductions were limited to actual income generated from family and friends using the property, and because the property was essential for the owner’s private use, he was liable for more tax and a penalty. Property owners will find the latest year's Tax Summary’s complete guide to rental property taxation and permissible deductions very useful.
2. Inappropriate sharing of rental dividends and deductions by spouses for properties under joint ownership.
There have been cases where spouses having joint-ownership of a property have spread rental income unfairly, to benefit from tax advantages available to the spouse earning the highest income. The Tax Office has encountered situations where the low income earner’s returns have indicated the rental income generated, and high income earner’s returns have carried the deductions. In cases where the Tax Office has reason to believe that this has been intentional, higher penalties are applicable.
3. Repairs and maintenance deductions following property acquisition
There is a misconception that initial repairs following the acquisition of a property are tax deductable, however these are viewed as non-deductable Capital Expenditures, by the Tax Office. The Tax Office says it is not unusual for property owners to make extensive renovations on a newly purchased property, and to submit tax claims for the expenses. Taxpayers need to familiarise themselves with the tax laws to avoid making this costly mistake. These deductions for initial repairs and refurbishments are not permissible, and could result in harsh penalties for the property owner.
4. Claims for Interest on Private Loan Proportions.
The Tax office is clear on the issue of deductions for Interest being incurred on rental properties. Interest claims are strictly limited to the property’s actual rental income capacity. Interest incurred for private use is dis-allowed. Taxpayers Australia’s senior tax specialist, Letty Tsoi shed more light on this. She explained that a property owner who owns a double storey home, and chooses to rent one storey out to tenants and occupies the other storey privately, can only claim 50% of the mortgage interest and other allowable expenses relating to the property. The private ‘half’ does not qualify for deduction.
It is in the best interest of every property owner to inform themselves of the tax laws and permissible deductions relevant to their rental property, because non-compliance will be a costly affair, irrespective of whether it was deliberate or accidental.
