The ATO are increasing their focus on rental property deductions, they have noted that common errors are:
1. Claiming deductions when the property is not available for rent, only available for rent for part of the year or only part of the property is available for rent:
- A deduction can be claimed for certain expenses that are incurred for the period the property is rented or available for rent. If the property is only available for rent for 3 months of the year, only the expenses relating to this period can be claimed. Annual expenses such as insurance need to be pro-rated to only cover the period that income is derived.
- If the property is used both privately and for assessable income producing purposes at the same time, the deductions need to be pro- rated. No deductions are allowable for the portion of expenditure that relates to your private use. Apportionment is usually based on a floor-area basis.
2. Incorrectly claiming repairs and maintenance when they are capital works deductions, capital in nature or not deductible;
- A deduction for repairs and maintenance can be claimed when it directly relates to the wear and tear that occurred as a result of renting out the property. The exceptions to this are:
- The item being replaced is expected to have an effective life longer than a year, e.g. a new oven, this is written off over the life of the asset pre-determined by the ATO;
- If the deduction is capital in nature a capital works deduction may be able to be claimed, e.g. an improvement such as an extension or renovation. These are written off over 25 or 40 years depending on the date the structure is built.
- If the repair is in relation to defects that existed at the date you purchased the property, this is capital in nature and added to the cost base of the property. Therefore no deduction is allowable.
3. Overstating deduction claim for the interest on loans taken out to purchase, renovate or maintain a rental property.
- If you take out a loan to purchase a rental property, purchase depreciating assets, repairs or renovations for the property, you can claim the interest charged on that loan as a deduction as long as the property is rented or available for rent.
- If you have a loan with a fluctuating balance due to a variety of deposits or withdrawals which are a combination of private and rental property purposes, you must keep accurate records to enable the calculation of the deductible portion of the loan.
- Interest on loans for additional borrowing for private purposes is not deductible; this is the case whether or not the rental property is secured for the loan.
For further advice on any of the above please contact LBW Chartered Accountants.