Rental property deductions for 2004
17 June 2004
Rental property deductions will again come under scrutiny
from the Australian Tax Office when people lodge their 2003-04 income tax
returns.
Australian Tax Office Commissioner Michael Carmody said more than
220,000 people claimed rental deductions for the first time last
year and the Tax Office wants to make sure people are aware of
their entitlements and obligations.
“More than 1.3 million people are returning
rental income on their income tax returns,” Mr Carmody said.
“We are seeing some genuine mistakes as well as
some deliberate attempts by people to avoid meeting their
obligations.
“By the end of June (2004), we will have
contacted 23,000 taxpayers about their deductions.
“This includes more than 20,000 letters
outlining common mistakes or asking for more detailed
information.
“We have also begun audit reviews of more than
3,000 rental deduction claims for the 2003 year.”
Some of the common income tax deduction mistakes
include:
- Claiming the cost of carrying out initial repairs – such
as rectifying damage, defects or deterioration that existed
at the time of purchasing the property - as immediate
deductions. These costs are capital expenditure and may be
claimed as capital works deductions over either 25 or 40
years, depending on when they were carried out.
- Claiming construction costs, which are eligible for
capital works deductions, as decline in value deductions
(previously known as depreciation)
- Claiming renovation costs as deductions for repairs -
again, these are expenses of a capital nature and may be
claimed as capital works deductions. The Tax Office is
investigating claims for repairs which are really capital
improvements, such as remodelling bathrooms and kitchens and
adding a deck or pergola.
- Including the cost of the land in capital works
deductions (ie as part of the cost of constructing the
rental property).
- Overstating interest deductions by including amounts
related to private borrowings – interest on a loan taken out
for both income-producing and private purposes, such as the
purchase of a rental property and a private motor vehicle,
needs to be apportioned into deductible and non-deductible
parts, according to the amounts borrowed for the rental
property and for the private purpose.
- Not apportioning travel costs where a visit to inspect
the rental property is combined with another purpose, such
as a holiday.
- Claiming deductions for a property that is not genuinely
available for rental or not apportioning deductions where
the property is rented for only part of the year.
If you funded the purchase of your rental property with an
investment loan under split loan facility, as a result of the
recent High Court decision in Hart’s case, you will need to
ensure that you only claim a deduction for part of the interest
on the investment loan. You cannot claim a deduction for the
extra interest imposed on the investment loan because you only
made repayments on the home loan part of the split loan
facility.
The Tax Office has also seen some incorrect claims for
deductions for items incorrectly classified as depreciating
assets. This year, the Tax Office has produced a comprehensive
list of over 230 items found in residential rental properties
and identified them as either depreciating assets and eligible
for a decline in value deduction, or as assets eligible for a
capital works deduction. This list will be included in our
Rental properties booklet for 2004.
The list is available at
http://ato.gov.au/large/content.asp?doc=/content/42604.htm
The comprehensive booklet,
Rental Properties
is available on
www.ato.gov.au or by
calling the Publication Distribution Service on
1300 720 092.
