Rental property deductions for 2004

17 June 2004

It's tax time-of-year again 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.