ATO investigation of landlord expenses explained
The ATO’s recent announcement about its data-matching program for the 2021-22 to 2025-26 financial years, aimed at capturing information about residential investment property loans is a timely reminder for all property investors to ensure their financial reporting is correct and in line with legislation.
What is the data matching program?
This property management data matching program is a new ATO program that will acquire property management data from property management software providers for the 2018–19 through to 2022–23 financial years. client identification details. This includes Property owner identification details such as names, addresses, phone numbers and dates of birth, and account details including account numbers and balances; transaction details; and rental property details.
The ATO states on its website, “We estimate that records relating to approximately 1.6 million individuals will be obtained each financial year.”
There are 17 financial institutions in Australia listed by the ATO, including the big four banks – Commonwealth, Westpac, NAB and ANZ – and mortgage provider RAMS. These institutions will be “obligated (sic) to provide the information request” by the use of “formal information gathering powers” which are “coercive” in nature.
Why is the ATO looking at this data?
The ATO points out most people do the right thing and take care to get their tax return right, making sure they only claim the deductions to which they are entitled. However, it is concerned “There is a risk that some taxpayers may over-claim their rental expense deductions in the rental schedule within their tax return in the hope of receiving a larger refund.”
According to sample audits across the individuals (not in business) population conducted under the Random Enquiry Program, there is an estimate of the net tax gap for the 2020 financial year as being $9 billion, or 5.6%.
The ATO says “a significant driver of the gap is the incorrect reporting of rental property income and expenses, with the net tax gap for rental property expenses contributing $1 billion, or 14% of the total individual’s gap.
Common reasons driving the incorrect reporting of rental expenses include:
- No or incorrect apportionment of the loan interest costs where the loan was refinanced for private purposes
- Claiming costs as repair rather than a capital works deduction
- Not apportioning expenses for private use of the property
The objectives of this program
- To help ensure that individuals and businesses are fulfilling their tax and superannuation reporting obligations
- To identify and educate those individuals and businesses who may be failing to meet their reporting obligations and assist them to comply with
- lodgement of tax returns
- the correct reporting of rental income and the associated deductions
- capital gains tax obligations for properties used to derive income
- To gain insights from the data that may help to develop and implement treatment strategies to improve voluntary compliance; which may include educational, behavioural or compliance activities of individuals and businesses that lease or let real property.
The ATO says the program would help “promote voluntary compliance” by taxpayers, including helping self-preparers through myTax and prefilling details in systems used by tax agents.
More information about the data matching program can be found here.
Importance of financial specialists
While there is a Tax time toolkit for investors on the ATO website, we recommend using a property financial specialist (your accountant or financial advisor). This specialist will know exactly what you can and can’t claim for, what is or isn’t a capital works deduction, and will ensure you’re not claiming for anything you shouldn’t be.
Property tax law is subject to change, and an expert will be on top of all the latest legislation.
Of course, paying for their services is a tax-deductible expense!
Added benefits of a property manager
We know we’re biased but employing a property manager is not only a tax-deductible expense, but they can also help reduce the time spent preparing your tax return.
As well as saving you time with managing your investment property, such as finding a tenant and managing your maintenance, we also manage and correctly record the financial outgoings and rental income paperwork. We send a copy of this to you at the end of each month, and also a final one at year-end to give to your accountant.
Furthermore, you can view this, and lots of other information such as current and past repairs and routine inspections, at any time through our dedicated online owners portal.
With many of our team having investment properties themselves, we are always exchanging ideas and coming up with solutions.
If you want to know more about our property management services or investing in property, get in touch. Our motto is very simple – we treat every property as if it’s one of our own, and we’ve helped thousands of people realise their financial goals through property.
Our aim is to make your life easier and your property experience exceptional. Simply give us a ring on 02 4956 9777, send us an email to mail@newcastlepropertymanagement.com.au or pop into our Cardiff office for a chat.
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