With the end of another financial year, tax time is well and truly upon us. The Australian Taxation Office (ATO) has said that one of the three big themes it will be focussing on this year is people over-claiming rental property expense claims, and it is easy to understand why this is the case.

Last year:

  • $47 billion was claimed in rental property deductions by over 2.2 million tax payers; and
  • 90% of tax returns that had rental deductions claims contained errors when reviewed by the ATO.

With the deductions being so large, and errors so common, it shouldn’t be a surprise that the ATO is increasing its focus on these claims.

So what are the common errors found by the ATO?

  • Interest claimed when some or all of the money borrowed (while secured over the rental property) has been used for private purposes, such as buying a boat or renovating the owner’s home (not the rental property).
  • Claiming an outright deduction for capital works such as upgrading the bathroom (which should be written off at 2.5% per annum over 40 years), or for plant and equipment purchases including air-conditioners (which should be depreciated over the effective life of the asset).

So what are the penalties for deliberately over claiming expenses?

The penalties for deliberately over claiming expenses are harsh – they can be up to 75% of the tax impact of the erroneous claim, with interest also being applicable on that impact. This means it is doubly important to only claim deductions you are entitled to.

Whether you are lodging the return yourself or using a tax agent, all property investors need to be careful and diligent when preparing information for inclusion in tax returns.