Common tax traps for property investors

tax traps

Tax traps to avoid this tax time

The ATO is reminding residential property investors to beware of common tax traps that can lead to audits or delay tax refunds and has clarified the position of investors affected by COVID-19.

Assistant Commissioner Tim Loh says, “The most common mistake rental property and holiday homeowners make is neglecting to declare all their income. This includes failing to declare any capital gains from selling an investment property.”

Other errors that may delay refunds or invite audits include:

  • failing to keep receipts or good records
  • immediate claims for the full amount for capital works as a lump sum rather than spreading the cost over a number of years
  • claims for interest charges on personal loan amounts, or
  • claims for ineligible deductions.

The ATO matches tax returns to rental income data from various third parties and has so far adjusted more than 70% of the 2019–20 returns selected for a review of rental information. Taxpayers are usually not penalised for genuine errors, but action will be taken against deliberate tax avoidance.

Meanwhile, on the impact of COVID-19, the ATO says that only rent received in a financial year needs to be declared as income. Expenses can still be claimed despite reduced rental income if rental rates are determined at arm’s length and the expenses consider current market conditions.

If plans to rent a short-term rental property in 2020–21 were the same as previous years but were disrupted by COVID-19 travel restrictions, the ATO will generally accept claims for the same proportion of expenses. The claims will have to be adjusted for any time the property was used privately or rented below market rate to friends or family.

For further information read ‘Dont bet against the house this tax time’ from the ATO

If you would like to discuss this further, contact the office