How to minimize ATO’s audit risk on your rental property and also improve tax position

Recently the Commissioner of Taxation Chris Jordan is focusing the tax audit attention to Rental Property Income and Deduction.

Mr Jordan made a comment recently about “More than 2.1 million taxpayers are claiming $47.4 billion in deduction against $44.1 billion in reported income. Looking at the scale of deductions claimed, you can get a sense of the potential revenue at risk”.

The areas of concern for the Australian Taxation Office are
1. Incorrectly claiming of interest expense when the taxpayer refinanced and combined two or more loan together (i.e. in which one or more of the loans are private in nature);
2. Not declaring the rental income;
3. Incorrectly claiming the capital allowance as capital work (i.e from 1 July 2017, second-hand dwelling cannot claim depreciation for capital allowance)

Australian Taxation Office also found that the data used by some of the tax agents to lodge the tax return contains mistakes, and encourage the tax agents to look harder at the rental property data in the 2018/19 to ensure errors are minimised. On that note, our opinion is that if a client engages rental agents to manage the rental property, then the data quality would be much higher, meaning there would be lesser mistakes and as such the tax audit risk will be minimised.

How to minimize rental property tax audit

As one of the most experienced and professional accountant and tax agent in Inner West Sydney and Ashfield, we will work with the clients to ensure the lodgements are all up to date, and the data errors are minimized. We often would encourage the clients to seek the expert help from a rental agent to manage the property, as the income and expense transactions will be summarised correctly in the rental statement by the Property Agent Firm to be provided to be tax agent.

On the note of not declaring the rental income, this is especially important for overseas buyers who had bought the rental properties and now are engaging property management agents to rent them out. It is important to note that you must lodge a tax return in the year when there are rental income, this is so, even if the rental expense exceeds the rental income, leading to a rental loss, those rental losses must be carried forward to future year, and will be used as tax benefits in the future to reduce income.

Australian Taxation Office has a very comprehensive data matching system which they can detect which rental properties are being rented out and have not done the rental tax return, and this is especially so for overseas buyers. Typically, when you are doing the tax returns, you can claim the following expenses relating to the deriving of the rental income, which includes
1. Interest expense
2. Council Rate
3. Land Tax
4. Strata management fee
5. Agent fee
6. Water fee
7. Capital work write off and capital allowance for new property
8. Repairs
9. Advertisement to get the new tenant.
10. Other expenses which are related to the rental income

Hence, as a tax agent, I would always encourage my clients to use the rental agents to pay all possible fees for the property.

As by doing so, those fees will be shown in the rental statement, and even if you might have lost the invoices, the rental agents should have the invoices, and that would be sufficient evidence for the Australian Taxation Office, and that would also reduce the tax audit risk.

For overseas buyers, it is paramount you catch up with all the overdue tax returns before ATO catches up with you, and the process is straightforward. You just need to contact EndureGO Tax on 0410829900, or office number 02-8958-1959, or you can send WeChat message to our WeChat ID EndureGo, our email address is JC@endurego.com. EndureGo Tax is considered by our clients to be the most professional, trustworthy and experienced accountant in the inner west Sydney.

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