Rental properties continue to remain in the ATO’s sights. ATO data shows 9 out of 10 rental property owners are getting their income tax returns wrong.

The ATO’S main focus areas are repairs and maintenance and interest deductions; No surprises there!

Repairs and Maintenance Deductions

Performing general repairs and maintenance on your rental property can be claimed as an immediate deduction. However, expenses which are capital in nature (like initial repairs on a newly purchased property and any improvements during the time you hold the property) are not deductible as repairs or maintenance. For example,‘You can claim an immediate deduction for general repairs like replacing damaged carpet or a broken window. But if you rip out an old kitchen and put in a new and improved one, this is a capital improvement and is only deductible over time as capital works.’ If you want to look at this in more detail, I would recommend you check out the ATO’s Tax Ruling TR97/23 Income tax: deductions for repairs.

Interest Deductions

Interest deductions is one of those areas where there seems to be quite a bit of confusion when preparing the Rental Property Schedule on the income tax return. The easiest way to explain it is, there is Good interest and Bad interest. One common problem we come across as tax agents is when, unbeknowns to the client, the loan amount originally borrowed to purchase the rental property (Good Interest) is tainted by the withdrawal of an amount to purchase something of a personal nature (Bad Interest). This means you cannot claim the whole amount of interest as a tax deduction, it needs to be apportioned. Now this is where it can become quite complex, especially if the loan has been used throughout the year as a, in-and-out for private purposes. Everytime you take money out for private purposes, even though you have repaid that said amount, the repayment will be apportioned according to the percentage applied on the date of withdrawal. Therefore, once you have taken the money out for private purposes you cannot fix what is now already broken. If you want to look at this in more detail, I would recommend you check out the ATO’s Tax Ruling TR2002/2: Income tax: deductibiliy of interest on moneys drawn down under a line of credit and redraw facilities.

Continuity Accounting provides a Investment Property Checklist (Information for the Accountant) that can be downloaded from our Resources Page.

Mr Thomson from the ATO suggests that you provide full and complete records to your registered tax agent. This will allow them to prepare your tax return correctly, so you claim everything you’re entitled to and nothing that you’re not,’