ATO Compliance for Investment Property Loans & Deductions

February 11, 2024

Simon Madziar
Simon Madziar

Investment Property Loans & Deductions: ATO Compliance Tips

The landscape of residential investment property in Australia is facing heightened scrutiny from the Australian Taxation Office (ATO). Property investors and managers, it's time to sit up and take note, as the ATO sharpens its focus on loan compliance and tax regulations affecting your investments. This comprehensive rundown will guide you through the latest measures, their implications, and the necessary steps to assure compliance and protect your interests.

The ATO's random inspection initiative reveals that there's an estimated net tax discrepancy of $9 billion from the 2019-20 fiscal year, mainly due to inaccuracies in declaring income and costs from rental properties.

A key factor contributing to this gap is the improper allocation of the loan interest expenses when loans are either refinanced or taken for personal reasons.

What are the tax deductions available for investment property loans?

Tax deductions available for investment property loans include interest expenses, property management fees, repairs and maintenance costs, insurance premiums, and depreciation on the property. It's essential to keep detailed records and consult with a tax professional to ensure compliance with ATO guidelines.

Understanding the Crackdown

The government has recently steered its attention towards ensuring that the tax law is upheld when it comes to residential property investment. This translates to a series of targeted actions aimed at identifying and addressing non-compliance in tax affairs. But what does this increased vigilance entail? Let's distill the specifics.

For instance, the ATO has begun a stringent review of deductions claimed and the proper reporting of income from rental properties. This initiative includes checking interest deductions on property loans and making sure they align with the income-producing usage of the property.

Impact on Real Estate Investors

As real estate investors, it's imperative to understand that loan applications are now passing under a more rigorous microscope. The ATO is watching, and they're keenly interested in the veracity of your financial claims and the legitimacy of your tax deductions.

Changes in tax deductions weigh heavily, especially when it comes to depreciation claims or interest deductions. Also, tightened reporting requirements mean that error-free lodgement is more important than ever. Any discrepancies found could lead to audits or reassessments.

Guidelines for Property Managers

Property managers, the mantle of responsibility rests on your shoulders, too. Ensuring compliance within ATO's regulatory framework is a task you share with investors. Your reporting obligations encompass the provision of accurate rental income details and deductible expenses. Stay abreast of regulation updates and reinforce the need for meticulous record-keeping with your clients.

Data matching and tax compliance now stride hand-in-hand. With the ATO leveraging technological advancements to cross-reference financial data, accurate lodgment is non-negotiable. Income tax filings must reflect true revenue, and capital gains tax (CGT) events related to property disposals must be correctly reported.

Data matching and tax compliance

The ATO will use the data to ascertain information about rental property loans including information such as repayments, interest charged, and borrowing expenses. This information will be used to identify, assess and treat several tax compliance matters including:

  • Lodgment – confirming that taxpayers with rental properties are lodging tax returns and the relevant rental property schedule on or before the relevant due date;
  • Income tax – confirming taxpayers with a rental property are correctly reporting interest on loan and borrowing expense deductions in their rental property schedules and associated income tax return labels;
  • Capital gains tax (CGT) – confirming the calculation of cost base elements used to determine the net capital gain or loss on a rental property used to generate income.

After a return is lodged, the ATO will use the data collected to identify relevant cases for action including compliance activities and education strategies.

If a discrepancy is identified, taxpayers will be contacted by phone, letter or email. Taxpayers will then have 28 days to respond before the ATO takes any action in relation to the discrepancy.

Key Considerations for Individuals

If you are an individual owning an investment property, pay particular heed to the tax implications of your venture. The ATO's drive for compliance means an unequivocal requirement for accurate record-keeping. Capital growth and revenue generation from these properties certainly aid your financial portfolio, but they also come with the caveat of tax obligations.

Seeking the expertise of tax professionals may prove invaluable to navigate the intricate waters of deductions, taxable income, and CGT events. Ensuring that your property affairs are in alignment with the compliance requirements will not only prevent future headaches but can also safeguard your investment's profitability.

Claim rental property interest correctly

Many people overlook the correct claiming of rental interest deductions, which is a common mistake. If your clients bundle their rental property loan with personal items like a car or holiday expenses, it's important to apportion the interest over the loan's duration, even if those items don't last as long as the loan. Refinancing doesn't allow for partial repayment of the loan related to private purchases.

To accurately claim interest expenses, your clients should consider:

  • Ownership percentage
  • Rental duration during the year
  • Renting out only a part of the property
  • Personal use or keeping the property vacant
  • Renting below market rates

It's crucial to ask the right questions. Don't forget to explore our Investors toolkit's factsheet on "Interest expenses" and from the ATO: Interest expenses.

The ATO's data matching program for residential investment property loans will be operational from the 2021-22 to 2025-26 income years.

The accumulated data by the ATO will be accessible to tax professionals via pre-filling reports on Online services for agents and practitioner lodgment service (PLS) through SBR-enabled software.

Moreover, individuals who are self-preparing can also gain access to the collected data by the ATO through myTax. Specifically, the information includes rental property schedule interest on loans or borrowing expense labels and rental income tax return labels.

Conclusion

As the ATO's efforts intensify in regard to residential investment property loans and tax adherence, maintaining compliance remains a pivotal practice for investors and property managers alike. Staying informed about the evolving tax environment is not merely beneficial—it's essential.

Nevertheless, navigating these regulations need not be an insurmountable challenge. With the aid of professional advice and robust financial practices, you can ensure that your investment not only yields returns but also stands up to the scrutiny of ATO's regulatory framework.

Real estate investors and managers, the message is clear: embrace a proactive stance on compliance, and you'll reinforce the foundation of your investment endeavours for the long term.

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