Over the past couple of years the Tax Office has been giving particular attention to the almost 2 million people who own rental properties.
Rental property deductions have increased in recent years as investors take advantage of low mortgage rates.
An increasing proportion of those landlords are holding investment properties in the low-tax environment of DIY super funds.
Whether or not that makes sense will depend on many factors – the least of which should be tax.
Tax losses from the property held in a DIY fund, for example, cannot be offset against taxable income outside the fund.
On the other hand, capital gains on a property sold after the fund is in pension phase will likely be tax-free.
More than $40 billion is claimed by landlords each year in deductions. About two-thirds of the landlords report losses on their investment property.
Those with loss-making properties are hoping to sell the property one day and realise a capital gain that is large enough to more than make up for the losses accumulated along the way.
The Tax Office is again, this year, targeting “excessive deductions” on investment property.
It is excessive deductions for those investment properties in popular holiday areas that are of most interest.
The main area of concern is that rental property owners can only claim costs for the period that the property is rented out or available for rent; for example, where the property is advertised for rent.
Expenses that cannot be claimed include those incurred while the owner is occupying the property. Deductions are allowed only on a pro-rata basis for the period the holiday house is genuinely on the rental market.
Adam Kendrick, an assistant deputy commissioner at the Tax Office, says some taxpayers are claiming rental deductions for holiday homes that are higher than expected when compared to the rental income reported.
He says the Tax Office is taking a “prevention before correction approach”. It will be sending letters to taxpayers in about 500 postcodes across Australia, reminding them to only claim the deductions to which they are entitled.
Mark Chapman, the director of tax communications at H&R Block Tax Accountants, says: “Periods of personal use can’t be claimed and accurate records need to be kept of when it has been rented out over the last year.
“Be careful of claiming deductions when nominal rent has been charged for friends and family staying at the property,” Chapman says.
He says it is also important to remember that the costs to repair damage and defects existing at the time of purchase or the costs of renovation cannot be claimed immediately, but are deductible, instead, over a number of years.
Individual tax returns for the 2014-15 year are due to be lodged by October 31. If the taxpayer is using a tax agent the deadline can be as late as May next year, provided the taxpayer is not in dispute with the Tax Office.