Tax Commissioner Chris Jordan says the Australian Taxation Office (ATO) is focusing on rental income as it pays more attention to “individuals not in business”.
By David Walker
The level of incorrect claims on rental properties is far higher than the ATO previously believed, and is prompting a stronger focus on rental income, says Tax Commissioner Chris Jordan.
In an interview with INTHEBLACK, Jordan says the level of incorrect claiming on rental properties “has been pretty much a revelation to us”.
The ATO has responded by ramping up the attention it pays to rental income, with random audits now “in the thousands”.
Australian rental income in 2017-18 was A$44 billion, he says. Deductions claimed against that income were actually higher, at A$47 billion.
“They’re big pots of money,” Jordan says.
ATO focuses on rental income
Rental income began to attract more of the ATO’s attention earlier in 2019 after a random sample of returns with rental deductions found that nine out of 10 contained errors.
The ATO says it now uses not just financial institution and property transaction data, but also information from online accommodation booking platforms to identify questionable claims.
More than two million Australians report rental income each year. The ATO reports that number is rising, while rental income is also increasing.
ATO focuses on the tax gap
The heightened attention to rental income is a result of the greater ATO emphasis on the group known as “individuals not in business”.
The ATO recently revealed that this group has a substantial “tax gap” – its estimate of the difference between what the tax office actually collects and what it would have collected if every taxpayer paid all the tax they legally owed.
The tax gap for individuals not in business was A$8.76 billion in 2014-15. That is 6.4 per cent of their total tax owed – notably larger than, say, the 4.4 per cent estimated to be owed by large corporates.
The ATO says deductions for rental property expenses are a notable contributor to that tax gap. It uses the tax gap analysis to determine “priority risks and development of strategies”.
Incorrect property claims
The ATO reports it is seeing several different types of incorrect claims, including:
- incorrect interest claims for the entire investment loan where it has been refinanced for private purposes
- incorrect classification of capital works as repairs and maintenance
- taxpayers not apportioning deductions for holiday homes when they are not genuinely available for rent.
Jordan says the ATO is asking questions about rental homes designed to establish whether a home is genuinely for rent, or being described as a rental property, with expenses deducted from income, when it was not truly on the rental market. The ATO is asking: “Are you renting it to friends, or not really renting it at all ... but you’re claiming all your deductions?”
The ATO is also looking at homes where the owner is claiming all expenses as deductions, but where the owner has “actually used it quite a bit yourself”.
He says there is an incorrect but common belief among owners of rental properties that a loan facility originally established to finance a rental property could be drawn down for improvements to the taxpayer’s home and the cost claimed as a deduction.
“Let’s say I borrow A$500,000 to buy a rental property. Over time, I reduced that down to A$200,000 in debt. [Then I say] ‘Oh, I need to do some renovations on my own home.
I’ll just draw out the A$300,000 I’ve got left on that facility and do the renovations on my own home – but still claim all the deductions on the rental property.’”
Rising expenses for rental properties
The ATO reports that 85 per cent of taxpayers with rental properties are represented by a tax agent.
A breakdown of reported rental expenses from rental schedules supplied to INTHEBLACK by the ATO shows the claimed cost of land tax skyrocketing, up 37 per cent in two years. It also shows substantial increases in claims for cleaning expenses (up 19 per cent), borrowing expenses (up 18 per cent), advertising for tenants (up 17 per cent) and legal fees (up 16 per cent).
2016-17 rental expenses
Figures are totals from rental schedules. Note that not all renters complete a full rental schedule.
The ATO has developed a range of products for tax agents, including a comprehensive rental guide, which is available on its website.
An exclusive interview with Tax Commissioner Chris Jordan will feature in the November edition of INTHEBLACK magazine.