EOFY 2021: property tax tips for real estate investors

The Australian Tax Office has its sights set on investment properties and working-from-home claims in what will be the first full financial year to capture the impact of COVID-19.

Lockdowns and flexible working arrangements pushed many Australian workers to temporarily relocate to the regions in 2020, with some setting up base in their investment properties usually leased out as holiday accommodation. The ATO said it will be watching for people lodging incorrect claims for rental property-related expenses.

“When you use your property privately, even if it’s in a period when you can’t rent it out, that becomes a private expense, so all your deductions for the property are no longer claimable,” ATO Assistant Commissioner Adam O’Grady said.

“What you need to do as an investor is keep records of when you are using the property yourself, of even if you’re lending it out to family and friends for either no rent or really low rent, then you need to take those expenses off your return for that period,” Mr O’Grady said.

International border closures have also driven demand for domestic holidays. The tax office has warned any money earned through short-term rentals must be included in tax returns and will be matched against data gathered from accommodation sites like Airbnb.

ATO cracking down on capital gains

Surging asset prices have also put capital gains in the spotlight, according to accounting firm H&R Block.

“Australians who have done well on the share market, with property or even with Bitcoin during the past year face being audited if they get their returns wrong,” H&R Block’s director of tax communication, Mark Chapman said.

“Australians can face a 25% penalty for carelessly miscalculating how much they earned from shares, investment properties, and now cryptocurrency,” he said.

Working from home

Working-related expenses will also be under heavy scrutiny, with two in five people still working from home at least once day a week, according to the Australian Bureau of Statistics.

People lodging regular car and travel claims as well as significant working-from-home expenses will raise a red flag.

The ATO said what’s known as the temporary shortcut method is available to those claiming working from home deductions this year.

The shortcut method was created at the height of the pandemic last year to deal with the surge in makeshift home workspaces. It allows claims at a rate of 80 cents per work hour at home, rather than needing to do complex calculations for specific items.

Mr Chapman said that’s not always the best method for workers.

“If you use the 80 cents per hour method, you can make no other claims in relation to working from home. So, items like mobile phone and internet usage are included in the 80 cent rate,” he said.

“Your tax agent will be able to give you advise on which method to use.”

The biggest ‘no-go’ expenses while working from home

• Personal expenses like coffee, tea and toilet paper;
• Expenses related to your child’s education, such as online learning courses or laptops;
• Large expenses up-front – any asset that costs more than $300 should be spread out over a number of years;
• Employees generally can’t claim occupancy expenses such as rent, mortgage interest, property insurance, land taxes and rates. If you claim occupancy expenses, you may have to pay capital gains tax when you sell your home, even if it is your main residence.

Landlords impacted by rent reductions

After a challenging year for landlords, the ATO said investors can continue to claim expenses as normal on properties that have faced rental reductions or mortgage holidays.

“You can continue to claim all those deductions, such as bank interest on the loan for the property, rates, all those sorts of things. Continue to deduct them as normal,” Mr O’Grady said.

Landlords only need to declare rent as income once it is paid. For example, if payments by your tenants are deferred until the next financial year, you do not need to include these payments until you receive them.

“If your tenants haven’t paid for a couple of months, then in August they give you three months’ worth of rent as a back payment you just report that income for that particular month,” Mr O’Grady said.

Key areas of focus for the ATO for EOFY 2021:

• Capital gains from selling property, shares and cryptocurrencies;
• Incorrect work-related expenses, such as claiming personal expenses or copying last year’s deductions despite changed work conditions;
• Incorrectly claiming expenses for rental properties when they’ve been using the properties themselves;
• Failing to declare all income earned from short-term accommodation.

Tax tips for property investors

When claimed correctly, investors can recoup a considerable amount on their properties at tax time on costs like rental expenses, mortgage interest and legal fees.

Property depreciation can also be overlooked by many investors.

According to BMT Tax Depreciation, 80% of property investors fail to take full advantage of property depreciation, potentially missing out on thousands of dollars.

Another significant deduction investors can claim is the interest on their loan. However, there are some rules around this:

• The property must have been rented out, or genuinely available for rent in the same year you claim a deduction;
• If the property was used for private purposes at any point over the year, you aren’t allowed to claim for that period;
• If you use some of the loan money for personal use, such as buying a boat or going on a holiday, you can’t claim the interest on that part of the loan. You can only claim the part of the interest that relates to the rental property.

Prove it with records

The ATO said the number one cause of claims being disallowed is a lack of receipts or other documents to support a claim.

Remember, if you can’t prove it, you can’t claim it.

While no penalties will apply for taxpayers who amend their returns due to genuine mistakes, those who deliberately over-claim can face penalties of up to 75% of the claim.