With the Australian Taxation Office clamping down on rental property deductions, a tax depreciation expert reveals the most common ways landlords can be caught red-handed.
BMT Tax Depreciation director Brad Beer said each New Year, the ATO announces its resolve to target a particular area of deduction claims.
“This year, it has indicated it will be ramping up its investigations into rental property deductions for owners of residential property,” he told RPM. “I believe most property owners are very keen to comply with ATO legislation, however, navigating the different rules can be challenging.”
Mr Beer has highlighted some of the common ways landlords can be caught out when claiming deductions – and what can be done to avoid this.
Claiming ‘capital works’ assets as ‘plant and equipment’
Mr Beer said deductions can be claimed for two different categories of assets: capital works, and plant and equipment.
“Capital works assets comprise the structural elements of a building, including fixed and irremovable assets,” he said, “Plant and equipment assets, on the other hand, depreciate at a faster rate according to an effective life set by the ATO, and the depreciation available on each item is calculated accordingly.”
“Determining which assets qualify for which category can be a sizeable challenge.
“Sometimes it may seem that a certain asset is supposed to be in one category or the other when, in reality, this is actually pre-determined by the ATO,” he added.
Mr Beer said TV antennas in residential properties are a great example of this.
“Though it may seem that they will wear down much more quickly than the rest of a building – which is depreciated over 40 years – they are still classified by the ATO as a capital works asset.”
Self-assessing the effective life of an asset
Mr Beer said it can be tempting for your landlord to think they are able to estimate the effective life of an asset themselves.
“As an example, their carpet may seem old and already worn out, so they may believe its effective life is just two years,” he said.
“However, the ATO assigns a specific effective life to every single asset. Carpets are currently deemed as having a life of 10 years.
“Even though there is a provision for landlords to self-assess an assets-effective life based on their own estimations, they may even be at risk of triggering an ATO review.
“I’ve spoken to a number of accountants who believe that self-assessing can trigger the ATO to have a closer look at claims, which could then leave property owners open to the possibility of being caught out,” he added.
Claiming ‘capital improvements’ as ‘repair maintenance’
Mr Beer said property owners can also claim on repairs and maintenance made to income-producing properties, but should be aware of what category these fall into for tax purposes.
“Sometimes, what appears to be repairs and maintenance instead actually falls under the different category of capital improvements,” he said.
“Understanding the difference between these terms may help prevent landlords from getting caught out.”
Mr Beer said ‘repairs’ typically involve restoring something to its original state, while ‘maintenance’ relates to work that prevents deterioration.
“According to the ATO, these both must relate to wear and tear occurring as a result of renting out the property,” he said.
“Capital improvements, on the other hand, involve any works which result in an improvement on the original state of the property.
“Deductions pertaining to capital improvements must instead be claimed at the slower rate of capital works or as depreciation.”