Property investors: Don’t let your tax return be a fixer-upper

By Jarrod Brown Published June 13, 2024

5 Min Read

Rental property owners are being put in the spotlight this EOFY as the financial watchdog cracks down on dodgy deductions.

The Australian Tax Office (ATO) has revealed that the majority of rental property owners make errors when lodging their tax returns every year, despite 86 per cent using a registered tax agent.

According to the financial watchdog, the most common mistakes were investors not understanding what expenses can be claimed and the difference between what can be claimed for repairs, maintenance and capital expenses.

Other mistakes on the ATO’s radar include overclaimed deductions and a lack of documentation to back up the expenses claimed by Aussies.

ATO Assistant Commissioner Rob Thomson says it’s vital owners who want to avoid incurring costs down the track get tax right the first time around.

“We understand rental property owners may already have long lists of things to fix in their properties. But by getting your tax return right the first time, you’ll avoid having to add ‘fix up tax return’ to your to-do list down the track,” Mr Thomson said.

“If you use a tax agent, make sure you let them know all about your rental property, including full records of your expenses. If you have a nagging question or something doesn’t make sense, make sure you ask your agent when you’re working with them.

“Rental property investments and taxation can get tricky, so it pays to get the right advice from the very beginning. Don’t rely on things you hear at a Sunday afternoon barbeque.”

The ATO receives data from various sources, such as banks, land title offices, insurance companies, property managers, and sharing economy providers, and cross-checks this data to determine the accuracy of tax returns lodged by rental property owners.

What can you claim?

Generally, property owners can claim any costs they incur when generating rental income on their tax returns each year. However, there are some exceptions to the rule.

“It’s normal for landlords to have to fix or replace damaged items in a rental property. But there is a bit of a myth that all expenses can be claimed immediately,” said Thomson.

“A repair can usually be claimed straight away but capital items, think dishwashers, curtains or heaters, can only be claimed immediately if they cost $300 or less, otherwise they need to be claimed over time.

“We sometimes see rental property owners ‘double dip’ on expenses that the property manager has arranged and included on the property’s income and expenses report for the year.”

Rental property owners can only claim for amounts they incur, so even if there are two records for the same expense, they can only claim the amount once.

While general repairs such as fixing a dishwasher can be claimed immediately, capital expenses like bathroom remodelling and home renovations must be claimed over time.

In most cases, capital expenses are claimed at 2.5 per cent over 40 years, with any unclaimed expenses tacked on to the cost of the property for capital gains tax purposes when you sell.

“Spending money to fix something could be a repair, initial repair, capital works, or a depreciating asset,” said Mr Thomson.

“Our Investor toolkit can help you to understand the difference, as the amount you can claim as a deduction this tax time will depend on which category it falls into.”

Rental owners also can’t claim initial repairs on damages that came with the property when you bought it, even if you don’t fix the issues immediately.