There is a saying in the USA that you do not mess with the IRS.

For Aussies, the same thing could be said about the Australian Taxation Office (ATO).

The UOAQ issued Newsflash #59 in January 2019 alerting members to a large audit program planned by the ATO regarding rental properties – with a focus on holiday rental units.  The ATO had received $130 million In the 2018 federal budget to increase its surveillance of personal tax deductions – including rental losses – over the next four years.

It would seem this program is very real. 

A recent speech to the Tax Institute’s national conference by Tax Commissioner Chris Jordan was reported by Ben Butler in The Australian (Friday, 15th March 2019 @ p.5. See the article here).  Mr. Jordan said that the incorrect deductions being claimed against rental income every year are next on his hit list.  He said that with more than 2 million taxpayers claiming $47.4  billion in property deductions against $44.1 billion in rental income “you can get a sense of the potential risk to revenue”.

As part of our broader random inquiry program, our auditors have now completed over 300 audits on rental property claims and found errors in almost 9 out of 10 returns reviewed.

The main errors detected include:

  • Incorrect interest claims for the entire investment loan where it has been refinanced for private purposes, e.g. purchase of a new car or boat;
  • Incorrect classification of capital works as repairs and maintenance, e.g. renovation of a whole bathroom or kitchen and claiming the entire expense upfront rather than depreciating it over time;
  • Failure to apportion deductions for holiday homes/units when they are not genuinely available for rent, e.g. when the taxpayer was using the property for their holiday time rather than renting it out.

The UOAQ understands that random inquiry audits are designed to ‘test the market’ and – if there is a substantial risk – identify who, what and where the ATO can then focus its full-scale audit program.

It would be safe to assume that because of the scale of the rental property market, and the 90% ‘strike rate’ with the random audits,  the taxman is serious about its audit program for the next year of so.

We encourage all UOAQ members who have rental properties to be especially careful when completing their tax returns for the 2018/19 financial year.

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