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The Australian Taxation Office (ATO) will pore over the records of up to 1.7 million mortgage holders this financial year as it seeks to stamp out the shortfall in tax paid by residential property investors.
Almost 20 financial institutions, including the big four banks, will be required to share loan data with the ATO as part of a new data-matching program, which the tax office says shows 9 in 10 landlords are getting their tax returns wrong.
The mortgage transaction records of 1.7 million property investors have been made available to the Australian Taxation Office.Credit: Glenn Hunt
“We often see mistakes where rental income has been left out or rental property deductions have been over-claimed, including mortgage expenses,” a spokesperson for the ATO said.
Under the data matching program, the ATO has access to loan accounts, including details of the investment property, such as the address, as well as transaction histories, including when the loan was started and ended.
The program includes the 2021-22 year and will run to 2025-26. This latest data matching program is in addition to the existing program of matching data from rental property managers. The ATO says it intends to commence another program, this time with issuers of landlord insurance.
The ATO estimates in the 2019-20 year there was a revenue shortfall for income-based tax for individuals totalling about $9 billion, of which about $1.3 billion was due to incorrect reporting around investment properties – primarily, the incorrect claiming of expenses and rental income.
For most property investors with a mortgage, the biggest single tax-deductible expense is the interest costs of the mortgage. Under its data matching, the ATO can see how much interest has been charged by the lender.
The ATO says a common reason driving the incorrect reporting of rental expenses is incorrectly apportioning loan interest costs. The ATO notes the problem is more prevalent if the mortgage is refinanced, or redrawn, where the interest on the private portion of the loan is wrongly claimed as an expense.
To claim interest and other expenses an investment property must be rented, or genuinely available for rent in the income year the deduction is claimed. Claims for interest cannot be made for periods you used the property for private purposes, even if it is for a short time.
Another major area for adjustments of tax return by the ATO is the claiming of costs as repairs rather than as capital works deductions, the costs of which are claimed over time rather than immediately.
As well as ensuring owners of rental properties are lodging income tax returns, the data matching will help ensure that investors are meeting their capital gains tax obligations when selling their investment properties.
Property investors need to keep records of both income and expenses relating to their rental property, as well as purchase and sale records.
Mark Chapman, director of tax communications at tax accountants H&R Block, says the ATO is “gunning” for property investors who make incorrect claims.
“Property investors need to be careful and correctly establish exactly what you can claim,” he says.
Chapman says the ATO will always opt for voluntary compliance in the first instance before it takes any action. He expects the ATO will use the information gathered from lenders to pre-fill tax returns online, such as the interest costs, to improve voluntary compliance.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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