It’s tax season, and every responsible taxpayer is bound to be looking into ways to file efficiently while ensuring tax savings wherever possible.
ATO, on its part, recently advised taxpayers, especially those with overdue debts, to come clean since lack of compliance has cost the nation $33.5 billion.
During the pandemic, the ATO had gone easy on debt collection, intending to help and assist impacted businesses and communities. However, moving forward, it has called on those with tax debts – even those unable to make one-time payments - to engage with the ATO.
ATO deputy commissioner Vivek Chaudhary explained that by coming forward to engage, taxpayers (or their registered tax professionals) could work with the ATO, avoid escalation and find pathways to set up payment arrangements. Failure to do so would lead to firm action by the authorities against defaulters.
ATO’s Priority Areas and Implications for Homeowners
Earlier this year, ahead of the tax season, ATO stated the four key areas it plans to target this financial year, these being:
- Work-related expenses.
- Rental property income.
- Deductions.
- Capital gains from crypto assets, property, and shares.
This latest outreach message by the ATO assumes great significance for home loan borrowers when filing returns. But, of course, everyone across the board would be happy to claim deductions, especially when saddled with mortgage repayments.
And depending on whether you are an owner-occupier or renting your property, the tax implications vary. Here’s a broad overview of both settings.
Your Property is Not Rented Out
If you have a property that’s not rented or available for rent, you usually cannot claim deductions because it’s not generating rental income.
Nevertheless, keep proper records if you buy a home - even if you’re using it as your primary residence. You’ll need them to ensure that you aren’t overpaying tax if, at some point in the future, you decide to rent your residential property; rent a part of the entire home through the sharing economy, or use all or some of your home to generate income.
Your Property is Being Rented Out
On the other hand, if you genuinely put your property on rent, you can claim deductions for most of the expenses - including interest on loans - you incur in these periods.
If you are a rental property owner, include all the income you’ve earned from your rental, including the rental bond money you retain, short-term rental arrangements, and insurance payouts.
What Happens If You Don’t Respond to the ATO?
Since ATO’s debt collection initiatives have prioritised high-risk taxpayers, the prime focus will be on taxpayers with higher debts, followed by taxpayers with other debts.
In this direction, ATO recently issued nearly 30,000 awareness letters for disclosure of business tax debts. It also sent out around 52,000 awareness letters regarding the use of director penalty notices.
According to the ATO media release, there’s been a relatively good response to the awareness campaigns. More than 20,000 have paid up or have agreed to the ATO’s payment plans.
The ATO has cautioned that those not responding to its outreach initiatives will face garnishees, disclosure of business tax debts, recovery of director penalties, and legal actions including summons, creditors petition, wind-up, and insolvency action.
If you’re keen to pay off your large tax debt as soon as possible, you could explore options with lenders and recently launched products, some of which offer you flexible repayment options.
Tax Time 2022 - Loan Against Rental Property and Deductions
Now that it’s Tax Time 2022, there’s no denying that many taxpayers, especially small businesses, have had it rough through COVID.
And while ATO’s debt book has grown significantly during the Covid pandemic, with the worst behind (hopefully), all efforts are on to normalise this over time. Therefore, it is actively working towards engaging with taxpayers more transparently, resuming audit activity, and refocusing on the debt book.
According to ATO second commissioner Jeremy Hirschhorn, who’s on the client engagement group, when it comes to individual taxpayers, the three main problem areas include overclaiming work expenses and property investments (including Airbnb listings at overpriced rates just for show), cryptocurrencies and NFTs.
Though exclusively residential properties aren’t eligible for claiming any tax deductions, there’s good news for rental property owners.
If you’ve taken a loan to purchase your rental property, you can claim interest charged on your loan, or a portion of the interest, as a deduction. Then again, your property must be put out on rent or be legitimately available for rent in the income year you’ll be claiming a deduction.
What You Can Claim Based on Your Rental Property Loan
According to the Rental Properties Interest Expenses ATO factsheet, you can claim interest charged on the loan you have used towards:
- Purchasing a rental property.
- Purchasing a depreciating asset for the rental property (For example, a new air conditioner for your rental property).
- Undertake repairs to the rental property (For example, repair the roof due to damage caused by a storm).
- Finance extensions and renovations on your rental property that is currently rented out or which you plan to rent out (For example, you add a deck to the rear of the rental property).
You can also claim interest expenses when:
- You have pre-paid the interest expenses up to 12 months in advance.
- You’re repairing damages to your rental property, and the property is uninhabitable when the repair work is in progress.
What You Cannot Claim Based on Your Rental Property Loan
You cannot claim a deduction for your interest expenses incurred:
- For the period the property was used by you for private purposes, notwithstanding that it was used for a short period.
- On that portion of the loan which you used for private purposes when you initially took out the loan or if you refinanced it.
- On a loan taken to buy a new home if you don’t use the new home to generate income, even if you use that rental property as security for your loan.
- On the portion of the loan redrawn by you for your private purposes, even if you are forward in your repayments.
Mixed-Purpose Loan Accounts Used for a Combination of Private and Rental Expenses
Suppose your loan account has a fluctuating balance because of the variety of deposits and withdrawals, such as redraw and flexible repayment, and is used for both private purposes and rental property expenses. In that case, you’ll have only to calculate the interest that applies to the rental property portion of your loan for claiming tax deductions.
For this purpose, maintain meticulous records. Loan repayments are apportioned across both purposes. You can’t repay only specific portions of your loan related to your personal purchase.
For instance, if you have taken a loan to purchase a rental property and also to buy a vehicle, you have to apportion your loan repayment across both purposes and not only repay the loan portion related to the personal purchase.
Likewise, you will have to separate the interest related to the rental property from other interest pertaining to your private use of the amount.
File Your Returns on Your Rental Property Simplified
If you prefer, like many rental property owners, you could hire a registered tax agent to help with your tax affairs. All rental income and deductions must be entered manually, and your registered tax agent can help you with this.
Also, suppose the ATO finds a discrepancy or needs more supporting documentation. In that case, it may delay the processing of your refund because of the back and forth in getting the corrections done.
Here are some of the top tips to help if you’re a rental property owner preparing to file your return:
- Include all the income received, such as income from short-term rental arrangements (for example, your holiday home), sharing part of your home, and other rental-related income, including the rental bond money retained by you and insurance payouts.
- Ensure that the expense details are accurate. Claim expenses incurred only during the period your property was rented or when you were genuinely trying to rent it on commercial terms. Also, keep in mind that some expenses, such as borrowing expenses, capital works, and decline in value of depreciating assets, have to be claimed over several years.
- Apportion your claim to reflect where your property was rented for a part of the year; where only part of it was rented; where the property was used for personal purposes; rented lower than market rates; and/or according to your ownership interest.
- Maintain accurate records of the income, expenses, purchase, and sale relating to your rental property.
To conclude, Tax Time 2022 is around the corner. The (ATO) remains committed to offering those with overdue debts tailored support and assistance even as it seeks to close the $33.5 billion tax gap. It actively supports engagement with taxpayers or their representatives who will respond to its calls.
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