Mistakes involving rental claims account for $1.6 billion a year of the individuals-not-in-business tax gap, according to ATO Assistant Commissioner Tim Loh, or almost 20 per cent of the 2018-19 total.

“It’s an area that we see taxpayers get wrong,” he said. Mr Loh said the most common mistakes involved record-keeping and misstated income or deduction claims.

When it came to record-keeping the message was straightforward: best practice was essential.

“If you don’t have a record, it’s hard to get that deduction or claim for that deduction,” Mr Loh said.

It’s really important to make sure that you’ve got good records in relation to the rental property deductions that you’re trying to claim.

Common mistakes regarding income often involved overlooked payments. It’s really important to include all your income in your tax return. Commonly missed income is things like short-term rentals, for example, Airbnb – it’s really important that income is included just like a long-term rental.

Mr Loh said many rental property errors involved wrongly claimed deductions.

“One is something related to travel to the property – that used to be a deduction, but the law has changed in recent years,” Mr Loh said.

“So you can’t claim any travel to the property or to the rental property.

“Another thing we sometimes see taxpayers get wrong is claiming a deduction for capital works outright. So think of it as a $20k kitchen reno – that’s something that’s deductible over time, and not as an outright deduction in the year that the kitchen reno was done.

“Usually it’s all bounded together and if it’s considered to be a capital works item then you deduct it over the effective life of that particular item — You typically need a depreciation schedule.”

Depreciation itself could also cause problems.

“The other thing we sometimes see clients get wrong is deductions for depreciation for existing assets or second-hand assets acquired during the year that are used in residential property,” Mr Loh said.

“Sometimes when refinancing gets done – to, say, buy a boat or some sort of personal expense –it’s really important that any interest deductions in relation to that loan is apportioned in relation to that personal component. So you aren’t claiming a full deduction in relation to those aspects.”

Finally, Mr Loh said it was important to be aware of changes in the tax treatment of granny flats.

“There’s a CGT exemption now for granny flat arrangements that effectively gives eligible people the right to occupy a property for life, which began from 1 July 2021,” he said.

“To be eligible for it there must be a written agreement in place between the property owner and the elderly person. And the elderly person must have the right to occupy the property for life.

“There’s more information on our website: ato.gov.au/grannyflat.”

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