In 2023, the ATO is cracking down on another disenfranchised and vulnerable group of taxpayers, Landlords. According to the ATO, 90% of landlords are lodging their tax returns incorrectly. Given the ATO's special focus on rental properties, landlords should take extra care to understand the rules to minimize the risk of an audit.
The ATO is particularly interested in rental income. They are finding that people are not reporting all of their income, especially from short-term rentals or renting out part of a property. Other unreported income may include insurance payouts and rental bonds kept by the landlord.
On the expense side, the ATO is concerned about repairs and maintenance. In the first year of ownership, any repairs are likely considered "initial repairs" and part of the purchase price for tax purposes. True repairs are more likely to be the result of damage caused by tenants. After the first year, the ATO will consider whether the expense is a repair or an improvement. Generally, an improvement is when an entire item has been replaced, whereas a repair fixes the existing item. These improvements must be capitalised rather than deducted immediately.
The other main area of concern is interest on a rental property loan. The ATO now receives data matching from mortgage providers to track deductions. An important difference that most people don't understand at first, is that the deduction is not the entire mortgage payment. The principal portion of the repayment is not deductible. Interest expense is usually the largest deduction, so there can be significant consequences if this is corrected during an audit.