Understanding Interest Expenses and ATO Scrutiny for Landlords

Interest expenses are the most scrutinized deductions by the Australian Taxation Office (ATO), especially for individual landlords. According to the ATO's 'Taxation Statistics 2016-17,' about 46.5% of total rental deductions claimed are for interest expenses, averaging $8,947 per claim in the 2017 income year.

The ATO is vigilant about ensuring that taxpayers don't overclaim interest expenses, particularly targeting those who fail to accurately allocate interest deductions when there are loan redraws for private purposes or if rental properties are used for personal use.

Common mistakes landlords make when claiming interest deductions include:

1. Using the property for private purposes, even briefly.
2. Using a portion of the loan for personal expenses, either at the loan's inception or through refinancing.
3. Using a loan to purchase a non-income-producing home, even if a rental property is used as security for the loan.
4. Repaying an income-producing loan ahead of schedule and then redrawing funds for personal use.

If you have any questions or need assistance, feel free to contact Tax Ideas Accountants & Advisers at +61 2 83181545 or book an appointment through our live calendar.

New Restrictions on Second-Hand Asset Depreciation for Rental Property Owners

Since the 2018 income year, certain rental property owners, like individuals, trusts, SMSFs, and certain partnerships, face limitations on claiming depreciation for second-hand assets. These restrictions affect assets acquired after 7:30 pm AEST on May 9, 2017, for residential rental properties.

Basically, if you buy a second-hand asset for your rental property after this date, you can't claim depreciation deductions starting from July 1, 2017. There are also transitional rules affecting deductions for certain assets bought before May 9, 2017, and exceptions to consider (see S.40-27).

However, the rules for claiming depreciation on new assets in rental properties and applicable capital works write-offs under Division 43 remain unchanged.

Similarly, if you use a depreciating asset in your rental property for a purpose other than earning rental income (like installing solar panels for generating electricity), the rules for claiming depreciation remain the same.

Got questions? Reach out to Tax Ideas Accountants & Advisers at +61 2 83181545 or book an appointment on ourlive calendar.

Understanding Exceptions to NALI Provisions for Internal Trustee Duties