Investment property tax deductions are set to surge as investors, spurred by rising rents, move strongly back into the residential market.
Many will be filing rental property tax returns for the first time from July 1 - and the odds are most will make what could be a costly mistake when claiming deductions.
The Australian Taxation Office says a "majority" of rental property owners make errors despite using registered agents and that "their tax returns are in the spotlight this tax time".
What investors are doing wrong
Not understanding what expenses can be claimed, and when, is the most common mistake, the ATO says, while overclaiming on loan interest payments is rife.
Fresh Australian Bureau of Statistics (ABS) data reveals property investment is rising and hit $11 billion in total value for April alone - 36 per cent higher than the same month last year.
Dr Mish Tan, ABS head of finance statistics, says the average investor loan for an existing dwelling grew 9.5 per cent in 12 months, rising from $592,000 to $648,000.
"Lending to investors continued to rise strongly relative to owner-occupiers, driven by increasing loan sizes," she says.
"This likely reflects expectations of higher rental yields and the greater borrowing capacity of investors."
H&R Block director of tax communications Mark Chapman says property investors need to get it right first time because the ATO pays most attention to fresh investments.
"They do tend to look very closely at the first year or two of ownership and they tend to look at the repair claims very closely to try to knock them out," he says.
Greater surveillance
Chapman adds that the ATO is now much better equipped to crack down on tax dodges or honest mistakes than in the past.
"If you went back 10 years the ATO was purely dependent on the figures you actually declared on your tax return," says Chapman.
These days the ATO is sourcing data from banks, land title offices, insurance companies, property managers and sharing economy providers.
"Therefore, they've got a pretty good idea of what's going on in the marketplace so when people lodge their returns, they can pick up the discrepancies."
Myths busted
ATO Assistant Commissioner Rob Thomson says one of the most prevalent issues is incorrectly claiming for repairs.
"It's normal for landlords to have to fix or replace damaged items in a rental property," says Thomson.
"But there is a bit of a myth that all expenses can be claimed immediately.
"A repair can usually be claimed straight away but capital items - think dishwashers, curtains or heaters - can only be claimed immediately if they cost $300 or less, otherwise they need to be claimed over time."
Thomson says investors often inflate their interest payment deductions by bundling in everything they have financed on the loan such as cars, holidays or school fees.
"For example, if you have an $800,000 mortgage for a rental property and then add $50,000 to the loan to upgrade your family car, you can only claim interest on the initial $800,000, not the interest on $850,000."
Getting it right
He admits the distinctions between what is and isn't permissible is sometimes tricky.
For example, body corporate fees paid by investment apartment owners can be claimed but special levies can't.
And while costs relating to borrowing such as establishment fees are deductable, that is generally over the life of the loans, not immediately, as many investors believe.
In all cases, Thomson says property investors need to have supporting documentation to support their claims.
Penalties for non-compliance can be severe with fines of up 75 per cent of the unpaid or incorrectly claimed tax deductions.
