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Accountants must ask all the right questions about what clients really do with their summer houses.
ATO turns up the heat on holiday home deductions
10 February 2023
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6 minute read
The ATO has fired another shot across the bow of those looking to over-claim deductions on their holiday houses, with accountants warned to ensure they have the full picture before submitting any claims.
An alert this week from the ATO warned accountants to ask the right questions of their clients when it came to their holiday home deductions as it would pursue those doing the wrong thing.
Tax partner at Mazars, Gaibrielle Cleary, said with the ATO on a warpath to eradicate those overindulging in deductions, accountants must be prepared to ask more questions of their clients to ensure the correct amount is claimed.
“Accountants need to be vigilant in obtaining information regarding the property’s rental and availability for rent,” said Ms Cleary.
“This will involve drilling down into the details of the property use, the rent received and the expenses incurred rather than just relying on the high level details.”
“It will be necessary to examine not only the total rent received, expenses incurred and the number of days rented or available for rent, but also the timing of those rentals, the rent received over the period and the timing of the expenses.”
The ATO has encouraged tax agents and accountants to ask clients questions such as, “How many days was it rented out and was the rent in line with market values? Where do you advertise for rent and were any restrictions placed on tenants? Have you, your family or friends used the property?”
The tax office said questions such as those should help accountants understand whether the claims were a valid rental deduction.
Speaking at the Accountants Daily Strategy Day late last year ATO assistant commissioner Kath Anderson flagged the crackdown and said with over 2.2 million property owners filing rental claims of $42.6 billion in 2021, full compliance would add $1.6 billion in revenue.
“Holiday homes might sound minor in the scheme of things but if we applied the pub test, I don’t think we would find many Australians would think it’s ok for someone to claim thousands — in some cases hundreds of thousands — of dollars in deductions for their holiday home,” said Ms Anderson.
“We need your help to educate clients about what is a valid rental deduction and what’s not.”
She said individuals who misled the tax office with their deductions were “effectively taking money from the community to pay for your holiday home”.
William Buck director Laura Johnstone said with rental deductions on the ATO’s hit list for 2022–23 accountants must ensure their clients’ claims are within bounds.
“The crackdown highlights the importance of reviewing your claims for your property, and ensuring you’re not pushing any boundaries of the legislation,” said Ms Johnstone.
“I would suggest that more information is often better than less, this is so they can understand the complete picture around what is happening with the property, how the property was funded and how much it was rented for.”
Ms Cleary said while having clients avoid claiming deductions for periods where the rental property was either used privately or not at all should be common sense, accountants should be wary of claims for deductions when the property was rented at below the market rate.
“It is important for owners to understand that a full deduction will only be available for expenses incurred to the extent that the home is being rented or is genuinely available for rent at arm’s length, market rates,” she said.
“For any period in which the property is rented for lower than market rates, the deduction will be limited to the rental income which is received.”
She said while in some cases the ATO could be challenged if it ruled against the claimed deductions, the key was to have contemporaneous notes and evidence that showed the rental amount for the disputed period.
“As with all dealings with the ATO, evidence to substantiate actions and expenses is the key to challenging any actions by the ATO.”
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- Believe this should be tightened after 40 years in the industry it is hard to get a correct answer from taxpayers on private usage. I had one who had two rooms locked with their furniture and cheap rental furniture for tenant, used it about a third of the year. When asked, said about 14 days' use. Most holiday unit owners are told by sellers that everything is deductible and don't worry about your use.0
- Just make it easy and apply a certain percentage of gross income as deduction.0
- If the average marginal tax rate including medicare of the rental property owners is, say 39%, then to achieve their estimated extra revenue of $1.6 billion the ATO is saying that $4.1 billion of claims are bogus. Really? - 10% of claims are bogus? Where is their empirical evidence, or did a pub patron come up with that as well?1
- Well unfortunately, Ms Anderson, the taxpayer does not have to undergo the "pub test". There are requirements of the tax law that need to be complied with, and if they are, deductions result. End of story. I don't care whether the ATO likes that or not - it is the law. The ATO can't just ignore certain parts of the law and enforce others - it is their statutory duty to apply the law.1
