Don’t get caught out in the latest ATO crackdown on Property Investors
The long lists of wordy classifications, endless questions, categories and sub-categories, can make the process of claiming with the ATO daunting and at times, perplexing. With the ATO this year set to focus on residential property owners and their rental property deductions, it is crucial that all claims comply with current guidelines. BMT Tax Depreciation director Brad Beer recently highlighted for RPM, three common mistakes property owners make when claiming;
Self-assessing the effective life of an asset
Self-assessing the life of individual assets results in inconsistencies with claims, potentially prompting the ATO to examine an entire claim more closely through a review. Landlords may take it upon themselves to assess the effective life of an asset based on appearance or functionality, however the ATO has set guidelines highlighting the life of each individual asset.
Mr. Beer gave the example of “their carpet may seem old and already worn out, so they may believe its effective life is just two years,” Although this may seem reasonable, the ATO currently states the effective life of a carpet is 10 years. It is essential to stick to the ATO outlined life durations, in order to remain consistent with present and future claims.
Claiming ‘capital works’ assets as ‘plant and equipment’,
Tax deductions can be claimed for two different categories of assets: ‘capital works’, and ‘plant and equipment’. ‘Capital works’ assets include any fixed structural elements of a building, whereas ‘plant and equipment assets’ encompass less permanent additions.
Depreciation is calculated in relation to the effective life set by the ATO, and as ‘plant and equipment’ assets depreciate at a faster rate than capital works, it is financially beneficial to determine which assets qualify for which category.
Although it may seem a daunting task to categorize every asset on the property, getting it right can save both time and money in the long run. Some assets may fall under unexpected classifications, for example, Mr Beer explained that TV antennas are in fact included as a capital works asset by the ATO, despite their relatively short life-span. Even the smallest items are listed by the ATO, so it is essential to check every asset against these classification guidelines before lodging a claim.
Claiming ‘capital improvements’ as ‘repair maintenance’.
Property owners should be aware of the difference between ‘capital improvements’ and ‘repair maintenance’.
Capital improvements include work done to the property that increase its previous value. Mr Beers said, “Deductions pertaining to capital improvements must instead be claimed at the slower rate of capital works or as depreciation.”
While repairs usually include the full restoration of existing structures, maintenance simply encompasses efforts to avoid future deterioration. In order to be recognised as a claim by the ATO, both repairs and maintenance must have been necessary as a result of renting out the property.
What is the solution?
In order to avoid the ATO reviewing a claim, take the time to ensure your assets are correctly classified and use the help of experienced professionals when in doubt.
What is your experience, do you let your accountant classify your asset or do you prefer to do it yourself?