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ATO to crack down on rental income, WFH deductions this tax time

Taxpayers who “copy and paste” work-related claims each year or try to offset their rental income by inflating deductions will be in the Tax Office’s sights.

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The Tax Office has revealed its focus areas this tax time, making clear it will ramp up scrutiny on landlords inflating claims for rental deductions and individuals incorrectly claiming work-from-home expenses.
 
Assistant commissioner Rob Thomson also warned taxpayers against rushing to lodge their returns on 1 July because it often resulted in them failing to include all their income sources.
 
“These are the areas that people are most likely to get wrong, and while these mistakes are often genuine, sometimes they are deliberate. Take the time to get your return right,” Thomson said.
 
Rental deductions would be under the microscope after the ATO found that 9 out of 10 rental property owners got their tax returns wrong, with most common issue being incorrect repairs and maintenance claims.
 
“This year, we’re particularly focused on claims that may have been inflated to offset increases in rental income to get a greater tax benefit,” Thomson said.
 
He said immediate deductions could be claimed for general repairs and maintenance of a rental property – like replacing damaged carpet or a broken window – but capital expenses could not.
 
“If you rip out an old kitchen and put in a new and improved one, this is a capital improvement and is only deductible over time as capital works,” Thomson said.
 
He recommended owners either “carefully reviewed” their records before lodging a return to ensure they were claiming deductions correctly, or using a registered tax agent to help with preparing income tax returns.
 
‘Ensuring you provide full and complete records to your registered tax agent allows them to prepare your tax return correctly, so you claim everything you’re entitled to and nothing that you’re not.”
 
Another target for the ATO will be work-related expenses in light of recent changes to WFH deduction rules. The ATO said that many taxpayers would trip up on changes to the fixed rate method of calculating a WFH deduction after more than 4 million people claimed one last year.
 
The 80c shortcut method, introduced during COVID-19, finished at the end of FY22 and a revised fixed rate method was introduced in 2023, raising the rate from 52c to 67c an hour.
 
The revised fixed rate method changes also included a broadening of expenses covered and adjusted record-keeping requirements, meaning “you must have comprehensive records to substantiate your claims as you would for any other deduction”, the ATO said.
 
Taxpayers would need to produce records that showed the actual number of hours worked from home (like a calendar, diary or spreadsheet) and additional running costs incurred to claim a deduction (like a copy of your electricity or internet bill) or face a “please explain” from the Tax Office.
 
“Deductions for working from home expenses can be calculated using the actual cost or the fixed rate method, and keeping good records gives you the flexibility to use the method that works for you, and claim the expenses you are entitled to,” Thomson said.
 
“Copying and pasting your working from home claim from last year may be tempting, but this will likely mean we will be contacting you for a ‘please explain’. Your deductions will be disallowed if you’re not eligible or don’t keep the right records.”
 
Thomson also said taxpayers should not rush to lodge returns on 1 July if they had income from multiple sources.
 
“We see lots of mistakes in July where people have forgotten to include interest from banks, dividend income, payments from other government agencies and private health insurers,” he said.
 
“By lodging in early July, you are doubling your chances of having your tax return flagged as incorrect by the ATO.”
 
Taxpayers should check with employers to see if their income statements had been marked as “tax ready” and if income was pre-filled in myTax before lodging.
 
“We know some prefer to tick their tax return off the to-do list early and not have to think about it for another 12 months, but the best way to ensure you get it right is to wait for just a few weeks to lodge … that way, an amendment doesn’t need to be made later, which could result in unnecessary delays.”
 
 
 
 
 
 
Christine Chen
06 May 2024
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