The Australian Taxation Office is cracking down on an estimated $1.2b in dodgy landlord claims that have seen taxpayers fund private costs linked to their cars, holidays and school fees.

ATO assistant commissioner Rob Thomson confirmed there was an estimated $1.2b “tax gap” or shortfall generated by rental property owners in their tax returns, including overclaiming, double-dipping on expenses, and not providing sufficient documentation to substantiate expenses.

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ATO says 42 per cent of errors in landlord deductions involve overclaiming on interest charges by adding in costs for loans taken out for holidays, school fees, cars and other private matters.

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Mr Thomson told the National News Network “the $1.2billion … is the ATO’s estimate of the difference between the tax we collect, and what we would have collected with respect to rental properties had all Individuals not in Business been fully compliant with the tax law”.

ATO found that 42 per cent of the $1.2b tax shortfall – or around $500,000 – was linked to rental property owners claiming deductions for the interest paid for loans for private costs like cars, school fees, and holidays.

“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 the interest on the initial $800,000, not the interest on $850,000,” Mr Thomson said.

“It’s also not a matter of simply paying back the private part of the loan and then claiming all interest as deductible. Payments must be apportioned between the private and investment components for the life of the loan.”

He said the majority of rental property owners had errors on their tax returns despite 86 per cent of them using registered tax agents.

ATO says it will use multiple sources of information to crack down on overclaiming by landlords.

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Mr Thomson warned ATO would crosscheck the accuracy of tax returns off data received from banks, land title offices, insurance companies, property managers and sharing economy providers.

Double-dipping on expense claims was also an issue, ATO found.

“We sometimes see rental property owners ‘double dip’ on expenses that the property manager has arranged and included on the property’s income and expenses report for the year. Often, property managers will pay for expenses like repairs from the rent received. The amount they then remit to the property owner is net of these expenses. They will also send the property owner a copy of the invoice for their records.”

Mr Thomson said even if there were two records for one expense, it could only be claimed once.

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Rental property owners have a wide array of items they can claim against in tax returns, though borrowing expenses like loan establishment fees, lender’s mortgage insurance and title search fees were generally claimed over a five-year period or life of the loan – whichever is less.

‘If you use a tax agent, make sure you let them know all about your rental property, including full records of your expenses. If you have a nagging question or something doesn’t make sense, make sure you ask your agent when you’re working with them.”

Mr Thomson said lack of documentation to substantiate claims was a major issue.

“You need to keep detailed and complete records, including receipts, invoices and bank statements for interest expenses. You should also detail how you calculate your deductions and any apportionments. This will allow you or your tax agent to correctly complete your tax return”.

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