ATO crackdown on depreciation claims

The Australian Taxation Office is launching a crackdown on one of the most lucrative tax breaks for investors by tightening the depreciation rules on residential investment properties.

According to published ATO figures, last year around 1.4 million taxpayers declared total rental income of $15.2 billion and claimed rental deductions of $17.8 billion. More worryingly for the ATO, while rental income was up by about 12 per cent on the previous year, rental deductions claimed increased by 19.5 per cent.

After tightening tax rulings in respect to depreciation in 2004, the ATO has been increasing its compliance activity to ensure taxpayers are using depreciation in line with the law.

CAST Depreciation Services managing director Scott Watters told WA Business News that, with the ATO focus on this area, investors needed the best advice and had to keep comprehensive records when buying and selling an investment property and for all rental income and expenses.

“For those with investment properties, there is a big spectrum for depreciation – some people get their accountants to do it and some people do it themselves, but it does pay to have the right people inspect the property and collate the right information,” Mr Watters said.

“Quantity surveyors are recognised by the ATO as being best placed to prepare depreciation schedules.

“With the ATO clearly outlining its intentions, property investors would be well served by having a report prepared by a reputable depreciation service provider.”

Mr Watters said another key area of concern was where rental deductions were over-claimed, including the incorrect calculation of capital allowances and claiming initial repairs and capital outgoings as expenses.

Apex Property Consulting director Nicola Woodward said that during the past four to five years, the ATO had been getting more interested in deductions claimed by residential property investors.

“Tax rulings have put new rules in place for what people can claim, and the ATO is making sure people use those rules properly and don’t claim things for investment properties that they aren’t allowed to,” Ms Woodward said.

She warned there were a number of companies taking advantage of the crackdown by the ATO, offering depreciation services.

“There are companies taking advantage of this, and there isn’t really any regulation over who can provide services, but we recommend that an AQIS or an RICS quantity surveyor goes to the property and does a tax depreciation schedule,” Ms Woodward said.

“People should also make sure they get a tax depreciation schedule done not only when they acquire property, but update it if they have spent capital on the property over the year,” she added.

This year the ATO expects to conduct around 6,000 risk reviews, which should lead to 3,600 audits of high-risk cases.