The ATO has recently indicated that rental property expense claims will be a significant focus for the regulator this tax time and has issued a number of fact sheets as part of its tax time toolkit for investors for 2022.

Speaking to SMSF Adviser, DBA Lawyers director Daniel Butler said in some of the recent information issued, the ATO has emphasised the importance of being careful about what deductions are claimed and also being able to substantiate it.

One of the areas that SMSFs need to pay close attention is how they apportion deductions based on what periods the property was available for rent, said Mr Butler.

“When you buy a property, you may have to do some work and over that initial period it may not be available for rent, so some of the repairs and improvements may not be deductible,” he explained.

“You need to work out whether it is a repair that is deductible as opposed to a repair that was undertaken prior to the property being available for rent.”

Mr Butler said there are also delicate decisions that need to be made in determining whether something is a repair or improvement.

“If you replace an old timber window that’s rotten with a new aluminium window with better quality and that’s the modern-day equivalent that that should be okay, it could be a repair. You’ve got to go through the process of determining whether it is a repair or improvement [though] because an improvement is not deductible,” he cautioned.

An improvement is generally regarded as improving what’s already there, he said.

He also reminded SMSF professionals and trustees that due to a change in the law in 2017, investors can only claim depreciation on plant equipment that is brand new for residential properties acquired after 1 July 2017.

Investors should also be aware that there are special rules around travelling to inspect residential rental properties.

“If you’ve got an apartment in Queensland and you travel up there, you generally can’t claim the cost of that travel,” he stated.

The ATO will also scrutinise whether a property in an SMSF complies with the sole purpose test and is not actually an in house asset or some form of financial accommodation.

“We have seen clients put to the test where [the ATO] has said if you were in this location at the time, then prove to us that you were not using that property when you were there,” he warned.

Mr Butler said he has also seen instances where clients have claimed a deduction for curtains for their rental property, for example, and the ATO has gone to the supplier to see if the curtains were actually installed in their family home instead.

SMSF trustees should also be mindful that deductions are only deductible to the extent that their income is assessable.

“Most funds are unsegregated, therefore if that property is part of an unsegregated portfolio, and the actuary says its only 50 per cent exempt, then all else being equal, you may only be entitled to 50 per cent of the deductions of that property,” he said.

Miranda Brownlee

28 July 2022

smsfadviser.com