Shelley Banton, head of education for ASF Audits, said rental property expenses are high on the ATO radar and most rental property owners are getting their returns to the regulator wrong.
“That’s just not limited to SMSFs, but it includes SMSFs, and understanding the difference between rental property repairs, maintenance and capital expenditure is critical to make sure you’re getting it right,” she said.
“Where the fund has repairs, it’s important to understand whether it’s on the revenue or the capital account, and you need to ask the right questions”
Banton said there is a “quick rule of thumb” to help with the distinction.
“If you’re replacing something that’s worn out, it’s got damage, or it requires repair as a result of renting out the property that’s maintenance repair, and can be claimed.”
“A good example is if you’re replacing part of a fence that was damaged in a storm, or getting a plumber to fix a leaky tap while the property was being rented. If, however, you’re repairing damage to the property that existed when it was purchased, or you’re renovating or adding to the property that’s capital works, and it’s not deductible.”
If a property owner is replacing an entire fence or upgrading taps to improve a bathroom, that would need to be included in the capital account and is therefore not deductible, she said.
“The ATO is data matching what’s on the tax return with banks, insurance companies, property managers and is cross-checking to make sure those deductions are accurate.”
Banton said another property issue that can cause confusion which the ATO is again watching closely is the valuation of property developments.
“These are some of the most difficult and complex areas we see. The valuations either don’t exist or are not backed up by sufficient, appropriate audit evidence.”
“The ATO bulletin released in 2020 discusses its concern about property development activities, along with TA2023/2 which is all about diverting profits of a property development project through the use of special purpose vehicles.”
These involve non-arm’s length arrangements which then include the acquisition of assets through those entities that aren’t at market value.
“That’s just a heads up. Please go and have a look at those clients who are investing in property development,” she said.
“When we look at property development, we look at three main valuation techniques. There’s a market approach, the cost approach and the income approach. There are other methods which depend on the purpose of the valuation, which could be for financial, legal or commercial reasons.”
Banton concluded that auditors are looking for a valuation report that includes the sources of the data used, the assumptions and the methods used and that it’s an appropriate valuation technique consistent with the prior period.
