Interest expenses – The deduction that attracts the greatest ATO attention
In looking at the ATO’s latest overview of taxation-related statistics (‘Taxation Statistics 2016-17’), interest continues to be (by far) the highest deduction claimed by individual landlords. Based upon individual rental property schedules received by the ATO, approximately 46.5% of total rental deductions claimed are interest deductions, with an average interest deduction of $8,947 in the 2017 income year.
Given that interest comprises such a large proportion of rental property expense claims each year, it is not surprising that interest consistently remains an audit target of the ATO. As part of its crackdown on rental property deductions, the ATO has focused on taxpayers overclaiming interest expenses. In particular, the ATO is targeting taxpayers who do not correctly apportion their interest deductions to allow for loan redraws used for private purposes (or for private use of rental properties).
Common mistakes property owners make when claiming interest deductions
As part of its communication with taxpayers lodging their 2019 income tax returns, the ATO warned taxpayers against incorrectly claiming interest deductions in the following circumstances:
- The property has been used for private purposes, even if it was only used privately for a short period.
- A portion of the loan has been used for private purposes, either when the loan was taken out or if it has been refinanced.
- A loan is used to a buy a new home, where the new home is not used to produce income, even if a rental property is used as security for the loan.
- A taxpayer is ahead in their repayments on an income producing loan and subsequently redraws an amount for private purposes.