ATO data mining targets 110,000 rental property owners over incorrect rent deductions

More than 110,000 property investors will receive letters from the Australian Tax Office after new data mining technology identified they may have submitted incorrect tax claims based on their 2011-12 tax returns.

Most will relate to incorrect rental property deductions with figures for the 2010-11 tax year revealing that around two-thirds of property investors negatively gearing their investments and claiming losses on their investment properties to offset their tax bills.

“This year we are writing to more than 110,000 rental property owners about their entitlements and obligations, to help ensure tax returns are filled in correctly,” said the ATO in a statement.

The incorrect claims have been identified through new data-mining technology and using a specialist team called “the doctors”, reports Fairfax Media.

In April, the ATO revealed it would use new data-matching technology to closely scrutinise residential and commercial property sales to ensure tax payers paid the correct amount of tax.

It said 10.4 million taxpayers would face scrutinise over their property dealings this year with the ATO’s high tech computer systems gathering real property transaction details from state revenue offices and relevant state government land and property departments.

The recently released 2010-11 ATO figures show there was a small rise in gross rental income from $28 billion to $30.7 billion but a bigger rise in tax deductible rental interest payments (up from $18.4 billion to $22.7 billion), capital works deductions and other allowable rental deductions.

The ATO has released tips to ensure property investors know what they can claim and cannot claim.

Expenses that may be claimed “straight away” in the income year in which they are incurred include interest on a loan used to purchase a rental property, interest on a loan to purchase land to build a rental property or interest on a loan to purchase a depreciating asset for the property – such as an air conditioner; or to finance renovations or home improvements, like a deck.

Investors can claim other expenses over a number of years, including the cost of depreciating assets, structural improvements and most borrowing costs.

Assets that are part of the property such as stoves, refrigerators, air conditioning and hot water systems can be claimed over a number of years as a ‘decline in value’ deduction.

Expenses for which investors are not able to claim deductions include acquisition and disposal costs of the property, expenses not actually incurred by them, such as water or electricity charges borne by tenants and expenses that are not related to the rental of a property.

This article first appeared on Property Observer.