Holiday home owners’ tax deductions in spotlight: ATO

Thousands of dollars in claims “that would fail the pub test” contribute to $1.6 billion tax shortfall, the Australian Taxation Office (ATO) Assistant Commissioner, Kath Anderson, has said.

Expense claims running to thousands of dollars for occasionally rented holiday homes fail the pub test and will fall foul of the ATO’s crackdown on property deductions, she explained.

Ms Anderson said 2.2 million property owners filed rental expense claims of $42.6 billion in 2021, but full compliance by the sector would add $1.6 billion in revenue and she called on tax agents to help bring owners into line.

“Holiday homes might sound minor in the scheme of things,” Ms Anderson said at the Accountants Daily Strategy Day, an initiative of Mortgage Business’ sister brand.

“But if we applied the pub test, I don’t think we would find many Australians would think it’s OK for someone to claim thousands — in some cases hundreds of thousands — of dollars in deductions for their holiday home.

“Many of the returns that have errors in them have actually been prepared by agents. Quite often clients are not telling their agents or providing them with all of the information that they should.”

Educating holiday property owners on their investment

Addressing accountants, she said: “We need your help to educate clients about what is a valid rental deduction and what’s not. We also need your help to get the message out there that claiming deductions and effectively taking money from the community to pay for your holiday home is not OK.”

Ms Anderson said rental property claims were high on the ATO’s hit list for 2022–23 as it attempted to reduce the tax gap — the difference between what is collected and what full compliance would yield — down from $33 billion.

“The gap represents an unfair advantage that those not doing the right thing have over those who are doing the right thing. And in the context of a business, especially a small business, this unfair advantage can be significant,” Ms Anderson said.

“As you would expect, integrity and levelling that playing field will continue to be a high priority for us.”

The recent budget had delivered funding to extend the personal income tax compliance program for two years and, as well as rentals, omitted income and work expenses were also key targets.

Automation aiding clamp down on ‘weird claims’

She said work-related claims accounted for $3.7 billion of the tax gap and while many were “optimistic” characterisations of personal expenses, some were more creative, “like the Maltese terrier guard dog or weekends away for stress relief”.

Increasing digitisation of ATO processes was a key feature of the compliance mission but would also make the work of tax agents easier.

“In 2022–23, you’ll see us continuing to use data as much as we can,” she said.

“We’ll provide it in prefill, [we’ll] harness advances in digitalisation and data to provide more real-time nudges and prompts for income and claims that seem to be a little bit outside of the norm.”

[Related: Mortgage serviceability a test in 2023]