The Australian Taxation Office (ATO) has launched an extensive crackdown on the tax affairs of landlords, specifically targeting those who misreport rental income, falsely claim deductions, or minimize capital gains tax (CGT) liabilities by inflating costs. The initiative aims to address significant tax gaps in the rental property sector, where recent audits revealed that nine out of ten landlords make errors in their tax returns.

Expanded Data Matching Program

As part of its strategy, the ATO is expanding its data matching program to acquire detailed property management records from property management software companies. This expansion, outlined in a recent government gazette notice, will cover around 2.3 million user records over a seven-year period from 2018–19 to 2025–26. The collected data will include property owner identification, transaction details, account balances, income, and expenses, encompassing both residential and commercial properties.

Focus Areas and Compliance Activities

The ATO’s crackdown will focus on several key areas: landlords failing to lodge tax returns on time, omitting or incorrectly reporting income and deductions, and inaccurately reporting CGT cost base elements. By expanding the data matching program, the ATO aims to enhance its compliance activities, refine risk models, and better educate taxpayers on their obligations.

Significant Tax Gap and Targeted Audits

The ATO's initiative builds on a previous program that began in May 2021, which initially collected four years of data from 2018–19 to 2022–23. The expansion is driven by findings that incorrectly claimed rental property expenses contributed $1.2 billion to the total $10.2 billion tax gap for individuals not in business during the 2019–20 financial year.

Verification and Administrative Actions

When discrepancies are found through data matching, the ATO will contact taxpayers to verify the information before taking further action. Taxpayers will have 28 days to respond before any administrative measures are taken. The ATO's current tax time campaign highlights rental deductions as a primary focus area, particularly targeting inflated claims designed to offset increases in rental income.

Clarification on Deductions

Assistant Commissioner Rob Thomson clarified that immediate deductions are allowable for general repairs and maintenance, but not for capital improvements. For example, replacing damaged carpet is deductible, while installing a new kitchen is considered a capital improvement, deductible only over time.

Overall, the ATO's expanded crackdown on landlords is a significant step toward ensuring compliance and reducing the tax gap within the rental property sector.