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Why landlords get their tax returns wrong

90% of tax returns are wrong and 86% were prepared by tax agents - Why?

The majority of landlords are mum and dad investors. Recent media (including ATO input) has been highlighting their “dodgy tax returns”. The inference in many of these media stories is of intentional wrongdoing by landlords. You must ask yourself “is this cohort a mob of system rorters or is there something a little less media-worthy behind the reported error count?”

90% of tax returns are wrong and 86% were prepared by tax agents - Why

At the heart of media finger pointing is an ATO headline estimate that 90% of landlord tax returns are wrong and 86% of those are prepared by tax agents. The better media story is that these people are “dodgy”.  The reality is somewhat more boring, agents are not going to risk their licences to be complicit in dodgy tax returns and the majority of landlords are not trying to ‘dud the system’ they are just making errors. Why? Before that question can be truly answered, a better statistical breakdown of the headline error estimates (the what) is needed to filter the true causes (the why). Once you understand the why you can truly set about reducing the error count.

A deeper statistical analysis of ATO error estimates will help identify the true causes including:

• Incorrect interpretations – a detailed analysis
• Ignorance of legislation – a detailed analysis
• Poor record keeping - examples
• Poor communication between landlord and tax agent - examples
• Intentional wrongdoing - a detailed analysis

In a deeper error analysis, we suspect that what you will find is that the vast percentage of the errors are unintentional mistakes of varying size and cause, but primarily smaller in amount. The remedy for these rests with better education, support and resourcing. There will be a percentage (presumably quite small) that demonstrates intent to game the system. A detailed analysis of this cohort’s actions would assist shaping rightful audit activity by the ATO. 

Subjective rules, complex ever legislation and poor record keeping

In light of ATO reports that 90% of landlord tax returns are wrong, despite most of those being lodged by a tax agent, Peter says this says more about the system than the individuals.

The ABN says there are three broad causes of errors:

• Subjectivity of rules: There is more to claiming a tax deduction than simply spending money. Sometimes a repair is a deductible repair and sometimes it might be deemed an improvement and subject to the capital allowance or decline in value rules and be claimed over time. The difference is interpretive and needs to be carefully considered. The timeframe over which improvements can be claimed is also subject to interpretation and legislative change.
• Legislative complexity: There are many specific tax laws affecting rental properties and deductibility of certain expenses that need to be understood in order to get rental property statements in tax returns correct, including: borrowing costs, interest, repairs, improvements, body corporate fees, private use of a property and more. Changes occur; over recent years legislation changed to deny travel costs and interest during the construction phase as deductions.
• Poor record keeping: Poor record keeping can give rise to claims being disallowed or indeed claims validly incurred being lost. Failure to understand the record keeping requirements often leads to incorrect tax returns. Good record keeping gives a tax agent a chance to get a landlord’s tax return right.

Landlords are just ‘everyday people’, not demon ‘fat cats’

“Despite what the media will have you believe, landlords are not dodgy, nor are they the mythical archvillain ‘fat cat’ types exploiting the tax system,” said Peter.

“The overwhelming ownership of residential rental properties are ‘normal’ folk like teachers, police, firefighters, and tradies who have a bit of equity in their home and seek to build some wealth for retirement.

“By and large this group of people are just trying to navigate the tax system and get their tax returns right and using a good tax agent improves the chances.”

Media shaming is not the answer, what is really needed to lower the error count from both the media and the ATO is:

• More clarity of explanation around subjective rules
• Better guidance material on legislation that can be complex
• Assistance and guidance around record keeping

But I suppose that does not sell many papers does it.

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