This article is general information only and does not constitute financial or tax advice. Consult a qualified tax professional for advice specific to your situation.
Key takeaways
- The ATO says nine in 10 rental property owners are getting their tax return wrong, and with 30 June about five weeks away, this is the window where landlords either fix it or carry the error into a lodged return.
- Around 80% of people with rental income claim a loan interest deduction, and the ATO says that is where it sees the biggest mistakes. Using redraw or a refinance for private spending while claiming interest on the full balance is the single most common trap.
- The ATO's property management data-matching program collects data on roughly 2.3 million individuals a year from property software providers for 2018-19 to 2025-26. A separate rental bond program pulls about 2.2 million records a year from state bond regulators. A third matches investment loan data from lenders.
- That bond program in 2022-23, combined with other compliance work, identified about 5,600 taxpayers who had mishandled property dealings and raised an extra $23 million.
- Repairs versus capital improvements remains the most disputed line on a rental return. A like-for-like fix is usually deductible now. A better-than-original upgrade is capital, written off under Division 43 at 2.5% a year over 40 years.
- Depreciation on second-hand plant and equipment in established homes bought after 9 May 2017 is gone for individual investors. Division 43 capital works on the building survives, and so does depreciation on new assets you install.
- The 12 May 2026 Budget makes record-keeping more important, not less: proving a property is grandfathered for negative gearing means keeping the original contract of sale, possibly for decades.
This article is general information only and does not constitute financial, tax, or investment advice.
The macro story of May 2026 has been about rates and the Budget. The RBA hiked to 4.35% on 5 May, the 19 May minutes kept August live, and the 12 May Budget closed negative gearing on new established purchases. But for most landlords, the number that will actually cost or save them money in the next eight weeks has nothing to do with the cash rate. It is 30 June, and what they put in the rental schedule of their 2025-26 return.
The Australian Taxation Office has been blunt about the state of those returns. Its message is that nine in 10 rental property owners get something wrong. That is not nine in 10 deliberately cheating. It is nine in 10 making at least one error, usually on the deduction side, usually in the same handful of places. The difference in 2026 is that the ATO no longer needs to guess where the errors are. It is matching the data directly.
The data the ATO already holds before you lodge
Three data-matching programs now sit underneath every rental return, and a landlord should assume the ATO has the numbers before the return is even opened.
The first is the property management data-matching program. The ATO acquires data straight from property management software companies, the platforms agents use to run trust accounts and rent ledgers. It expects to collect data on around 2.3 million individuals each financial year, covering 2018-19 through to 2025-26. That feed shows gross rent collected, management fees, and every expense the manager paid on the owner's behalf. The ATO retains each year's data for seven years.
The second is the rental bond data-matching program. State and territory bond regulators hand over bond records on roughly 2.2 million individuals a year for 2023-24 to 2025-26. The ATO has been collecting bond data since 2005, with records dating back to 1985, so it can see when a property started earning rent and when it was sold. In 2022-23, that program in combination with other compliance work identified about 5,600 taxpayers whose property dealings had not been treated correctly and raised an additional $23 million.
The third is the residential investment property loan data-matching program, which pulls loan account data from lenders for 2021-22 to 2025-26. That is the one that lets the ATO test whether the interest you claimed matches the loan that was actually used to buy the property.
Put those together and the ATO can independently reconstruct most of a rental schedule: what you earned, what your manager paid, when the lease started, and what your loan looked like. The audit no longer starts with a question. It starts with a discrepancy.
Mistake one: the interest deduction
The interest deduction is where the ATO says it sees the most errors, and it is easy to see why. Around 80% of people reporting rental income claim a deduction for loan interest, so it is both the biggest dollar line on most schedules and the most common.
The trap is not claiming interest. It is claiming the wrong interest. Interest is only deductible on the portion of a loan used to produce rental income. If you have an investment loan and you redraw $40,000 to buy a car or renovate your own home, the interest on that $40,000 is private and not deductible, even though it sits inside the same loan account. Refinancing makes it worse, because borrowers often roll a mixed-purpose loan into a single new facility and then claim the lot.
With the loan data-matching program live, the ATO can see the loan balance and movements. A loan that grew through a redraw while the claimed interest also grew is exactly the pattern the match is designed to flag. If your loan has ever been used for anything other than the rental property, the deductible portion needs to be worked out and documented before you claim it.
Mistake two: repairs versus capital improvements
This is the most disputed line on a rental return, and the rule is genuinely easy to get wrong because the language is ordinary but the tax treatment is not.
A repair restores something to the condition it was in, using similar materials. Replacing a few cracked roof tiles, fixing a leaking tap, or patching a section of fence is generally deductible in the year you pay for it. An improvement makes the property better than it was, or replaces a thing in its entirety. A new kitchen, a re-clad roof, a new deck, or a full bathroom rebuild is capital. It cannot be claimed upfront.
Capital works on the building structure are written off under Division 43 at 2.5% a year over 40 years. So a $40,000 kitchen renovation is not a $40,000 deduction this year. It is roughly $1,000 a year for 40 years. The cash flow difference between treating that as a repair and treating it correctly as capital is large, and it is precisely the kind of overclaim the ATO is hunting.
One more wrinkle catches new owners. Work done to fix defects that existed when you bought the property, before it was first rented, is an initial repair and is capital, not a deduction, even if the same job would be a deductible repair later in the property's life.
Enter asset cost, purchase date and effective life to see your depreciation schedule.
Mistake three: depreciation on second-hand assets
Depreciation is a legitimate, valuable deduction, but the rules narrowed sharply in 2017 and plenty of investors still claim under the old regime.
Since 7:30pm on 9 May 2017, individual investors can no longer claim Division 40 depreciation on previously used plant and equipment in an established residential property. If you bought an established home after that date, the existing dishwasher, carpets, blinds, hot water system and air conditioner that came with it do not attract depreciation, because someone already used them.
What survives is worth knowing. Division 43 capital works on the building structure is unaffected, so a quantity surveyor's schedule on an eligible building still produces a real deduction. And any genuinely new asset you buy and install yourself, a new dishwasher or new carpet you put in, is depreciable in the normal way. The line is between assets that came with the house and assets you added.
Mistake four: double dipping and net rent
The simplest error is also one the data-matching program is purpose-built to catch. Many owners see the net amount their property manager deposits, after the manager has already taken fees and paid rates, water and repairs, and they declare that net figure as income. Then they separately claim the rates, water and repairs as deductions.
That is double dipping. The expenses get counted twice, once by reducing the income figure and once as a deduction. The correct method is to declare the gross rent collected and claim each expense once. The property management software feed the ATO now receives shows the gross rent and every expense line, so the net-versus-gross mismatch is one of the cleanest flags in the system.
Mistake five: co-ownership and short-stay apportionment
Two more catch a lot of returns. If a property is owned 50-50, the income and deductions must be split 50-50 in line with legal ownership, regardless of who actually paid the bills or who earns more. Skewing the split to the higher earner to maximise the deduction is a common and easily detected error.
And if you let a property, or part of it, on a short-stay platform, that income is fully assessable and your deductions must be apportioned for any period of private use or genuine availability. The ATO receives data from short-term rental platforms, so undeclared holiday-let income is no longer invisible.
The Budget made record-keeping a long game
The 12 May 2026 Budget added a reason to keep records far longer than the standard five years. Negative gearing on established residential property is being abolished for purchases made after 7:30pm AEST on 12 May 2026, with effect from 1 July 2027, but properties owned or under contract before that cut-off are grandfathered, as covered in our Budget breakdown.
Grandfathering is only as good as your evidence of it. To keep negatively gearing a property after 1 July 2027, you need to prove you held it, or had exchanged contracts on it, before the cut-off. That means keeping the original contract of sale and settlement records for as long as you own the property, potentially for decades. The five-year retention habit is no longer enough for anything you intend to rely on as grandfathered.
Enter your weekly rent and expenses to see whether your property is negatively or positively geared.
The five-week checklist
With 30 June about five weeks out, the useful work is the boring work:
- Reconcile gross rent, not net. Get the full annual statement from your property manager and declare the gross figure. Claim each expense on that statement once.
- Split your loan by purpose. If your investment loan has ever funded anything private through redraw or refinance, work out the deductible portion now and keep the calculation.
- Sort repairs from improvements. Go through the year's property spending and move anything that made the property better than original, or replaced a whole structure, into capital works rather than an upfront deduction.
- Check your depreciation basis. If you bought an established home after 9 May 2017, make sure you are not claiming Division 40 on second-hand fixtures. Get or update a quantity surveyor's schedule if the building qualifies for Division 43.
- File the contract. Store the contract of sale and settlement statement for every property somewhere permanent. After this Budget, that document is the proof of your grandfathered tax treatment.
Keep a clean ledger all year, not just in June
The reason nine in 10 returns carry an error is rarely fraud. It is a shoebox of receipts reconstructed in a panic in October. The fix is keeping the ledger clean as you go, so the return is a printout rather than a forensic exercise.
Propkt gives landlords one ledger for rent, expenses and loan interest across every property, with each transaction tagged deductible or not as you record it. The expense tracking keeps repairs separate from capital improvements so the repairs-versus-capital line is decided when you spend, not the night before you lodge, and the depreciation tools hold your Division 43 and Division 40 schedules in one place. When tax time comes, the gross rent, the apportioned interest and the capital works are already where the ATO expects to see them.
The data-matching net is now wide enough that the ATO sees most of your rental numbers before you lodge. The cheapest insurance against being one of the nine in 10 is making sure your return matches the data, because this year, the data is already on file.