As Australia's tax season rolls around again, the national tax office has a familiar group in its sights: landlords.

The Australian Tax Office (ATO) this week revealed Australians with rental properties were one of three groups under scrutiny, after findings that nine out of 10 landlords were making mistakes on their returns.

The ATO estimates a recent trend of "double dipping" on expenses and other tax return errors could be costing Australia $1.2 billion in its tax take.

So why are landlords falling foul of tax return rules so often?

Overclaimed deductions, lack of documentation among common errors

ATO Assistant Commissioner Rob Thomson said while some tax return mistakes were genuine, there were some seeking to deliberately evade tax by inflating expenses to offset rental income.

The most common mistakes on landlords' tax returns included overclaiming deductions, particularly around interest payments, lack of documentation to substantiate expenses claimed, and people claiming capital works on their investment properties incorrectly, he said.

"For example, where the investor makes a capital improvement, such as building a new patio or remodelling their kitchen, they attempt to claim it as a repair in the year they incur the expense," Assistant Commissioner Thomson said.

"In most circumstances, this should be claimed at 2.5 per cent over 40 years."

Another common error involves landlords claiming interest expenses on portions of loans that had actually been used for private or investment purposes.

The ATO's $1.2b of potential tax loss was informed by an analysis of incorrect landlord tax returns filed for the 2020-21 tax year.

Assistant Commissioner Thomson would not be drawn on whether the added pressure on landlords from the likes of higher interest rates and taxes was likely to have resulted in more attempted tax evasion, or larger potential losses in tax take.

Landlords say errors are usually unintentional

Brisbane-based landlord Merwyn Machado, who has sold two of his three rentals since 2022 and is considering selling his third, said many investors were struggling under higher mortgage rates, higher land taxes and higher council rates.

He said it was only human to try and "claw back" something from the government when times were tougher, but he did not believe landlords were intentionally trying to evade tax.

"We all want to make ends meet and we all have ups and downs like everyone else," he said.

Mr Machado used a tax agent to file returns and said he had never been pulled up for an error.

He said tax arrangements could be complex, and rules often had grey areas, so the error rate may be down to different interpretations by landlords, agents, and the ATO.

Mr Machado had three investment properties but sold one in 2022, and another this year.

He sold the first because it was losing money and nearby developments had caused prices to flatten. He said he sold the second because it would be unaffordable to keep in the higher interest rate environment, and the market was strong.

Mr Machado made substantial capital gains on both properties, with both jumping from 70 to 100 per cent in price during the five to seven years he owned them.

"I think I speak for most of the investors, there might be a few who hold onto their properties, but most just want to sell because the rates are going up, the land tax is going up.

"All of the taxes on everything that the investment property is doing is going up.

"It doesn't make sense to be in for the long term.

"Thirty years ago it made sense to have a house and hold onto it. These days people are flipping houses when there is an opportunity if the property has really gone up in value, and if there is a point when you could really make some money and get rid of the mortgage, you just sell."

Mr Machado said he tried to keep rents affordable on his properties, often renting them out for below the market asking price.

"We don't just want to jump on the bandwagon and increase the rent to cover the mortgage, and I think most people are trying to do the right thing," he said.

"There might be a few greedy landlords who might just jack up the rental price."

Mr Machado is considering whether to sell his final rental, the rent for which covers mortgage payments, but not rates or other expenses.

Tenants say tax system 'incentivises' search for loopholes

Tenants' Union of New South Wales chief executive officer Leo Patterson Ross said the ATO had issued similar warnings to landlords for several years, which showed investors continued to attempt to evade tax.

"The game that the government has set up, whether directly or indirectly, they are being encouraged to participate in this sort of behaviour, or we wouldn't see it at such a widespread level.

"This isn't one or two people taking the mickey, this is a whole industry who clearly have endemic issues around the way they view tax and their obligations around it."

Mr Patterson Ross said there had to be a shift in the business model of landlords, who were encouraged by government, tax and bank policy to leverage themselves with as much debt as possible, and then use that debt to reduce their tax bill.

"It really encourages and incentivises people to look for loopholes to try and minimise their tax, rather than encouraging a responsible mindset and acknowledging this is a service," he said.

From a renter's point of view, Mr Patterson Ross said landlords were allowed to deduct repairs because they were running a business, and they should therefore be expected to meet their tax obligations as professionals.

He said while Australians could have some empathy for landlords facing significant interest rate increases, the only long-term fix was for investors to approach property investing with their eyes open to the potential for risk.

"I think there's been a mythology around property that prices will always go up and particularly over the recent decade or so that interest rates would always stay low, and that was never a sensible position, but I think people were investing in good faith and were misled essentially."

Mistakes persisting despite most landlord returns being lodged by tax agents

Property Investment Professionals of Australia chair Nicola McDougall said she did not believe tax return errors would be malicious and that the error rate cited by the ATO "seemed extraordinarily high", particularly as most landlords used property management companies or tax agents to file tax returns.

Ms McDougall is correct on the last point. According to the ATO, about 87 per cent of taxpayers who owned rental properties used a registered tax agent.

Institute of Public Accountants (IPA) general manager technical policy Tony Greco said the IPA was aware of the error rates flagged by the ATO, as was the Tax Practitioners Board (the regulatory body for tax practitioners).

"In defence of the tax professional it could be a case of a client not being forthcoming with the right information," Mr Greco said.

"Agents don't charge a lot of money for rental returns, and they can't audit every assertion made by the client, so there has to be some level of accepting the explanations provided by the client."

While tax agents did not need to question everything, Mr Greco said there was a bar of "reasonable care" that had to be applied.

"That's not a precise science but if the client is claiming a whole lot of repairs, we can't just accept that, we have to drill down and look at some of those invoices and see that they are legitimate repairs," he said.

Mr Greco said IPA members had been told to verify landlords were supplying correct information.

He said some errors may be down to landlords having incorrect assumptions about what was deductible, or not keeping up to date with tax rule changes.

Such changes may include the scrapping of the ability to claim travel expenses to visit rentals, which Mr Greco said was scrapped in 2019, and second-hand equipment no longer being depreciable.

Clients also often incorrectly thought they could keep deducting interest payments when the property was not available for rent, for example during renovation, which they legally could not.

Mr Greco said the IPA had also been warned about the recent trend of landlords declaring net income (income after expenses had been deducted) and then attempting to claim expenses again as tax deductions, a practice Assistant Commissioner Thomson refers to as "double dipping".

Assistant Commissioner Thomson reminded taxpayers they were responsible for what they included in their returns, even when using a registered agent.

Steps taken to combat errors

The ATO has taken steps to help educate landlords about their tax obligations, including updating its Investor Toolkit, which investors could use to see what they could and could not claim.

"We have also increased the data sources that we use to identify and educate individuals and businesses who may be failing to meet their reporting obligations," Assistant Commissioner Thomson said.

The ATO now received income data from the likes of banks, state revenue offices, land titles offices, motor vehicle registries, insurance companies, share registries, ASIC, PayPal, eBay, Uber, Airbnb and crypto asset exchanges.

"We use this data for a range of activities and one of those is data matching. This ensures everyone declares all their income, offsets and exemptions correctly," he said.

Property Investors Council of Australia chair Ben Kingsley said breaking the law to keep your investment property afloat would not be a recommendation anyone would make.

He said the ATO's data matching capabilities were strong, and tax cheats would eventually be audited and charged.

If a landlord was struggling to make their investment add up, they should think about picking up other jobs or side hustles to cover any shortfall, he said.