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What does the ATO have its sights on for Property Investors?

ATO has property owners in its sights this EOFY

The Australian Taxation Office has announced the key areas it will be keeping a close eye on this tax time, with investors and sellers at the top of the list.

ATO Assistant Commissioner Tim Loh said the ATO is targeting four problem areas where it sees people making mistakes.

Those areas are record-keeping, work-related expenses, rental property income and deductions, and capital gains from crypto assets, property, and shares.

Landlords who incorrectly claim income and deductions are in the ATO’s sights. Picture: Getty

The ATO has warned firm action will be taken against people who try to increase their refund, falsify records or cannot substantiate their claims.

Director of Tax and Communications at H&R Block, Mark Chapman, told realestate.com.au the ATO has issued this warning so taxpayers can’t complain that they weren’t forewarned if they’re caught doing the wrong thing.

“The ATO recently announced that in a series of audits, they found errors in 90% of returns reviewed,” Mr Chapman said.

“The focus on investment property owners is likely to be particularly pronounced because rental losses are likely to be bigger than normal this year due to the hit that rental returns have taken during the COVID-19 crisis.”

Property investors in focus

Landlords have been warned to include all the income received from their rentals in their tax returns, including insurance payouts and rental bond money retained.

“We know a lot of rental property owners use a registered tax agent to help with their tax affairs,” Mr Loh said.

“I encourage you to keep good records, as all rental income and deductions need to be entered manually, you can ask your registered tax agent for assistance.”

                   TIM LOH

  ATO Assistant Commissioner

Mr Loh said any discrepancies could delay the processing of refunds.

“We can also ask for supporting documentation for any claim that you make after your notice of assessment issues,” he said.

Mr Chapman said he often sees investors making basic errors, either accidentally or intentionally, on their returns.

“Investors claiming repairs they’re not entitled to, so repairs that are actually improvements they’re capital in nature, nevertheless the investors are claiming them anyway,” he said.

“Or alternatively so-called ‘initial repairs’ which are actually repairs to defects which existed in the property when the property owner acquired it, they’re capital as well.

“That’s an area the ATO really does focus on, they’re very keen on checking repair deductions particularly larger ones.”

Mr Chapman said investors can also be caught out for claiming excessive interest costs, and even attempting to claim deductions on their family home as well as their investment property.

“The family home is a private claim, you can’t claim a tax deduction so anyone who attempts to do that is tripping up the ATO red flags.”

Property owners must have evidence of income and expenses in order to claim. Picture: realestate.com.au

Perth-based Mortgage Choice broker Catherine Fury has seen an increase in investors coming into the market this financial year, attracted by the relative affordability and high rental yields.

“A property is a great long-term investment to have and Perth is still a lot cheaper than our other capital cities making this an ideal place to invest for locals, interstate and overseas investors,” Ms Fury said.

Of the capital cities, Perth had the second highest rental yield for the March quarter at 5.1%, behind Darwin on 6.3%, PropTrack data shows.

Nationwide, investment properties remain attractive for investors who can afford it, despite PropTrack’s Rental Report revealing total rental yields were down to 3.9% in March 2022 compared to 4.2% in March 2021.

“The key benefits include claiming interest and expenses which include the interest paid on your investment loan, depreciation of the building and fittings within the home, property management fees, property maintenance and any repair work,” Ms Fury said.

”Regardless of whether the property is positively or negatively geared, the items you can claim on all add up to make a big difference at tax time.”

Incorrectly declaring capital gains

Mr Chapman said the biggest mistake made around capital gains tax – the tax you pay on profits from selling assets like property – is not declaring it at all.

“If you sell a property there is a capital gains liability, either a capital gain or a capital loss, but either way you’ve got to declare it in your tax return,” Mr Chapman said.

“Not doing that is basically a red flag for the ATO because obviously the ATO gets data externally from real estate agents and so on, which highlight properties which have been sold and they can match that with somebody’s tax return and if there isn’t disclosure that trips the warning flag.”

Most properties, other than the family home, are subject to capital gains tax. This includes investment properties and holiday homes.

The latest PropTrack Home Price Index report revealed property prices in our capital cities have grown 14% from April 2021 to April this year, and 23% for regional areas over the same time.

Price growth is likely to slow further as we head toward June 30, but the significant price surge during the peak of the pandemic meant this financial year was a strong time to sell.

Prove it with records

The main advice from the ATO is to use these last few weeks before the new financial year to get your records in order.

“If you start organising the income and deductions records you’ve kept throughout the year, this will guarantee you a smoother tax time and ensure you claim the deductions you are entitled to,” Mr Loh said.

Mark Chapman agrees, records are key.

“The most important tip is really to keep good records,” Mr Chapman said.

“Keep records of your income, keep records of your expenses, invoices, receipts et cetera, and get a depreciation schedule,” he added.

“Basically, if you’ve got all of those to hand then you can’t really go too far wrong.”

The three golden rules for investors claiming this tax time, according to the ATO, are:

• You must have spent the money yourself and weren’t reimbursed.
• If the expense is for a mix of income producing and private use, you can only claim the portion that relates to producing income.
• You must have a record to prove it.

Source  :  https://www.realestate.com.au/news/ato-has-property-owners-in-its-sights-this-eofy

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