The Tax Office has property investors in its sights
By Ed Chan
Being the chairman of a national accounting firm that specialises in property investors gives you a special insight into the ATO’s areas of interest. We have noticed an interesting trend over recent months: the ATO is becoming more aggressive in its approach to collections of revenues and taxes when assessing claims. This could be a directive from the top, with so much discussion about budget deficits and the government trying to keep to their promises of balancing the books by certain dates there may be external pressures placed upon their biggest collection agency the ATO. Generally we find that the behaviour of people within businesses and organisations is a direct result of the management above who place directives upon their staff to reach certain targets.
The collections and assessment people hired within the ATO are no different than those debt collectors or assessors outside – they are employed for a reason, and that reason is to ensure that all taxes are paid and collected. That involves monitoring closely what individuals claim in their tax returns each year because this has a direct impact on the revenues and the budget. The ATO simply through being more efficient and diligent can literally save hundreds of millions – according to ATO sources more than $16 billion worth of deductions are claimed by taxpayers each year, and if 10% of claims are incorrect… well, you get the picture.
Having completed more than half the tax year I thought it timely that I share with you some of the common mistakes made by taxpayers have been, what you can and cannot claim, how to ensure that the taxman does not come knocking on your door and if he does how you can survive the audit. The ATO is targeting property investors among others, and the most common errors are failing to keep receipts, wrongly claiming capital items as expenses, generally tardy record-keeping and misunderstandings about what you can and cannot claim.
The ATO see the property area as an area where there is potential huge leakage of revenue due to incorrect claims. This year the ATO has said that more than 100,000 property investors will be contacted. Here are some useful tips to ensure you comply if you receive that ATO letter.
1. We always suggest to clients to get the real estate agent to pay for all expenses of the property from the rental it has collected. There are several reasons for this. Firstly, you are already paying the agency a commission for handling the management, so you may as well make use of the service. Secondly, you are working your money harder (rent sitting in the agency’s trust account). Lastly, when its tax time you simply ask for a yearly summary of rents and expenses, and you give this to your accountant, which will save in accounting costs. Than all you need to do is provide your accountant with a list of other expenses that you have paid for out of your own pocket.
2. Ensure you have a quantity surveyor’s report to back up the depreciation claims. Any capital works can be claimed as depreciation over many years, and you need a quantity surveyors report to claim this back
3. Also, if you have renovated you can claim back the items that have been thrown out such as old kitchens and demolishing of walls and other structures. To get these as a tax deduction you will need to secure a scrapping schedule from a quantity surveyor.
4. Ask your bank to provide you with an annual loan interest summary that relates to each property so you claim the appropriate interest against the appropriate property.
5. If you have undertaken any major works to your property, be careful what you can claim as a repair vs a capital improvement, this is an area the ATO likes to focus on as many people get it wrong because it is quite grey . A repair is fixing something to bring it back into close to original workable condition, and a capital improvement is replacing it with something better. To provide an example, if you had an oven and you just replaced the fans that is a repair, but purchasing a new oven is a capital improvement. If you replace the roof tiles of the entire roof with new terracotta that is a capital investment, but if you replace a few broken slate tiles that is a repair. A word of advice: if the amount is substantial this will more than likely trigger an audit, so seek professional advice beforehand or even go to the extent of contacting the ATO for a ruling.
6. Depending on the size of your portfolio you are entitled to claim an apportionment of things like use of home computers and home office costs to manage the properties, travel to view the property if the sole intention is just that (however, if the intention is say 50% to view property and 50% to holiday you will need to keep a diary record and receipts to justify the apportionment of expenses including airfares and accommodation).
7. If you have purchased an investment property in the last financial year, prepare a purchase statement that includes the purchase price, legal costs, stamp duties, borrowing costs and other capital costs, which are not tax deductible but carried forward to form part of the cost base. If and when you sell in the future you will have this information to help reduce the capital gain tax payable at that time.
8. Land tax paid by you for the property is tax deductible.
9. A word of warning: if you have incurred travel costs to inspect a property to purchase the cost is not deductible because it is part of the initial purchase cost, such as stamp duty.
10. Always seek professional advice if in doubt, as fees paid to professionals like your accountant are fully tax deductible.
Some accounting firms like Chan & Naylor offer audit insurance, for a small tax-deductible fee per year you can insure yourself against the costs of having a professional represent your case on your behalf to the ATO. An ATO audit can be a very expensive exercise, time-consuming and stressful, and this type of insurance provides you with peace of mind knowing that your professional will be the go between and handle everything for you at little or no cost to you. This is simply risk management, and I believe is something everyone should consider especially with the ATO being so active.
One last thing: we recommend that you get your work to your accountant on time to avoid the standard rush periods which helps avoid late lodgement penalties. Also note that the ATO standard work-related deduction amount of $500 does not apply until this year, and the standard deduction would be available regardless of whether relevant expenditure was actually incurred. For example, a person who completes his own tax return would be able to claim a deduction for his own efforts. The standard deduction will translate into a $157.50 saving for a person on a 30% marginal tax rate in the first year of the measure; it remains at $300 for 2011.
Above all else, if in doubt we recommend you seek professional advice when lodging your tax returns, the tax-deductible fee paid to the accountant may be a lot cheaper exercise than getting it wrong and triggering an ATO audit.
Ed Chan is a founding partner of Chan and Naylor accountants and a leading property tax specialist. He has co-authored three best-selling books as a seasoned property investor who understands the relationship between property investment and tax.
Non-Executive Chairman, Chan & Naylor
Disclaimer: This information has been prepared as a general guideline, and is not intended to be an exhaustive or a complete analysis of the topics in question or issues raised in this article. There are many particular legal, taxation and accounting matters which have not been dealt with in this article and readers are urged to discuss any aspect of the operation of any of these matters discussed herein with their professional advisers. In particular asset protection, estate planning and superannuation are potentially a very litigious areas of law and you will need specific advice before you take any actions if you want your wishes complied with. Before taking any action or implementing any strategy you should seek professional advice from your lawyer, accountant and or financial planner who will take into account your specific circumstances and objectives.
When your circumstances change it affects your tax and asset protection position.