[Podcast] Attention property investors, the tax man is after you. Here’s what he’s looking for, with Ken Raiss

If you’re a property investor, today’s episode is a must. 

Why?

Because the taxman is after you – you and all property investors.

It’s not long until tax time and the Australian Taxation Office is already preparing its so-called “hit list” of priority areas due for a crackdown in the 2021-22 financial year.

Property owners, crypto investors, and those working in the gig economy will be front of mind for the tax office plus a number of other areas, so today Ken Raiss and I are going to look at this hit list in the hope that you’ll be able to avoid a nasty surprise at tax time.

What the taxman is looking for

The Australian Taxation Office might be taking a much closer look at your tax return this year than you would like.

Now it's not only property-related deductions that the taxman is looking at, so I'd like to discuss the other areas with you in a moment, but since many people listening to this podcast are property investors, let's look at some of the common errors made by property taxpayers first.

1. Repairs vs. Maintenance

The cost of repairs can be claimed in full in the year they are incurred whereas an improvement must be depreciated over its useful life.

It is not always easy to ascertain whether a cost is a repair or improvement or both, so you should obtain tax advice in many situations. 

      2. Interest expenses

The deductibility of the loan will be determined by its purpose. So, make sure your loans are correctly structured. Keep good records i.e. you can demonstrate what investment asset each loan relates to.

3. Property divestments

If you sell an investment property you will need to calculate the capital gain (or loss).

This capital gain will be taxable and if your property is owned for over 12 months you will benefit from a 50% general discount if purchased with the intention to own the property as an investment.

If you purchased the property with the intention to sell it at a profit, you can’t claim this CGT discount.

4. Personal expenses including holiday homes

The ATO’s main concern is to make sure that any deductions claimed with respect to holiday homes rented out for part of the year are correctly apportioned.

If you rent out your holiday home, carefully apportion your expenses taking into account whether the property was rented at a rate below market (to friends or family), whether it was available for rent during peak periods, if the owners unreasonably refused tenants and whether the owners genuinely took steps to find tenants during periods it wasn’t occupied.

5. Renting part of your home

If you are renting part of your home, you must declare the income.

Costs associated with the income are proportionally deductible.

The renting of a room or the total property on say AirBNB must also be reported to the tax office.

6. Double claims for interest expenses

Property owners trying to claim borrowing costs on their family homes and rental properties.

     7. Incorrect apportioning of rental income

Deduction claims on a jointly owned property being claimed by just one owner (with higher taxable income) rather than jointly between both property owners.

    8. Weak claims for new rental properties

Claims to immediately recoup damage repair costs on newly purchased rental properties rather than claiming them over a number of years (as is appropriate for tax deductions).

    9.  Substantiation of expenses – receipts

The onus is on the taxpayer to prove a tax deduction is legitimate.

In the absence of this proof, the ATO will simply deny the deduction.

The ATO found that many taxpayers failed to produce sufficient evidence of expenses claimed.

Work-related expense claims

The ATO has identified dodgy work-related expense claims as to the key driver of Australia’s tax gap – the difference between the tax people should pay and what they actually pay.

With that in mind, these are the expense claims the ATO has its eye on:

• Work-related clothing: The ATO is expecting fewer claims for dry cleaning and laundry expenses due to COVID-19 and the rise in working from home.
• Deductions for home offices: Claims for occupation costs like rent or mortgage interest are on the ATO’s radar as they’re not allowed
• Mobile phone and internet costs: The ATO is watching those who try to claim their whole personal phone bill as a work expense.
• Incorrectly using the receipt rule: The ATO is worried taxpayers are taking advantage of the $300 threshold allowing expense claims to be made without receipts.

Crypto investors

Crypto is in the ATO’s crosshairs again this financial year after a huge effort to bring digital currency investors under the tax umbrella last year.

The ATO is looking at 500,000 to a million crypto owners in Australia, using data from prominent exchanges to capture everyone, so if you’re hoping to hide your crypto you’re likely to be caught out.

Sharing economy

The sharing economy is also shaping up as a focus area again for the ATO – they’ve even published a few examples about their concerns.

These include:

• Expenses for ridesharing: Incorrectly reporting expenses related to transporting passengers for a fare.
• Renting out a room: The ATO believes Airbnb hosts are claiming the full Capital Gains Tax main residence exemption despite renting out a room through sharing economy platforms.
• Expenses for task work: Those working on task platforms like Airtasker can expect tougher scrutiny over their expense claims.

Links and Resources:

Michael Yardney

Ken Raiss- Director Metropole Wealth Advisory

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Some of our favourite quotes from the show:

“I guess the taxman is wanting to make sure that you’re correctly apportioning the rental income.” —Michael Yardney

“Apparently there’s at least half a million and maybe a million crypto owners in Australia.” — Michael Yardney

“The probability of you drawing a ticket that has the favourable circumstances you’re in right now is incredibly small.”— Michael Yardney

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