ATO focus on rental shifts

Chris Jordan of ATO spoke at the Tax Institute National Convention today :

The $47 billion in deductions claimed against rental income every year will face tougher scrutiny from the Australian Taxation Office after more than 300 audits of investor returns revealed errors in nearly 90 per cent of those cases.

“We’re seeing incorrect interest claims for the entire investment loan where it has been refinanced for private purposes, incorrect classification of capital works as repairs and maintenance, and taxpayers not apportioning deductions for holiday homes when they are not genuinely available for rent."
- ATO will more closely look at refinancing, blended loans and interest deductions across time (Why did it go up ?)
- Strata fees - Special levies are non-deductible
- Repairs
- Private use, not available for rent or non arms length tenants

 

i expect a massive tax recoupment from this exercise. many have gone with cheap resources and got it all wrong. $688m from work related expenses. this one should bring in more.

 

I'm guessing a whole lot of outright fraud is going on with these sorts of claims. I imagine, that, yes, a lot will be saved as a result!

 

I have seen 3 in the past 3 months out of the 300 I suspect. Each had an issue of some sort. None I could have identified. 1 of them caused by a QS report error that doubled the cap allowance for each taxpayer v's what it should have been. I saw it first but we amended in the voluntary disclosure anyway after QS replaced report. Made no difference except to c/fwd losses for a non-resident.

Its a comprehensive review. EVERY single aspect of the rental schedule is verified - 2017. And terms of rental etc all carefully checked with agents etc. Total time for 1 x IP is at least 6 hours. ATO looks back for all loans and all refinance to day 1 acquisition - they want every single statement. They expect all taxpayers retain this evidence of refinance or loan continuity. And proof of rental from agent deposits etc. And original loan docs.

We are now comparing three years of interest v's present year. 1 in 3 isnt linear and indicates a higher loan. Mostly non-deductible private use drawn down for a car or other purpose. Taxpayers (investors) all think that the loan relates to the property or forgot about the redraw.

 

If everyone paid tax as they should it would raise billions and then they wouldn't have to remove franking credits.

 

If special levies are not deductable, how are they accounted for? Added to the purchase price? And I've never quite got my head around depreciation of common property v. sinking fund payments. It would seem logical that you can't claim both?

 

Why not do both mwuahahha

 

About time they cracked down (why so late though?).

There are many dodgy property investors out there come tax time. And dodgier tax agents.

People should pay their fair share. Ignorance of the law is no excuse.

 

I think it's time to introduce Standard Deductions!

 

another headwind for investor market.

 

Please excuse my ignorance but can you explain why special levies are not deductible? Our body corporate had to raise money via a special levy a few years ago, i seem to remember a water pipe burst and caused a mess..

 

My non expert point of view is that its not a fee like your other quarterly strata costs, you're actually contributing to buy some infrastructure. So in my opinion, you'd then be able to add that infrastructure (or your share of which) to your depreciation schedule.

Disclosure im not a tax professional.

 

capital cost.

 

Well it will be interesting when the apartment owners in the news recently who have building remediation works and fire safety remediation start getting their special levies over the next few years and realise they can not claim tax deductions!

 

Tough luck, it is what it is!

"The law is reason free from passion."
- Aristotle

 

Thanks DT and Terry

 

Maybe tough luck for them @Waterboy but I am glad I am not one of them.

 

They may or it may be Div43. A qs coukd assess the works and amend the qs report after works are completed

 

I think a lot of people have been a bit generous over the years with how Special Levies have been treated. Many just claim the contribution as a deduction along with their other strata fees. If the Special Levy is only $5,000 or so, they would get away with it.
Generally speaking, there are two main things that broadly determine how a Special Levy is treated: the nature of the work funded by the Special Levy, and the length of time someone has been renting out the property.
If a person buys a rental in a building with known problems and gets hit not long after with a Special Levy for those works, they are paying for an 'improvement' to the building and will need to claim their contribution at 2.5%..
If someone owns a rental in a building and the owners corp decide to bung in a BBQ area or something like that, that is also an improvement.
If someone has been renting out an apartment for some years and a Special Levy is imposed to deal with a problem that arose while they were renting it out, they may be able to claim that cost as a deduction - 'repair'.
The grey area may be with people who buy into a building with unknown problems.

 

"Get away with it"...Until its detected. Its important all taxpayers realise that :

1. Tax returns are the taxpayers responsibility.
2. The tax agents isn't responsible even for a mistake - refer to 1. above
3. Self assessment is the basis for lodgement. While a 2 year amendment period is typical it doesnt cover a mistake. Mistakes commonly fall under evasion & avoidance rules and have no time limit to detect.

Most taxpayers fail to understand the special levies themselves are NEVER deductible. The payment is always a capital expense. The taxpayer needs to consider their share of the total expense and works undertaken using the pool of levies using a look through basis for their share. That skill requires a QS to assess the nature of the levies spent when the works are completed and the cost based on actual or assessed costs. It may be an improvement, a lift replacement (div 40), fascade and balcony remedial works (Div 43). A good example - Concrete replacement for a balcony wont be a repair even if it is a repair as the cost is a capital outgoing by the BC. However the value of the former balcony demo may trigger a write off and the new works may trigger a new addition to Div 43. Based on the taxpayer share of the total and the date the works were completed.

Taxpayers can easily get this wrong.and underclaim too. eg Mary buy a new unit with a concrete balcony cancer issue. The past owner had contributed $28K to special levies which were held by the strata for a $600K rebuild of all balconys. The levies had been imposed 4 monthly for the past year. Two weeks after Mary buys the works are started. Mary has paid nothing herself. Mary could have her QS assess her share of the new Div 43. The QS checks with the strata on the works undertaken and its cost. The QS determines her 12% share of the costs is $72K...But Mary has paid nothing except a single settlement adjustment to her acquisition for the $28K of $26K based on a days held apportionment