Div 43 - Capital works deductions

Hi all!

Got a letter from the tax man saying they are highly suspicious of my Capital Works deduction of $7122, and may want to audit me.

I obtained a Depreciation Schedule which clearly states Capital Works deduction is $7122 per year (for the next 40 years), so this is the figure I put down in my 2019/2020 tax return.

Am I doing something wrong? Definitely prefer not to be audited, even though I don't feel like I did anything wrong. I'm not claiming Div 40 depreciation as I lived in my rental property for 2 years commencing March 2017 and started renting it out on 1 July 2019.

Much thanks!

 

No its quite normal. I would have up to 5 clients checked each year. The ATO may just require a copy of that report. It is a common check. There are taxayers who dont obtain a QS report who falsify a claim and the ATO will be looking at that and the Div 40 issue.

The ATO also send out "scare letters" which I think are very misleading. These letters tell taxpayers they may have made a mistake and encourage amendment for something that may be quite legit. You may have received one of those in which case they arent auditing anything. A computer compared your claim with "reisk indicators". If it hits the desk of a person they may look at other data and ignore it and not progress to a "review". A rental review would generally look more closely at the whole property and not just a QS deduction.

 

I just got off the phone to an accountant and recalled this thread.
The client had just received one of those letters querying the Cap Works deduction they had been claiming since 2009. It was around $8,500 per year.
The accountant had taken on this client some years ago and had just kept claiming what the previous accountant had been claiming.
I had a look at the address online while the accountant was on the phone and found that the property was a pretty ordinary townhouse built in the 90s and had sold in 2009 for $340K.
The previous (and then current) accountant had been claiming that $340K at 2.5%.
Oh dear.

 

Oh, and the build cost of that property in the 90s would have been $60-70K

 

ATO then reports reckless conduct to the TPB.

 

For the PropertyChat wishlist: Facebook-style reactions along the lines of wow, laugh, sad, etc., although I can't decide which one would be most appropriate in this scenario.

 

and then a silent muttered...oh ****

 

The accountant said more than a muttered 'oh' when he realised he had claimed a total of about $70K more than he should have.

 

The taxpayer may need to make a voluntary disclosure to the ATO to address this as its largely outside amendment. Accountants legal adviser may need to advise them on giving that client advice and the risks associated with admission by the adviser. And hope like hell the ATO dont refer the matter to the TPB. They may need to even consider a full practice review to ensure all QS claims have a QS report as ATO or TPB will likely ask that. We have a practice policy to ONLY include Div 43 when we have:

• Copy of a prior ITR prepared by a tax agent
• Cost of construction basis eg kitchen receipts etc
• QS report

We dont generally accept builders invoiced cost or estimates as we consider them too likely to be defective and include profit margins. We push such clients to obtain a valid QS report.

One red flag is foreign property. We insist on a QS report with a TPB registered practitioner number evident. No foreign sourced reports.

 

I had a call from an ATO desk jockey about one report I prepared. They questioned how a massive gym / sports complex could have such large deductions.
I said there was a lot of claimable items especially Div 40 items. Her response was what’s Division 40?
I didn’t know how to move forward after that expose of the lack of knowledge.
Needless to say the investigation was dropped that same day and my client got in with life.
Phew!

 

Most ATO enquiries can be closed off pretty quickly. Often the staffer who is handling the issue is handling several hundred identical cases and its a real public service tick a box job. So no technical experience necessary. Perhaps even working remotely several days a week or in another city to the leader. The team will have a more experienced leader who gives the official sign off. Newcastle seems to do a lot of rental vetting

 

As Tim Loh , Assistant Commissioner has said many times the "tax man" is outdated.

 

How an a staff member be assessing someone's compliance with the law if they have not read the law?

 

just a public servant box ticker. Decisions on issues of compliance or non-compliance will be elevated up the ladder. Apparently the escalation issues in the ATO are just part of the job and its is a well accepted and frustrating part of the job. The coal mine work is mostly lower level staffers due to cost. They arent mean to say things , they just collect it.

I see it like allowing the newest graduate in a tax practice to speak to clients. You just dont allow it. Maybe ask them for bank statements. Thats it. The risk is them speaking if asked anything. First thing they learn is - I cant answer that but will have XXX get back to you or I can put them on now if they are free. Client asks why they are involved and its a issue of cost. The partner wont do hack work at their charge out rate without pain for the client.

 

Coincidently, we just had a client who was asked by the ATO how he arrived at the Cap Works figure in his 21 tax return. I told him the response was: 'I did not know what I could claim and so I engaged a quantity surveyor to prepare a Depreciation Schedule'. I told him that will shut it down because that's what they want people to do.

 

I have been asked for a copy. No problem ever. But when its an accountant produced one they want to check original costs esp if it has Div 43 shown. Recenty had one which was GF.
I also prefer clients to provide the QS with costs and them to report and breakdown the spend into D40 / 43. Too easy for me to get a builders invoivce and I cant split it up...risky and arguably will understate deductions

 

Yep. We always ask if costs are available. Saves going in circles.