Episode Details

We all want to stay on the ATO’s good side. No one wants to invite a tax audit. But, at the same time, it is prudent to investigate all opportunities to minimise the amount of tax we pay.

This often requires a balance between minimising taxes wherever possible, but not being too aggressive that you risk getting into trouble with the ATO. My view is that you always stick within the black letter of the law – never transgressing into any grey areas – as it’s never worth it in the long run.

The ATO has made some significant changes lately that I want to bring to your attention. These changes might encourage you to review how to manage your finances.

ATO: 90% of property investor tax returns have errors

The ATO announced in April that it will double the number of audits of property investor tax returns to 4,500. It said that its data indicates that 90% of property investor tax returns contained errors. The ATO found four main errors:

Interest deductions

Errors included incorrectly claiming interest that was not tax-deductible (i.e. debt was not used to produce taxable income e.g. home loan) and/or loan purpose was not able to be proven by the taxpayer e.g. they mixed purposes in one loan.

It is likely that interest is your largest tax deduction, so you must take care in not compromising it. Make sure your loans are correctly structured as I have previously described here. And keep good records i.e. you can demonstrate what investment asset each loan relates to.

In short, separate loans by asset i.e. separate loan/s for each property or investment – avoid having one loan for multiple purposes. And if you refinance and/or loan amounts change, keep thorough records.

Claiming improvements as repairs

In short, a repair brings an asset back to the same condition it was in when you first acquired the property. An improvement on the other hand is improving the asset beyond its original condition and/or changing the nature of an asset.

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.

The ATO does provide some guidance in its website here but sometimes its not easy to ascertain whether a cost is a repair or improvement or both, so in that situation you should obtain tax advice.

Holiday homes

The ATO’s main concern is making sure that any deductions claimed in respect to holiday homes that are rented out for part of the year are correctly apportioned. Apportionment of expenses must take 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.

If you own a holiday house that is partly rented out and partly occupied, ensure you use the services of an experienced registered tax agent.

No receipts

The onus is on the taxpayer to prove a tax deduction is legitimate. In the absences of said proof, the ATO will simply deny the deduction. The ATO found that many taxpayers failed to produce sufficient evidence of expenses claimed e.g. receipts.

I always recommend that you ask your managing agent to pay for all expe