Over 1.3 million people claimed more than $25 billion in rental deductions in their tax returns last year, with almost 150,000 people claiming deductions for the first time. It’s probably for this reason that the Tax Office is continuing its focus on rental property deductions.

With the Tax Office’s targeting of property investors and its “prevention is better than cure” approach to compliance in this sector, now is the time for property investors to get their house in order to avoid any unwelcome attention – and the penalties that may be imposed.

Last year, the Tax Office used over 500 million transaction records reported to them by third parties to substantiate taxpayers’ claims. This year, the Tax Office plans to analyse a similar volume of records in its data matching compliance and review exercises. The Tax Office’s continued focus on rental properties, particularly those that are negatively geared, is reinforced by 2011 Compliance Program. The Tax Office intends to continue issuing review letters to taxpayers who have unusually high claims for rental deductions, low rental income in relation to rental deductions, high claims for interest expenses, and high claims for borrowing expenses.

Property investors claiming expenses during periods when the investment property was not available for rent or where the owners use it for their own use, are just two of the most common mistakes picked up by the Tax Office.

Reporting obligations
The first step in determining the reporting obligations of a taxpayer is the identification of the legal interest a taxpayer has in each and every separate and identifiable investment property.

An investment property may be owned independently by a single taxpayer, or may in fact be owned by multiple taxpayers. An investment property owned by multiple parties may be held as tenants in common, where the property investors hold unequal interests in the property (one investor may hold a 70% interest and the other a 30% interest); or as joint tenants where the property investors each hold an undivided interest in the property.

A partnership holding property may hold the interests under either of the above, however, the Tax Office will invariably treat joint tenants as equal interests.

Legal jargon
Understanding the terminology is important from a legal perspective as it will determine the amount of income and expenditure the taxpayer’s must disclose to the Tax Office as part of their annual reporting obligations.

The property investment income and expenses must be attributed to each co-owner according to their legal interest in the property, and the Tax Office will apply this rigidly despite any agreement between co-owners, either oral or in writing, stating otherwise.

The following outlines the tax treatment of the most common income and expenditure items that property investors should disclose to the Tax Office as part of their annual income tax obligations.

Reporting Income
In reporting income from property investment, taxpayers should disclose:

• recurrent lease/rental payments received
  
  
• bond money retained by the property investor in place of rent for damages caused to the property during the tenancy period
  insurance payments to rectify damages caused to the property by tenants
  
  
• insurance payments received in lieu of rent not paid by tenants
  
  
• reimbursements received from tenants as contributions towards expenses for rectifying damages made to the property.

Forgetting to include insurance and bond recoveries from gross income received from property investment is a red rag to a bull where the Tax Office is concerned.

Claiming Expenses
There are two separate categories of expenses that an investor is entitled to claim; revenue expenses and capital costs.

The Tax Office is also getting wiser where property investors claim expenses during periods when the investment property was not available or not advertised for rent, or where the owners keep the property for their own use. This is particularly apparent with holiday homes where the Tax Office will reduce claims proportionally for the period.

The Tax Office is turning up the heat on property investor’s as its education and compliance program commonly referred to the “prevention is better than cure“ policy has been operating for about four (4) years. So it’s important to get the right advice from a tax professional to avoid any unwanted attention or penalties.




Contact

Martin Booth
T +61 2 8236 7700
mbooth@moorestephens.com.au

www.moorestephens.com.au