ATO Implements Stringent Measures for Rental Properties, Work Claims, CGT

The Australian Tax Office (ATO) is set to intensify its efforts this year, targeting three specific areas that are prone to common mistakes, resulting in fewer tax refunds and potentially leaving taxpayers in debt.

The primary focus of the ATO crackdown will be on rental property deductions, work-related expenses, and capital gains tax (CGT). The ATO has issued a warning to accountants, notifying them that landlords, individuals working from home, and investors will face increased scrutiny.

ATO’s Efforts to Support Taxpayers and Agents in Accurate Tax Claims

According to ATO Assistant Commissioner Tim Loh, “Within these areas, we have identified common mistakes and are particularly focused on addressing these and supporting taxpayers and registered tax agents to get their claims right this year.” He further added, “We expect fewer people will receive a refund or may receive smaller refunds than they were expecting, and more may have tax debts to manage.”

Loh highlighted that approximately nine out of ten rental property owners make errors in their returns, such as omitting rental income, overclaiming expenses, or inaccurately claiming improvements to private properties. Given that 87% of landlords utilize tax agents for return preparation, the ATO’s analytics systems can now identify residential property loans and other rental data.

Mr. Loh urged rental property owners and their tax agents to exercise caution this tax season and carefully review their records before lodging their returns. Particularly, he emphasized the correct apportionment of loan interest expenses when part of the loan was used for private purposes. Interest deductions can only be claimed on loans used for the purpose of purchasing a rental property to generate rental income. If the loan includes private expenses, such as a new car or a personal trip, only the portion relevant to producing rental income can be claimed.

Regarding work-related expenses, the ATO abolished the shortcut method for claiming last July and introduced a fixed-rate method with a deduction of 67 cents per hour. This revised regime imposes stricter record-keeping requirements. The alternative method is to use the actual cost method. However, the changes were introduced midway through the tax year, potentially catching individuals who had previously made claims during the pandemic by surprise. Mr. Loh emphasized the importance of complying with eligibility and record-keeping requirements, cautioning against copying and pasting claims from previous years. He highlighted the need to consider whether claims accurately reflect the current working arrangements, as many people have returned to offices compared to the previous year.

The ATO’s scrutiny has also extended to capital gains tax events, encompassing a broad range of assets. CGT applies to the disposal of shares, managed investments, properties, and cryptocurrencies. Taxpayers are required to calculate capital gains or losses for each asset unless an exemption applies. While main residences are generally exempt, if the property has been used to generate income, such as through short-term rentals or home-based businesses, it may not be eligible for the exemption. It is essential for taxpayers to maintain records of income-producing periods and the portion of the property used for income generation when calculating capital gains.

Mr. Loh warned taxpayers not to assume that the ATO will overlook unreported gains from asset sales, stating, “Don’t fall into the trap of thinking we won’t notice if you sell an asset for a gain and don’t declare it.”

Bottomline

In summary, the ATO is intensifying its efforts to address common mistakes in rental property deductions, work-related expenses, and CGT. Taxpayers should exercise caution, review their records diligently, and ensure their claims accurately reflect their circumstances. Compliance with eligibility criteria and record-keeping requirements is crucial to avoid unexpected tax debts and penalties.

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