Property investors may be good at researching where to buy, what their rental returns will be like and working how to get capital growth, but they often do so at the expense of considering any tax obligations.
On a recent episode of The Smart Property Investment Show, acting assistant commissioner of individuals and intermediaries at the Australian Taxation Office Adam O’Grady spoke with host Phil Tarrant about some of the things property investors need to be thinking about with regard to their investments.
One of the biggest issues the ATO finds with property investors is that “people just don’t keep records of what’s happened and why, and when”.
In addition, the acting assistant commissioner flagged that when the tax office does review returns and audit property investors, more often than not, it sees simple mistakes or a lack of understanding of what an individual is or isn’t allowed to do with regard to investments in tax returns.
“The vast majority of people don’t deliberately go out to claim things they shouldn’t or obtain refunds,” he acknowledged.
“Those that do, finish up in front of the courts and prison.”
While some people are quick to lump these extra responsibilities regarding disclosure requirements with their accountant, Mr O’Grady said an accountant is “only as good as the information you provide them [with]”.
“They can really help you, make sure you’re structured in the right way and help you set up the proper recording requirements and all those sorts of things,” he offered.
“But, they can only do that if you’re open and honest with them.
“You need to talk to your accountant, explain what you’ve done, why you’ve done it, how you’ve set it up, and then they can give you that right advice.”
Mr O’Grady reiterated that “the majority of people, they want to try and do the right thing”.
But he flagged one of the real examples where people have recently tripped themselves up as relating to short-term rentals: “Where you can now rent out your house for two or three weeks when you go away, or you can rent out a room”.
“That’s all income that needs to be taxed – you need to report that through the tax system,” he said.
“But, a lot of people have jumped onto that as a way of earning extra income and didn’t really consider the tax implications of doing that,” he continued.
Not only is there the income component of such an arrangement, but Mr O’Grady said it changes the capital gains treatment of the property too.
His biggest piece of take-home advice to all investors, and especially those just starting out?
“Make sure you have an understanding of what the tax obligations are, and in particular keep all your records,” he continued.
“That’s really critical for you to understand and meet your obligations through the tax system.”
For anyone who is thinking about their potential tax obligations, Mr O’Grady touted the information available on the ATO’s website as ready to assist interested individuals.
“It’s not all the legal ins and outs, but it gives people a sense of what they should be looking at, [and] what they should be considering” on any investment journey.
“We want people to get what they’re entitled to... We want them to claim the expenses they’re entitled to claim,” the acting assistant commissioner said.
“But we want them to do it in the right way.”