ATO rental property focus to keep investors on their toes

Within the recently unveiled federal budget for 2023–24, there was a federal spending allocation of an additional $89.6 million to the ATO to extend the Personal Income Tax Compliance Program, which made special mention of “deductions relating to short-term rental properties”.

The action would increase receipts by $474.9 million and increase payments by $90.8 million over the next five years.

HLB Mann Judd tax consulting partner Peter Bembrick said investors must be across CGT when it came to their rentals or holiday homes, as this will be key to meeting the ATO’s stricter compliance crackdown.

“When you think of CGT and residential properties, the two most common situations are the family home (tax-free) and an investment property (CGT applies on sale),” said Mr Bembrick.

“What is not widely appreciated, however, is that this can be viewed as a spectrum on which lie various other scenarios where the tax treatment can be more complicated.”

He said premises that were once used as an investment property but later used as a primary residence had complex CGT implications.

“It is necessary to calculate the total capital gain as if it had always been an investment property, and you will then be taxed on the portion before you moved in, calculated pro rata on a days’ basis,” said Mr Bembrick.

“One saving grace is that the 12-month test for applying the CGT discount is measured from the original acquisition date.”

He said difficulties could arise for clients with properties that were used as holiday homes or occupied by family members.

“Many people don’t realise that CGT applies in much the same way as for an investment property, with one significant difference — any holding costs such as council and water rates, land tax, property repairs and mortgage interest that have not been claimed as tax-deductible (because the property was not rented) can be added to the CGT cost base, as long as the property was acquired after 20 August 1991,” said Mr Bembrick.

He also conceded that investors with holiday homes and investment properties needed to be across CGT to avoid added pain when it comes time to sell.

“Finding this out at the time of selling a property can cause great practical difficulties as typically records of such expenses have not been kept, especially going back several years,” said Mr Bembrick.

“So ideally, you should be aware of the rule and keep records as you go along; otherwise, it will be necessary to undertake as much investigation as possible to maximise the cost base.”

An increased emphasis from the ATO on the rental industry was flagged as early as last year when the Tax Office’s assistant commissioner Kath Anderson stated full compliance would add $1.6 billion in revenue.

“Holiday homes might sound minor in the scheme of things, but if we applied the pub test, I don’t think we would find many Australians would think it’s OK for someone to claim thousands — in some cases hundreds of thousands — of dollars in deductions for their holiday home,” said Ms Anderson.

Smart Property Investment recently revealed the extent to which the ATO would be scrutinising property investors from this year onwards.

Residential investment property loan data (RIPL) will be collected on 1.7 million individuals from 17 Australian financial institutions as part of the data matching program, which aims to recoup $1.3 billion in unpaid property taxes.

This was followed up by a warning, also from H&R Block, which advised a need to be “particularly careful not to understate your income or overclaim your expenses when you complete your 2023 tax return”.