The tax office will again be diligent this year, but especially on matters pertaining to capital gains and rental properties. By TERRY HAYES of Thomson Legal & Regulatory
By Terry Hayes
Putting their tax house in order may be foremost in the minds of most entrepreneurs at this time of year, and knowing which areas the tax office will be most interested in can help.
Now the 2006-07 financial year has just closed, many businesses will be turning their attention to getting all that information ready for the lodgement of 2007 tax returns later in the year. So, a question that arises is: what will the tax office pay particular attention to this year? The answer is lots of things, but especially capital gains tax issues and rental properties.
Capital gains tax trap
For 2007, the tax office says it will continue its focus on people and businesses that do not report capital gains from the sale or disposal of properties, shares and other assets. And of course, as we’ve noted before, the tax office’s use of data-matching features highly here.
The rush to contribute funds to superannuation before 1 July 2007 has meant that many people may have sold assets to realise those funds. The problem is that the gains on those asset sales may be subject to capital gains tax.
The tax office has warned that funds should be set aside to meet any tax liability from selling or transferring assets into super. This is an obvious and practical suggestion, but of course such liabilities are likely to be one-offs and would be on top of any existing and regular financial commitments.
The desire to put money into super might be understandable, but SMEs need to appreciate that the steps they may have taken to achieve that might produce tax liability consequences of their own.
With any transaction such as this, a key is to keep good records. It’s a requirement under the tax laws anyway, but the importance of keeping records cannot be overestimated.
Rental properties are a perennial bugbear for the tax office. In the 2006 tax year, almost 200,000 people claimed rental property deductions for the first time, but they didn’t all get it right.
In total for that year, more than 1.4 million people claimed more than $21 billion in rental property tax deductions. That’s a lot of deductions, so the tax office is bound to want to check many of them carefully.
So, what is the tax office looking for – what do people get wrong?
Incorrectly claiming the cost of structural improvements as repairs instead of capital works deductions is a problem area and has been for some time – things like remodelling bathrooms and kitchens, and constructing a deck or pergola.
In the rush to get a repair done, this distinction can easily be overlooked, but it is important to understand the tax consequences first.
Renovation costs and costs to repair damage or defects cannot be claimed as immediate deductions. These costs are capital expenditure and must be claimed as either decline in value deductions over the asset’s effective life, or as capital works deductions over 40 years. This can have an effect on cash flow and must be carefully considered.
A loan can be taken out for both private and income-producing purposes. The interest on the private portion of the loan is not tax deductible. The tax office finds this is a common problem. The use to which loan funds are put must be clearly understood.
Another error commonly made is claiming deductions for rental properties that are not genuinely available for rent. Similarly, where a property is available for rent for only part of a year, deductions cannot be claimed for that period.
The above are but a few of the areas the tax office will be looking at this year. Tax law is tricky, so when contemplating making expenditures like those noted, seek advice before acting, and keep good records.
Terry Hayes is the senior tax writer at Thomson Legal & Regulatory , a leading Australian provider of tax, accounting and legal information solutions.
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