With the ATO making it quite clear that they will being paying close attention to property investors' deductions this year, we thought we would investigate. With the help of our Tax Consultant we have prepared the following information.
IMPORTANT - This posting is provided for general information only and shall not be viewed as professional advice. Readers of this email should obtain professional advice specific to their own particular circumstances prior to acting.
The ATO has indicated that it plans to crackdown on property investors by announcing investment property owners will form a major part of their compliance program for 2003/2004. The ATO intends to place 10,000 property investors under scrutiny, paying particular attention to depreciation claims, interest payments on borrowings and capital gains made upon sale.
The following are some of the common issues that are attracting the ATO’s attention, as identified by Keith Harvey in the August release of the “Property Transactions Tax Letter”:
Claiming expenses when a property is not available for rent:
Certain expenses can only be claimed as deductions when they are ‘incurred to the extent that’ they relate to the production of rental income and fall within the period that the property is rented or available for rent.
Example
Ted owns a workers cottage located on the Labrador foreshore at the Gold Coast. For a 180 day period over Spring and Summer Ted works overseas. For this period Ted rents out the property as a holiday home, because it is a popular spot with tourists at this time of year. Therefore, all costs to be deducted must be apportioned on the basis of the time that the house was available as an income producing asset.
Lets use Council rates ($1,300 per year) as an example. Ted would apportion the rates as follows:
$1,300 x (180/365) = $641
Therefore, in relation to his rates bill, Ted can claim a total of $641 as a deduction.
Claiming initial capital improvements as being repairs:
When an investor purchases a rental property that is in need of repair, the ATO will deem that it was the intent of the investor to subsequently repair and improve the property in order to increase its suitability for renting. The cost of these repairs are incurred prior to renting the property and as such do not relate to generating assessable rental income. Therefore, these expenses are of a capital nature and are not an allowable deduction.
Example
David is in the market for an investment property. After much searching he settles on a 3 bedroom house in reasonable condition. The property requires some repairs prior to the first tenants moving in. The walls are slightly damaged as well as requiring painting, the front door requires replacing and two power points also need to be replaced.
The ATO will deem that these costs are going to be incurred to prepare the property for rent and not from David’s use of the property to generate rental income. Therefore, the expenses are regarded as being capital in nature and David will not be able to claim a deduction for these costs.
Claiming interest on loans that are partially or wholly for private purposes:
In instances where a rental property has been financed with borrowings that also relate to the purchase of other assets, such as a motor vehicle, the interest needs to be apportioned in a way that the specific amounts for deduction only relate to the rental property.
Example
Sue and Jeff decide to utilise one of their banks products to borrow money for an investment property and a new car. The investment property costs them $200,000 and the new car $25,000 for a total loan amount of $225,000 at 6.25% per annum. The following is how Sue and Jeff would work out exactly how much of their interest payments are tax deductible:
Total interest for first year = $225,000 x 6.25% = $14,625
Apportionment of interest payable in relation to the rental property
$14,625 x ($200,000/$225,000) = $13,000
Therefore Sue and Jeff could claim $13,000.
Estimating construction costs of buildings instead of relying on cost estimates provided by independent qualified professionals:
When a property investor purchases a property and is unable to precisely determine the costs associated with construction, then an estimate from an appropriately qualified person should be used. The property investor’s own estimate will not suffice, unless the property investor themselves posses the qualifications stipulated by the ATO.
Inclusion of land value as part of the construction cost:
Construction expenditure that can be claimed only relates to the actual cost of building the structure. The cost of the land upon which the rental structure is built, the costs associated with clearing the land prior to building and the costs for landscaping the property are not to be included in the construction expenditure being claimed.
Travel expenses being unreasonably apportioned where the purpose of the travel is partly or predominantly private in nature:
Where the sole purpose of a trip relates to a property investor’s rental property, they are allowed to claim the expenses as a full deduction. However, if the main purpose of the trip is to have a holiday then the investor cannot claim a full deduction for the travel expenditure. In these circumstances the following may be claimable:
· Expenses relating to the property inspection, such as taxi fares from the holiday accommodation premises to the investment property; and
· A proportion of the accommodation expenses that the ATO considers reasonable.
For further information visit the ATO's website at www.ato.gov.au
Best of luck with your wealth creation endeavours.
PROPERTY MANAGER APPRAISALS
www.propertymanagerinfo.com.au/Free_service.html
IMPORTANT - This posting is provided for general information only and shall not be viewed as professional advice. Readers of this email should obtain professional advice specific to their own particular circumstances prior to acting.
The ATO has indicated that it plans to crackdown on property investors by announcing investment property owners will form a major part of their compliance program for 2003/2004. The ATO intends to place 10,000 property investors under scrutiny, paying particular attention to depreciation claims, interest payments on borrowings and capital gains made upon sale.
The following are some of the common issues that are attracting the ATO’s attention, as identified by Keith Harvey in the August release of the “Property Transactions Tax Letter”:
Claiming expenses when a property is not available for rent:
Certain expenses can only be claimed as deductions when they are ‘incurred to the extent that’ they relate to the production of rental income and fall within the period that the property is rented or available for rent.
Example
Ted owns a workers cottage located on the Labrador foreshore at the Gold Coast. For a 180 day period over Spring and Summer Ted works overseas. For this period Ted rents out the property as a holiday home, because it is a popular spot with tourists at this time of year. Therefore, all costs to be deducted must be apportioned on the basis of the time that the house was available as an income producing asset.
Lets use Council rates ($1,300 per year) as an example. Ted would apportion the rates as follows:
$1,300 x (180/365) = $641
Therefore, in relation to his rates bill, Ted can claim a total of $641 as a deduction.
Claiming initial capital improvements as being repairs:
When an investor purchases a rental property that is in need of repair, the ATO will deem that it was the intent of the investor to subsequently repair and improve the property in order to increase its suitability for renting. The cost of these repairs are incurred prior to renting the property and as such do not relate to generating assessable rental income. Therefore, these expenses are of a capital nature and are not an allowable deduction.
Example
David is in the market for an investment property. After much searching he settles on a 3 bedroom house in reasonable condition. The property requires some repairs prior to the first tenants moving in. The walls are slightly damaged as well as requiring painting, the front door requires replacing and two power points also need to be replaced.
The ATO will deem that these costs are going to be incurred to prepare the property for rent and not from David’s use of the property to generate rental income. Therefore, the expenses are regarded as being capital in nature and David will not be able to claim a deduction for these costs.
Claiming interest on loans that are partially or wholly for private purposes:
In instances where a rental property has been financed with borrowings that also relate to the purchase of other assets, such as a motor vehicle, the interest needs to be apportioned in a way that the specific amounts for deduction only relate to the rental property.
Example
Sue and Jeff decide to utilise one of their banks products to borrow money for an investment property and a new car. The investment property costs them $200,000 and the new car $25,000 for a total loan amount of $225,000 at 6.25% per annum. The following is how Sue and Jeff would work out exactly how much of their interest payments are tax deductible:
Total interest for first year = $225,000 x 6.25% = $14,625
Apportionment of interest payable in relation to the rental property
$14,625 x ($200,000/$225,000) = $13,000
Therefore Sue and Jeff could claim $13,000.
Estimating construction costs of buildings instead of relying on cost estimates provided by independent qualified professionals:
When a property investor purchases a property and is unable to precisely determine the costs associated with construction, then an estimate from an appropriately qualified person should be used. The property investor’s own estimate will not suffice, unless the property investor themselves posses the qualifications stipulated by the ATO.
Inclusion of land value as part of the construction cost:
Construction expenditure that can be claimed only relates to the actual cost of building the structure. The cost of the land upon which the rental structure is built, the costs associated with clearing the land prior to building and the costs for landscaping the property are not to be included in the construction expenditure being claimed.
Travel expenses being unreasonably apportioned where the purpose of the travel is partly or predominantly private in nature:
Where the sole purpose of a trip relates to a property investor’s rental property, they are allowed to claim the expenses as a full deduction. However, if the main purpose of the trip is to have a holiday then the investor cannot claim a full deduction for the travel expenditure. In these circumstances the following may be claimable:
· Expenses relating to the property inspection, such as taxi fares from the holiday accommodation premises to the investment property; and
· A proportion of the accommodation expenses that the ATO considers reasonable.
For further information visit the ATO's website at www.ato.gov.au
Best of luck with your wealth creation endeavours.
PROPERTY MANAGER APPRAISALS
www.propertymanagerinfo.com.au/Free_service.html
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