Who declares the income for this IP?

[ritchie77]

A scenario seems to have arisen and I require some feedback to determine the right procedure in regards to the declaration of income on an IP of a family member:

Scenario = A house in Sydney is being rented for say $500 per week.

Person A = Owns the property, bought in her name and took out mortgage in her name.
Person B = Lease signed with tennant is in her name.
Person C = Receives the rent into his bank account.

Now person A, B and C are all siblings (I Know mixing family with business doesn't always seem to work but this is the way we're flowing at the moment!) and they are all partners in the purchase of the property which was put in person A's name.

Now this is a bit tricky/messy and we are trying to structure the IP to get the tax breaks but we are unsure how much info the ATO have on an IP such as this?
ie. do they check the LPI title index and therefore know that person A owns the property and should therefore be declaring the income?
Or does ATO liaise with the rental Bond Board and therefore be aware person B has signed a lease and should therefore be declaring $500 income?
Or does ATO receive info on bank accounts and can therefore determine person C is receiving $500 per week in income and should be declaring it?

If the above scenarios planned out then the siblings would have to declare $1,500 income whilst only receiving $500 rent haha!! (that would not be a good tax strategy ...)

A big mistake seems to have arisen in the paperwork signing lease, paying money into a/c etc because ideally it should all be dealt with by the 1 person. From my knowledge person A should declare the income because she owns the land in her name!

Any feedback would be much appreciated.

Thanks guys,
Ritchie

 

[Twitch]

Person A is 100% owner and therefore the only person entitled to deductions. Effectively these deductions can only be claimed by person A if 100% of the rent is declared. Whose account the rent goes in is irrelevant.

Person B & C have NO legal entitlement to the house and therefore the deductions.

It all reads like they have outsmarted themselves.

 

[buzzlightyear]

As Twitch said.

For your reference, try this link and go to page 4 under Rental Income - Dividing income and expenses according to legal interest.

 

[BayView]

Person A is 100% owner and therefore the only person entitled to deductions. Effectively these deductions can only be claimed by person A if 100% of the rent is declared. Whose account the rent goes in is irrelevant.

Person B & C have NO legal entitlement to the house and therefore the deductions.

It all reads like they have outsmarted themselves.

Not only that, I think you'll find person C should be declaring the rent as income if they are receiving it.

 

[ritchie77]

Not only that, I think you'll find person C should be declaring the rent as income if they are receiving it.

Thanks guys.... this was the danger in my view when I first saw the scenario... Person C has no entitlements to the deductions, however, he is technically receiving the rent/income so he may have to declare this? (in a technical sense)... Obviously, they do not want to declare twice!!

In regards to the ATO, how do they keep track of income? Can they or do they often view rental board bonds/mortgage accounts or bank accounts to determine if people are receiving funds and not declaring it?

I am not too familiar with these factors and the ATO therefore input may help us come to a decision re changing the lease or account? Also, they may be forced to sell because at first person A wanted to declare the income and now she doesnt.... Yes its a bit of a mess I know

 

[buzzlightyear]

Ritlchie77, I don't believe Person C would have any tax liability, because the rent is owned by Person A. The fact that it is being paid to Person C's bank account is more an issue of funding for Person A to deal with ie funding loan repayments with no rental. The same amount cannot be taxed twice

The only implication for person C that I can see is maybe a higher tax bill due to increased interest earned on any surplus rents in that account.

But I would check with an accountant just to be sure

 

[Twitch]

I agree with Buzz, it's not person C's income, it's 100% person A's. It doesn't matter what account it goes into, what matters is whose asset it was that generated the income.

Think about it, otherwise I could instruct my employer to put half my income in my account and half in my wifes account and therefore income split with my wife ... LOL, I don't think so. That's not how tax law works, it's who (or what) earned the income, not which account it goes into.

I'm confused about person A's position. They don't want to declare the rent, but they want the tax deduction What planet are they on, and how dumb do they think the ATO are?

 

[Twitch]

On the question on how the ATO knows these things, well they have many hooks into other government (and some non-government eg banks) computer systems that they use to cross match against a persons tax return.

Just one example is that they cross match with SRO records to check who owns a property other than their PPOR and isn't declaring rental income. But even before that, claiming deductions on a property for which you don't declare rent is a huge red flag. That person can then expect a letter form the ATO and if a satifactory answer isn't provided, an audit.

 

[ritchie77]

I knew the ATO can look into certain govt agencies and non-govt. banks etc... Just wasnt sure how often or why they would? IE what would flag this and make the ATO dig further into a person's finances/situation. And does the ATO view the OSR website often to see if each investor are declaring the income???

Person A does not wish to outline deductions and ignore the income! This would be stupid and the ATO would pick it up straight away!

 

[BayView]

I agree with Buzz, it's not person C's income, it's 100% person A's. It doesn't matter what account it goes into, what matters is whose asset it was that generated the income.

I think the problem would arise if and when the ATO looked at Person A's tax returns by way of an audit.

If he was claiming deductions and not declaring rent, this may send up a red flag at the ATO, then they might do an audit, and ask where the rent was being sent.

This may lead them to Person C, who then gets audited.

 

[ritchie77]

ok, thanks for your input guys on this tricky situation!

I guess you just gotta try your best to ensure everything is in order INCASE the ATO come knocking!! Maybe the best medicine is to not trigger any alarm bells then you more than likely will not get audited?

I personally have 2 IP's and have never been audited in 8 yrs since I been in OZ.... How do others rate their chances of being audited??

 

[Propertunity]

I guess you just gotta try your best to ensure everything is in order INCASE the ATO come knocking!! Maybe the best medicine is to not trigger any alarm bells then you more than likely will not get audited?

Why not just make sure that everything is always in order all the time anyway? That way it does not matter who comes knocking - and you can always get a good night's sleep.

There is so much opportunity in a country like Australia to do well. Why the need to do something dodgy to 'save a few bucks' to add to the bottom line? IMO you're better off applying the same amount of mental activity to add to the top line

 

[LynnH]

How do others rate their chances of being audited??

We've been audited - it's no big deal as long as everything is squeaky clean, which I am at pains to ensure that our records are.

Hubby used to poke fun at me, since I keep every piece of paperwork I get my hands on ..... but now he realises that my 'strange habits' DO have benefits!

Cheers
LynnH

 

[boomtown]

Its Person A's income.

Person A has the right to transfer the funds to Person C as a gift. A gift has no taxation consequences as far as I know - its still A's taxable income and not taxable income in the hands of C.

 

[Token Funder]

Now this is a bit tricky/messy and we are trying to structure the IP to get the tax breaks but we are unsure how much info the ATO have on an IP such as this?

"We've got a complicated structure and we'd be nervous if the ATO had the whole picture"...I think you know you're out on a limb.

Ultimately, here's your problem. Unless you can show a reasonable alternative motivation for the structure you have concocted, if that structure reduces the ATO's net take, you start to get into the avoidance provisions under the act.

Having to explain your way out is rarely pleasant or cheap.

My personal view is that any investment that only makes sense if built around complex and dubious taxation arrangements is simply not a sound investment.