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An understanding of how CGT works for homes and rentals is vital, says HLB Mann Judd.
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ATO rental property focus to keep accountants on their toes
12 May 2023
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The ATO’s focus on rental property and holiday home compliance – backed by increased funding in the budget – means accountants must be right across their clients’ property portfolios and impact of CGT, says HLB Mann Judd.
The budget allocated an additional $89.6 million to the ATO to extend the Personal Income Tax Compliance Program and made a 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.
Tax consulting partner at HLB Mann Judd Peter Bembrick said ensuring clients were across CGT when it came to their rentals or holiday homes was 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.”
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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 said those 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 late last year when the tax office’s assistant commissioner Kath Anderson spoke at the Accountants Daily Strategy Day and 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.
“We need your help to educate clients about what is a valid rental deduction and what’s not.”
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