Have you ever wondered what oversight is provided to ensure investors place their properties on the market at market rents? Or do some push rents higher so they fail to rent and NG writeoffs are accentuated?
Recently the Greens senator Peter Whish-Wilson had the following ‘questions on notice’ answered by the ATO in the Senate Economics Legislation committee.
1. What does the ATO do to ensure claimants have legitimately put their property on the market?
2. What does the ATO do to ensure claimants have legitimately put their property on the market at a fair price?
3. What does the ATO do to ensure claimants of tax deductions on investment properties are actually living in their primary place of residence?
4. How many property investors have been penalised for breaches of any of these conditions?
1. The Australian taxation system operates under a self-assessment system, which means the Australian Taxation Office (ATO) initially relies on the taxpayer to correctly assess their own affairs and comply with taxation laws. To help taxpayers correctly comply with taxation laws in relation to rental properties, the ATO provides comprehensive guidance via a range of products including the downloadable Guide for rental property owners, a series of rental property videos at ato.gov.au/rental videos, and a suite of Tax Time Toolkit factsheets. These products outline the factors that indicate whether a property is ‘genuinely available for rent.’
We use extensive data analysis and modelling (including a range of third party data from the states and territories and accommodation sharing platforms) to identify properties that may not have been genuinely available for rent. Where there are concerns we may require the taxpayer to review their affairs and make an amendment, conduct audits where we make specific enquiries to ensure all relevant factors are met, or refer the case for prosecution.
2. We use extensive data analytics and modelling including web scraping of online material to identify properties that may not be genuinely available for rent and conduct compliance activities.
One factor in determining whether a property is not genuinely available for rent is the inclusion of unreasonable or stringent conditions for renting the property such as setting the rent above the rate of comparable properties in the area.
3. We use extensive data analytics and modelling, including third party property data, to identify where taxpayers may be incorrectly claiming deductions for rental expenses. Where concerns are identified, we may require the taxpayer to review their affairs and make an amendment, conduct an audit, or refer the case for prosecution.
4. Our compliance program in relation to rental properties this year will include 4,500 audits. When undertaking rental audits, we look at taxpayers who are higher risk, regardless of whether they are negatively or positively geared. We adjust a range of labels to calculate the true net rental position; therefore it is difficult to attribute compliance outcomes to a particular error such as wrongly claiming a loss from negative gearing. So
far this year our rentals program has seen almost 2,500 returns adjusted at audit, with approximately $13.5 million raised in revenue and more than $1.3 million in penalties and interest applied.
The ATO’s August 2018 announcement highlighting a focus on the declared rental income of $42 billion by property investors provides long-overdue oversight of the sector. This year’s 4,500 audits is a conservative 0.15% of all investment properties.
If this is the result of the new ATO campaign, what level of oversight was provided during the boom years?
Concerns continue about investment oversight, including the ability of investors to ‘post-code hop’. This is a regular tactic promoted by property spruikers whereby investors change their electoral postal address and another billing address (ie mobile phone) to claim the primary place of residence capital gains tax exemption. In relation to question three, does third party property data provide detailed enough transparency?
Slowly the playing field is moving to re-balance the advantages the speculative sector enjoys over the productive.