ATO cracks down on dodgy developers

Investors using trust structures to hide income from developments may face steep fines, the Australian Taxation Office has warned.

The ATO has undertaken to audit developers to ensure their adherence to regulations.

Increasingly, some people are using trusts to mischaracterise their development activity and claim a discounted tax rate, deputy commissioner Tim Dyce said.

“A growing number of property developers are using trusts to suggest a development is a capital asset to generate rental income and claim the 50 per cent capital gains discount,” he said.

“Our enquiries indicate that these arrangements are contrived and some property developers are inappropriately claiming capital gains tax concessions.”

ATO scrutiny over these activities is set to increase this year, Mr Dyce announced.

“The ATO has already raised millions in adjustments from people who exploit the system and our current compliance activity shows we are likely to make many more adjustments in the coming months,” he said.

He warned investors to declare their income from their construction activity or risk severe penalties.

Fines of up to 75 per cent of the tax avoided may apply to those found to be misusing special purpose trusts, the ATO stated.

The Tax System Explained in Beer

This article is not strictly property related, but a gem nonetheless. Enjoy!


Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this…

The first four men (the poorest) would pay nothing The fifth would pay $1 The sixth would pay $3 The seventh would pay $7 The eighth would pay $12 The ninth would pay $18 The tenth man (the richest) would pay $59

So, that’s what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve ball. “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by $20?. Drinks for the ten men would now cost just $80.

The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free. But what about the other six men ? How could they divide the $20 windfall so that everyone would get his fair share?

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer.

So, the bar owner suggested that it would be fair to reduce each man’s bill by a h higher percentage the poorer he was, to follow the principle of the tax system they had been using, and he proceeded to work out the amounts he suggested that each should now pay.

And so the fifth man, like the first four, now paid nothing (100% saving). The sixth now paid $2 instead of $3 (33% saving). The seventh now paid $5 instead of $7 (28% saving). The eighth now paid $9 instead of $12 (25% saving). The ninth now paid $14 instead of $18 (22% saving). The tenth now paid $49 instead of $59 (16% saving).

Each of the six was better off than before. And the first four continued to drink for free. But, once outside the bar, the men began to compare their savings.

“I only got a dollar out of the $20 saving,” declared the sixth man. He pointed to the tenth man,”but he got $10!”

“Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar too. It’s unfair that he got ten times more benefit than me!” “That’s true!” shouted the seventh man. “Why should he get $10 back, when I got only $2? The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison, “we didn’t get anything at all. This new tax system exploits the poor!”

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn’t show up for drinks so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and government ministers, is how our tax system works. The people who already pay the highest taxes will naturally get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.

David R. Kamerschen, Ph.D.  –   Professor of Economics.
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Landlords warned to keep careful records when claiming rental properties as business

A recent Administrative Appeals Tribunal decision has reminded rental property owners to be particularly careful with record keeping if they claim to be conducting a business of letting rental properties.

In the AAT case, a taxpayer appealed the Australian Taxation Office’s decision that she was not carrying on a business of letting properties and was not entitled to claim certain tax deductions.

The taxpayer worked full-time as an industrial chemist and owned rental properties with her husband. The couple had been investing in property since the 1990s and owned nine properties in the 2003-2005 income years, to which the dispute related.

The taxpayer declared a net rental loss for those years and argued that she carried on a business of letting rental properties.

The AAT sided with the taxpayer in agreeing that she was carrying on a business in letting properties and allowed claims including part of her telephone, computer and work-related expenses.

It refused several other deductions, including car and travel expenses, repairs and maintenance costs, and the costs of investment seminars, saying that either the link to the taxpayer’s income-producing activities was not strong enough, or that she had “insufficient or unsatisfactory substantiation” of the claims.

HLB Mann Judd tax partner Peter Bembrick said it was rare for someone who had another full time job to claim to be operating a business of letting properties. He said in this case, the number of properties and the fact that the taxpayer had a track record of letting rental properties would have affected the decision that she was carrying on a business.

The taxpayer in this case did not have a business plan, and the rental activities had never returned a profit but the AAT found that that she intended to make a profit by increasing rents and buying more properties.

“The general test of carrying on a business is that it all comes down to: Are you doing it in a business-like manner? The scale is important but exactly how are you going about it?” Bembrick said.

“It would be helpful to have a business plan that can show that you are serious about the enterprise and that you had set out to make money. The ATO often has a problem with loss-making ventures such as primary production and agribusiness operations that make losses year after year and can’t show how they are ever going to make a profit.”

Bembrick says rental properties could be negatively geared and still be part of a business but there would have to be proof that there were prospects of making an income from the operation.
“If you’re solely dependent on making a capital gain the ATO might say it’s an investment not a business,” he said.

The main advantage in claiming to be conducting a business rather than holding investment properties is that more deductions are potentially available to people who are running a business.

Bembrick said that for most people who owned one, or a few, properties the deductions available to investors would be adequate.

The ATO may allow investors to claim deductions for home office and transport expenses relating to managing an investment property portfolio.

Both business operators and investors needed to maintain log books, diary notes and evidence of the expenses incurred in managing the properties, Bembrick said. Any training courses would have to have a clear link to the income-producing activities.

“People try to claim all sorts of courses, and maybe draw a long bow between the seminars and making investments. It would come down to the nature of the seminar,” Bembrick said.

Are Property Investment Seminar Expenses Tax Deductible?

Here is a great article from Property Tax Specialists about the tax deductibility of property investment courses and seminars.

With the huge opportunities in the investment property market at the moment, many people attend seminars to learn more about how to invest and generally educate themselves on how to create wealth.

Attending seminars almost always involves a fee or a contribution of some sort. These can range from just covering the venue expenses, a short intensive program with materials or a long program with monthly meetings/seminars and continuous support for the long term.

The most common question I am asked regarding seminar expenses is ‘are the seminar fees are tax deductible’

Depending on your personal circumstances and marginal tax rate the tax saving from claiming the expense as a deduction can vary from $15 for every $100 spent to $46.5 per $100 spent.

Being able to claim a tax deduction means a tax saving and reducing the cost of the program, making it more affordable. In some cases it may mean the difference between being able to take it on or not, particularly where the fee is large.

So what factors determine whether the fees are tax deductible for the individual or not?

Click here to read the full article – Are Property Investment Seminar Expenses Tax Deductible


Property Tax Planning for 2013: How you can maximise your tax savings

Here’s a scan of a recent article titled “Property Tax Planning for 2013: How you can maximise your tax savings” from Your Investment Property July 2012.

It’s a good read and there are a few things in there you might pick up!

View the Tax Planning 2013 – YIP July 2012 (PDF)


How to use depreciation to cut your tax bill

Are you looking for tax tips to save you money as the end of the financial year looms? You’d be well advised to take a good look at your depreciation allowances to make sure you’re claiming your full entitlements. You may be able to cut thousands from your tax bill, and even turn a negatively geared property into one that actually puts cash in your back pocket.

“Research shows that 80% of Property Investors are failing to take full advantage of property depreciation and are missing out on thousands of dollars in their pockets,” said BMT Tax Depreciation director Bradley Beer, who added that depreciation is often missed because it is a non-cash deduction – i.e. the Investor does not need to spend money to claim it.

So what can you claim?

Depreciation related to a building’s structure can be claimed via capital works allowance, explains Beer. Deductions are based on the historical cost of the structure. As a general rule, any residential building which commenced construction after 18 July 1985 is eligible for the capital works allowance.

Depreciation on plant and equipment, and fixtures and fittings can also be claimed. The depreciation deduction available on each item is calculated using the effective life set by the ATO. Some plant and equipment depreciable items commonly found within a property include hot water systems, carpets and blinds.

He offers the following example to demonstrate how property depreciation changes a typical investment scenario from being negatively geared to being cash flow to positive.

An investor has purchases a property for $420,000 and is receiving $490 per week in rent for a total income of $25,480 per annum. The estimated expenses for the property include interest, rates and management fees, which total $32,000 per year. The following scenario shows the investor’s cash flow with and without depreciation.

Depreciation Example Scenarios

In this example the investor uses property depreciation to go from a negative cash flow scenario, paying out $79 per week, to a positive cash flow scenario, earning $3 per week on the property. By claiming depreciation this investor will save $4,255 for the year, claims Beer.