1. Tax Trap … whoops.
When a taxpayer borrows money for the purposes of acquiring an investment, such as a rental property, a business, a share portfolio or an income generating capital asset, the interest expense associated with the investment is generally deductible.
In recent years, banks and financiers have become ever more accommodating by allowing borrowers to redraw funds (or associate offset accounts) with their investment loans. Just as they would for a normal home loan.
However, if a taxpayer redraws against that loan, and if the purpose of the loan was not to earn assessable income (such as to cover a temporary cash shortage or to purchase a holiday or pay school fees), the interest associated with that redraw is never deductible.
And even if they repay that redraw, the proportion of non-deductibility will always stay with that loan. Of course, if the taxpayer subsequently repeats this cycle, the non-deductible proportion of the loan grows even larger.
If a taxpayer temporarily has excess cash, rather than to pay down the deductible loan and redraw later, it is wiser to deposit into an offset account. That way the deductibility of the entire loan stays intact, regardless of how any redrawn funds are used.
2. Rental Properties & the ATO
This tax season sees the ATO announce their crackdown on rental property deductions and missing income.
What are they looking for?
- Double dipping. Where a property manager pays an expense and taxpayer shows the net (after expense) rent in their tax return, along with another separate claim for the same cost. Double dip.
- Missing documentation. Nothing to substantiate claims for expenses and deductions. May be legitimate but didn’t keep those invoices.
- Borrowing expenses. Claimed as an outright deduction rather than amortised over 5 years.
- Capital improvements. Is it a repair or has the functionality been improved? This is not always easy to determine. There is plenty of case law on these types of items and the ATO is on top of all the cases.
- Body Corporate special levies. May be deductible, but not until the BC spends the money on repairs. That could be years later.
How do they know?
- Data sources include banks, land titles office, insurance companies, and property managers.
- Don’t forget Sharing Economy providers (like Airbnb) … in case a taxpayer rents out their holiday home ‘just for a few months, off the record’. Missing rental income can be easily matched.
- Audit. We heard of a case where the investigator reviewed every Bunnings receipt to verify that every single item on every invoice related to the rental property. Then they checked to find each item. That’s true investigative passion.
3. Instant Asset Write Off
Yes, the Senate tried to increase it to $30,000, but unfortunately it is only $20,000 for the year ended 30 June 2024 and will be again for 2025.
It would probably make sense to make this instant write off a permanent feature of the taxation system, but for now we wait for the annual legislative update.
Andrea McNamara