2007 tax returns: Tax Office flags rental property; work deductions; CGT

The Tax Office says over 1.4 million people claimed more than $21 billion in rental deductions in their tax returns for the 2006 tax year, with almost 200,000 people claiming deductions for the first time.
• To help minimise errors, the Tax Office has outlined some of the common mistakes made by both first-time and other rental owners:
• Incorrectly claiming the cost of structural improvements as repairs when they are capital works deductions (e.g. remodelling of bathrooms and kitchens, and constructing a deck or pergola).
• Overstating deduction claims for the interest on loans taken out to purchase, renovate or maintain a rental property. A loan can be taken for both income-producing and private purposes, such as to buy a car or go on an overseas holiday. The interest on the private portion of the loan is not tax deductible.
• Incorrectly claiming the full cost of an inspection visit when it is combined with a private purpose, such as a holiday. Deduction claims can only be made for the portion of the travel that directly relates to the property inspection.
• Claiming deductions for rental properties not genuinely available for rent.
• Incorrectly claiming deductions for properties only available for rent for part of the year. If a holiday home or unit is used by a taxpayer, his or her friends or relatives free of charge for part of the year, the taxpayer is not entitled to a deduction for costs incurred during those periods.
• Incorrectly claiming the cost of land as a capital works deduction. The cost of land forms part of the cost base when calculating CGT on the sale of the property.

Incorrectly claiming deductions for depreciating assets that are actually capital works deductions. There is a comprehensive list of more than 230 residential property items setting out whether items are depreciating assets that are eligible for a decline in value deduction, or assets eligible for a capital works deduction. This list appears in the Tax Office’s Rental Properties booklet, which is available from the Tax Office website.

The Tax Office also notes that renovation costs and costs to repair damage, defects or deterioration existing on purchase cannot be claimed as an immediate deduction. These costs are capital expenditure, depending upon what is repaired or improved, and must be claimed as either decline in value deductions over the asset’s effective life, or as capital works deductions over 40 years.

Work-related expenses
The Tax Office says that, last year, over 7 million people claimed more than $12 billion in deductions for work-related expenses. For 2007 tax returns, the Tax Office says it will review a range of deduction claims including expenses for motor vehicles, self-education, home-office and travel.

Each year, the Tax Office selects a number of occupations for specific focus because they have above average work-related expense claims, a high number of work-related expense claimants or because the ratio of work-related expense claims are high compared to the salary and wages. For 2007 tax returns, the Tax Office will focus on:

• tourism, travel consultants and guides;
• fitness and sporting industry employees;
• construction trades people who are employees;
• guards and security employees; and
• a continued focus on mining site employees.

CGT issues for 2007 returns

The Tax Office says it will continue to focus on CGT and people who do not report capital gains for the sale or disposal of shares, properties and other assets. The Tax Office uses data from state and territory revenue offices, managed funds, the Australian Stock Exchange and share registries, matching it against tax return information to identify share and property sales that involve capital gains. The Tax Office reminds taxpayers of the following points regarding CGT.

• Taxpayers who took advantage of the opportunity to invest into superannuation prior to 30 June 2007 and sold assets may have made a capital gain. This gain may be subject to CGT. The Tax Office warns that it is important for taxpayers to set aside funds to meet any tax liability (including CGT) from selling or transferring assets into superannuation.
• Taxpayers who purchase or inherit an asset, receive an asset as part of a divorce settlement or as a gift, may be liable for CGT when they sell or otherwise dispose of it.
• Capital losses from collectables can only be offset against capital gains from collectables, not against capital gains made on other assets.
• Records on the purchase or acquisition and the sale or disposal of any asset that may attract CGT must be kept.

This is an excerpt from an article appeared in Thomson’s InTAX magazine (July 2007)