The Australian Taxation Office (ATO) recently announced that it would be cracking down on investors, targeting those who are incorrectly reporting rental income and expenses, or failing to declare capital gains. Going forward, banks will be required to share transaction data of 1.7 million property investors and the ATO will be able to obtain residential investment property loan data (RIPL) from financial institutions in Australia. Here’s more on the ATO's crackdown and its potential impact on investors.

Under scrutiny from ATO

Property investors in Australia are being warned of the consequences of non-compliance as the Australian Taxation Office (ATO) launches a campaign to crack down on tax avoidance and evasion.

A key focus of the ATO’s scrutiny will fall on the misuse of investment loans for holidays and unlawful expense claims for renovations, with 3 critical areas identified:

1. Using investment loans for private purposes: Some investors are borrowing more than is required to supplement investment strategies or their own lifestyle, and claiming a loss offset against their other income. Interest paid on a loan is only deductible if used for generating income, such as mortgage payments for an investment property.
2. Claiming costs for repair rather than capital works: It’s important for investors to distinguish between repairs – which can be offset against rental income – and capital spending. Repair costs cover routine work that keeps a property in its original condition while capital expenditure, or improvements, increases the value of an asset.
3. Claiming expenses for private use of the property: Deductions can only be claimed for the period the property is used for producing income. All costs must be split between income – typically rental income – and private use. Tax specialists warn the ATO can access rental platforms to match booking data with individuals who are receiving rental income.

With an estimated nine out of 10 landlords incorrectly filing their net income from rental properties, contributing to a $1.3 billion shortfall between the amount collected and what is due, the ATO will recruit banks to hand over data of Australia’s 1.7 million landlords to help corroborate property use, and income and expenses.

The ATO will also monitor property managers for information on their clients to be matched with its records to ensure tax returns are being lodged, income tax paid, and capital gains tax liabilities covered.

Penalties for non-compliance

To crack down on investors who are not complying with tax laws, the ATO is undertaking several measures, including increased data matching, targeted audits, and investigations into suspicious activity. The ATO has already conducted investigations into a number of high-profile investors and wealthy individuals, resulting in significant fines and even jail time in some cases.

To avoid running afoul of the ATO, investors are urged to seek professional advice and ensure they understand their tax obligations under the law, including keeping detailed records of financial transactions, and being more diligent about reporting income and paying taxes.

Ultimately, it is the responsibility of all investors to stay on the right side of the law to help maintain the integrity of Australia's tax system. It’s important that property investors in Australia take the ATO's crackdown on tax avoidance and evasion seriously in order to avoid the potentially severe consequences of non-compliance.

For financial advice with a view to investing in property in Australia, contact a Mortgage Express broker.

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