Australian Property Investors: Beware! the tax man’s new powers cometh

With the ongoing and loud debate about the merits of negative gearing and property investment, Australian property investors may not be paying enough attention to the mountains of property data the ATO recently gained access to and what the ATO might do with it in the very near future – say this financial year ending 30 June 2017.img_1059

Everyone is long used to the ATO pre-completing tax returns with interest income earned on our bank accounts.  We all know that our banks are forwarding information about our interest income to the ATO so the ATO can ‘check’ if we forgot to declare some income.

The ATO are very good at sniffing out small amounts of Term Deposit income that a taxpayer might forget to include as they tap away late at night on 31 October each year and even better at sending “Dear Taxpayer” letters a few months later.

Few people realise that it will not be long before the ATO starts pre-completing our tax returns with a list of the all property that we own or have an interest in and asks tax payers to declare what income or capital gains that property generated.

They may even insert what income they think the property earned or should have earned.

And owners of positively geared property or owners getting paid property income ‘in cash or kind’ have even more to worry about than their deduction hunting negatively geared brethren.

Is this a distant dystopian future or just around the corner?

The ATO helpfully provides a clear explanation of what the future holds.

“..In the 2013-14 Federal Budget the government announced that it would legislate to make the reporting of real property transfers to the ATO mandatory in the future. The current government confirmed that it would proceed with this measure, applying from the 2016-17 financial year onward.

The objective of the exercise is also clear

“…The purpose of this data matching program is to ensure that taxpayers are correctly meeting taxation and other program obligations administered by the ATO in relation to their dealings with real property. These obligations include registration, lodgment, reporting and payment responsibilities.  “

And we are not talking about just recent information either.  They have collected a data set for the entire 32 year period from 1985 when Capital Gains Tax was first introduced right through to the present.

“..The ATO will obtain the following data items from the source agencies for the period 20 September 1985 to 30 June 2017:..”

It also explains what property ownership information the State and Territory Land Titles offices will be transmitting to the ATO to allow the ATO to build and maintain a complete record of land ownership records for Australia.

For example:

The ATO will be provided with the following information about  all the rental agreements lodged with Rental Bond authorities since 1985.  Name of the landlord, the identity of the property and the amount of the rent.   There might be more than a few landlords between 1985 and 2017 that rental-bond‘forgot’ to mention in a tax return that they received rental income or the full amount of that income.

Now for sure, the ATO probably has no intention of trawling through the  rental bond records over 30+ years looking for ‘anomalies’ – unless they get annoyed or perhaps unless Mr Morrison gets more desperate for revenue to ‘balance the budget’ and pretend to be an economic ‘adult’

But if they are auditing a return they might take a peek at the rental bond records and search the property titles database and see if there is any property the taxpayer ‘forgot’ to mention.

How much data is involved?

The ATO will need lots of Hi-Vis vests for the data ‘mining’ they will be undertaking.

“..It is estimated the total number of records that will be obtained is:

  • rental bond authorities – 1 million records for each year
  • revenue and land titles offices – approximately 30 million records for each year.

Based on current data holdings it is estimated these records identify approximately 11.3 million unique individuals…”

But how will they ‘match’ property ownership to particular taxpayers?

Initially this will be quite difficult because Land Titles Offices have not, up until recently, been in the habit of collecting information that would allow the ATO to match a property to a particular taxpayer with complete precision.

This means that the ATO will not immediately be able to link every taxpayer to all of their property interests.   That means they will probably only use the property database to search for names that they are already investigating for some other reason.  If they find some ‘matches’ they may start asking the target of their investigations to confirm whether they own the properties identified.

But as of 1 July 2016 the Land Titles Offices and state revenue offices have been collecting and providing very detailed information about the identity of parties to property transactions to the ATO.   This means that with every year that passes the ATO database will be become more complete and more detailed.

Increasingly the ATO will know exactly what property each individual taxpayer owns and what income is being generated before the taxpayer sits down to prepare their return. Property that is not owner occupied and does not generate an income or generates a below market income is likely to attract plenty of interest from the ATO.

A bit like a bank account that pays no interest attracted attention in the years before ZIRP and NIRP.

How frisky will the ATO be?

Chances are that the ATO will take things slowly for a year or two as they experiment with their fabulous new data and database.

No doubt they will concentrate on low hanging fruit, soft targets, blatant shonks and a publicity campaign that is designed to ‘encourage’ good behaviour from the rest.

The ATO says the focus will be capital gains tax but that word ‘generally’ and the other references to “other obligations” and “all of their income” suggests it will not be long before the tax office is looking closely at investpropertyment property ownership that appears to be ‘underperforming’ in the income generation department.

When you have a massive database of property information to play with and you are matching every block of land to a taxpayer as fast as you – it becomes an easy exercise to spot ‘anomolies’ in the income reported by owners of similar investment properties.

Now of course the taxman will be happy to hear your explanation that your income was lower because the splashbacks in your ‘rental’ property are a bit dated but be prepared for questions to be asked.

HORROR SCENARIOS !!

So what are some possible scenarios that may interest the ATO this year or in the years to come?

Australian Property owned illegally by foreigners (both offshore and temporary resident)

As the ATO is also responsible for helping out the FIRB (Foreign Investment Review Board) it can make excellent use of its new database by using it to identify property that is high risk of being owned illegally.

One simple technique should generate tens of thousands of leads that will keep the ATO interns busy for years.

Departed Temporary Resident sweep

Obtain from Minister Peter Dutton a list of all the temporary residents who have departed Australia in the last 10 years up until 3 months ago.    Temporary residents are required to dispose of any existing property they bought to live in while in Australia within 3 months of departure.

Now run that list against the national property database and look for any matches and investigate each of the properties, whose ownership has not already been fully confirmed, by sending a letter to the registered owner seeking proof of their identity and status (entitlement to own the property).

At the very least the process of investigation will help confirm the legitimate ownership of thousands of properties in the national database and it may well reveal properties that are illegally owned by a temporary resident who has departed more than 3 months ago.

Note:

As discussed here temporary residents should be immediately prohibited from purchasing existing property

The ATO instantly identifies hundreds of thousands of rented property across the country

If the ATO wants to quickly identify hundreds of thousands, if not millions, of rented properties across Australia and the income represented by that renting, all the ATO needs to do is to include in the 2016/2017 Financial Year Tax return some simple questions.

“Did you pay rent at any time this year for housing?”

“List the addresses of all the properties that you paid rent for this year and the amount of rent paid for each property”

Instantly, the ATO will be able to identify millions of properties where someone claims that they paid rent to live.    Unlike a landlord, a renter has few reasons to conceal that they paid rent during the year or the addresses of those properties.

With that information the ATO will be able to generate a list of the owners of those rented properties and assign a team of ATO interns to start matching those properties to  landlords and their tax returns.

Property owned outright and rent collected in cash or kind.

While a practice that may be less common now, the Glass Pyramid has heard many stories over the years of property owners or their ‘agents’ personally collecting rent in cash from tenants who are renting properties that have been ‘in the family’ for generations.

Because the properties were owned outright and there was no mortgage, the existence of a renting arrangement was largely invisible to the ATO. Generally the rent was below market and so the tenant had an interest in not complaining too much about payment in cash in person or asking too many questions about whether the rental bond had been lodged.

The difficulty for these types of landlords is that even if the ATO does not ask in future tax returns whether a taxpayer paid rent (see above) the ATO may still take an interest because the property is NOT owner occupied yet does not appear to be earning an income.

With Australian real estate setting new records every year – the idea that a piece of Aussie Golden Dirt is not generating a return will be deeply suspicious.

Fake holiday homes

There is a small cottage industry directed to making private holiday homes “appear” to be investment properties so that the owners can claim tax deductions for the costs of maintaining their little private “getaway”.

While the tax office is well aware of this lurk and from time to time “puts some stick about” and asks a few questions about holiday home “investments” that never seen to earn more than a few bucks a year, the ability to instantly match every holiday home investment in a locality or a postcode with corresponding tax returns should make it very easy to identify those “investments” they do not pass the sniff test.

Imposing a deemed level of income based on the better performing “holiday homes” in an locality might be a good way to encourage the owners of holiday investments to actively market their properties and work them harder.

SUMMARY

Property investment is considered a sacred part of Australian life by our Treasurer Mr Scott Morrison.

We know he will do everything in his power to protect the interests of those who have a punt on property, BUT he, like all Australian governments, depends on milking property investments every step of the way to balance the budget.

So when it comes to predicting what the ATO might do with three decades of property ownership and rental data, there is a good chance it will involve property owners paying more tax on either the income  or the capital gains generated by the property.

One thought on “Australian Property Investors: Beware! the tax man’s new powers cometh

  1. That’s all good but it assumes the ATO is fully competent. In about 2000 the ATO gave me a PhD. I told my accountant this was false and wrote to the ATO in order for them to change their records. They never have and to this day I pay my PAYG/BAS with as a Dr.

    Liked by 2 people

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