The ATO is sending letters directly to taxpayers who reported either rental property income or dividend income for the first time in their 2010-11 income tax returns. It said the letters are aimed at assisting taxpayers in understanding their tax obligations and avoiding common mistakes.
As the tax return season for 2011-12 gets into full swing, people need to be careful about returning this sort of income and they should be aware of the common problems the ATO has flagged.
Normally, the returning of dividend income is quite straightforward. The grossed-up amount of the dividend is returned as income and an offset claimed for the franking credit. All this information should be on the dividend statement a taxpayer receives from the company concerned.
However, it can get complicated. For example, where a dividend reinvestment scheme or company demerger is involved, or where shares are inherited or gifted. The ATO has seen plenty of mistakes with these over the years and so is keen to ensure taxpayers understand how to deal with this.
Some tips to help get this right include:
- Keep a record of reinvested dividends to help work out any capital gains or capital losses that may be made when the shares are disposed of.
- Be aware that disposal of bonus shares received on or after September 20, 1985 (when CGT started) may result in a capital gain. It does not matter that the original shares are pre-CGT.
- Giving shares to children as a gift creates tax consequences (surprise, surprise!).
- a parent who gives shares as a gift must treat the shares as if he or she disposed of them at their market value on the day they gave them as a gift – this may result in a capital gain or loss;
- a child receiving shares as a gift must treat the shares as though he or she received them at their market value on the date they received them.
- Inheriting shares can also create its own problems.
- where the deceased acquired the shares before September 20, 1985, the person inheriting the shares must use the market value on the day the person died, not the market value on the day they received the shares;
- inherited shares should be treated in the same way as any other capital gains tax assets.
- Above all, keep good records. The “shoebox” of receipts might have had its day, but the principle of keeping receipts and records for tax purposes lives on.
Statistics suggest that rental property losses are large and growing, so it’s no surprise the ATO is keen to ensure people get their claims right.
There’s nothing new in this, but it seems people continue to get it wrong.
A few pointers and warnings might help here:
- At the most basic level, a person must have a clear intention to rent the property. If they make no attempt to advertise the property, or they set the rent so high it is unlikely a tenant could be found, the ATO is likely to find that the person had no intention of renting the property and their rental claims would not be allowed.
- The purchase cost of the land on which a rental property is constructed cannot be claimed as a deduction. Instead, the land forms part of the cost base for capital gains tax purposes.
- Initial repairs to rectify damage or defects that existed at the time of purchasing a property are capital expenditure and may be claimed as capital works deductions over either 25 or 40 years, depending on when the repairs were carried out. They cannot be claimed as outright immediate deductions.
- If a loan facility is used for both investing and private purposes, the interest expense on the private portion of the loan is not tax deductible. The interest deduction must be apportioned. It continues to be amazing how many people fall foul of this.
- Travel expenses to visit and inspect a rental property are basically deductible. However, where travel related to a person’s rental property is combined with a holiday or other private activities, an apportionment of the expenses may be needed.
- In some situations, rental expenses may need to be apportioned. For example, if a holiday home is used by a person, their friends or relatives free of charge for part of the year, they are not entitled to a deduction for costs incurred during those periods.
- Again, as with almost everything to do with tax, keep good records. For example, records must be kept of the ownership of the property and all the costs of purchasing it and selling it. These records must be kept for five years from the date a person sells their rental property. As capital gains tax may apply if a rental property is sold, it is advisable that records be kept of every transaction over the period of ownership of the property.
Many of the tax issues concerning shares and rental properties are quite basic (although not always adhered to), but there are twists and turns along the way that can complicate things. Good advice from a professional adviser is always a good idea.