CGT and Rental Properties: Understanding the ATO Crackdown. An understanding of how CGT (Capital Gains Tax) works for homes and rentals is vital, as the ATO is watching more closer than ever

The ATO’s focus on rental property and holiday home compliance – backed by increased funding in the recent Federal Budget – means accountants must be right across their clients’ property portfolios and the possible impact of CGT.

The budget allocated an additional $89.6 million to the ATO to extend the Personal Income Tax Compliance Program and made a special mention of “deductions relating to short-term rental properties”.

The ATO believes that this action will increase receipts at their end by $474.9 million over the next five years.

At Financially Sorted, we are asking more questions to ensure our clients are across CGT when it comes to their rentals or holiday homes to help meet the ATO’s stricter compliance crackdown.  We have reported previously that the ATO will start to crack down on property investors

When you think of CGT and residential properties, the two most common situations are the family home (tax free) and an investment property (CGT applies on sale).

It is perhaps though not this black and white.  

For example, premises that were once used as an investment property but later used as a primary residence may have complex CGT tax implications.

In this scenario it would be necessary to calculate the total capital gain as if it had always been an investment property, and you will then be taxed on the portion before you moved in, calculated pro-rata on a days’ basis. This is just one method that we can use. 

Difficulties could also arise for clients with properties that were used as holiday homes or occupied by family members perhaps.

Many of our clients don’t realise that CGT applies in much the same way as for an investment property, with one significant difference – any holding costs such as council and water rates, land tax, property repairs and mortgage interest that have not been claimed as tax-deductible (because the property was not rented) can be added to the CGT cost base, as long as the property was acquired after 20 August 1991.

Any property investor should understand the potential impact of CGT. CGT applies to investment properties when they are sold and the ATO may scrutinize the documentation and calculations associated with the sale. To ensure compliance, keep meticulous records of the property’s purchase price, associated costs (e.g., legal fees, stamp duty), and any capital improvements made. It is crucial to accurately calculate your capital gains or losses and report them appropriately in your tax returns.

Those with holiday homes and investment properties need to be across CGT to avoid added pain when it comes time to sell. Finding out at the time of selling a property about your possible CGT implications can cause great practical difficulties, as typically records of such expenses have not been kept, especially going back several years.

Ideally you should be aware of the rules, and keep records as you go along, otherwise it may be necessary to undertake a lot of investigation and possible costs to maximise the cost base. An increased emphasis from the ATO on the rental industry was flagged as early as late last year. The ATO frequently updates its guidelines and regulations to adapt to changing market dynamics. Make it a habit to stay abreast of any revisions or new rulings pertaining to rental property compliance and any Capital Gains Tax. By doing things such as reading updated information to attending webinars you can ensure your strategies align with the latest requirements and maximize your compliance efforts. 

Holiday homes might sound minor in the scheme of things but if we applied the pub test, I don’t think we would find many Australians would think it’s ok for someone to claim thousands – in some cases hundreds of thousands – of dollars in deductions for their holiday home.

One recommendation, what is a valid rental tax deduction and what’s not, should be fully understood. Hopefully Financially Sorted broke down CGT and Rental Properties: Understanding the ATO Crackdown. Need help with rental properties or holiday homes, please ask.



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