ATO Targeting “Landlords”

Rental property owners are once again in the sights of the ATO in 2018 as they plan to crack down on landlords who wrongly claim tax deductions on their personal holiday homes. And they have some staggering figures to justify their interest, such as one Victorian tax payer who attempted to claim $760,000 of expenses on a property that was used by the tax payer and his friends for 87% of the year. The ATO were able to reliably estimate this figure based on the property’s listing on a holiday home website that clearly showed block out periods where the home was not available.  

While the headlines are all about holiday homes, we believe tax payers who charge a low rate of rent to help family members such as kids studying full time can also expect some extra ATO scrutiny this year. This is because the ATO systems pick investigation targets based on ratios of income to expenses in the first instance and the ATO have shown a new willingness to issue ‘please explain’ letters en masse. 

To help our clients manage this risk we implement the following strategies which can easily be applied to a holiday home or below-market rental: 

Apportioning Your Expenses 

Under this method the expenses claimed against your rental income are reduced by a percentage to allow for the private use component. We recommend this method where a property is rented at a market rate for part of the year and used privately (or leased out for no charge to friends and family) for the remainder. 

The formula to calculate the deductible percentage of your expenses is as follows: 

The deductible percentage will apply to all expenses claimed against rental income in that financial year and is re-calculated each year based on occupancy.  

Substitute a market rate of rent 

Under this method the actual rent received is not included in your tax return, instead the expected rent from offering the property to the public for the full year is included. For example, a landlord with a property that should rent for $200 a week will include $10,400 as rental income in their tax return. No adjustment is made to the expenses incurred to maintain and operate the property, they are included in the landlord’s tax return as normal. 

We recommend this method where: 

• A property was rented at a below market rate to a related party (for example where Mum and Dad rent their property to their kids whilst they study at university for a cheap rate) 
• A property was rented for part of the year to the public, part private use and partly to related parties without consideration for market value 
• A property which had previously been a market rental is being used by a family member on a temporary basis and no rent is being charged 
• No records have been kept as to the days available for rent to the public vs days of private use 

It should be noted though that a property which has never been available for rent to the public cannot be treated as a rental if it is only used for private purposes. It is also possible for expenses incurred during a period of private use to be added to the cost base of an asset, so it is still important to keep accurate records each year. 

*Where the property was purchased or sold during the financial year, this number will be the days the property was held during the year 

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DIV 293 – Beware the unexpected tax

If your remuneration including reportable fringe benefits and salary sacrificed superannuation contributions is more than $250,000 pa, you may have an additional tax liability over and above the normal income tax payable on such earnings. Now that would be a substantial salary package, so it may seem like a good problem to have, but no-one likes an unexpected demand from the ATO. 

It started about five years ago when the government introduced a rule called Division 293 to the tax system. Division 293 is intended to even out the effect that the concessional tax treatment of superannuation has for higher income earners compared to middle and lower income earners. This results from before-tax (known as concessional) super contributions being taxed at 15% within a fund, and the higher relative difference in marginal rates for high income earners compared to the average. 

“If you are a high income earner, your marginal tax rate is higher than an average income earner,” the ATO says. “When you make concessional contributions to your fund, you receive a larger tax concession. Division 293 imposes an additional tax of 15% to bring the concession back to an amount in line with the average.” 

Division 293 may be better explained by using the worked example that the ATO has provided. 

“In the 2015-16 financial year Mark earns $320,000 and his employer contributes $20,000 to his superannuation fund. Mark’s fund pays tax of $3,000 on his contribution (15% × $20,000)”. 

If Mark’s employer had not contributed to super, Mark would have earned $340,000 and the additional $20,000 would have been taxed at his marginal rate of 49%. Mark would have paid $9,800 tax on the additional $20,000. The tax concession Mark would receive on his contributions is $6,800. 

“By paying Division 293 tax of $3,000 (15% × $20,000) Mark still receives a concession but it is reduced. The total amount of tax paid on the contribution is $6,000 (30% × $20,000, made up of 15% taxed in the fund and 15% Division 293 tax). The tax concession is now $3,800.” 

When Division 293 was introduced in the 2013- 14 year (the legislation was called “Sustaining the superannuation contribution concession”), the threshold at which it applied was set at $300,000 annual income for each individual. However in contrast to some other income thresholds and limits, which can tend to go up, this has now reduced to $250,000 (from July 1, 2017). 

That’s quite a drop in the threshold, and since it applies to the current financial year it is opportune to alert taxpayers to be circumspect as regards this aspect of taxation law. 

So if you or yours are at or near the new threshold, be aware that this division could be another consideration in your possible tax liabilities. The ATO uses information from income tax returns and contributions reported by your super fund to work out if Division 293 applies, and if so, how much tax is owed. And remember, as income levels can move year to year, there is potentially an annual possibility of Division 293 tax being imposed. 

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