Posted on July 15, 2020 by Kelsi Keep
If you decide to earn some extra cash during these difficult times by renting out part of your home this can impact your tax return in the year you earn the income as well as the tax treatment of your residence on sale of your property.
Income and expenses
The rental income you receive is generally regarded as assessable income. This means you:
- must declare your rental income in your income tax return
- can claim deductions for the associated expenses that you incur personally, such as interest on your home loan, rates and taxes, etc
Good and services tax (GST) doesn’t apply to residential rentals, as such you are not liable for GST on the rent you charge.
If you are only renting part of your home, for example a single room, you can only claim expenses related to renting out that part of the house.
As a general guide, you should apportion expenses on a floor-area basis based on the area solely occupied by the renter (user) and add that to a reasonable amount based on their access to common areas.
If you use the room in any capacity when it is not occupied, for example for storage or as an office, you can’t claim deductions for this unoccupied period.
If you rent out all or part of your home at normal commercial rates, the tax treatment of income and expenses is the same as for any residential rental property.
If you rent out all or part of your home at less than normal commercial rates this may limit the deductions you can claim. For example, if you rent to a friend at a reduced rate, the deductions you claim in relation to this income cannot be excessive.
Note that payments from a family member for board or lodging are considered to be domestic arrangements and are not rental income. As this income is not assessable, you cannot claim deductions for expenses in relation to the earning of this income (interest, rates and taxes, usage costs, etc).
Capital gains tax
Generally, under the main residence exemption you do not pay Capital Gains Tax (CGT) if you sell the home you live in. However, if you have used any part of your home to produce income, such as renting out a room you are generally not entitled to the full exemption.
To work out the capital gain that is not exempt, we need to take into account a number of factors, including:
- the proportion of the floor area that is set aside to produce income
- the period you use it for this purpose
- whether you’re eligible for the ‘absence’ rule
- whether it was first used to produce income after 20 August 1996
You should keep a record of the dates your property is earning assessable income and advise us upon sale of your property. We can use this to work out the proportion of your capital gain that is exempt from capital gains tax. You can also contact us at any point during your property ownership to provide you with an estimate of the non-exempt portion of any gain on the potential sale of your property so that you are not caught off guard by an unexpected capital gain.
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Posted on July 22, 2020 by Ashley Dawson
The Australian Taxation Office (ATO) has a broad range of information gathering powers which have been helped by improvements in technology, connections with other Governments as well as increased mandated reporting requirements. The information gathered allows the ATO to use this information in a number of ways, such as verifying the information supplied by Australian taxpayers in relation to their tax affairs.
Some of the ways that the ATO gathers information is through:
- Taxpayer reporting regime
- Third Party parting regime
- Data exchange
- Social media and online presence
- Telecommunication providers
- Motor vehicle registry data
- Toll road user data
- Family Law Courts
- Data leaks
In this article I will run through some of the above measures that that ATO uses to give you an understanding of the information that the ATO is collecting and how it is being used.
Under the taxpayer reporting regime, this not only includes the lodgement of your annual income tax return, but also includes the following lodgements, which all provide data to the ATO for cross-checking purposes:
- Single Touch Payroll
- SuperStream reporting
Single Touch Payroll has meant that employers are now reporting payments made for work, services and superannuation guarantee liabilities in respect of each employee, as the payments are made, whether it be weekly, fortnightly or monthly. This has resulted in timely data that has improved the ATO’s visibility over employers’ compliance behaviour as well as providing the information for prefilling individual taxpayers income tax returns.
SuperStream reporting is the mechanism by which employers must pay employee superannuation guarantee contributions to superannuation funds. The information from this reporting allows the ATO to check the superannuation guarantee payments being made by employers against the information that the ATO receives from Single Touch Payroll data collected.
Under the Third-Party Reporting regime, the ATO obtains the information from the following means:
- Taxable Payments Reporting System;
- Business transactions through payment systems from banks and financial institutions;
- Share and unit transactions from listed entities, ASIC and managed funds;
- Real property transactions by state and territory revenue agencies;
- Digital transactions from online selling and sharing platforms such as Uber, eBay and Airbnb; and
- Cryptocurrency designated service providers
Taxable Payments Reporting System is primarily designed to assist the ATO in identifying contractors who may not be meeting their tax and lodgement obligations in relation to the following industries:
- Building and construction services
- Cleaning services
- Courier or Road Freight services
- Information technology (IT) services
- Security, investigation or surveillance services
Australian banks and financial institutions provide transactions to the ATO annually from EFTPOS machines and online payment facilities of their clients. Australian financial institutions also provide the ATO the details of foreign residents with bank accounts in Australia, on an annual basis, which the ATO then exchanges with its relevant foreign partners.
Listed entities, ASIC and managed funds provide the details of all buy and sale transactions of shares and units. Investment bodies including financial institutions, public companies, solicitors, government bodies, bodies corporate, trustee companies, betting companies and unit trusts are required to report their investors’ investment income to the ATO by 31 October each year. This information is used by the ATO to compare against capital gain transactions and trust or dividend income reported in income tax returns.
Real property transactions, such as buy and sell information, is provided by state and territory revenue agencies to the ATO on a quarterly basis and is being used by the ATO to check property capital gains transactions reported in income tax returns.
eBay has been providing the ATO with data in relation to sellers whose annual trading activity is more than $10,000 since 2015 financial year. In October 2019, Airbnb advised its property hosts that it had provided the data of 190,000 property owners and hosts to the ATO, which detailed the income they have received from the platform. From 1 July 2022, the sharing economy will be required to report ID and income details for clients from all ride sourcing and short-term accommodation platforms. Other platforms such as asset sharing, food delivery and tasking-based platforms will be required to provide this information from 1 July 2023.
The ATO’s concerns about taxpayers on sharing economy platforms are:
- for ride sharing drivers, the ATO is concerned with making sure that they are registered for GST;
- failure to report income; and
- over-claiming deductions by listing their properties on sharing economy rental platforms to allege that their property is genuinely available for rent in respect of a particular period, when in fact it is not really available as they don’t respond to inquiries or ever rent the property
ATO has also been collecting data from cryptocurrency designated service providers operating in Australia in relation to cryptocurrency accounts and transactions, which is being used by the ATO to check against capital gains transactions for cryptocurrency reported in income tax returns.
International borders are no longer a barrier to obtaining offshore information and foreign jurisdictions have entered into information exchange agreements with Australia, whether this be through our Double Tax Agreements with 45 countries or through Tax Information Exchange Agreements that have been arranged with 36 other countries. However, these are still subject to the recipient country’s secrecy laws.
One of the more interesting measures that the ATO implemented as a means to check on Australian taxpayers has been through the investigation of taxpayers online presence including social media to see if this agrees with the income declared in the income tax return. Some taxpayers social media accounts have shown that they were living the ‘high’ life when there was very little income being declared in their income tax returns. Other have been caught with online businesses from which they have not been declaring any income.
A data leak occurs when confidential information is shared by an individual or a network with government agencies, media outlets, or other organisations usually with the intent of exposing individuals, groups, or businesses linked to potential criminal activity. Some of the data leaks that we have seen in recent years that the ATO has used for investigation purposes are the Swiss bank account information and transactions, the Panama Papers and the Paradise Papers. The ATO is still working with domestic and international partners to process the Paradise Papers data in determining unreported income by Australian taxpayers.
The information gathered from all of the above methods is then used by the ATO for the following:
- Prefilling income tax returns
- Categorising and selecting taxpayers
- Conduct audits
- Data matching letters
- Checks on Tax Agents
- Checks on employers and industry groups
- Collecting tax debts
- Benchmarking
- Identifying employer obligation non‐compliance
So, there are many ways for the ATO to check what has been, and even what has not been, but should have been, reported in an income tax return.
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