What The ATO Has In Its Sights This Tax Time 2023

The Australian Taxation Office (ATO) has recently unveiled its top three focus areas for this Tax Time, highlighting the importance of accurate reporting in key categories:

Rental Property Deductions: The ATO is placing emphasis on rental property deductions, as this is an area where mistakes are commonly made. Ensuring that taxpayers and registered tax agents understand the correct rules and guidelines for claiming rental property expenses is crucial for accurate reporting.

Work-Related Expenses: Work-related expenses are another focal point for the ATO. With numerous types of expenses that can be claimed, it's essential to be aware of what qualifies as legitimate deductions and to keep proper records. By addressing common mistakes and providing support, the ATO aims to assist taxpayers and tax agents in correctly reporting their work-related expenses.

Capital Gains Tax: The ATO has also identified capital gains tax as an area that requires attention. Understanding the rules and requirements around capital gains tax calculations and reporting is vital for taxpayers who have disposed of assets during the financial year. By providing guidance and addressing common errors, the ATO aims to facilitate accurate reporting of capital gains tax.

Assistant Commissioner Tim Loh emphasized the ATO's commitment to supporting taxpayers and tax agents in getting their claims right. By focusing on these key areas and addressing common mistakes, the ATO aims to ensure taxpayers have the information and assistance they need to accurately report their tax obligations.

Let’s look at each a little closer.

Rental property deductions: landlords – listen up!

The ATO's recent analysis of income tax returns has revealed that a significant number of rental property owners, approximately 9 in 10, are encountering issues with their returns. These errors commonly involve neglecting to include rental income or making mistakes when claiming property-related deductions, such as overclaiming expenses or inaccurately claiming improvements made to personal properties.

One particular area of focus for the ATO is interest expenses related to rental properties and to correctly allocate loan interest expenses when a portion of the loan is used or refinanced for personal purposes.

You can only claim interest on a loan that was specifically used to purchase a rental property for the purpose of earning rental income. The ATO will be putting a magnifying glass to private versus business proportioning of loans and interest on loans.

As part of its efforts to ensure compliance, the ATO has recently introduced a new program that focuses on matching data pertaining to residential investment property loans to help in this effort.

Rental Property Tax Deductions

When it comes to rental properties in Australia, there are several tax deductions that can be claimed by property owners designed to help to offset the expenses associated with owning and maintaining a rental property. Here are some common tax deductions that may be applicable:

Depreciation: The decline in value of assets within the property, such as appliances, furniture, and fixtures, can be claimed as a deduction over time. A qualified quantity surveyor can help determine the depreciable value of these assets.

Repairs and maintenance: Costs incurred for repairing and maintaining the rental property are generally deductible. You’ll need to distinguish between repairs (restoring or maintaining the property's existing condition) and improvements (adding value or increasing the property's lifespan), as only repairs can be claimed as an immediate deduction.

Council rates and taxes: The rates and taxes levied by local councils on the rental property can be claimed as deductions.

Insurance: The premiums paid for insuring the rental property, including building insurance and landlord insurance, are deductible.

Property management fees: If you engage a property manager to handle the rental property, the fees you pay to them can be claimed as deductions.

Advertising and marketing costs: Expenses incurred for advertising the rental property, such as online listings or signage, are generally deductible.

Travel expenses: You may be able to claim travel expenses related to inspecting or maintaining the rental property.

Water and utility expenses: You can claim the portion of water and utility bills attributable to the rental property if you pay these expenses as the property owner.

Pro Tax Tip: Don’t forget the paperwork. Back up your claims with receipts, tax invoices, contracts, rental statements, bank statements, rates notices, utility tax invoices, mortgage documents, depreciation schedules, lease agreements and ownership documents. It’s also a good idea to keep a separate bank account for your rental property to make it easier to track and substantiate tax deductions.

Work-related expenses: avoid the ‘copy-paste’

There have been changes in calculating deductions for working from home expenses. Merely copying and pasting last year's claims may not be appropriate, especially considering the significant number of people who have returned to working in the office compared to the previous year.

To claim deductions for working from home expenses, you have the option to use either the actual cost method or the revised fixed rate method, provided you meet the eligibility criteria and maintain proper record-keeping practices.

Under the revised fixed rate method, the hourly rate for tax deductions has increased from 52 cents to 67 cents per hour worked from home. This allows for a higher deduction to cover various expenses incurred while working remotely. Additionally, the requirement of having a dedicated home office space has been removed, meaning you can claim expenses even without a specific area solely dedicated to work-related activities. The revised method also covers a broader range of eligible expenses, including electricity, gas, phone and internet usage, computer consumables, and stationery. This means that you would claim 67 cents per hour instead of claiming a proportion of the above expenses.

You can however, separately claim the work-related portion of the decline in value of depreciating assets such as office furniture and technology.

The revised fixed rate method not only benefits individuals but can also be utilized by businesses operating partially or entirely from home, enabling them to claim home-based business expenses.

Changes To Work Diaries

If you’re claiming the revised fixed method, you’ll need to make sure you record each working hour on a daily basis from 1 March 2023. This includes work rosters, timesheets and employment details. You’ll also need to keep one receipt for each of the other expenses that are covered under this method of claim. For example, one monthly bill for the internet, electricity and stationery if they are additional costs you incurred for work.

?A 4-week representative diary showing hours worked from home will also be required to cover the period of 1 July 2022 to 28 February 2023.

Working From Home Tax Deductions – Actual costs method

There are several tax deductions that individuals can claim when working from home under this method. This method requires detailed calculations and records.

Home office electricity and gas expenses: You may be eligible to claim a portion of your home office expenses, such as heating, cooling and lighting provided you have a dedicated workspace such as a study or spare room and will need to work out the associated business related costs based on current bills, the area of the home used and the hours worked. A 4-week representative diary or record of the hours worked from home is acceptable for claiming under this method.

Phone and internet expenses: If you use your personal phone or internet for work-related purposes, you can claim a portion of the expenses based on the percentage of business use. Receipts for the expenses and an average business percentage based on the analysis of one monthly bill would be required.?

Computer and technology expenses: If you use your personal computer, laptop, or other devices for work, you may be able to claim a portion of the cost, as well as any related expenses such as software, repairs, or maintenance. Receipts for the expenses and an average business percentage based on the analysis of one monthly bill would be required.?

Work-related supplies: Expenses for work-related supplies like stationery, printer ink, and other office supplies can be claimed. Receipts required.

Depreciation of equipment: If you use assets or equipment for work purposes, such as a computer or printer, you can claim the decline in value (depreciation) of these items. Receipts for the expenses and an average business percentage based on the hours worked would need to be calculated.?

Professional development and self-education expenses: If you undertake professional development courses or self-education related to your work, you may be able to claim expenses such as course fees, textbooks, and other relevant materials.

Home office occupancy expenses: In certain circumstances, if you have a dedicated home office space used exclusively for work, you may be eligible to claim a portion of your home's occupancy expenses, such as rent, mortgage interest, or property insurance. Generally, this is a home office where clients are able to attend.

Pro Tax Tip: If your boss or employer has reimbursed you for home office expenses, you can’t claim some working from home deductions.

Capital gains tax: have you considered all assets?

Capital gains tax (CGT) is applicable when you sell or dispose of assets like shares, cryptocurrency, managed investments, or properties. You’ll need to calculate the capital gain or loss for each asset, unless an exemption applies, in order to fulfill your obligations and ensure the correct amount of tax is paid.

While your main residence is generally exempt from CGT, it's important to note that if you have utilized your home to generate income, such as renting it out through platforms like Airbnb or Stayz, or running a business from home, CGT may be applicable. Maintaining good records that detail your income-producing period and the portion of the property used for income generation is a must. If you qualify for an exemption and have used your property for income purposes, remember to declare that in your tax return.

The ATO will be cracking down on undisclosed gains from asset sales and taxpayers should not to assume that such transactions will go unnoticed. It's important to keep detailed records of your asset acquisitions, costs, and sales to accurately calculate your capital gain. If you have multiple assets or complex transactions, professional help will ensure compliance with CGT regulations and maximize any available deductions.

How To Calculate Capital Gains Tax

Determine the cost base: This includes the original purchase price of the asset, as well as any additional costs incurred during the acquisition, such as legal fees or brokerage fees. It may also include certain expenses associated with holding and maintaining the asset, such as renovation costs for a property.

Subtract the cost base from the selling price: Once you've determined the cost base, subtract it from the selling price of the asset. This will give you the gross capital gain.

Apply any eligible deductions: Certain deductions can be applied to reduce the capital gain. For example, you may be able to claim expenses related to the sale, such as advertising costs or agent fees. If you've held the asset for more than 12 months, you may be eligible for a 50% discount on the capital gain for individuals (or a 33.3% discount for superannuation funds).

Include the capital gain in your income: The net capital gain (after applying deductions and discounts) is added to your assessable income for the financial year in which the asset was sold. It will be taxed at your applicable marginal tax rate.

When it comes to tax deductions, it's important to approach them with honesty and integrity. While there are various deductions available to individuals, you’ll need to ensure that you meet the eligibility criteria and have proper documentation to substantiate your claims. Remember, being transparent and truthful in your tax affairs is not only ethically sound but also helps you avoid potential penalties or legal consequences. By consulting with a tax professional and staying informed about the applicable guidelines, you can navigate the world of tax deductions responsibly, ensuring you receive the benefits you're entitled to while maintaining compliance with the tax laws.