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Counting the cost of an ATO investment property crackdown

AUSTRALIAN BUSINESS REVIEW   March 14, 2019   James Kirby

ATO Commissioner Chris Jordan. Britta Campion:The Australian

Property investors who have already been slugged by a string of tax reforms from the Morrison government now have the Australian Tax Office to worry about too as Commissioner Chris Jordan launches a crackdown on investment property tax returns.

The main targets are incorrect interest claims, incorrect classification of capital work as maintenance work and investors pretending holiday homes are for rent when they don’t genuinely try to rent them out.

Clearly the holiday home issue is fair game for the ATO, the other issues however are rarely simple and, in many cases, are often impossible to get right. For example, the line between maintenance and capital work in an investment property can often be blurred, regardless of how heavy the ATO comes down on the issue.

Commissioner Jordan says the ATO found errors in almost nine out of ten rental property returns already reviewed which is a headline grabbing statistic, though ultimately it is unconvincing.

Here’s why. First, the ATO’s claim of poor standards among investors is based on a sample of 300 people which is a tiny fraction of the 2.1 million investor who claim deductions. Second, it is highly unlikely the scale of the issues outlined by the ATO — such as the $47.4bn in rental related deductions will remain at those level. Remember it was only on July 1 last year that depreciation deductions were greatly reduced while other expenses relating to investment property such as travel costs were scrapped.

Moreover, if the ALP gets elected this year and goes ahead with a plan to scrap negative gearing on existing properties annual deductions will slide further still.

The tax office has turned its attention to investment property after considerable success with a similar move on deductions relating to personal expenses — the ATO says that for the first time in 25 years the average work related claim expenses decreased, falling on average by about $130 over the past two years.”

So, there is no dispute the crackdowns are working — the question is what price is there for this success?

Previous crackdowns on small business and the highly contentious use of garnishee notices (where the ATO can simply withdraw money it believes it is due from a bank account without the bank account holder’s consent) are unsettling. A report this week from the Inspector- General of Taxation pointed to localised pockets of trouble in this area “particularly so at the ATOs Adelaide local site”. Defending the ATO, Jordan says “these allegations about garnishee practices have now been refuted after exhaustive investigation.”

The continuing claims of hard justice from the small business sector have also prompted the Small Business Ombudsman Kate Carnell to use her office to carry out an independent inquiry into several cases.

As my colleague Robert Gottliebsen has argued in these pages for some time, there is now unease throughout the investment community on both the powers of the ATO and the implementation of those powers. With a crackdown underway on property rentals we can reasonably expect more investors will be added to the list of voices calling for increased transparency at the ATO and crucially for a system of appeal that works properly.

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