Poorly kept records a tax no-no

Australian Taxation Office marketing and education assistant commissioner, Kathy Dennis-Carter, says recent audits have highlighted poor record keeping as one of the most frequent blunders made by property investors. She says this is particularly the case when people’s circumstances change. For example, if a person converts what was once their main residence into a rental property, they need to keep a record for the time the property was their main residence. We asked her for other examples of where investors can be their own worst enemy.

Example: a taxpayer purchased a property in December 1992. His family immediately moved into the property. In March 1993, they decided to renovate to add an extra bedroom to accommodate their growing family. The husband was subsequently transferred interstate in November 1993 and the property was rented at this time. The couple purchased another property which they elected to treat as their main residence. The property was sold in January 2003.

Why is this important? In determining the capital gain the taxpayer may include the costs associated with the renovation. In this instance, the taxpayer failed to keep accurate records (i.e. receipts for the renovations, building contracts, plans or additional loan information), therefore they were unable to substantiate these costs and could not include them in the cost base in calculating their capital gain.

“The other key thing that we see is around the fact that people continually use the date of settlement when working out a capital gain instead of the date they entered into the contract, and that can make a significant difference because they can be in different financial years,” Dennis-Carter says.
Example: a taxpayer purchased a property on July 7, 2002. The property was sold under a contract entered into on June 30, 2003 with settlement occurring on July 30, 2003. The property was rented for the entire period of ownership.

Why is this important? The taxpayer claimed that they intended to declare the capital gain in the 2004 year, believing that the capital gains tax obligation was calculated at the date of settlement, as opposed to contract date. The capital gain tax obligation should have been declared in the 2003 year. Furthermore, as the property was purchased and sold within a 12-month period (contract to contract date), the taxpayer was unable to apply the 50 per cent discount in calculating the gain.

“In terms of deductions more generally, one of the things that people need to be aware of is that there are some things that they can deduct on a year-by-year basis but there are other things that they can only include when they calculate their cost base for capital gains tax purposes,” Dennis-Carter says. “They can’t actually claim them as a deduction on their tax return.

“Anything that relates to an acquisition or disposal cost needs to be included in the calculation of the cost base of the property.”
Example: a taxpayer purchased a property in June 1998 and sold it in April 2003. The property was an investment property for the entire period of ownership. In his income tax returns from 1999 until 2003 he claimed rates and insurance premiums. When calculating his capital gain to be included in his 2003 return, he included these rates and insurance premiums as part of the cost base.

Why is this important? If a property is used for income-producing purposes these items are deductible expenses. These items cannot be used to reduce the cost base.

For more information, visit the Tax Office website at www.ato.gov.au For an introduction to the essentials of CGT - click on the capital gains tax section under Tax topics explained. You can also order the publications Rental Properties, Guide to capital gains tax and Guide to depreciating assets from the Tax Office website, or you can call 1300 720 092 to order copies.