ATO targets negative gearing tax dodgers

By Leith van Onselen

Back in May, the Australian Taxation Office (ATO) noted that property investors were rorting the tax system by claiming excessive depreciation expenses on plant and equipment:

“The ATO has actively monitored this area over many years. During this time we have identified a number of issues relating to inflated valuations of depreciable assets in rental properties.”

The spokesman said that one of the ATOs concerns was the use of the “new for old” method, which effectively values assets at new prices even if they are many years old…

Then in July, the ATO again noted that property investors were rorting the tax system, and warned that it would begin to target these tax dodgers:

The tax chief also said that people wrongly claiming car expenses and the $44 billion in expenses claimed by landlords, which means negative gearing is costing over $3 billion a year, were also “well and truly” in the Tax Office’s sights.

“There is about $40 billion in rental income and about $44 billion of rental deductions resulting in around $3.6 billion net rental loss. These are the areas we are going to focus on,” Mr Jordan said.

Today, The Australian reports that the ATO will use data-matching technology to combat fraudulent tax deductions in the rental housing market:

The Tax Office has started a massive escalation of its monitoring of rental properties in recent months over black economy and negative gearing issues. The Australian understands the ATO has conducted checks and audits on 100,000 rental property owners in the last year, to ensure they are tax compliant…

The Commissioner believes the sheer size of the rental market means it must be watched extremely closely for any potential rorts.

He is concerned by Tax Office statistics showing that deductions claimed exceed rental income across the country for individually-owned properties.

“In the rental income space, there’s $40.1 billion of income and $43.6 billion of expenses,” he said. “So it’s a net $3.5 billion negative. Just think of (those) figures. That’s a large pot of money to play around with.”

But he is equally concerned that a growing amount of rental income, particularly in property hotspots like Sydney and Melbourne, is disappearing into the cash economy.

Mr Jordan has revealed the ATO is taking several data-matching measures to check whether properties are really unoccupied.

His newest weapon is the data-matching of utility records, like electricity and gas meters, against properties that are claimed to be unoccupied, to test if landlords are telling the truth.

“There’s going to be a whole lot of new things,” he said. “So when people say their place wasn’t rented, well, we’ll look at the electricity records and (see) they went up. And we’ll say (to landlords): ‘Hey, you said the place wasn’t rented, so why are your electricity records going up?’

The widespread rorting by property investors was presumably behind the May Budget’s measures to limit plant and equipment deductions to actual outlays incurred, as well as to disallow property investors from claiming travel expenses relating to their property:

As shown above, these negative gearing tweaks are forecast to save taxpayers some $800 million over the forward estimates period – a small win in the era of Budget deficits.

The measures are also a stripped-down version of Labor’s proposed negative gearing reforms and should act as a worthwhile proving ground before Labor implements their full policy if elected after the next Federal Election.

In particular, the depreciation deductions will now only be able to be claimed on the initial purchase of plant and equipment (and disallowed when the property changes hands), and will effectively skew negative gearing towards new builds, which should (in theory) stimulate dwelling construction, while removing some speculation from existing dwellings (at the margin).

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Comments

      • Well there’s plenty of big business opportunities if you use overseas loans through the Caymans. Get your business bigger.

      • The Wealth Navigator

        Footsore it is called tax consolidation. You can have one company in a group running at a loss and this loss can be offset against the profits of another company in the same group. And these can be in totally different industries, different states.
        So business has been able to offset unrelated losses against unrelated profits for years. Just that most people don’t know this.

    • Yep.

      Giving them a hard time on depreciation and fraud with data matching makes a big difference.

      Limiting the capital gains discount for specific asset classes (existing residential housing) will also help in encouraging productive investment in new economic capacity over unproductive mere asset price speculation.

      Do that and negative gearing will be a non-issue.

  1. There are a lot of speculator landlords out there buying adult diapers at this very moment.

    Imagine seeing your capital gain evaporate and plunge south just as the taxman comes a knocking with a non-negotiable demand for payment of back taxes and penalties

    Popcorn!!

    • reus often slips on a pair of depends as well as a pair of dark glasses after a particularly enthusiastic night with the poppers and lube.

      He’s not too choosy about what goes where, if ya know what i mean.

    • scootytootyMEMBER

      Most negative gearers I come across don’t know how it works and why they use it. It’s just what everyone else is doing to get ahead, total pack mentality.

      • Amazing but true. I’ve met a few property investors who are convinced that they actually make a profit when negatively geared because they get *all* their losses back in their tax refunds while benefiting from capital gain. They way they see it, it’s making money through magic while simultaneously Sticking it to Da Man. The ignorance among some property “investors” is astounding.

        Meanwhile, the capital gains are disappearing in Sydney and elsewhere, and the Pina Coladas are turning into wee-wee all over the place as reality starts to impinge on these idiots fantasies. Heh heh heh. The lolz are enormous in my AO.

      • @LSWCHP
        It’s perfectly possible to be both negatively geared tax wise and making an actual profit given our tax laws. One of the biggest deductions is depreciation which is not an actual loss but can be claimed as such.

    • Perhaps the ATO realises you can’t get blood from a stone…best to try and claw back while the puntertariat still have (some) funds. Put a fork in it….RE is done.

  2. Good. The biggest scams are renovation of the primary residence charged to the rental and claiming the rental is the primary residence whilst getting all interest and tax advantages applied to the family home (which is nominated as the rental).

    Best scrap negative gearing all together.

  3. He is concerned by Tax Office statistics showing that deductions claimed exceed rental income across the country for individually-owned properties.

    Oh man.

    All of the money in rent is less than all of the money in deductions.

    That blows tiny eggshell mind!

      • The Horrible Scott Morrison MP

        These figures prove that it if it wasn’t for negative gearing, landlords would double rents overnight. As it stands just now, negative gearing allows them to generously provide property at 50% of market rent. So negative gearing prevents poor people becoming homeless, plus it allows mums and dads to sound like sexy and sophisticated investors when they’re at BBQs.

      • The Horrible Scott Morrison MP

        As I’ve said before, Mr Reusa is a generous donor to the campaigns of the Superstar Treasurer. This is because he supports democracy and the free market for property.

      • Yep, a Reusa wanna-be, just nowhere near as clever or funny. One day this bloke will be able to stump up for a subscription.

    • Keep thinking it through- all the rent money (and then some) gets paid to the banks in interest.

      The banks keep a small margin and then pay it all away to their offshore lenders (bondholders). This is exempt from withholding tax.

      The end result is that the 3.5bn gets deducted here and then it taxed to anyone. It’s taxed (as interest income) in the country where the bond holders are.

      So we’re giving about 3.5bn of our tax base to foreign governments. Insane.

      • Interest deductions are less than rent. The $3.5 billion doesn’t even cover capital works deductions and Land Tax. Plus it ignores capital gains on sale.

      • @Jason – you’re right. I’ve oversimplified.

        But it’s also true that ALL the interest gets deducted (this is much more than $3.5bn – probably over $30b) and gets paid to foreign bond holders tax free. The banks hold onto a couple of percent as their margin and pay tax on that at 30%.

        YIKES!

        There used to (before the depreciation changes) also be a tax arbitrage on the depreciable assets – the seller treated their value as CGT proceeds, whereas the buyer got to deduct them over time in depreciation.

      • A couple of percent margin is more than half the gross amount!

        In any case, you are picking and choosing where offshore funding is used versus local funding. Australian banks still borrowing mostly from onshore depositholders who do pay tax on that income.

      • Just look at Aust Govt Bonds (AGB)
        Exempt from non-resident interest withholding tax (not taxed in Australia). On the same bonds, if you are an Aust resident and don’t quote a Tax File Number you get approx 50% withheld.

  4. reusachtigeMEMBER

    So what? I’ll just buy a whole lot of new stuff for my rental properties so that I can claim it back as deductions because claiming stuff on tax is the best thing about property investment!

  5. “There is about $40 billion in rental income and about $44 billion of rental deductions resulting in around $3.6 billion net rental loss.”

    This is quite ridiculous. Clearly investors aren’t intending to create an income producing “business” and all deductions, including interest, should be disallowed.

  6. Sirius building in Sydney is up for sale. Sirius is right next to Harbour Bridge, it is as close as I can get to Harbour Bridge.

    Sirius auction will publicly unfold the ‘genuine demand’ in the property market, atleast in Sydney.

    • Do you think? Given the genuinely unique nature of that property, my guess is it should (at any stage of the cycle) attract much more demand than the market as a whole, so might not be a good measure of “genuine demand”.

      • If an apartment developer buys it, he needs to think in terms of only land banking coz for the next 10-15 years there aint any building happening. Therefore, profits are ‘not in sight’ hence no one will pay top dollar unless of course it is hush money from overseas for laundering purposes. I say ‘genuine demand’ because lets say it exchanges hands for price equal to or less than an amount some developer paid for 10KM away from Harbour Bridge, thats when the light bulb moment happens, because it will be all over MSM.

    • You are living in a fantasy of your own creation

      The government just ran another round of Millers Point auctions last night (former public housing right under the harbour bridge, right next to Sirius)

      4 bedroom terrace, in nearly uninhabitable condition and with extremely severe heritage overlays, sold for 6.3million

      Bear in mind, this house was built in the mid 1800s by unskilled labour, and you cannot even dig a hole in the backyard without paying to have an archaeologist present, nor so much as paint the walls without paying a heritage architect to apply to the heritage council.
      Renovation costs will be 2 million bare minimum, and it will be a nightmare to get anything through heritage and council

      1 bedroom cottage (doll’s house really) in similar condition sold for 1.7

      Property (land) values are still inflating.
      It is labour and cash that are deflating

      • we had a number of those workers cottages in red hill brisbane, convict bricks in the foundations.
        somehow, white ants got into em
        these white ants were not locals but were the type who chew on railway sleepers for desert, did heaps of damage,
        but, the owners had to fully restore all white ant damage,
        some people had their cars torched .
        Diesel killed the ants. deader than doornails.

  7. “And we’ll say (to landlords): ‘Hey, you said the place wasn’t rented, so why are your electricity records going up?”

    WTF? You’ll just say your son, daughter, uncle, aunt whoever is living there.

    • At which point you can’t claim any deductions for it.

      Whereas you can (I believe) claim deductions for a rental property that is “vacant” because it hasn’t managed to find a tenant.

      • I think ATO should also include a clause “showcause that all efforts were deployed to find a tenant but we were unable to find tenant” if someone is claiming tax deductions on untenanted property. For example one of the showcause must and should be “if property is available to rent but could not find tenants, after two weeks did you reduce the asking rent? if yes, have you continued reducing asking rents every two weeks until you found a tenant?” if the answer is no they “there is no intent to find a tenant”!

      • Virus

        Yep. I reckon the ATO and government are going to keep squeezing negative gearing. Landlords have already lost over $10k per property per year via depreciation rules and travel to inspect.

      • It sounds like we’re getting rid of negative gearing, without actually getting rid of it yet. ;D

    • Dazza and Arrow

      True, it has to be available to rent to claim. They need to up the penalties or something. There’s ways around everything. It’s dodgy people that’s the problem.

  8. When I rented out my main residence as I worked elsewhere, the depreciation report was amazing.
    I built the home, but they estimated my oven to be worth $9k. I know I could buy it for just $2.5k at the time.
    Good times!

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