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).