ATO wants YOU!

[Peter 14.7]

Seems like the Court Decison on Split Loans means the ATO has a reason to "bash" poor old IP investors.

Glad I didn't split?

Read on, Peter 147

Taxman after property punters
By Duncan Hughes
May 31, 2004

The nation's tax tsar yesterday said the landmark High Court ruling last week on tax avoidance could have widespread implications for business and individuals and reaffirmed the Australian Taxation Office's hardline policy.

Tax commissioner Michael Carmody also said Tax Office audits of investment properties, where tax minimisation via negative gearing has fuelled the property boom, would be widened to identify abuses.

Mr Carmody was commenting on last week's High Court's unanimous ruling that "split loan" mortgages where home buyers direct all their interest bill to deductible investment properties were illegal.

While differing reasons for the decision in the five justices' three separate judgements have provided tax lawyers ample scope to argue the decision, there is agreement the decision has confirmed the legality of the broad anti-avoidance strategy.

"It will only give me greater confidence in relation to the cases that we have already taken on," Mr Carmody told ABC's Inside Business.

Last week the High Court found that Canberra residents Richard and Trudy Hart's attempt to use a split loan to finance an investment property while paying off their main home was illegal.

The High Court rejected a narrow interpretation of what the scheme was designed to do - buy a house - and considered the purpose was to avoid tax.

"Because it is a very significant issue in the community, more and more people are entering investment properties and we will continue our audits there, they will be expanded, and this will be one aspect that we are looking at," Mr Carmody said.

 

[Lplate]

I hope this was a misquote because it sounds like his announcement and the audits are more politically motivated than anything else:

"Tax commissioner Michael Carmody also said Tax Office audits of investment properties, where tax minimisation via negative gearing has fuelled the property boom, would be widened to identify abuses." (my italics)

It would be misleading for a senior bureaucrat in his position to play the blame game and attribute the recent price growth solely or mainly to negative gearing. He knows better than that. Is there an election in the air?

 

[Peter 14.7]

Hi Lplate

You may be suprised but my mild mannered accountant has told me he has been told face to face by senior ATO officers that NG is wrong and if he had his way it would be dumped.

Makes you think "stay a small target", Peter 147

 

[geoffw]

Hi Lplate

You may be suprised but my mild mannered accountant has told me he has been told face to face by senior ATO officers that NG is wrong and if he had his way it would be dumped.

Makes you think "stay a small target", Peter 147

I would be surprised if NG stays in its present form. But it is legal, and I am a supporter of trying to keep well within the guidelines.

ATO are targeting investors who stray from those guidelines (Capital gains, claiming improvements as repairs, and claiming fast depreciation aginst items which ATO regard as part of the structure are some stated targets).

In the future, due to the number of small investors making claims, I'm sure the guidelines will change.

If I were making losses on a property overseas, I could not claim those losses against my income in Australia (no matter what the source of income). I could not even claim those losses against active income overseas- I can only claim them against passive income.

Those rules are already in place, and have been for a long time. It would be simple for a government to extend those rules to Australian income.

In the US, I understand that there is a $ amount limit of depreciation which a person can claim. That's another option.

I'm sure there's a lot of other options. But I'm also sure there will be changes. ATO I think view property investment as a major loss of income, and will try to change things (though the past experience with trying to kill it did not work- so I don't see kill as an option)

 

[Aceyducey]

You may be suprised but my mild mannered accountant has told me he has been told face to face by senior ATO officers that NG is wrong and if he had his way it would be dumped.

Obviously these senior ATO figures have a very short memory

1985-87.....

However as Geoff sez, I also expect there to be substantial changes to how negative gearing operates, such as limits on how long you can claim NG benefits on a property (which will stimulate flipping IPs every X years) and restrictions on what can be claimed....aka the recent depreciation list revisions - more to come.

Cheers,

Aceyducey

 

[GreatPig]

If I were making losses on a property overseas, I could not claim those losses against my income in Australia (no matter what the source of income)

So for an Australian resident investing in NZ property, negative gearing is just going to build up a pile of unusable losses?

Can the losses later be offset against capital gain when the property is sold?

GP

 

[geoffw]

So for an Australian resident investing in NZ property, negative gearing is just going to build up a pile of unusable losses?

Yes

Can the losses later be offset against capital gain when the property is sold?

Losses can be carried forward to be used when the property starts making a profit. I'm not sure though whether it can be offset against CG. The property I had in England was bought before changes to CG- when I sold, the CG was less than inflation for the period anyway. It was not a great performer

 

[GreatPig]

Geoffw,

Thanks for the info. Obstacles at every turn.

Wonder if I could set up a NZ hybrid trust, get my sister there to buy units, then give the losses to her...

GP

 

[Peter 14.7]

ATO wants You NO 2

Hi All

This little gem from todays SMH reinforces many of the comments re ATO position.

Thankfully I am also Not Low Doc.

What about you?

Peter 147

Full article here. http://www.smh.com.au/articles/2004/05/31/1085855499814.html

Excerts below


Taxman is very curious about low-doc loans
By Alan Kohler
June 1, 2004

The Tax Office is preparing a crackdown on low-doc loans - the ones where borrowers don't have to substantiate their income.

It is a market dominated by self-employed borrowers and small lenders looking to take market share off the majors.

And it's working: low-doc lending is among the fastest growing segments of the residential market; on some estimates low-doc loans now represent 10 per cent of all new lending.

The premium paid by a borrower for the privilege of not providing proof of income ranges between 0.5 and 1 per cent, usually for a minimum of two years.

Why pay it? Well, perhaps the Australian Tax Office is a bunch of cynics jaundiced by constant exposure to the mendacious side of human nature but there seems to be a bit of official suspicion about.

And it is rather hard to think of a reason for volunteering to pay higher interest rates that does not involve at least one kind of fib: either inflating income on the loan application or deflating it on the tax return, or both.

Early indications are that the data matching shows tax evasion is a big reason for the growth in low-doc loans.

This news may well cause a wave of cold panic to churn the stomachs of many a borrower this morning but one can only ask: what did you think would happen? Did you think your loan application was printed on rice paper, to be eaten by your banker?

 

[geoffw]

Hi All

This little gem from todays SMH reinforces many of the comments re ATO position.

Thankfully I am also Not Low Doc.

What about you?

Peter,

There are some very worthwhile responses to the article in the thread http://www.somersoft.com/forums/showthread.php?t=16030- especially from Rolf.

I'm quite comfortable going Low Doc myself. I would be doing it because I needed to from servicibility- I'm not trying to hide anything from the ATO.

 

[Peter 14.7]

Hi Geoff

Thanks for the pointer.

I also agree low doc has its place being a business owner and virtually having to give the Bank rights to my first born as opposed to normal PAYE who they treat as solid gold,

Personally dont use them but glad they are there.

Peter

 

[NormH]

The next stop will be corporations as they have been using the capitalisation of interest for years. (refered to on this board as splits) So I suspect the
ATO will be looking very closely at those book-keeping entries.

Norman

Seems like the Court Decison on Split Loans means the ATO has a reason to "bash" poor old IP investors.

Glad I didn't split?

Read on, Peter 147

Taxman after property punters
By Duncan Hughes
May 31, 2004

The nation's tax tsar yesterday said the landmark High Court ruling last week on tax avoidance could have widespread implications for business and individuals and reaffirmed the Australian Taxation Office's hardline policy.

Tax commissioner Michael Carmody also said Tax Office audits of investment properties, where tax minimisation via negative gearing has fuelled the property boom, would be widened to identify abuses.

Mr Carmody was commenting on last week's High Court's unanimous ruling that "split loan" mortgages where home buyers direct all their interest bill to deductible investment properties were illegal.

While differing reasons for the decision in the five justices' three separate judgements have provided tax lawyers ample scope to argue the decision, there is agreement the decision has confirmed the legality of the broad anti-avoidance strategy.

"It will only give me greater confidence in relation to the cases that we have already taken on," Mr Carmody told ABC's Inside Business.

Last week the High Court found that Canberra residents Richard and Trudy Hart's attempt to use a split loan to finance an investment property while paying off their main home was illegal.

The High Court rejected a narrow interpretation of what the scheme was designed to do - buy a house - and considered the purpose was to avoid tax.

"Because it is a very significant issue in the community, more and more people are entering investment properties and we will continue our audits there, they will be expanded, and this will be one aspect that we are looking at," Mr Carmody said.

 

[geoffw]

Capitalisation of interest per se is not a problem.

It's possible, as I understand, for interest to be capitalised- for instance, if I were developing a property.

The problem with this setup was that, while income was being capitalised, income from the same property was not being applied back to the same property- it was being applied back to reduce a non deductible loan (on PPOR).