EP40: Staying Compliant with the ATO

Welcome back to the Property Investors Handbook Podcast! In this episode, host Adam Bell dives deep into the intricacies of the Australian Taxation Office's advanced data matching capabilities with seasoned accountant Tony Sutherland. Together, they explore what the ATO looks for in your investment properties, how to ensure you're compliant, and the critical steps to take if you ever face an audit. From understanding red flags in repair expenses to the power of meticulous record-keeping, this episode is packed with invaluable insights for every property investor. Don't miss out on expert tips to keep your investments both compliant and profitable!

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  Hello and welcome back to the Property Investors Handbook Podcast. I'm your host Adam Bell and today we're diving into an essential topic for all property investors, understanding what the Australian Taxation Office, the ATO, looks for in investment properties. Particularly focusing on their advanced data matching capabilities that they've now got.

Joining me again today is, Tony Sutherland, who is a seasoned accountant who will help us navigate through the ATO scrutiny. And ensure compliance. Let's get started and ensure our investments are not only profitable, also perfectly aligned with tax regulations.

Tony, welcome to the podcast. Thanks, Adam. Thanks for having me again. No problems at all. Good to have you back. All right. Well, look, Let's start off with, you know, what the ATO might be looking for in terms of discrepancies, uh, when it comes to investment properties and tax returns.

Okay, as we've probably mentioned before, residential rental properties in particular always high on the ATO's annual target list.

So they're always looking for, they have an opinion that, you know, not everyone's doing the right thing. So they're looking for discrepancies. At the top of the line, it's, you know, uh, is everyone reporting all of their rental income in the first place, you know. Some people get it in cash, some get it through agents, things like that.

So they, they, they're looking at all the areas that they can identify that there might be under reporting of the income. Sure. Then on the bottom lines, they're always looking for over claiming of expenses. Expenses. Okay. So, uh. The two classics. Yeah, the two classics. So, they're looking at all those areas, but, and there's a couple of particular things around expenses, which we may touch on a bit more, but things like where, travel expenses, people particularly from interstate used to claim.

Travel expenses to visit their rental properties and that's that

now no longer can be done. Is that right? That's

all been changed a couple of years ago. So you can't do that anymore. So they're looking for people still, still doing those sorts of things. Yeah,

right. Okay. Well, look, while we're on it, what are some of the other ones that they do look for, particularly in claiming expenses that, you just, shouldn't or can't do anymore?

Yeah, the biggest one they always look for is a red flag is repairs and maintenance. Right. Okay, if the, if they, they perceive that the repairs and maintenance costs for that particular year is excessive, they'll probably delve a little bit deeper into it. And that's in particularly when someone's owned the property for the very first time.

Right. 12 months.

Okay.

The ATO have a, have a guidelines where. Their rulings are that if you buy a property and you have large, repairs and maintenance in the first 12 months, they deem that to be capital expenses on the basis that you bought the property. Cheaper because it needed all this repair work,

right?

So that's their

theory, but a

really good thing to understand that probably a lot of people don't realize so yes Yeah, first year and what you do in that first year is obviously Well, and truly on there on their radar more so than they think Probably subsequent years by what you're saying. Yeah, it is.

Yeah.

First, first 12 months is crucial, for repairs and maintenance. So landlords owners need to keep that in mind and try and keep it to a minimum. During that period, if it needs repairs, general repairs after that, you know, it's not going to be on their radar as much,

nearly as much.

I can give you, an example of a client in Sydney some years ago, he bought a property.

And then within a matter of months discovered, it was never disclosed, but it was discovered it had a major plumbing water leak under the slab. Oh, really? Yeah. So, it cost him, you know, tens of thousands of dollars. And the tax office denied him a deduction for repairs, even though he, you know, Didn't know about it.

There wasn't a price adjustment when he bought the place, things like that. And they, we argued till we were, you know, blue in the face, but they weren't, unless we really pushed it through the court, they weren't going to relent on that one. Do

you think that could have been different? Had it been beyond the first 12 months?

Yeah, certainly. Yeah.

So

It wouldn't have been as big a, a argument, you know, between the owner and the ATO and us. If it had been further down the track.

Sure, sure. And look, probably a good point to make while we're on the topic of, you know, whether looking at your, the rental income and expenses, whether you're, you're claiming things that you shouldn't, that's a great, point.

point for me to make that this is where a property manager has all of the records and absolutely everything to back up, you know, what you are putting in your return. But if you are your own, you know, managing your own property, you've got to be on top of those records, don't you?

You do. You certainly do.

Because once the ATO start looking at it for any reason, you have to have the records to justify your position that you've taken in your tax return or your subsequent, you know, arguments with them. So yeah, it's definitely, record keeping is crucial. Yep. Yeah.

Excellent. Well, look, one thing I do want to really delve into with you today is that the data matching capabilities that, the ATO now have, cause look, we're living in a different world now with technology that is available, AI and such, but.

Data matching sort of on the, on the same level. Look years ago, you know, they didn't have the ability to be able to look at various different, sets of data and link them together in order to, you know, put a picture together, but they can now, can you explain what they can do and how they can do it?

Yeah. Okay. The, like everyone, the ATO's capabilities for data matching through technology is growing. They're investing a lot of money into those areas, because it's very fruitful for them. So they're, gathering data from all sorts of places, you know, obviously they get it from all the state, titles offices, uh, where they're looking at who's got, who owns what property, is it their, residential main residence or is it a investment property?

And then they'll matching against returns to see if there's income being declared. There's data matching from places like the, RTAs State RTAs, the residential Sure. Tenancy authorities. Yep. As, , property managers might mention, they have to declare what the weekly rental is on those properties.

Yep. So the ATO is getting data from those, they're getting from, land tax. The land tax offices. All of those government areas in particular. They're not getting it from, generally from private, organisations like property managers at the moment, but the day may come.

May come. Sure. Here's a question for you, cause I, you know, I'm a, I guess what you'd call your lay person when it comes to all of this, and do my tax returns on, online, and they've got the pre data that they've already got in there, your, your group tax, et cetera.

And they do get your, your interest from your bank account. Can they, do they have access to your bank accounts? Oh, absolutely. Yep. So 100 percent of the data in your bank account, the ATO can look at any time.

Yeah, exactly.

Yeah.

So the banks are required to report things like people's, yearly bank, bank account interests, term deposits, uh, even now, , share transactions.

that are listed on the stock exchange are going on to your pre fraud report. So, but if the ATO wants, they can, they'll have access to your bank statements and they control through that 12 months, however many years they like and seeing what deposits are going in there. And then you get the tap on the shoulder saying, please explain.

Look, I think, and this will be a, An episode for another day, but, what they'll be able to do with AI, in the future in terms of not even to having to trawl through it themselves, but, to get AI to look through and flag, Oh yes. It's probably, probably starting already, I would imagine.

They've

already done that. They, you know, they have, document recognition, so, Yeah. They can key in, you know, parameters that they're looking for and the computers will do it for

them. Yep. Sure. So, how can property investors ensure that their data is accurate and compliant with, with the ATO?

Yeah, it gets back to that record keeping. So for example, the best example is where if you've engaged a good property manager, they're going to have a full record of all the rents collected, and all the outgoings that they've done for you. For example, a good property manager will even pay your rates and body corporate costs and things like that if you like, and then that appears on their annual report.

statement summary for you. And then it's only up to the owner to keep sort of incidental expenses they may have paid directly themselves. So dealing through a property manager is a good thing because it, it's sort of consolidates most of the information you need. And then there'll be some, some other data you may need to keep yourself.

Sure. Okay. Now here's a question that, I'm glad that I'm asking you as an, as an accountant, because you would have had to deal with this with some of your clients, I'm sure. How does one prepare when they do get the tap on the shoulder and there's the email, we're coming to give you an audit, you know, whether that just be over your, you know, investment property or obviously when they're doing it, it's across all your tax affairs.

But, yes. What does one do when they get that tap on the shoulder? How do they prepare?

The, well, obviously the best thing is to go see your accountant and a good

one. I know one for anyone listening.

Yeah. It's definitely a wise to go see your accountant because you have time limits, that you've got to reply to the ATO in, and their audits or their reviews can come in different forms.

Yeah. For things like rental properties and things like that, it'll generally be just correspondence. So it'll be letters, emails, maybe the odd phone calls where they'll send you a letter requesting certain information that you'll need to supply to them if they're looking at particular issues. It could, if you had multiple rental properties, it could get to what they call a desk audit, where they come visit you, and you know, drag out all your records, that's pretty unusual, you know, unless they think it's something that's very Okay, so that

doesn't happen, because that's the vision most people have, isn't it?

Yeah. The accountant with the, you know, the straight looking, audit guy with the black beard. The black suit turns up and sits at your kitchen table and start shifting through everything.

Yeah, that used to happen a lot, but technology's, uh, prevented a lot of that. So you know, it's correspondence generally via email and phone and things like that.

And

How deep do they go when this actually happens? I've never been audited. Hopefully never, not because is it a problem just because of the hassle I'm thinking, but you know, how deep do they, do they go? Yeah.

Look, it, that, again, depends on how serious they perceive. The problem to be right. It can be very basic, you know, it might just say, we think your repairs and maintenance, costs are high this year.

We want a breakdown of those repairs and maintenance and then please explain, you know, sort of thing. And there might be some back and forth as to, you know, why did you need to repair that kitchen or that bathroom or, you know, the roof or whatever. So they, and if they're satisfied, that might be the end of it.

But if they still see there's a problem, they'll go, they'll go a little further, a little further. If they find someone who's, they think has been really rorting the system, you know, not declaring. Really

gone to town, yeah. Income,

that sort of stuff, you know. Uh, they'll, they'll, they can go back four years and, and dig, dive into.

Okay, so four years

is it? I thought it used, was it, did it used to be seven?

No, you, it used to be seven that you had to keep your records, from the date of time of lodgement. Right. That got reduced to five years. That's record keeping. Sure. But generally, the ATO can only go back. Four years in tax returns, if they believe there's, an error, or, you know, some sort of simple, straightforward thing.

If it's fraud, they can go back as far as they like.

Right, okay. So if you, if they perceive you've done things different, if you've done things deliberately rather than just, um, misperceived.

But if it's, yeah, if it's like that, it's four years, they can go back if they want.

Fantastic. Well, look, some absolutely invaluable advice that you've given there, Tony.

I really, really appreciate your time today. I think the key takeaway probably for listeners here today is look, stay informed, which will help you stay compliant. And the key is really the key to managing your investment. properly, successfully and get advice from, you know, people like, like accountants and so forth.

So, uh, look, don't hesitate to, to reach out for personalised guidance on managing your, your property portfolio within the scope of the law. Please visit, Colleen and her team and get information that you need from her website, which is Spmg. com. au. So look, join us next time on the Property Investors Handbook podcast for more expert tips on maximizing your property for investment success.

And look, thanks again for joining us in the studio, Tony. Thanks for having me, Adam.