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Tax Office Hot Spots
For 2005 Tax Returns

The tax office have announced that they are stepping up audit activity and have announced the main areas of audit activity. Taxpayers should be aware of the following areas when completing their tax return this year.

1. Rental property owners
The tax office are looking at rental property owners’ tax returns for this tax year with a particular look at claims for interest, borrowing expenses, depreciation and capital allowances and checking the taxpayers who sell their properties are correctly reporting the gain and or loss on sale.

Rental Property deductions - Common Errors

  • Initial work done to allow the property to be rented being claimed as repairs
  • Expenses being claimed where a property is not available for rent
  • Deductions not being apportioned when non-commercial rates of rent are being charged to relatives or friends
  • Estimating the construction costs of buildings rather than relying on cost estimates provided by independent qualified persons
  • Including land value as part of the construction cost
  • Interest being claimed on loans that are partly or wholly for private use
  • Assets being incorrectly classified as depreciating assets for uniform capital allowance (UCA) purposes
  • Incorrect asset values being used for calculating uniform capital allowances (UCA)
  • Travel expenses not being reasonably apportioned when the purpose of the trip is partly or predominantly private
  • Borrowing expenses not being correctly apportioned

2. Work related Expense Claims

ATO Audit Activity
The ATO’s action for the 2005 tax year is to write to selected taxpayers in June indicating the focus the ATO have on this area and that taxpayers will need to be careful when making claims. The letter also details some of the common errors and for some taxpayers they will be required to complete and lodge additional schedules, called WRE schedules, which provides more details on claims made. The ATO audit staff will review these claims, after the assessment has been issued. All Taxpayers including who use Tax Agents and those who do their own returns will be targeted.

Taxpayers need to be careful with their claims. In general terms any claims you make will be allowed, as under self assessment no claims are checked. The Tax office does review claims after the assessment issues and penalties will apply. Just because your friend was successful in having a claim allowed, it does not mean it will not be overturned at audit.

Work related expenses—Common Errors

  • Motor vehicle claims made using logbook method when there is no logbook
  • Clothing being claimed when qualifying conditions are not met
  • Self education claims made when there is no work connection at the time the expense is incurred
  • Students receiving AUSTUDY or ABSTUDY payments incorrectly claiming self education expenses against those payments
  • Taxpayers incorrectly calculating depreciation and not apportioning deduction claims between business and private use. This applied particularly to home computer and mobile phone claims
  • Claims made for meal expenses when no overtime meal allowance received
  • Claims when there is no connection to current employment income
  • Ongoing FID claims. FID was abolished with effect from 1 July 2001

3. Income Matching

Not declaring interest and dividends
The Tax Office each year conducts an electronic review of the income declared by taxpayers in their tax returns, matching that to the reporting information they have received from banks other financial institutions and corporate share registered, Centrelink and other sources. From this they generate letters advising taxpayers of the discrepancy asking for an explanation. If no response is received or not reason why the information is incorrect the Tax Office automatically amends the tax returns, charges the General interest charge on the tax outstanding at 11.8% and in some occasion penalties up to 45% of the tax avoided

4. Capital Gains

Not reporting income from capital gains on sale of shares and properties
This year we will compare 1,100 tax returns with share trading and rental property sales data. The Tax Office is increasingly gathering information in regard to asset disposals with a view to ensuring any capital gains is declared.

5. Foreign Income received by Australian Tax residents

Many Australian Citizens receive income from overseas in the way of pensions, interest dividends and rental income. The ATO is active in ensuring this income is declare of it is assessable in Australia. All Australian residents for tax purposes are required to declare their worldwide income in their Australian tax return.

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