August 2016 Edition

In this edition:

Welcome

Accountants now licensed to give SMSF advice

ATO small business benchmarks updated

ATO focus on rental properties

Investment timing versus strategy

The ATO has highlighted a number of areas of specific concern surrounding rental properties.

One area is the incorrect apportionment of rental income and expenses between owners. Co-owners that are not carrying on a rental property business must divide the income and expenses according to their legal interest. If the property is owned as joint tenants, they each hold an equal share. If the property is owned as tenants in common, they may hold unequal interests. For example one may hold 70%, the other 30%. Rental income and expenses must be split between co-owners according to their legal interest. The ATO will not accept agreements between co-owners stating otherwise.

Another area is excessive interest expense claims. There are a range of financial products available when purchasing a rental property. Many offer flexible redraw facilities and repayments resulting in loans containing deductible and non-deductible components according to the amounts borrowed for the rental property and for private purposes.

For example when purchasing a rental property you also borrow enough money to buy a new private car. The portion of interest on the new car component of the loan is not deductible. Another example is a loan account with a fluctuating balance because your income is deposited directly into this account and you withdraw funds for personal use. Accurate records must be kept to enable the interest that relates to the private use of funds to be separated from the rental property interest.

If you borrow money to buy a new property to move into and rent out your previous home you must ensure that only the deductible interest is claimed. Because the previous property is now used to produce assessable income, interest on an outstanding loan for this property would be deductible. However interest cannot be claimed on the loan for the new property as it is not used to produce income. This is the case whether or not the previous home is used as security for the new home.

The ATO is also focusing on holiday homes that may not be genuinely available for rent. Expenses may be deductible for periods when the property is not tenanted providing the property is genuinely available for rent.

Factors that may indicate a property is not genuinely available for rent:

• Advertised in ways that limit its exposure – for example, only advertised at your workplace, by word of mouth or outside holiday periods when the likelihood of it being rented is low
• The condition, location and accessibility of the property means that it's unlikely that tenants will seek to rent it
• Unreasonable conditions such as above market rents, and restrictions such as short holiday stay restrictions of "no children" and "no pets"

Please contact the Goodwin and Chivas Team if you have any queries.