Many Australians invest in property, financial markets and other assets, both here and overseas. In 2016-17, almost 4 million individuals received dividend income of $23.4 billion while 2.1 million reported rental income totalling $44 billion. $20 billion in capital gains were reported by almost 700,000 individuals while more than 900,000 reported capital losses of $27 billion.
Assessable foreign source income of almost $6 billion was reported by 730,000 individuals.
The ATO’s data matching and information exchange capabilities continue to evolve and now cover many capital transactions and investment revenue streams.
It is therefore more important than ever to report investment income including from overseas, maintain accurate records, correctly calculate capital gains or losses on disposal and to ensure you comply with the various rules and concessions available to investors.
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Investment income deductions
You can claim a deduction for expenses incurred in earning interest, dividend or other investment income but not if you receive an exempt dividend or other exempt income.
Examples of deductions include:
- account-keeping fees for an account held for investment purposes
- interest charged on money borrowed to buy shares and other related investments from which you derive assessable interest or dividend income
- ongoing management fees or retainers and amounts paid for advice relating to changes in the mix of investment
- a portion of other costs if they were incurred in managing your investments, such as some travel expenses, investment journals and subscriptions and borrowing costs.
If you attend an investment seminar, you are only entitled to claim a deduction for the portion of travel expenses relating to some investment income activities.
The ATO continues its focus on checking rental deductions and matching reported income against details from AirBnb and other providers. From this year, a multi-property rental schedule for individuals is required to be lodged with tax returns.
COVID-19 has raised a number of tax issues for rental property owners for agents to consider, including:
- deductions for properties where tenants are not paying their full rent or have temporarily stopped paying rent as their income has been affected due to COVID-19
- reductions in rent for tenants whose income has been adversely affected by COVID-19, to enable these tenants to stay in the property
- assessable receipts of back payments of rent or an amount of insurance for lost rent
- interest deductions on deferred loan repayments for a period due to COVID-19
- cancellation of bookings due to COVID-19 for a property that is usually rented out for short-term accommodation, but has also previously had some private use by the owner
- the private use of a rental property owner (e.g. holiday home) to isolate during COVID-19 and adjusting available deductions
- changes to advertising and other fees for short-term rental properties during COVID-19 due to no demand for the property.
The ATO has produced information on holiday homes, renting out part or all of a home and holiday apartments in commercial residential properties, as well as factsheets on:
Owners of rental properties that are being rented out or are ready and available for rent can claim immediate deductions for a range of expenses such as:
- interest on investment loans
- land tax
- council and water rates
- body corporate charges
- repairs and maintenance
- agent's commission
- pest control
- leases (preparation, registration and stamp duty)
- advertising for tenants.
Landlords may be entitled to claim annual deductions for the declining value of depreciable assets (such as stoves, carpets and hot-water systems), and capital works deductions spread over a number of years (for structural improvements, like remodelling a bathroom).
Remember that landlords are no longer allowed travel deductions relating to inspecting, maintaining or collecting rent for a rental property.
Further, deductions for the depreciation of plant and equipment for residential real estate properties are limited to outlays actually incurred on new items by investors in residential real estate properties. For example, for properties acquired from 9 May 2017, landlords can no longer depreciate assets that were in the property at the time of purchase; however, should they purchase a new (not used or refurbished) asset, they can depreciate that asset.
Plant and equipment forming part of residential investment properties as of 9 May 2017 will continue to give rise to deductions for depreciation until either the investor no longer owns the asset, or the asset reaches the end of its effective life.
Ensure that interest expense claims are correctly calculated, rental income is correctly apportioned between owners, claims for costs to repair damage and defects at time of purchase are depreciated and that holiday homes are genuinely available for rent.
You can contact your CPA Australia-registered tax agent to clarify if your expenditure is repairs and maintenance and can be claimed immediately or improvements, which can be claimed over time.
Deductions for vacant land
Changes to legislation to limit deductions that can be claimed for holding vacant land received royal assent on 28 October 2019. These changes apply to costs incurred on or after 1 July 2019, even if the land was held before that date.
Deductions for expenses incurred for holding costs of vacant land can continue to be claimed by corporate tax entities, superannuation plans (other than self-managed superannuation funds), managed investment trusts, public unit trusts and unit trusts or partnerships where all the members are the previous entity types.
There are some entities and circumstances where deductions for vacant land can still be claimed – for example, where the entity holding the land is a company, where you use the land in carrying on a business, or exceptional circumstances apply. Expenses of holding land remain deductible if they are incurred in carrying on a business such as farming or gaining or producing assessable income.
The ATO has produced a flowchart to assist in determining if deductions for expenses related to vacant land are limited.
Residential property and non-residents
A change in law on 12 December 2019 means if you are a foreign resident for tax purposes at the time you dispose of your residential property in Australia, you will not qualify for exemption from CGT unless you satisfy the life events test.
For properties held before 7.30pm (AEST) on 9 May 2017, the CGT main residence exemption will only be able to be claimed for disposals that happen up until 30 June 2020, provided the taxpayer satisfies the other existing requirements for the exemption.
Cryptocurrencies and crowdfunding
The ATO is now matching transaction data obtained from digital exchanges so it is more important than ever to ensure cryptocurrency gains and losses are correctly reported. If you are currently, or have been, involved in acquiring or disposing of cryptocurrencies in the past, you need to be aware of the income tax consequences. These vary depending on the nature of your circumstances.
A person involved in cryptocurrency transactions needs to keep appropriate records for income tax purposes. If you have dealt with a foreign exchange and/or cryptocurrency, there may also be taxation consequences for your transactions in the foreign country.
The tax consequences of crowdfunding vary depending on the nature of the arrangement, your client's role (i.e. promoter, intermediary or contributor) and the circumstances.
The tax laws which apply to investment and financial activity undertaken in a conventional manner (for example, buying goods and services, buying shares, lending money) apply in the same way to investment and financial activity conducted under crowdfunding.
If you are involved in cryptocurrencies or crowdfunding, you should contact your CPA Australia-registered tax agent for advice.
Capital gains tax planning
Careful planning should be undertaken in planning the timing of the disposal of appreciating assets which may trigger a capital gain. In this context, it is important to recognise that CGT is triggered when you enter into a contract for the sale of a CGT asset rather than on its settlement.
This is particularly important where the entry and settlement of the contract straddle year-end. In these circumstances, it may be preferable from a cash flow perspective to defer the sale of the CGT asset to the subsequent year where other relief may be available, such as a capital loss sold on another asset.
Care should also be taken to ensure that an eligible asset is retained for the 12-month holding period required under the CGT discount, and to recognise that the CGT discount is not available to the extent that any capital gain accrued after 8 May 2012 and you were a foreign resident or temporary resident at any time after that date.
The ATO publishes guidance on capital gains tax.
Keep proper records for all of your investments and ensure that you keep them for at least five years after a capital gains tax event occurred.
If you are an Australian resident with overseas assets you need to include any capital gains or capital losses you make on those assets in your tax return and may have to include income you receive from overseas interests in your tax return. You can 'receive income' even if it is held overseas for you.
If you receive foreign income or gains that are taxable in Australia and you paid foreign tax on that income, you may be entitled to an Australian foreign income tax offset.
Individual taxpayers may be able to apply the CGT discount to the gains made on the shares with the recent decision in Burton v Commissioner of Taxation  FCAFC 141 clarifying the availability of foreign income tax offsets to apply against the tax on the capital gain.
The ATO has published information on foreign source income and property and a guide to foreign income tax offset rules.
Be aware that the ATO has information exchange agreements with revenue authorities in many foreign jurisdictions and therefore is likely to receive data on any of your overseas investments and income.
Speak to your CPA Australia-registered tax agent about your offshore investments and income.
A product ruling is a type of public ruling which gives certainty to participants (or potential participants) on the tax consequences of an arrangement, provided it is carried out as described in the ruling. The ATO publishes product rulings on its legal database.
An ATO product ruling isn’t a sanction or guarantee any product as an investment. Nor does the product ruling give any assurance that the product is commercially viable, that charges are reasonable, appropriate or represent industry norms, or that projected returns will be achieved or are reasonably based.
Potential participants must form their own view about the commercial and financial viability of a product. They need to consider issues such as whether the projected returns are realistic, the 'track record' of the management, the level of fees compared with similar products, and how the investment fits an existing portfolio.
If you are considering such an investment, seek independent advice before making a decision.
Investment products promoted as tax effective
The end of the financial year often sees the promotion of investment products that may claim to be tax effective. If you are considering such an investment, seek independent advice before making a decision, particularly from your CPA Australia-registered tax agent.