How property investors can ease the pain of a tax audit

How property investors can ease the pain of a tax audit
How property investors can ease the pain of a tax audit

It’s winter, and most of us are not at maximum enthusiasm. On top of this it’s tax season. To make matters worse you have received a letter from the ATO advising they will be conducting an audit of your tax affairs.

For many this is a daunting task and dare I say it; even a visit to the dentist is looking better. With an increasing number of ATO audits it is imperative that as a property investor we prepare ourselves for an easy passage that can be achieved by following a few simple steps. 

  1. Audit insurance. A relatively inexpensive policy can at least assist with the costs of an audit.
  2. Ensure that the name on the property contract (and therefore title deed) is the same as on the loan documents. The primary information is the title deed and if the loan is in different names then additional paperwork in the form of an “On Loan Agreement” may be required to substantiate the interest deductibility to the ATO.
  3. Ensure all rents and property expenses pass through the bank account in the same name as the property title deed.
  4. Your depreciation schedule must be prepared by a quantity surveyor.
  5. If a renovation has been completed you should have a properly prepared scraping schedule to allow you to write off the value of the items you throw away.
  6. All repairs and maintenance costs must be fully justified and you need to ensure that any costs of a capital nature are depreciated and not expensed. This can be tricky and a repair to the kitchen cabinets prior to the property being rented is deemed capital while the same repair during a rental period could be a repair.
  7. Ensure all your records are easily accessible. The use of a rental agent can assist, as he should be authorised to pay all expenses (other than interest) and receive all rents. He will send you a monthly and annual summary with all supporting documents attached.
  8. If you are using a trust you need to ensure that the trust has been correctly written and operated, especially if as an individual you are claiming negative gearing. Remember not all trusts are the same and many do not allow the taxpayer to claim negative gearing, which the Chan & Naylor Property Investor Trust ® allows.
  9. The use of a tax variation request will improve your cashflows and may reduce the risk of an audit especially if a large refund is envisaged.
  10. If you have incorrectly made a claim in your tax return then a voluntary disclosure to the ATO prior to the tax office completing the audit could significantly reduce penalties.
  11. Even if you are innocent of any wrongdoing an ATO audit can be nerve-racking. Above all work with an experienced property accountant who will help you through any audit or review.
Ken Raiss is a certified accountant and director of Chan & Naylor national accounting firm. Chan & Naylor offers a free five-minute question-and-answer session on its website under the "Ask the Experts" section.

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