Property transactions to face increased ATO scrutiny in 2012-13

Small businesses that dispose of property, foreign owners of Australian property, individual tax payer with property investments and property developers will all face increased scrutiny from the Australian Tax Office (ATO) in the forthcoming financial year.

Details of a crackdown on how property transactions are reported for tax purposes have been revealed in the ATO’s Compliance program for 2012-13, which highlights “particular issues” that will attract the attention of the taxman with a warning that it will “deal firmly with those who intentionally seek to obtain advantage over their competitors through the inappropriate use of the tax and superannuation systems”.

“The annual compliance program outlines the actions we are taking to deter, detect and deal with those who do not meet their tax and superannuation responsibilities,” says Bruce Quigley second commissioner of compliance at the ATO.

Individual taxpayers

Along with the standard focus on incorrect or fraudulent refunds, those with property holdings should take note that ATO’s forthcoming compliance program will focus on those who omit “income, including dividends and interest, capital gains and foreign source income”.

In addition, the ATO will continue to match third-party information with tax returns to identify the omission or understatement of capital gains on real property and share transactions.

“We will conduct reviews where we suspect taxpayers may have incorrectly reported capital gains or losses.”

Small business owners (SMEs):

The ATO warns that it will “continue to monitor and investigate taxpayers who dispose of real property and fail to report the transaction on their activity statement or misclassify the transaction for GST purposes”

“We will match information from third party sources (such as sales data from state and territory revenue offices) with information reported on activity statements,” says the ATO.

As part of its compliance program the ATO plans to conduct around 700 reviews and audits to “address GST risks associated with the sale, transfer and acquisition of real property, particularly in relation to the reporting of property sales and the incorrect application of the margin scheme provisions to reduce the GST payable on property sales”.

Foreign investors

The ATO will also look closely at transactions involving taxable Australian property by foreign residents, who must report and are subject to capital gains tax on any such transactions.

It says it will focus on “valuation outcomes designed to fail the principal asset test in relation to the disposal of indirect interests in Australian real property, as well as arrangements that seek to circumvent the non-portfolio interest test – including the use of non-share equity as part consideration for foreign resident acquisitions”.

The ATO says it increasingly receives information from overseas, “such as details of employment-related foreign source income”.

“We also see a continuing compliance risk arising from the sale of taxable Australian property by foreign residents and the claiming of exemptions,” says the ATO.

Property developers

In relation to GST and property transactions, the ATO says it will increase its focus on property developers with a history of non-compliance.

“By engaging with taxpayers at registration and throughout the property lifecycle, we will encourage them to correctly assess and report their liabilities and, where necessary, require them to provide security bonds against projected future tax liabilities,” says the ATO.

The ATO highlights that it has a strong relationship with the states and territories in developing and supporting its complementary compliance programs.

As an example it says it received a referral from the Northern Territory Revenue Office that initiated a series of audits on property developers “disengaging from the tax system and thus evading payment of income tax and GST on property sales”.

This information resulted in revenue of around $5 million being collected with potential compliance impacts for these developers in relation to state stamp duty and land tax.

Other ATO property compliance activities

• expanding and improving the use of third party information to identify unreported sales, particularly in the case of one-off property transactions
• working with taxpayers and their tax agents to alert them to discrepancies before audit action
• identifying incorrect application of the margin scheme provisions to reduce the GST payable on property sales
• undertaking approximately 1,000 reviews and audits
• providing greater certainty for taxpayers on the treatment of transactions associated with commercial residential premises through the publication of the final commercial residential ruling in August 2012.

A copy of the full compliance program can be downloaded on the ATO website.