Taxman’s warning on GST and property sales

Property transactions can have all sorts of tax implications. There’s capital gains tax, straight income tax and GST issues to consider as well.

The ATO is concerned that some property investors:

• are claiming rental and share investment expenses they are not entitled to or cannot substantiate;
• are failing to declare capital gains on the sale of their investments;
• particularly first-time investors, are incorrectly reporting rental and dividend income in their tax returns.

The ATO is also concerned about GST issues with property transactions. It has warned taxpayers to make sure they correctly report property transactions (including transfers, sales and purchases) on income tax returns and Business Activity Statements (BASs).

In the financial year ended June 30, 2010, the ATO said it conducted 3,250 GST reviews and audits that directly related to property transactions, and subsequently raised net GST liabilities of approximately $195 million. So, there are clearly some problem areas here.

The ATO says it will also increase its focus on taxpayers selling property and “disengaging” from the GST system by not lodging their BASs.
In 2010-11, the ATO expects to focus on:

• data matching with property transaction data it obtains from third parties and various government agencies (eg. state revenue authorities);
• using data-mining techniques to identify taxpayers who either do not or incorrectly report property transactions.

As an example of recent ATO action, a company that developed a 40-unit, strata titled, apartment block sold 36 of the units at market value and reported the sales on the appropriate BAS.

The ATO said the company also:

• sold three of the remaining four units to suppliers for well below market value as settlement for outstanding accounts;
• transferred ownership of the single remaining unit to the spouse of a director of the company;
• did not report the sales and transfer of ownership on its relevant BAS.

By data-matching, the ATO said it identified the company’s unreported transactions, which resulted in a large GST debt. The relevant Office of State Revenue also recouped from the company under-paid stamp duty amounts for the units sold for less than market value.

For many SMEs and other businesses, GST is often seen as a purely mechanical and procedural issue and, in many respects, so it should be. However, there are GST issues that regularly impact on the ability of a business to comply with the laws. The above is perhaps a brief reminder of some of those issues.

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.

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