Tax experts warn documentation critical after property investor loses attempt to split tax burden

Property owners and investors have once again been reminded of the importance of documenting everything, after a recent ruling by the Administrative Appeals Tribunal stopped a man from attempting to split half his tax burden with his ex-wife.

Tax experts point out poor documentation is a large reason why many cases or appeals fail.

“Proper documentation is absolutely critical,” says Chan & Naylor director Ken Raiss. “We always tell our clients to start paperwork from day one.”

Barrie Harbutt argued at the AAT he had attempted to split the income – and the tax burden – for the rental property in question between him and his wife. He argued he was in a “tax law partnership”, despite the fact he received all the money in his own account.

AAT deputy president Stephen Frost said in the decision Harbutt’s evidence was lacklustre. There was no documentation to suggest there was any partnership in place. Frost even said it is unlikely Harbutt even knew what a tax law partnership was.

But tax experts say while it could be possible to argue you have a tax partnership with someone, it’s always best to keep as much documentation as possible.

Ken Raiss says if you’re going to keep investments in one name and then share them, you need some form of evidence, whether it is through an agency agreement, or a joint venture agreement.

“What’s critical with all of these methods is that you have the proper documentation. The easiest are bank accounts, and then a formal agreement is also good,” he says.

“Obviously either one of those is sufficient as long as they properly document everything.”

Business owners are frequently property investors, but tax experts say they often become frustrated because many clients do not bother with keeping proper records.

“There are some documents you have to keep forever, and others are more just year to year stuff,” he says.

“But there is a very large number of taxpayers who lose arguments based on poor documentation. It’s important to keep this all intact.”

Terry Hayes, a regular SmartCompany contributor and senior tax writer at Thomson Reuters, says while many entrepreneurs may come to the conclusion record-keeping is too costly, he says “it can be critical” in cases such as this.

“Saying you intended to have a partnership all along is great. But the question is, how do you prove it?”