Investments and your tax returns

Intro:
Welcome to CPA Australia's With Interest podcast, bringing you this week's need-to-know information for businesses and accounting professionals.

Elinor Kasapidis:
Welcome to CPA Australia's With Interest podcast, bringing you this week's need-to-know information for business and accounting professionals. Hello, I'm Elinor Kasapidis, senior manager tax policy at CPS Australia. It's Monday the 20th of June, and we continue our Tax Time chats with assistant commissioner, Tim Loh, from the ATO's individuals and intermediaries area who is the official face and voice of Tax Time. Welcome back, Tim.

Tim Loh:
Hi El. Thanks for having me again.

Elinor Kasapidis:
As technology reduces barriers to investment globally, Australians are increasingly investing in a broad range of asset types through many markets and exchanges, both in Australia and overseas. Property investment also remains a firm favourite. While everyone loves building their wealth, tax may not necessarily be something they think about. Sometimes they might not even know that they need to pay tax. On the deduction side, rental property expense claims have been identified by the ATO as another area where mistakes are commonly made. Tim, let's start with those. Rental expenses are an ATO priority when it comes to claims by individuals. Where are the problem areas and what are investors getting wrong?

Tim Loh:
Look, thanks El. Deductions for rental properties, as you said, are a key contributed to the tax gap. The rental component of individuals not in business tax gap is estimated at being 1.6 billion. Now, in terms of the areas that we want people to watch out for, it's really important to make sure that deductions are apportioned according to the share ownership. So, Mum, Dad going 50/50, or anything where there's more than one person on ownership papers, income and expenses really need to be divided up by the share of ownership. Another thing to watch out for is properties must be generally available for rent. So, check if your clients use the property themselves, or that friends or family rent at mate's rates. If they're renting it out at mate's rates, they aren't eligible to claim expenses for these periods.

Tim Loh:
Now, if they're vacant, they must be able to show that they attempted to rent the property out at market rates. We know properties aren't generally available for rent when they advertise at higher than average rates in that location or when unreasonable or restrictive conditions are in the lease. So, one example is let's say, Airbnb as an example. If you're customising your rent upwards say around Christmas time so you can use it yourself, that would be an example of when your property isn't generally available for rent, and the deductions in that case would need to be apportioned for that period.

Tim Loh:
Now, each rental property needs to be included on its own rental property schedule. So, we sometimes see expenses for multiple properties bundled up into one schedule, and even if the numbers all stack up, it comes up in our systems and it's something that we end up looking at. So, it's really important that you have that separate rental property schedule. Now, we also see taxpayers claiming items for rental properties are only used for personal use and not for the rental property. That's an absolute no-go as a tax deduction. One tip that we have is clients should set up a depreciating asset schedule for all brand new assets over $300 to keep track of them. So, things like dishwashers, smoke alarms, air conditioning, and so on. Taxation ruling TR 2021/3 covers many types of depreciating assets, including how many years they take to depreciate, and obviously, as I said before, don't forget to make an appropriate adjustment for any private use. While an immediate deduction is available for a new asset costing $300 or less, like guarding tools being one example, you need to proportion for any private use in relation to that production.

Tim Loh:
Another thing to remind people of is to check if the repairs or maintenance should be classified as capital works that need to be claimed over a period of time. So, examples of capital expenses generally include structural improvements. Like a 20k kitchen renovate, that would be considered to be a capital works. It must be claimed over several years and not as an outright deduction. Another thing to note is if your client has sold their rental property during the income year and they're entitled to any main resident exemption, it's really important to make sure you report it in your client's tax return in the year the contract was signed. To reduce the likelihood of any contact from us, I encourage you to also include any main resident exemption they're entitled to.

Elinor Kasapidis:
Tim, thank you so much. That was a great rundown of the rental expenses and the aspects that a lot of property owners do need to get right. In particular, your comment about rental property schedules being submitted as a whole rather than for separate properties seems to suggest that's probably the way the books have been kept too. Once again, I think we've got our theme for our Tax Time podcasts, and that is about recordkeeping, making sure that, like you said, Tim, the depreciating asset registers are established right from the beginning, the property accounts are kept separate, and of course, that always those conversations with tax agents at tax time. So, that's rental. I also, before we move on, have noticed that you do make a comment about interest expenses, and what are some of the tips or the tricks or the issues that you see when it comes to loans?

Tim Loh:
Yeah, look, I think it's really important when it comes to loans that if you are borrowing money or additional money or refinancing for private expenses, that you apportion the interest expense that's used for your investment property versus the refinance component that might be used for a personal expense. So, my advice would be to have a separate loan account so you can really kind of clearly identify the interest that's used for your rental property vis-à-vis the interest that's related to the personal expense, if it's buying a boat or buying a car with the refinance fund. So, that would be my best tip to make sure you can clearly show the evidence that the interest that you are claiming for the rental property is purely for the investment property.

Elinor Kasapidis:
So, while a redraw might be financially flexible sometimes for tax, it can make things a bit tricky. And speaking of tricky, as crypto and digital assets become more mainstream, Australians are dipping their toes into these types of investments at quite a rapid rate, and we've seen from the volatility over the past few months that it is a bit of a wild ride. A couple of years ago, we were talking about million-dollar capital gains, and now we would suspect that there'd be a few capital losses coming through this side of the financial year. So, while most of us are getting our heads around paying capital gains tax on the gain when exchanging or trading, can you talk us through some of the things that we need to think about when declaring gains or losses from crypto assets?

Tim Loh:
Yeah. No, good question, El. Look, if your clients are investing in crypto assets, every time a crypto asset is disposed of, there will be a CGT event. So, as you said before, if you sell, swap, or exchange your crypto, that's going to be a capital gains tax event. So, your clients, again, need to keep really good records of the times in which the crypto asset is disposed of. People often overlooked that transferring crypto assets to a platform, an exchange or a smart contract may be a disposal of that crypto, depending on the rules of the platform or exchange or the code of a smart contract, but at a minimum, they need to keep a record of every transaction, have dates of transactions, the value of the crypto in Aussie dollars at the time of the transaction. So, this can be from a reputable crypto online exchange, what the crypto asset was for and where they received it from. So, even if it's just their crypto address, that's information that will be required as a minimum.

Tim Loh:
The other records they need to keep include receipts of purchase or transfer, exchange records, records of agent to accounts and the legal costs, software costs related to managing their tax affairs, as well as any transaction costs like wallet fees and the like. Now, if your clients have the right records, it'll be easier to calculate the cost base for each disposal, including things like, as I mentioned before, those wallet fees, but also brokerage fees, transfer costs, platform costs, borrowing expenses, interests, or loans that they've been borrowing to buy crypto, and legal fees. Now, like other investments, crypto assets have high and lows as you pointed out before, El, but most investments aren't quite as volatile. Now, with the recent crash in prices, it's really important to remind your clients that they can't use their capital losses to offset salary and wages as a crypto investor, but they can offset those capital loss against other capital gains that they might have made during the year, whether it's from property shares or other crypto gains that they might have made.

Tim Loh:
Now, if your client can't utilise the loss in the current year, they can carry them over into future years. It's just really important that they include that in this year's tax return as a carried forward capital loss, and they can do that at net capital losses in the tax return. By including those carried forward losses, there's less likely of us contacting taxpayers when the losses are then used later on against future capital gains. And when your client does get any capital gains, they need to be reported at total current year capital gains and net capital gains in the tax return.

Tim Loh:
Now, one thing to remember is while the CGT rules applied to the disposable of crypto assets, they may be displaced in some circumstances with the gain or losses being subject to tax on a revenue basis, for example, gains in the order or in the course of carrying on a business or from a profit-making scheme. So, in those cases, the gain made from the crypto asset needs to be reported as ordinary income in your tax return. For example, if you make gains from mistaking or airdropping arrangement in the course of carrying on a business or a profit-making scheme.

Elinor Kasapidis:
And things like Bitcoin mining or professionally trading crypto, so not just as a hobby on the weekends, that's where you start to become more of a business, I guess, and it becomes ordinary income rather than the holding of an asset. I guess really it's the uncertainty because share trading, for example, has been around for a long time. People understand what a disposal looks like. They're pretty clear usually on script for scripts or rollovers, things like that, whereas in the world of crypto, they're not always seeing the same mirror image, and I think that's really the challenge. So, it's really good, Tim, that the ATO's coming out there.

Elinor Kasapidis:
You are really catering to the vast majority of people who hold a bit of crypto. They might exchange it for another one occasionally, and they may even buy a coffee with it, and it's those sorts of transactions and events that people need to be open about with their tax agent and actually where the tax agent needs to understand how to classify it and how to report it. In a digital space, there is actually a lot of data. So, you talked about what records need to be kept, and because you've got the blockchain in theory, there's actually a lot of it already in the systems. When it comes to assets and investments, the ATO collects a lot of that data, including on rental bonds, property managements, crypto exchanges, share exchanges. You often publish your data-matching protocols. It's a pretty long list. How do you use the information?

Tim Loh:
Yeah, look, what we would say is we use this information for a number of different things, but for the most part, for example, for rental properties, as an example, we get a lot of data, including from sharing economy platforms, information about rental bonds, property management, and property transactions. The main reason why we use the information is to actually help educate investors on their tax obligations and remind them to include the right information in their tax returns. So, we use it to ensure people are paying the right amount of tax. So, we do use it for data-matching purposes as part of those data-matching protocols, but our key driver is really to make sure that we are educating investors about their tax obligations. We're not in the business of trying to catch people. It's just not, it's not a great use of our resources. We think it's better if we use our resources to educate investors.

Elinor Kasapidis:
And it's a good prompt. I did get feedback from one member who was saying they can see the data on online services for agents where you data match crypto currency transactions, for example, and it's interesting because they go through that client conversation, and client doesn't even mention it. Even anything else that you earned money from and the client's like, "Yeah, nah, nothing." And so, being able to play that back in real time or as soon as possible, Tim, is very helpful because it does actually facilitate those conversations and allows the tax agent to make sure that the taxpayer's getting it right.

Elinor Kasapidis:
So, that's a positive news story for you and the information that you do play back. It's also important, I think, because many people very early on in the game really didn't understand the tax consequences. Now that the conversation is that, yes, there's tax, it really is just making sure that they understand when that tax occurs, and how much it's going to be, and that they're reporting it correctly. So, that's a really helpful summary. Do have a look for our listeners at the ATO's guidance on crypto, and there's always more in that space to listen to. Before we sign off, I did have one question though. We've talked about crypto assets and non-fungible tokens. NFTs are pretty popular in the media at the moment, people buying these different tokens and different NFTs, sorry. Is the guidance basically the same, Tim? How do you approach those?

Tim Loh:
Yeah, good question, El. Look, how tax is applied to non-fungible tokens depends on the way your client uses the NFT or NFT and the reasons for holding them. So, if your client just buys a piece of art, a piece of digital art to hang on a wall, it's more likely to be personal, on the digital wall, I should say, it's more likely to be a personal asset, but if your client uses the NFTs to gain income such as charging people to see that piece of digital art, it's no longer going to be a personal-use asset, and so that's going to be taxed in a different way. So, and then when it comes to selling of these things, typically speaking, if you're in the business of selling NFTs, you're going to be taxed on a revenue account basis rather than a capital gains tax account basis. So, again, it really depends on people's facts and circumstances when they're investing in these NFTs.

Elinor Kasapidis:
So, those vast virtual real estate holdings that I've been building up on my phone during trips, maybe I should start thinking about establishing [inaudible 00:15:45] for those then. That's so helpful. Thank you, Tim. That was our wrap up. That's a wrap up of our third episode, and in our fourth and final Tax Time episode next week, we're going to cover side hustles. If you've got a question about any of the topics we've discussed today, or you have another suggestion for something you'd like us to explore with interest, email us at [email protected]. Thank you for joining us today. If you've enjoyed what you've heard, please tune in again next week for our final Tax Time podcast for this year. From all of us here at CPA Australia, thanks for listening.

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