Financial Doomsday Looms: July 1 Brings Six Devastating Tax Blows to Property Owners’ Wallets

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Buckle up and brace yourselves as the looming July 1 unleashes an apocalyptic onslaught of six catastrophic tax blows, threatening to wreak havoc on property owners’ fragile wallets.

Property owners and buyers are preparing for heightened expenses, amplified land taxes, and stricter scrutiny of tax claims as revenue-driven state and federal governments intensify their efforts for the fiscal year-end on June 30.

ATO Cracks the Whip: Don’t Get Caught in the Tax Deduction Tornado

The Australian Taxation Office (ATO) is cautioning individuals about its intensified focus on tax deductions related to remote work, underreported rental income, excessive expense claims, and inaccurate property improvement claims.

Certain homebuyers in Victoria will face significantly higher costs as the state government raises thresholds for concessions on popular off-the-plan (OTP) properties. At the same time, land taxes will rise for property owners in most states and territories.

Here is a comprehensive guide on what to anticipate and how to mitigate the impact.

Stamp Duty Smackdown

Escalated stamp duty: Victoria is reducing stamp duty concessions for OTP homebuyers, resulting in substantial cost increases for some purchasers. 

According to Sahil Bhasin, the founder of Bricks @ Mortar Real Estate, a $4 million apartment buyer could pay approximately $200,000 in stamp duty, nearly quadrupling the previous amount. Other states and territories are currently reassessing these concessions.

The Remote Work Record-Keeping Rumble Begins

Stricter record-keeping for work-from-home expenses: Mark Chapman, the tax director of H&R Block, highlights that providing evidence will be the “most significant burden” when making claims.

The ATO has abolished the 80¢ per hour “shortcut” method for deductions associated with remote work this year. Ursula Lepporoli, a tax partner at KPMG consultancy, explains that as of July 1, 2022, the fixed rate will be 67¢ per hour. This rate covers energy expenses (electricity and gas), mobile and home phone bills, internet charges, stationery, and computer costs. 

Notably, phone usage and internet expenses are included in the fixed rate method for the first time.

Separate expenses that can be claimed include the depreciation of assets used for remote work, such as computers and office furniture, and any necessary repairs and maintenance. 

Additionally, deductions can be made for cleaning a designated home office.

For Chris Kiefer, a marketing manager at a finance company, working from home saves him at least two hours of commuting daily and eliminates various office-related expenses, including coffee, lunches, and post-work drinks. 

Kiefer, employed by Allied Credit, a privately-owned credit firm, discovered his preference for remote work during the COVID-19 outbreak. He has since established an office at the rear of his residence in Caroline Springs, located approximately 30 kilometres southwest of Melbourne.

“I’m completely content with remote work,” states the father of a teenage daughter and son. “I don’t require a social environment with numerous individuals to maintain productivity.”

Kiefer opts for the flat rate method, stating, “It’s much simpler than sorting through bills and allocating time to daily tasks.”

Alternatively, individuals working from home can utilise the actual cost method, which involves claiming the specific work-related portion of running expenses. Chapman emphasises the importance of maintaining detailed records and providing evidence for calculating expenses. 

Interest Expense Claims Under the Microscope

Increased scrutiny of interest expense claims: The ATO focuses on interest expenses, permitting deductions solely for loans used to acquire a rental property and generate rental income.

Landlords, Beware: ATO Cracks the Whip on Rental Income Disclosure

Crackdown on landlords: All rental income must be disclosed as assessable income. Tax deductions can be claimed for all associated expenses.

“Typically, when the entire property is rented out, all costs related to property management are deductible,” explains Chapman. “However, if you rent out part of the property you live in, some degree of apportionment is necessary.”

Expenses for the entire property, such as insurance, rates, or mortgage, must be proportioned based on the floor area used for renting compared to the total floor area. Expenses related to shared spaces can be apportioned based on access.

CGT Warning: ATO Shatters Illusions of Undeclared Gains

Focus on capital gains: ATO Assistant Commissioner Tim Loh warns taxpayers against the misconception that the ATO won’t notice unreported gains from asset sales.

In most cases, the sale of a primary residence is exempt from CGT. However, renting out part of the property will incur a CGT liability.

“This may require a complex calculation upon sale to determine the taxable portion of the gain and the portion covered by the main residence exemption,” states Chapman.

Another consideration arises when a family home is initially the primary residence but later becomes a rental property. In such cases, for CGT purposes, the owner is deemed to have acquired the property at its market value when it was first used for rental purposes.

“Failure to consider CGT in the initial cost/benefit analysis when deciding to rent out the property can result in significant financial implications,” cautions Chapman.

However, there is a CGT exemption for the primary residence if you move out for up to six years, provided you do not establish another property as your primary residence.

Land Tax Shockwave: Brace for the State-imposed Wallet Assault

Increased land tax: Starting from July 1, land taxes will be imposed by states such as the ACT, Queensland, South Australia, and Western Australia. Victorians who own second homes or investment properties will face a new flat-rate tax of up to $975 and an additional levy based on the land’s value, effective January 1. NSW property owners will receive land tax assessments beginning January 1.

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