TAXPAYERS hoping to avoid paying capital gains tax on property deals have been receiving nasty shocks over recent months. A data-matching program undertaken by the Australian Taxation Office has resulted in two types of letters being sent to taxpayers. The first relates to property transactions done before July 2004, and asks why the taxpayer had not declared the capital gain on their tax return.
The second letter, relating to the sale of property after June 2004, acts as a gentle reminder that it is the ATO's "responsibility to the community to ensure that everyone pays the correct amount of tax". This second letter provides details of property that had been sold and asks the taxpayer to declare any applicable capital gain on their 2005 tax return.
The data-matching program began in May 2005 and involved the ATO in obtaining property sales information from the various states' titles offices. For property transactions that took place before July 2004, the information was compared with capital gains tax details shown on tax returns lodged.
If the ATO found details of a sale that did not have a corresponding capital gains tax item on a tax return, it obtained further information relating to it. A letter was then sent to taxpayers advising them of the transaction information and the amount of capital gain made.
The letter only asked the taxpayer to respond if the information was incorrect. If the ATO received no response it would issue an amended tax assessment including the missing capital gain plus extra tax and penalties. Due to a misunderstanding of capital gains tax rules, some taxpayers had declared a capital gain, but in the wrong year.
Under income tax law the relevant date for purchasing or selling an asset is not the date settlement takes place but the date of the contract. As property transactions usually take between 60 and 90 days, and in some cases up to and longer than 120 days, they can easily straddle two tax years.
This means that, where a sale note to sell a property is signed in one tax year and settlement takes place in the following year, the relevant date for capital gains tax purposes is the earlier tax year.
Taxpayers who have in error shown a capital gain in a later tax year are issued with an amended tax assessment for the earlier year. In this situation the ATO does not impose incorrect return penalties but interest is charged. This interest is offset against interest the ATO owes on the tax paid on the capital gain shown in the later year.
When calculating capital gain, all associated costs can be used to decrease the profit made on a sale. These costs include the purchase costs, including stamp duty and legal fees, the costs of maintaining the property, and selling costs such as the real estate agent's sales commission.
Other costs include council rates, water rates and the cost of any improvements or additions made to the property.
If the property had been rented out, most holding costs would have been already claimed against the rental income. Properties that have been used for private purposes will have a greater number of holding costs that can be used to decrease the capital gain.
Once all costs have been taken into account, tax is payable on half the capital gain.
aussieproperty.com footnote.
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