Has the tide turned on how the ATO views property income?

There has been a long standing view in the tax community that the ATO will eventually get around to targeting people who earn income from investing in the property sector.

The issue comes down to when you can treat a profit from the sale of your property as a capital gain and when it should be treated as ordinary income.

By treating a profit as a capital gain, a taxpayer can use the capital gains tax (CGT) concessions, such as the 50% CGT discount, to significantly reduce their tax bill. This discount can sometimes be extended by the small business CGT concessions.

But the 50% CGT discount does not apply to profits from ordinary income, and sometimes it is not easy to decide whether the profit that is made from a property sale qualifies a capital gain or ordinary income.

It appears some people may have been getting this wrong for a long time.

The reality is, if a property is purchased for the purpose of making a profit from the subsequent sale of the property, the income is ordinary income for tax purposes.

And now, the ATO is striking back.

A taxpayer was recently taken to court by the ATO over the treatment of a gain on the sale of a couple of properties.

In finding against the defendant, the court said that it was not satisfied the properties were purchased as a long term investment, and that it was more likely than not that the properties were purchased for the purpose of being developed, tenanted and sold for a profit.

Again, it comes down to a point that I have been telling you about for a long time: When it comes to tax, your documentation needs to support the position you have taken.

If you don’t have documentation that supports the fact that you are holding a property as a long term investment, the ATO (and the courts if it gets to that) will look at the objective nature of everything you have done and decide for itself what your most likely reason for buying the property was.

It remains to be seen whether the ATO will continue to challenge the tax treatment of property transactions, or whether this was an isolated case. But I suspect the tide has finally turned.

Be careful, and make sure you’re not swept away with the tide.

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Tags: Capital Gains Tax, Rental Property