Five tax traps you can avoid

THE taxman is hungry. After years of rich pickings during the boom times earlier this decade, his food source has dried up.

Capital gains tax has all but disappeared amid the worst share market downturn in more than 30 years, business profits have slumped, and even income tax receipts are affected by a workforce more interested in keeping jobs than pay rises.

One thing unchanged is the number of traps that can snare those completing tax returns.

Some are new, a result of constant tinkering with tax and superannuation laws by federal governments, while others have always been there but still catch unsuspecting taxpayers.

Matthew Laming, associate director of accountancy firm PKF, says employees and investors often get caught.

“There’s a whole range of things that people miss,” Laming says.

We examine 5 traps to beware of this year.

1. Completely losing interest

If your personal tax return is audited by the tax office check your home insurance policy, some insurers cover accounting...

It is easy to forget interest received on bank accounts, but Laming warns that the tax man is watching.

“The tax office does data matching with bank accounts and Tax File Numbers, and also data matching with dividends from shares,” he says.

The ATO has made keeping track of income much easier in recent years, with the introduction of pre-filling of information into tax returns for people who lodge electronically.

It collects data from banks and other financial institutions and pre-populates your tax return, but the technology also means it can easily cross-check its figures and catch people who conveniently forget to declare some income.

2. Mixing investing with pleasure 

Real estate investors often borrow against the equity in their investment property but use some of the funds for private purposes such as a holiday or new family car, which are not tax deductible.

“The trap is that they say the whole loan is their investment loan, but they cannot claim all the interest if they use some for private purposes,” Laming says.

“They need to say that’s not deductible, and need to do a calculation to work it out.” Rawson Verco financial planner Tim Lindsay says deductible and personal interest often gets mixed up.

“Another trap is when a loan is refinanced and loans are bundled together by a mortgage broker or bank lender, which can create a headache for the accountants to unravel,” he says.

3. No gain - hopefully no pain

Did you sell an asset such as a share or managed fund last financial year and make a profit? 

Not as likely this year as other years, but any gains need to be declared in the year they are booked and added to your taxable income.

The gain is discounted by 50 per cent if the asset has been held more than a year, but it still can create a nasty tax bill, particularly on a large asset sale such as an investment property.

Capital losses - much more likely over the past two years - can only offset capital gains, not general taxable income.

Lindsay says with capital gains tax, timing is critical.

“There’s nothing like the agony of paying tax on capital gains one year, then incurring a loss in the next.” Lindsay says.

Laming says many mistakes are innocent.

“A lot of people tend to forget about it or not even think they have a tax problem,” he says.

Sales of managed funds can cause more issues, because many of these investments - particularly real estate investment trusts - often have deferred tax components that need to be taken off the cost base, he says.

4. Property can be a problem 

There is a minefield of traps awaiting property investors.

HLB Mann Judd partner Annett Bonnett says a common mistake is declaring that capital improvements to rental properties are repairs and claiming a 100 per cent deduction over just one year.

“Instead, any new assets or substantial renovations should be written off according to the Tax Commissioner’s prescribed rates of self-assessed useful life, which in many cases may be five to 10 years,” she says.

“If people claim large repair expenses, it is probable the ATO will ask them for more details.”

5. Make it a date 

Bonnett says another trap is using the settlement date of a sale, rather than the date the contract was signed, when working out capital gains tax.

While property is a prime suspect here because of its longer settlement periods, problems can also arise with the disposal of shares and other investments.

“’This may see people paying capital gains tax before they are required to, or may result in capital losses not being utilised until a future year,” Bonnett says.

Another 5 next month.

Anthony Keane is the print editor of Your Money