April 2, 2020 by Dymphna

Dealing with the ATO in Property Investing

All profits in real estate investing may be subject to tax. Learn what you need to pay attention to regarding the ATO.

When running a business, you earn profits. With real estate investing, you earn equity. Equity, unlike profits, isn’t subject to taxes if it just sits there. 

However, as a property investor you still have to concern yourself with the Australian Taxation Office (ATO). For instance, you may need to take out a loan. and any money you owe to the ATO can affect your credit rating.

To avoid trouble and unnecessary expense, you should know what to focus on with respect to the ATO. Here are some tips regarding this.

  1. Pay Your Dues

Before July 2017, the ATO was much more forgiving of unpaid tax bills. As an individual or a company, you could get away with an unpaid tax bill and just fork over the money when ATO prompted you to. But since then, the ATO has decided to start reporting any unpaid tax bills to the credit bureaus.

That’s right, unpaid tax bills are now visible in your credit file. This lowers your credit score and reduces your chances of getting approved for a loan. On top of that, the ATO has also put an interest rate on the outstanding balance, which comes out to around 10%.

So, if you don’t pay your tax bills in a timely fashion, the ATO will be contacting Equifax, Experian, and the other credit bureaus. All credit applications that result in an inquiry will be visible on your credit file. And the negative info can remain for five years or more.

This is why you should pay what you owe to the ATO on or before the due date. Be careful, as late payments can ravage your credit score, making it difficult or impossible to take out a loan. There might be a way around this, however…  

  1. Contact the ATO in a Timely Fashion

People usually wait for the ATO to inform them about any money owed. Don’t ever think that the ATO has forgotten, because it never does. And waiting for the ATO to contact you isn’t the best way to go.

Contrary to popular belief, the ATO isn’t a difficult organization to deal with. If you keep them updated and admit that you’re late lodging your tax return or payment, they may let you off easy.

If you have any unpaid taxes, you’re still going to have to pay the interest. But what’s important  is that they may decide not to send the negative info to the various credit bureaus.

If you need a payment extension, contact the tax office and ask for it. Do the same if you need to change your payment plan. If you work with the ATO and notify it of everything, what you owe may not show up on your credit report.

  1. They Do Data Matching

You may not be aware of it, but the ATO knows your purchasing history. They can see when you buy a new home, a new car, and even when you purchase things off websites like eBay.

Of course, that’s also true of all government transactions. Social security, benefits, and superannuation contributions are all open info to the ATO.

The government has a lot of information on your monetary situation, so you may want to pay attention to your taxes. It’s always better to be upfront and pay your dues on time, rather than try and get away with it.

  1. Expect an Audit

The average Australian can expect an audit at least once in a 5-year period. The ATO uses its data gathering to assess whether you’re living within your means, as declared on your tax returns. If they decide that you’re spending more than you claim to make, this is what ends up triggering an audit.

So, what will happen during the audit? 

There are different audit types. Most people don’t have to go through every one of them.

The first stage is typically the most basic. This audit of work-related expenses won’t take up too much of your time. The ATO will only ask you to send over the receipts that support your tax return.

The next type is made up of computer-assisted verifications or computer-generated audits. The ATO uses computer spiders to analyse your data. For example, the ATO may find out that you didn’t declare any interest earnings for that year. These are income audits, to put it simply.

You also have GST and superannuation audits. These cover superannuation contributions and employee contributions. For these, the ATO mostly chooses to audit businesses. The ATO is aware that mistakes can happen and the auditors may not get on your case over honest mistakes.

Finally, you have the notorious desk audits. In these, you get invited to sit down with an auditor, who’ll go through your accounts in detail. These are usually done at your premises, which may make you even more uncomfortable. You may want to buy audit insurance to avoid having to pay for the expenses involved in an audit.

When it comes to audits, you need to prepare properly. The ATO is at the top of its game here.

Don’t Play with the ATO

Taking care of tax liability is very important in real estate investment. Besides that, you should make sure that you’re not hiding anything. It’s always better to contact the ATO and ask for an extension than to have negative info on your credit file for the next five years. Understand that the ATO knows about your transactions, and be prepared in the event of an audit.