What the ATO is focusing on, and how to prepare for tax time…

The Australian Tax Office (ATO) has flagged its key areas of focus for the 2023-24 tax year.

The tax regulator will be using its increasingly sophisticated data-matching capabilities to ensure taxpayers are declaring all their income from earnings and investments.

In 2023, according to the ATO, analysis of more than 110 million pieces of individual data resulted in almost 500,000 lodged tax returns needing adjustments to account for missing information.

This year the ATO has said it will again be focusing on taxpayers who make inflated claims on rental property deductions. It also will be closely tracking capital gains made from the disposal of exchange traded funds (ETFs), managed fund units, shares, bonds, property, cryptocurrencies, commodities, investment properties, and other assets that may be liable for capital gains tax (CGT).

This includes transactions undertaken overseas, with the ATO actively leveraging its technology links with global financial markets and other regulators.

Keeping good records is imperative, and the ATO is aiming to pre-fill more information in peoples’ tax returns.

The next few weeks leading up to the end of this financial year are an opportune time to ensure all your investment records are in order, and that you have a clear picture of where you may have potential tax liabilities.

The ATO has warned people not to lodge their next tax return until they have a full record of their interest income, dividend and distributions income, and any payments from government agencies received during the financial year.

For some investors, this will involve having to wait until investment product providers issue their annual individual tax statements.

1. Identify all your investments

From an investments and tax perspective, it’s important to have a detailed record of all of your asset holdings in order to be able to prepare and lodge your next income tax return in the new financial year.

That’s fairly easy if your all investments are housed in one place, but many of us have investments spread across different investing platforms and asset classes.

It can be easy to lose track of some investments and miss tax liability issues that could potentially be averted if acted upon prior to 30 June.

Spend some time, over the next few weeks if possible, to do a full audit of your investment holdings so you’re fully across your portfolio.

It may be prudent to consult your financial adviser, if you use one, to determine if any portfolio adjustments before 30 June are appropriate.

2. Calculate your tax liabilities

The ATO is reminding taxpayers to correctly calculate and declare capital gains and losses from the disposal of shares, managed investments, properties, and crypto assets during the financial year.

For individuals, CGT is payable at your marginal tax rate on profits you’ve made from sold investments.

Net capital gains are calculated after taking into account your total acquisition cost, including any costs and adjustments associated with buying, holding, and selling your investment.

Most other income earned from investments during the financial year is taxable.

If your investments are held in your own name, then any taxable income earned, including net capital gains, is added to your personal income, including your salary, and taxed at your marginal tax rate.

Investment income includes distributions paid from ETFs and managed funds, share dividends, bond distributions, interest income from cash including savings and term deposit accounts, and rental income from investment properties.

You’ll need to provide a detailed record of distributions paid or attributed from each investment you owned in 2023-24 in your next tax return.

3. Tax loss harvesting

A way of reducing CGT is to consider selling investments before 30 June that have made a loss since you purchased them.

These losses, including losses carried over from previous tax years, can be used to offset capital gains made on other investments that have been sold during the financial year.

As well as reducing CGT liabilities, the sale of loss-making investments can also free up money to invest elsewhere.

But you may want to seek external professional advice before taking any action in this regard.

Investments currently recorded in your portfolio as loss-making may become profitable in the future.

You should also be mindful of the ATO’s ongoing focus on “wash sales”, where investors sell assets in one financial year to generate a tax-deductible loss and then repurchase the same or a similar asset shortly after.

The ATO may cancel any tax benefits received if it determines transactions have primarily been undertaken to avoid the payment of CGT.

4. Keep track of allowable deductions

Allowable tax deductions can be offset against investment income.

Among other things, you may be able to claim a deduction for expenses you incur in earning interest, dividend, or other investment income.

You also may be able to claim a deduction if you attend seminars in relation to existing investments.

The ATO allows investors to claim a deduction for interest charged on borrowed money to buy shares or other investment assets. You can also claim deductions on investment account-keeping fees and investment management fees or retainers.

Furthermore, you may be able to deduct a portion of other investment costs you incur including expenses linked to how you monitor your investments.

Examples include depreciation in the value of your home computer and the cost of internet access.

Deductions are also allowed by the ATO for some travel expenses and the cost of specialist investment journals and subscriptions.

In terms of rental property deductions, the ATO says nine out of 10 investment property owners are lodging incorrect income tax returns by leaving out rental income, and overclaiming for repairs and maintenance deductions.

General repairs and maintenance on rental properties can be claimed as an immediate deduction, however capital expenses such as improvements are not deductible as repairs and maintenance and can only be deducted over time as capital works.

The ATO is particularly focused on interest expenses and ensuring rental property owners understand how to correctly apportion loan interest expenses where part of the loan is used for private purposes.

Summary

With limited time left before the end of the financial year it makes sense to get yourself into good tax shape before 30 June.

That really means ensuring that you’re across all your investments, are aware of income you’ve earned during the year, your potential tax liabilities, and your allowable deductions.

If you’re unsure of what pre-30 June investment steps make the most sense for you, consider contacting a tax specialist and/or financial adviser.

Rick Maggi