The ATO Might Know More About Your Property Than You Do

The ATO might know more about your property than you do.

I saw a post this week about property sales that may not have been properly reported.

That did not surprise me.

The Australian Taxation Office has more property data than ever. Its data-matching programs are designed to support the correct reporting of rental income, expenses and capital gains tax.

It can receive information connected with property ownership, rental activity and transactions.

But there is another side to this that I think is being missed.

What Do You Know About Your Own Property?

What happens if you have owned a property for 10, 15 or 20 years and spent a substantial amount improving it?

New kitchen.

Bathrooms.

Extension.

Pool.

Landscaping.

Structural works.

Perhaps you spent $100,000 or $200,000 over the years.

Do you still have all the invoices?

Many owners probably do not.

That matters because the cost of qualifying improvements can form part of a property's capital gains tax cost base. If the evidence has disappeared, reconstructing that history after the decision to sell can be difficult.

The Valuation May Be the Easy Part

Everyone is talking about valuations as capital gains tax receives more attention.

I think the valuation could end up being the easy part.

The harder part may be proving what was spent on the property over the years and getting the cost base right.

A valuation answers what something was worth at a particular time.

It does not automatically reconstruct every renovation, extension, replacement, professional fee and capital work completed across decades of ownership.

That exercise depends on records.

Adjustments Can Move Both Ways

There is another complication.

Division 43 capital works deductions can affect the cost base. The ATO states that capital works expenses that can be claimed as deductions generally cannot also be included in the cost base or reduced cost base, subject to specific exceptions.

So it is not always as simple as saying, “I never claimed depreciation, so it does not matter.”

You can potentially have adjustments moving in both directions.

• Documented improvement expenditure may increase the cost base.
• Capital works deductions may reduce the amount included in it.

The result depends on the facts, the dates, the property's use and the records supporting the calculation.

This is where property owners should work with their accountant and, where construction costs need to be established, an appropriately qualified quantity surveyor.

Long Ownership Creates a Records Problem

This is especially important for people who have held property for a long time.

The longer you hold, the more likely it is that work has been completed, records have disappeared and nobody can remember exactly what happened.

Builders retire.

Accountants change.

Emails are lost.

Paper invoices fade.

Renovations completed in stages blur into one another.

The ATO says records connected with buying, owning and selling a property generally need to be kept for at least five years after disposal. In practical terms, that means the documents supporting a future cost base may need to survive for the entire ownership period and beyond.

I have bought and sold more than 50 properties myself, and I know how quickly the paperwork builds up over time.

Do the Work Before You Sell

Property owners should be thinking about this before they sell, not trying to reconstruct everything afterwards.

Start by bringing together:

• purchase and settlement records
• contracts, invoices and receipts for improvements
• plans, approvals and building records
• bank and accounting records
• depreciation schedules and records of capital works deductions
• documents connected with the eventual sale

Then have the records reviewed before a transaction creates a deadline.

The ATO is getting better at keeping its property records.

Property owners probably need to get better at keeping theirs too.