In this sponsored post, accountant GAIL FREEMAN explains how a real estate agent’s account summary was exposing her clients to Tax Office penalties.
Sammy and Charlie came to see me concerned about an unexplained bookkeeping issue with their rental property.
“We’ve received an annual summary from our estate agent and one of the columns is headed up ‘funds introduced’,” said Charlie.
“We have no idea what this means and would appreciate your advice.”
I told them that “funds introduced” usually meant funds the owner had put in to cover an anticipated cost due to occur in the next month or two and that the rent would be insufficient to cover it.
“It would include things such as a repaint or replacing an air conditioner,” I said.
“These funds are not taxable so do not have any impact on the income earned. Did you pay in anything like this?”
Sammy said: “No, we have never paid anything in and you can see that from looking at the individual monthly rental statements. In fact, we got a payment every month from the agent.”
After confirming this from the statements, I said: “The items being classified as ‘funds introduced’ include your share of water rates, a refund from a cleaning company and insurance proceeds from the leaky shower.
“It appears that the real estate agent has incorrectly classified what is usually called ‘other income amounts’, which usually increases your income.
“As the amount that should have been classified this way on your annual rental statement exceeds $3500, it could have expensive ramifications for you if it had been incorrectly treated as non-taxable ‘funds introduced’.
“Had you not queried this, we would have not put it in your return as ‘funds introduced’ are not included,
“Accordingly, we would have understated your rental income by $3500 and you would have been inappropriately refunded about $1500 too much tax.
“In any Tax Office audit this would have been identified and you could have been facing penalties for an incorrect return. These items will now be classified correctly so the returns that we lodge will be correct.”
Charlie said they had another issue.
“There are two loans on each of our rental properties that were all renegotiated on the same date that the new rental property was purchased,” he said.
I asked if the loans were renegotiated so they could buy a new property and Sammy confirmed they were raised to use their equity in existing properties so they could purchase the new property.
“So the new loans are secured by mortgage over one property but used for the purpose of purchase of a different property,” I said.
“So the question of their deductibility depends on what you did with the funds, not the security of the funds. Accordingly, we will have to prepare loan apportionment spreadsheets for each property following the rules laid out by the ATO.
“As you are living in the new property, unfortunately the interest on your home equity loans and the loan specifically for that property will not be deductible to you.”
Sammy said: “We had no idea of what we could claim, but we did think that the property that the mortgage was over was claimable but now we are aware that we can’t claim the interest. We’re looking forward to signing our returns and seeing the final outcome.”
If you have questions about your rental properties or any other tax issues contact the friendly team at Gail Freeman & Co Pty Ltd on 6295 2844, email firstname.lastname@example.org or visit gailfreeman.com.au
This column contains general advice, please do not rely on it. If you require specific advice on this topic please contact Gail Freeman or your professional adviser.