New guidelines to aid detection of undeclared property gains

THE Inland Revenue Department is poised to crack down on tax evaders who have failed to declare profits from property trading.

Tougher reporting requirements introduced last week will make it easier for specialist tax teams to spot investors who have made undeclared profits from the booming property market.

The composite tax return will ask taxpayers to disclose their employment income, property rentals and profits from businesses in which they are the sole owner on a single return.

Coopers and Lybrand partner Nick Hammans has warned that those who failed to disclose their profits were likely to face fines of up to $5,000 plus three times the amount of tax outstanding.

''Those who fail to declare profits will now find they have made an incorrect return, whereas in the past it would have been the less serious problem of omitting to make a return,'' he said.

Property tax during 1993-94 for companies is 17.5 per cent, for individuals it is 15 per cent.

While profits from a trade, profession or business are taxable, gains from the sale of capital assets, such as a private home, are excluded.

However, some individuals and companies mistakenly believe that this means profit from the sale of all properties is exempt.

''The distinction between whether a profit derives from the sale of a capital asset, or is part of the profits from a trade business, is fine,'' Mr Hammans said.

''The Inland Revenue can be expected to inquire into the nature of the profit in some depth. The onus of proof is on the taxpayer to show that it is a capital profit.'' The Inland Revenue has developed a special unit to monitor property transactions by tracking stamp duty payments and the location, cost and date of transactions.

If it considers turnover is too frequent to be reasonable for an individual, it can ask for an explanation of why profits tax is not being paid.

To prevent this, taxpayers who have made profits on property transactions in the past 12 months should ask themselves the following questions before filing their return: Was the property bought and sold within a short period - say, within two years - and is it possible to prove that the intention was not to make a quick profit? Is there a history of buying and selling properties for speculative purposes? If so, is it possible to prove that this property was held as a long-term investment and that it should be treated differently from those disposals that were taxed? How was the purchase financed? The Inland Revenue could consider short-term funding as an indication that there was an intention to dispose of it for a short-term profit.

Was the cost of financing the purchase of the property higher than the actual or anticipated rental yield? A shortfall could be evidence of an intention to cover the short-term loss with a profit on sale of the property.

What was the purpose of buying the property? Evidence that the property was used for domestic or business accommodation for a significant time could satisfy the Inland Revenue that it was not bought purely for trade.

Why was the property sold? If there was an unexpected need for the funds, this could demonstrate a good reason for sale.

If you answer yes to any of these, it could be worth consulting a tax adviser.

''The new return makes it easier to detect possible tax evasion - Inland Revenue can identify the number of properties owned by the taxpayer, the income declared by the taxpayer, and the interest payable to produce rental income,'' Mr Hammans said.

''All the information necessary for the department to make a judgment about the six questions will be available in one form.''