Low Doc Loans and the ATO

Hi Terry and all,
The penalties of 5% and 70% you quoted, are percentages of what exactly? Is it undeclared income?
I think the tax office would have a hard time with prosecuting these cases. Aren’t lo doc loans for people who are not up to date with the paperwork or self-employed? Aren’t we then really guessing what our income is? I could be $20,000 over or I could be $20,000 under the actual figure.
I’d say they’d have to allow a percentage of error each way, as I think that many people who are trying to make an honest estimate could be way out.
Just my 2 cents,
Sue [biggrin]

“Be careful not to step on the flowers when you’re reaching for the stars”

This is an interesting area for me – a lot of my more recent loans have been lo doc.
Why? No, not because I’m a drug dealer on the side [biggrin] but because last year’s tax returns didn’t look good. By using the emerging profits accounting system, all my costs of buying a property are counted as expenses. It doesn’t matter where those costs come from, (in my case loans from investors usually!), because the house is in my company/trust name, it’s a cost against my business. So although my cashflow is very strong, my tax returns don’t reflect that.
Lo doc loan applications are interested in cashflow – so therefore my “cash” position looks quite different.
It’s silly really. Mind you, I hope the ATO doesn’t start looking at my lo doc applications, in the space of 12 months and quite a few houses, they will have varied enormously!!!! I’m sure it will look incredibly suspicious.

Keep smiling
Felicity

Precisely – and yet I do make money! Because all the upfront purchase costs are borrowed from my investors, I don’t ACTUALLY spend $30-50k to settle a property – but my tax return says I do. I’ve never really understood this, I have to say!!! Instead I have an outgoing of $x per month to the investor – my REAL cost.
Mostly I don’t buy a house unless the bottom line is positive.
This situation will start to change however when wrap buyers refinance or I sell for capital gain.

Keep smiling
Felicity

Update:
The tax office will begin a blitz on low documentation loans after a preliminary audit showed 70 per cent of borrowers may have failed to declare full incomes. In some cases, small businesses’ annual incomes as stated to the ATO were lower than the repayments on the loans. The ATO looked at 176 low doc loans, typically used by the self-employed and people who can’t meet normal bank lending criteria. But the ATO is concerned that some people are using them to hide their true levels of income. If the initial findings are confirmed, borrowers could face ATO penalties of up to 75 per cent of the unpaid tax as well as interest.

By Australian Financial Review, 25/6/04.

Sue, on the Low Doc loan I just got, I declared a (little) bit more than $90K as my income…

The lender told my broker to make the loan ‘fit’ the guidelines, as they were more than happy to lend us the money……

I’m guessing I should be worried about now ????

Cheers
Mel

Yes and i certainly wouldn’t advise telling the ATO to go and jump.

Remember an administrative penalty of 20 penalty units ($2,200) applies if a taxpayer fails to provide ALL reasonable facilities to a taxation officer who is authorised by taxation law to have access to places, premises, books and other information (TAA Sch 1 sec 288-35 ). These access powers are very broad. Just look at the Citibank case.

Refusal or failure to duly keep or provide information, or give access to it, also constitutes an offence that renders the taxpayer liable to prosecution . If a prosecution is instituted, however, no administrative penalty is payable. (Great but you have committed a criminal offense – how nice)

For many years the ATO has not had the resources to clamp down on the things that they are now looking at. I am aware of many business owners who are facing amended assessments, penalties and interest for incorrect claims. The Tax Office has equipped its arsenal and many are going to feel the pain of their might very shortly. If your records are in order and you have sought professional advice then you should be fine but if you have tried to evade tax then be careful. The matching software the ATO has installed in recent years is state of the art. It matches Land Titles Office records to personal, trust, company and partnership returns. They have software that matches interest from all financial institutions to your personal tax return. The software is sophisticated and so are there methods. If you have made a mistake then be up-front, be honest and they can reduce your penalty. If you are defiant and tell them to get stuffed be prepared for harse penalties if you are wrong, and also an audit of all your last five years return (at your expense!!!)

still nothing to fear if you haven’t cheated – a big difference between cash flow and expectations vs. actual taxable assessed income.

John – 0419 198 856

The idea of a cashbond is to take equity from your properties and turn it into cashflow, when you’ve reached the point where you’re asset rich but can’t borrow any more because of serviceability issues.

Keep smiling
Felicity