ATO issues warning on common CGT errors to Next 5,000 groups

The ATO has revealed some of the top errors being made with capital gains tax (CGT) through its in engagements with Next 5,000 privately owned and wealthy groups.

In a recent update, the ATO said common mistakes included cost base errors, reporting of transactions in the wrong year or not at all, incorrect characterisation of ordinary income as capital income, beneficiaries that failed to gross up discounted share of capital gain distributed by trusts, unsubstantiated carried forward capital losses, and inability to substantiate assets sold to related parties.

Many of the errors were the result of the mischaracterisation of information and poor recordkeeping, the ATO said.

“Failing to correctly prepare tax returns can lead to audits and amendments. These can be time-consuming and costly, highlighting the importance of accurate CGT reporting and recordkeeping,” the ATO said.

The ATO provided an example of a Next 5,000 group that incorrectly characterised a transaction as ordinary income instead of capital income when lodging their tax return.

The group in question acquired a property while it was in the process of being subdivided and developed, before marketing the property for sale shortly afterwards.

The ATO said during its audit, it concluded the property sale wasn’t simply the mere realisation of an asset but part of a profit-making undertaking where the intention was to generate a return.

The Tax Office then amended the group’s tax returns which resulted in their tax liabilities increasing by over $5 million, plus penalties and interest of over $1 million.

“To avoid these type of issues, you should note that certain capital losses, disposals, and business CGT concession claims will attract out attention,” it said.

The ensure compliance and accuracy in CGT reporting, the ATO said groups should ensure they understand the nature of the transaction and asset and keep records of everything that may be relevant to working out whether you’ve made a capital gain or loss from a CGT event.

It also advised groups to obtain independent professional valuations to support assets sold between related parties.

“By addressing these key areas, Next 5,000 groups can ensure compliance and avoid the pitfalls associated with CGT errors,” the ATO said.