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Non-disclosure of rental income

A new client has undisclosed rental income going back to 1991. During that time the tenants have mainly been family members paying an amount of rent that barely covered the mortgage and expenses, so the amount of tax due is likely to be fairly low. The client's mother occupies part of the property, this being the reason for the original purchase.

Unfortunately this is not a voluntary disclosure, the client has received a letter from the Revenue out of the blue.

Will the client be required to complete tax returns for all these years, or will it be a matter of drawing up income and expenditure accounts for this source and only submitting these?

Any advice would be gratefully received.
Anonymous

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Talk to the Inspector
It may well never have been the intention of your client to make a profit, but just to cover costs. If so, my view is that the Reveneue might be satisfied with three or four years' accounts to demonstrate the not-for-profit basis in principle, and I think that no reasonable Inspector would then want to go back to 1991.

I am sure that this sort of arrangement is quite common where relatives cover the cost of the provision to them of living accommodation. This problem demonstrates that in the Self Assessment regime it is important to make reference in the white boxes on the Tax Returns in respect of any arrangement which whilst not in reality taxable might come to the attention of the Revenue in another way.

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There may be a profit
It is a common misconception, particularly among clients, that if the rent received is applied to the mortgage, then there is no profit.

That is true for an interest only mortgage, but not for a repayment mortgage, where the capital element of the mortgage payment is not tax deductible.

So if your client's rent "just covered" a repayment mortgage, then there will be a taxable element, which increases year on year. After 13 years there could well be a significant capital repayment.

Your expectation that the tax payable is likely to be fairly low may not be correct. The easy way to get a ball park figure would be to take the amount repaid from the mortgage as the taxable amount, and multiply it by the basic or higher rate (whichever applies). That will be before interest or penalties.

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Penalties?
I suspect that the Inspector will not insist on tax returns if he is satisfied that rental income is the only item undisclosed. However, circumstnaces may lead him to the question - if taxpayer has omitted income from one source, what else has he/she failed to disclose?

There is, of course, the question of penalties under TMA 1970 s.7. These are likely to be minimal if, as the questioner indicates, taxabale profits are negligible and there are no other untaxed sources.

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Rental Subsidy Non-Disclosure

 Housing NSW charges market rent for all its properties. However, public housing tenants can apply for a rental subsidy to reduce the amount of rent they actually pay. This makes the rent more affordable for those households on a low income. A rental subsidy is the portion of market rent contributed by Housing NSW.Housing NSW grants a rental subsidy based on the gross assessable income and assets of all members of the household who are aged 18 years or over (except in cases where the tenant or their spouse is under 18 years).

employment agreement

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