As the end of the financial year approaches, many investors consider strategies to optimise their tax position. But with the Australian Taxation Office (ATO) receiving significant funding each year – delivering an estimated $7 return for every $1 invested in compliance activities – it’s important to ensure your plans don’t inadvertently draw unwanted attention.

Here are some key areas to review for year-end and planning for 2025/26:

Disposing of assets

Selling investments in June to crystalise a capital loss is common, but it can be risky if not done correctly. The ATO actively targeting “wash sales,” where an asset is sold to realise a loss and then repurchased soon after. This also includes transferring ‘loss’ investments to another entity you control which could lead to penalties. If you are selling underperforming assets, ensure there’s genuine intent to exit the position. Don’t repurchase the same asset unless new, independent research supports that decision, such as a change in broker recommendations from “sell” to “buy.”

Foreign exchange

Foreign exchange rules are often misunderstood. If you hold large foreign currency deposits or loans, be aware that withdrawals, transfers, or rollovers (such as term deposits) can trigger what’s known as a “foreign realisation event.” Any gains are taxed as ordinary income, meaning there’s no access to the capital gains tax discount. If you hold less than A$250,000 in a foreign currency transaction account, you may be able to opt out of these foreign currency rules. It’s critical to plan these transactions carefully.

Debt deductions

Debt-related tax deductions can be a trap for the unwary. Common errors include:

• Claiming interest on loan increases where the additional funds drawn weren’t used for income-generating purposes. For example, refinancing your rental property loan, increasing the limit, and using the extra funds for personal purposes may result in an overstated interest deduction – and create a headache for your accountant too!
• Failing to repay debt when geared investments are sold – if the proceeds aren’t used to reduce the debt, that portion may become non-deductible if the funds are later used personally.
• Misunderstanding home loan offsets – drawing from a non-deductible loan offset doesn’t convert the debt into deductible debt when used for investment purposes. In many cases, the only option may be to establish a new loan or refinance the existing loan to secure deductibility.

Property development

If you are considered a ‘personal property developer’, the ATO agrees the capital gains tax provisions apply to the subsequent property sale. If not, you face full marginal tax rates and possibly GST. For this reason, the ATO continues to focus on property development activities and the perennial ‘property flippers’.

More recently, the ATO has turned its focus on landowners (such as farmers) developing or selling their property to developers. The key question addressed by the ATO is “what is your purpose” when you buy, develop, or sell the property. Was there a profit-making motive? The ATO notes that this purpose can change over the course of ownership which is where you could get caught out. Taking substantial steps to develop the property could also result in the sale being taxed as income rather than as a capital gain, potentially doubling your tax liability.

Additionally, if you’re engaged in a profit-making activity, such as renovating or ‘flipping’ properties, any net profit or loss should be included in your income tax return, with no capital gains tax discount available. Be aware that the ATO receives property sales data including the address and contract value when individuals dispose real estate property.

The bottom line: Year-end planning requires more than last-minute adjustments. Understanding these key issues and working closely with a trusted adviser can help you avoid costly errors and stay on the right side of the ATO. It’s also an opportunity to set a stronger foundation for the year ahead.