TAX TIPS FOR INVESTORS

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RENTAL PROPERTIES

The ATO has received a large boost in funding to close the $8.7 billion individuals tax gap. Part of its focus is to ensure taxpayers are returning all rental income as well as claiming only the rental property expenses to which they are entitled. Some of this additional funding will go to improving the checking of claims in real time, additional audits and prosecutions.

The ATO receives details from Airbnb and other providers which will be data matched against tax returns. From this year, the ATO will receive details of your deductions data from your tax agent or myTax, and a multi-property rental schedule for individuals may be available this year and will be mandatory in 2020.

The ATO’s most recent random checks of rental claims found 90 per cent contained an error and it plans to double the number of audits on rental deductions.

Owners of rental properties that are being rented out or are ready and available for rent can claim immediate deductions for a range of expenses, such as:

  • interest on investment loans
  • land tax
  • council and water rates
  • body corporate charges
  • insurance
  • repairs and maintenance
  • agent’s commission
  • gardening
  • pest control
  • leases (preparation, registration and stamp duty)
  • advertising for tenants.

Landlords may be entitled to claim annual deductions for the declining value of depreciable assets (such as stoves, carpets and hot-water systems), and capital works deductions spread over a number of years (for structural improvements, like re-modelling a bathroom).

Remember that landlords are no longer allowed travel deductions relating to inspecting, maintaining or collecting rent for a rental property.

Further, deductions for the depreciation of plant and equipment for residential real estate properties are limited to outlays actually incurred on new items by investors in residential real estate properties. For example, for properties acquired from 9 May 2017, landlords can no longer depreciate assets that were in the property at the time of purchase. However, should they purchase a new (not used or refurbished) asset, they can depreciate that asset.

Plant and equipment forming part of residential investment properties as of 9 May 2017 will continue to give rise to deductions for depreciation until either the investor no longer owns the asset, or the asset reaches the end of its effective life.

Ensure that interest expense claims are correctly calculated, rental income is correctly apportioned between owners, claims for costs to repair damage and defects at time of purchase are depreciated and that holiday homes are genuinely available for rent.

CAPITAL GAINS TAX PLANNING

Careful planning should be undertaken in planning the timing of the disposal of appreciating assets which may trigger a capital gain. In this context, it is important to recognise that CGT is triggered when you enter into a contract for the sale of a CGT asset rather than on its settlement.

This is particularly important where the entry and settlement of the contract straddle year-end. In these circumstances, it may be preferable from a cash flow perspective to defer the sale of the CGT asset to the subsequent year where other relief may be available, such as a capital loss sold on another asset.

Care should also be taken to ensure that an eligible asset is retained for the 12-month holding period required under the CGT discount, and to recognise that the CGT discount is not available to the extent that any capital gain accrued after 8 May 2012 and you were a foreign resident or temporary resident at any time after that date.

Keep proper records for all of your investments and ensure that you keep them for at least five years after a capital gains tax event occurred.

DO YOU HAVE FOREIGN INVESTMENTS?

If you are an Australian resident with overseas assets, you need to include any capital gains or capital losses you make on those assets in your tax return and may have to include income you receive from overseas interests in your tax return. You can ‘receive income’ even if it is held overseas for you.

If you receive foreign income that is taxable in Australia and you paid foreign tax on that income, you may be entitled to an Australian foreign income tax offset.

Please be aware that the ATO has information exchange agreements with revenue authorities in many foreign jurisdictions, and therefore is likely to receive data on any of your overseas investments and income.

Speak to your registered tax agent about your offshore investments and income.

INVESTMENT PRODUCTS PROMOTED AS TAX EFFECTIVE

The end of the financial year often sees the promotion of investment products that may claim to be tax effective. If you are considering such an investment, seek independent advice before making a decision, particularly from your registered tax agent.

Source : https://www.cpaaustralia.com.au/professional-resources/taxation/tax-tips/investors.

 

Tax Tips For Employees

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CLAIM WORK-RELATED DEDUCTIONS

Claiming all work-related deduction entitlements may save considerable income tax. Typical work-related expenses include employment-related mobile phone, internet usage, computer repairs, union fees and professional subscriptions that the employee paid themselves and for which they were not reimbursed.

Be aware that the ATO has received a large boost in funding that enables a stronger focus on ensuring taxpayers claim only the work-related expenses to which they are entitled.

Some of this additional funding will go to improving the checking of claims in real time, additional audits and prosecutions.

CLAIM HOME OFFICE EXPENSES

When you are an employee who regularly works from home and part of your home has been set aside primarily or exclusively for the purpose of work, a home office deduction may be allowable. Typical home office costs include heating, cooling, lighting and office equipment depreciation.

To claim the deduction, you must have kept a diary of the hours you worked at home for at least four weeks.

CLAIM SELF-EDUCATION EXPENSES

Self-education expenses can be claimed provided the study is directly related to either maintaining or improving current occupational skills or is likely to increase income from your current employment. If you obtain new qualifications in a different field through study, the expenses incurred are not tax deductible.

Typical self-education expenses include course fees, textbooks, stationery, student union fees and the depreciation of assets such as computers, tablets and printers.

Higher Education Loan Program (HELP) repayments are not deductible. You must also disallow $250 of self-education expenses, which can include non-deductible amounts such as child-care costs.

CLAIM DEPRECIATION

Immediate deductions can be claimed for assets that cost under $300 to the extent the asset is used to generate income. Such assets may include tools for tradespeople, calculators, briefcases, computer equipment and technical books purchased by an employee, or minor items of plant purchased by a landlord.

Assets costing $300 or more that are used for an income producing purpose can be written off over a period of time as a tax deduction.

The amount of the deduction is generally determined by the asset’s value, its effective life and the extent to which you use it for income-producing purposes.

MAXIMISE MOTOR VEHICLE DEDUCTIONS

If you use your motor vehicle for work-related travel, there are two choices of how you can claim.

If the annual travel claim does not exceed 5000 kilometres, you can claim a deduction for your vehicle expenses on the cents-per-kilometre basis. This figure includes all your vehicle running expenses, including depreciation.

The allowable rate for such claims changes annually; this year’s rate can be obtained from the ATO or your CPA Australia-registered tax agent.

You do not need written evidence to show how many kilometres you have travelled, but the ATO and therefore your tax agent may ask you to show how you worked out your business kilometres. The ATO has flagged concerns that taxpayers are automatically claiming the 5000-kilometre limit regardless of the actual amount travelled.

If your business travel exceeds 5000 kilometres, you must use the log book method to claim a deduction for your total car-running expenses.

You can contact your CPA Australia-registered tax agent to clarify what constitutes work-related travel and which of the above methods can be applied to maximise your tax position.

CLAIM DONATIONS

The ATO will pre-fill your tax return with the gifts and donations information they have received. Make sure to add in any donations not included where the receipt shows your donation is tax deductible.

If you made donations to an approved organisation through workplace-giving, you still need to record the total amount of your donations at this item.

Your payment summary, or other written statement from your employer showing the donated amount, is sufficient evidence to support your claim. You do not need to have a receipt.

CONSIDER SALARY SACRIFICE ARRANGEMENTS

You may wish to review your remuneration arrangements with your employer and forego future gross salary in return for receiving exempt or concessionally taxed fringe benefits and/or making additional superannuation contributions under a valid salary sacrifice arrangement.

You should consult a licensed financial planner to consider the merits of exploring these options.

SUPERANNUATION CONTRIBUTION LIMITS

Watch your superannuation contribution limits. You may wish to consider maximising your concessional or non-concessional contributions before the end of the financial year, but keep in mind the contribution caps were reduced from 1 July 2017.

The concessional contribution cap for the 2018-19 financial year is $25,000. Concessional contributions include any contributions made by your employer, salary sacrificed amounts and personal contributions claimed as a tax deduction by self-employed or substantially self-employed persons.

If you’re making extra contributions to your super, and breach the concessional cap, the excess contributions over the cap will be taxed at your marginal tax rate, although you can have the excess contribution refunded from your super fund.

Similarly, the annual non-concessional (post-tax) contributions cap is only $100,000 and the three-year bring forward provision is $300,000. Individuals with a balance of $1.6 million or more are no longer eligible to make non-concessional contributions.

High-income earners are also reminded that the contributions tax on concessional contributions is effectively doubled from the normal 15 per cent rate to 30 per cent if their combined income plus concessional contributions exceeds $250,000.

Importantly, don’t leave it until 30 June to make your contributions as your super fund may not receive the contribution in time and it will count towards next year’s contribution caps, which could result in excess contributions and an unexpected tax bill.

CLAIM A TAX DEDUCTION FOR YOUR SUPERANNUATION CONTRIBUTIONS

Claiming a tax deduction for personal superannuation contributions is no longer restricted to the self-employed. The rules changed on 1 July 2017 and anyone under the age of 75 will be able to claim contributions made from their after-tax income to a complying superannuation fund as fully tax deductible in the 2018-19 tax year.

Any contributions you claim a deduction on will count towards your concessional contribution cap. Such a deduction cannot increase or create a tax loss to be carried forward.

If you’re aged 65 or over, you will have to satisfy the work test to contribute and if you’re under 18 at 30 June you can only claim the deduction if you earned income as an employee or business owner. Other eligibility criteria apply.

To claim the deduction, you will first need to lodge a notice of intent to claim or vary a deduction for personal contributions form with your superannuation fund by the earlier of the day you lodge your tax return or the end of the following income year.

Source : www.cpaaustralia.com.au

Clients warned on possible car review

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Vehicle-related expenses and even the make and model of the car you drive can attract extra scrutiny from the ATO, an accountant has warned, citing the example of a manufacturing business.

Speaking on the podcast of sister publication, My Business, Alexander Laureti of LMS Advisory revealed that a manufacturing business had its fringe benefits tax (FBT) history reviewed by the Tax Office because of a BMW.

“I did have a phone conversation with an ATO officer not too long ago, and the comment was… [the taxpayer was] in the manufacturing industry, and they had had a number of vehicles actually. The FBT review that came up purely started because the owners of the business had purchased a BMW, a new vehicle, and the business wasn’t registered for FBT,” he explained.

Now there’s nothing sinister or untoward about that; there was a private-use portion that was being claimed, but the ATO didn’t see an FBT tax return being lodged on an annual basis, and they said ‘there’s a BMW in a manufacturing business — why? We’d like to find out more information about this’.

“And a whole questionnaire came out relating to all of the vehicles that were owned for a number of years.”

Mr Laureti urged anyone that has, or is looking to, purchase a luxury vehicle that will be used — either in full or in part — for business purposes to keep detailed records.

“Please make sure that you’re appropriately either registering for FBT or keeping records of your private-use portions, log books, all of the above,” he said.

“Because if you don’t have those records in place and you do come up for ATO review later on, you could get some nasty surprises.”

Brand not only red flag for ATO

It isn’t just the brand of vehicle that can attract the ATO’s attention, Mr Laureti agreed, but also the type of vehicle in question.

“The family car can be such different cars these days, and by the same token, you could take the family around in a four-door ute or you can have your tools of trade on the front seat, you can have all kinds of things that are being carried around. So, the same vehicle could have a different purpose to 50 different owners of [that type] of vehicles,” he said.

“Because the ATO doesn’t know, they will ask the questions, and the problem is that you have got to stop and take the time to answer these questions, and while the ATO is having a look around, what other things might they ask you about?

“Not to say that businesses are out there doing things that are inappropriate on purpose, but everyone just wants to get on with their businesses and not have to stop and be subject to reviews.”

Mr Laureti added: “The great majority of people are doing the right thing, and they’re lodging their tax returns and their compliance all in good faith, and yeah, these reviews are a distraction.”

Source: Article by – Adam Zuchetti (www.accountantsdaily.com.au)

US tax net expansion to hit Aussie clients

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In all the hoopla over the US corporate tax cuts, introduced late in 2017, a change to the way the US Treasury views income earned offshore went almost unnoticed in the world of private clients.

But for American citizens operating businesses in Australia, or Australian companies with a large individual US shareholder, the bite is about to be felt.

The key lies in a sweeping extension of the US tax jurisdiction, which has traditionally covered only the non-business income of corporations owned by US “persons” on an ongoing basis.

In simple terms, any person who is a US citizen is taxed by the US forever, whether they live in the US or not.

People now resident in Australia suddenly discover they need to deal with the problem of being taxed in two countries, either by unwinding or creating structures or dealing with their affairs in a way that means they don’t get double taxed. Frequently, smaller private clients are largely unaware of the vast complexity of the situation they are in.

There are good reasons why the US wants to ensure tax it is owed is collected.

Many of its multinationals operate and generate revenue largely within the nation’s physical borders but have structured their affairs so they are taxed somewhere else.

One way they do this is by holding intangible assets, such as software patents or intellectual property, abroad in low-tax countries.

Part of Trump’s tax cut package included a charge for “global intangible low-taxed income”, known as GILTI for short, which amongst other changes imposes an effective 10.5 per cent tax rate on this income for US domestic corporations.

It was a bid to limit the option for companies like Apple or Google to move IP to areas where corporations pay low tax, and bring at least some of that income back into the US tax net.

But the devil for US citizens lies in GILTI’s detail.

In making the change, the US Congress did not only target international corporations, but also managed to capture the activities of individual taxpayers operating businesses outside the US.

GILTI doesn’t apply just to big companies but to any company overseas in which US citizens have a controlling interest — a controlled foreign corporation, or CFC, as defined by the US.

So, if you are a US person living in Australia, and you set up a company and start running a business, these rules will apply to you.

Your tax exposure then comes down to how the US defines intangible income, and a good example might be to consider a coffee shop.

If a US person comes to Australia, starts a company and opens up a coffee shop, they might spend $100,000 on equipment, furniture, tables and chairs, before they ever open their doors or serve a latte.

The US laws then look at the income and consider what a fair return might be for the company’s investment in assets.

If the coffee shop made $10,000, for example, the US might say the 10 per cent profit can be attributed to a fair return on the physical assets.

But if it made $20,000, the additional $10,000 in profit would now be seen as income from “intangibles”.

In a practical light this is fiction — it is the same return for effort — but under GILTI, the income judged to be intangible now falls into a special tax category.

The first problem is the owner of the company will now be taxed as if they earned that money directly as an individual, rather than through the company.

The second problem is that, by default, there is also no credit for any tax paid in Australia.

Returning to the coffee shop example, the company might have paid 27.5 per cent tax in Australia on the profit from the business, but the US owner will still have to pay individual tax on the full profits to the US Treasury.

If there is no credit from the US for the tax paid in Australia, then the business will have a genuine double tax problem, because there will certainly be no credit from Australian authorities for tax paid in the US.

In the absence of any planning, the US owner could end up with a 70 per cent tax hit on ordinary income from running a business in Australia.

The changes were introduced in 2017 but only took effect for the 2018 tax year. In other words, the effects are just starting to be felt as 2018 returns are filed over the next few months.

Some good news was finally announced in March this year, as US Treasury confirmed the availability of election to mitigate the effects of the GILTI charge. The section 962 election is designed to ensure that an individual doesn’t pay more tax on earnings of a CFC, than if that corporation was domiciled in the US.

But US taxpayers need to act quickly to ensure the election is made in a timely fashion, and need to be aware of exactly how the election and the new rules apply to them.

Corporations may already be well versed in the new rules, but many individuals and small business owners may not have the resources to stay at the forefront of these technical changes.

Overlooking the planning options could be an expensive mistake to make, and GILTI could even become a disincentive for US citizens to invest outside their borders — which is in part the point of the legislation in the first place.

The takeaway for American citizens — or Australian companies in which a US citizen holds a substantial stake — is that the US Treasury has increased the scope of the activity it considers taxable and is not likely to back down.

It’s time to look at your exposure and take steps so you aren’t left holding the bill.

Source: www.accountantsdaily.com.au

How Much Tax Is Taken Out Of My Super Withdrawals?

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If you’re aged 60 or over, you usually won’t pay any tax on super benefits you withdraw. However, if you’re under 60 your benefits will be taxed.

To understand how much tax you’ll pay, it helps to remember that your super benefits are split into two components:

  • The “tax free” component of your benefits is not taxed when you make a withdrawal, even if you’re under 60. This component is the part of your super balance made up of things like non-concessional (after-tax) contributions.
  • The “taxable” component is taxed. This component reflects things like compulsory superannuation guarantee contributions, salary-sacrifice contributions and personal contributions for which you claimed a tax deduction, as well as investment earnings.

You can’t “cherry pick” which component you would like to fund your withdrawal. This means, for example, that if your accumulation account is 80% taxable and 20% tax-free at a particular point in time, any lump sum you withdraw at that time would also reflect this 80/20 split for tax purposes. Similarly, any pension you start at that time would have this 80/20 split locked in from the commencement day of the pension.

Therefore, the bigger your “taxable” component as a percentage of your account balance, the more tax you’ll pay when you withdraw benefits. The applicable tax rates are as follows:

  • Pensions: the taxable part of your pension payments is taxed at your marginal rate, less a 15% tax offset.
  • Lump sums: the taxable part of a lump sum withdrawal is tax-free up to your “low rate cap” of $205,000 (for 2018–2019; set to increase to $210,000 for 2019–2020). This is a lifetime cap that you gradually utilise each time you withdraw a lump sum. Once you have fully utilised your cap, the remaining taxable part of any lump sum is then taxed at 17% (or your marginal rate, whichever is lower).

Several exceptions apply to these rules. First, if you’re receiving certain “disability superannuation benefits” or accessing super before you’ve reached preservation age (eg on “compassionate” grounds), different tax treatment applies. Second, some people such as members of public sector or government superannuation funds are subject to special rules that mean they will pay some tax even if they’re aged over 60.

Planning ahead

It’s worth talking to your adviser to plan the best strategy for your super withdrawals. For example, if you’re under 60, a lump sum may be more tax effective than a pension because of the “low rate cap” discussed above.

However, to access a lump sum before age 65 you must meet a relevant condition of release such as “retirement”, whereas you only need to reach your preservation age in order to access a transition to retirement income stream (TRIS).

Your adviser can also help you explore the possible tax benefit of starting a full account-based pension (ABP). Unlike a TRIS, an ABP requires that you’ve met a relevant condition of release such as retirement, but the advantage is that it attracts a partial or possibly a full exemption from income tax on investment earnings inside the fund. So, as you can see, the decision to access your benefits is best made with professional advice that takes into account a range of factors including:

  • your age;
  • employment status and income;
  • lifestyle/cashflow needs;
  • tax efficiency of running a pension;
  • eligibility for the Aged Pension; and
  • special planning required if you hold more than $1.6 million in super (the current limit on the amount you can hold in full pensions like ABPs).

Need to access your super?

Talk to us today and we’ll help you navigate through the tax rules to get the most out of your retirement savings.

 

ATO fires warning ahead of tax time

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The ATO has released a wide range of case studies of taxpayers cheating the tax system as it signals its hard-line stance ahead of tax time 2019.

The first case involves 56-year-old Peter Garven, who was sentenced in the Sydney District Court to three years and three months’ jail time for fraudulently obtaining and attempting to obtain more than $200,000 from the ATO.

As the sole director of Peter Garven Consulting and Garven Resources, between October 2002 and July 2004, Mr Garven lodged three income tax returns where he fraudulently obtained $102,504 in refunds and attempted to obtain a further $41,758.

Mr Garven claimed to have received salary and wages of more than $150,000 from the University of New South Wales, despite the university having no record of any payments to Mr Garven.

In addition, between August 2002 and July 2004, Mr Garven fraudulently obtained $51,684 in GST refunds on behalf of his two entities, Peter Garven Consulting and Garven Resources.

In 2004, Mr Garven acknowledged that his claims were false and said he would lodge amendments. The ATO never received the amended returns, which triggered audit action.

Following this, Mr Garven failed to appear in court for his trial in March 2009, with a warrant for his arrest issued shortly after. He went into hiding and was registered on the missing persons list. In 2017, he was arrested on a warrant by the NSW Police in the Watagan Mountains.

Mr Garven has also been ordered to repay $154,188.96.

Fraudulent BAS leads to jail sentence

A wholesale distribution company director has also been sentenced to four years and six months’ jail time for fraudulently obtaining and attempting to obtain nearly $600,000.

David Irvine lodged 39 BAS between January 2012 and March 2015. By reporting fake export sales, he reduced the company’s GST payment obligations and fraudulently obtained $480,680 in refunds he wasn’t entitled to.

Mr Irvine also failed to report any income on his personal tax returns for the 2009 to 2011 financial years, resulting in a tax shortfall of $116,056.

Sole trader gets home detention

Linda Taylor was sentenced in the South Australia District Court to two years and nine months to be served on home detention after being convicted of GST fraud made in BAS lodged between April 2013 and September 2015.

Ms Taylor, a sole trader of a home styling business trading as Signature Styling Design Innovation, lodged 32 monthly BAS with the ATO, fraudulently obtaining $138,076 in GST refunds.

The audit found Ms Taylor claimed a total of $2,023,646 in capital and non-capital purchases in her BAS, with her overall reported sales during the same period inclusive of GST being $259,977. To support these claims, Ms Taylor supplied false documents to the ATO.

The court found these claims to be entirely fraudulent. Signature Styling was not entitled to GST refunds that had been claimed and received.

The audit found Ms Taylor used the money obtained to fund private expenses like school and vet fees, meals at restaurants and hotels, as well as significant spending on hair and beauty services, clothing, shoes and accessories.

She has also been ordered to perform 150 hours of community service and pay reparations of $137,936.

Source: www.accountantsdaily.com.au

CGT Strategy highlighted with work test exemption

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In December last year, the government finalised the regulations for the work test exemption measure which enables individuals aged 65 to 74 to make voluntary contributions to superannuation for an additional 12-month period from the end of the financial year in which they last met the work test.

In order to be eligible, they have to have a total superannuation balance of less than $ 300,000. According to the ATO website, the regulations will take effect from 1 July this year.

Advisers Digest director Peter Johnson said one of the ways the exemption could be beneficial for SMSF clients is where they want to sell a significant asset and contribute the proceeds from the disposal of that asset into their super fund.

The client may have an asset they wish to sell that is subject to capital gains. If they sell the asset they are going to have a capital gain, and if they want to contribute the sale proceeds to super, they will have to realise that gain in the same year as they are still working.

Under the work test exemption, however, they may be able to sell the asset and then still contribute the money to super in their first year of retirement, he said.

For a couple, he said, each spouse will be able to contribute $ 100,000 in non-concessional contributions and $ 25,000 in concessional contributions.

The government also made an amendment to the regulations which allows members to trigger the bring forward rules under the exemption, which was restricted under the original draft legislation.

The work test exemption could also be useful for those receiving an employment termination payment in July and will be retiring afterwards, he said.

Source: www.smsfadviser.com