Category: Featured Articles

Rental Property Owners – New Rules!

Housing affordability was a major focus of the 2017 Federal Budget. Among the measures announced was a tightening of some of the deduction rules around rental properties as follows:

Rental Property Travel
Deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential rental propety will be disallowed from 1 July 2017. Before this date, the rules were very generous and allowed an owner to claim everything from airfares, accommodation, overseas travel (in certain circumstances) and car expenses incurred when:
  1. Preparing a property for new tennants
  2. Inspecting the property during or at the end of tenancy
  3. Undertaking repairs, where the repairs are because of damage or wear and tear incurred while you rented out the property
  4. Maintaining the property (e.g. cleaning or gardening) while it is rented or available for rent
  5. Collecting the rent, and
  6. Visiting your agent to discuss your rental property.

In light of these changes, there are a few important take away points for property owners as follows:
  • Category (a), (c) and (f) expenses appear to be still claimable under the new rules (we will need to await the final legislation to confirm this)
  • This measure will not prevent investors from engaging third-parties such as real estate agents for property mamagement services. These expenses will continue to be deductible. Indeed, if the travel is costly (e.g interstate) then you may wish to engage third parties to undertake Category (b), (d) and (e) expenses from 1 July 2017 rather than you personally.

Restriction on Depreciation Claims
From 1 July 2017 “plant and equipment” depreciation deductions are now limited to outlays actually incurred by investors in residential real estate properties. Plant and equipment items are usually mechanical fixtures or those which can be “easily” removed from a property such as dishwashers and ceiling fans. This change was made to address concerns that some “plant and equipment” items are being depreciated by successive investors in excess of their actual value. Acquisitions of existing plant and equipment items will be reflected in the cost base for CGT purposes for subsequent investors…….

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Tax Relief on Changing Business Structures

Whilst the ability for a small business to change their legal structure without attracting a tax liability has been available for a little over 15 months, it may be one of those areas that small business and tax practitioners are still coming to terms with. This tax tip considers:
The eligibility criteria;

  • How the provisions work; and
  • What are the impacts. 

Is My Business Eligible 

To be eligible and to gain access to the rollover provisions, a number of tests must be satisfied as follows: 

  1. Both the transferor and the transferee must be small businesses 

This means that both the transferor and the transferee must be businesses each with an aggregated turnover of less than $10 Million.  Note that this aggregated turnover not only relates to the subject entity, but also to entities that may be affiliated or connected with the subject entity. Care is required in determining the applicability of this test as the affiliated or connected with test can be quite complex. 

  1. The restructure must be part of a genuine restructure and not part of a tax driven scheme 

Whether or not a restructure is “genuine” will depend on the specific circumstances surrounding the restructure. The guidelines that accompanied the restructure legislation provide some details on what may be considered a “genuine restructure” and include:

  • A bona fide commercial arrangement has been undertaken to enhance business efficiency;
  • The business continues to operate following the transfer, through a different entity structure;
  • Transferred assets continue to be used in the new business structure;
  • The new structure that has been adopted has taken professional advice when setting up the business;
  • The restructure is not artificial or unduly tax driven; and
  • The restructure is not a divestment of assets or a preliminary step to facilitate the disposal of assets outside the business. 
  1. Ultimate economic ownership must be maintained before and after the restructure 

The ultimate economic owners of an asset are the individuals who, directly or indirectly, own an asset. Where there is more than one individual with ultimate economic ownership, there is an additional requirement that each individual’s share of ultimate economic ownership be maintained. Where a discretionary trust is involved, this means that there is no practical change to the individual beneficiaries who ultimately benefit from the assets before and after the transfer. 

How The Provisions Work 

A business can be operating either as a sole trader, a partnership, a company or as a trust. There may be a time when the business owners believe that they have “outgrown” their current trading structure and that the structure no longer meets their needs. This could involve asset protection issues, commercial requirements, public perception, etc.  The Rollover Provisions provide opportunities for a business to restructure from one legal entity to another without incurring a range of tax liabilities that would normally arise when such a transaction is performed. 
It is important to note however that the rollover provisions only apply to certain “active assets” of a business. Such assets are normally CGT assets, depreciating assets, trading stock and other assets that form part of the operating business being restructured.  The rollover does not apply to certain assets such as shareholder or beneficiary loans or  passive assets held in a structure. 

What Are The Impacts 

There are a number of impacts that you should consider before applying the restructure rollover measures including:

  • Assets are taken to be transferred at their tax cost and as such will not result in an income tax liability to either the transferor or the transferee.
  • There is no requirement for any consideration (market value or otherwise) to be provided by the transferee in exchange for those assets.
  • In relation to specific asset classes, the following should be considered:
  • Pre-CGT assets retain their pre-CGT status.
  • Post-CGT assets are taken to be acquired by the transferee at the date of transfer for their cost at that time. This means that to be eligible to claim the CGT discount on any subsequent sale from the new structure, you will need to wait at least 12 months.
  • Access to the 15 year exemption however as part of  the small business CGT concessions is not affected as the transferee will be taken to have acquired the asset when the transferor acquired it (different to the CGT discount).
  • Trading stock can either be transferred at the transferor’s cost or at the market value of that stock held by the transferor at the start of an income year.
  • Revenue assets take the cost which will result in no profit or loss to the transferee.
  • Depreciating assets will be transferred at the written down value of those assets at the date of the transfer and then continue to depreciated using the same method and effective life that the transferor was using. 
  • There may also be issues to consider in relation to GST or stamp duty on the restructure so professional advice should be sought when utilising the rollover measures. 
  • The restructure provisions can have a very positive outcome for small businesses looking to restructure their affairs, but ensure you seek appropriate professional advice as there may also be some other implications that result in unwanted outcomes..

SBE Opportunities


CGT

Small Business Restructure Rollover

The increased SBE threshold of $10 million also applies to the rollover for restructures of SBEs. To recap, this measure allows SBEs to change their operating structure without incurring capital gains tax or other income tax liabilities. It does this by providing an optional rollover (deferring any CGT liability or income tax liability until the asset is eventually sold) where an SBE transfers an active asset of the business to another SBE as part of a genuine business restructure, without change the ultimate economic ownership of the asset. The rollover may also be available for assets that are used by the SBE but held by an entity connected or affiliated with the SBE or, if the SBE is a partnership, a partner of that partnership. This ensures that partners and other ‘passive entities’ within an SBE that are not themselves SBEs (because they do not carry on a business themselves) can access the new rollover. Under the rollover, specifically, from a CGT standpoint:

  • No capital gain or loss will accrue to the Transferor. The Transferee will be treated as acquiring the asset on the date of transfer for an amount equal to the cost base of the asset.
  • Pre-CGT assets will retain their pre-CGT status post-transfer.
  • For the purposes of the 50% CGT discount, the ’12-month clock’ will be reset, such that the Transferee will need to hold the asset for a further 12 months following the restructure to avail themselves of this discount.
  • For the 15-Year Exemption however, the Transferee will be taken to have acquired the asset back when it was originally acquired by the Transferor.


As the $10 million increased threshold is backdated to1 July 2016, tax returns may need to be amended in respect of capital gains made and declared from restructures after this date. Amendments may result in refunds where any capital gains liabilities have been paid. 

CGT Small Business Concessions – No change


Unfortunately, the increased $10 million SBE threshold does not apply to the CGT Small Business Concessions (i.e. the Active Asset Reduction, Retirement Concession, Rollover, 15-Year Exemption). To access these concessions, the standard criteria must be met, namely you and connected entities must be met, namely you and connected entities must have net assets to the value of less than $6 million or your annual turnover (including connected entities and affiliates) must be less than $2 million.



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Non-Resident CGT Withholding Rules…. REBOOTED!

Are you buying or selling property? If so, you need to be aware of the newly adjusted withholding rules, which are now set to impact a much wider range of property sales.

Background
Last year Federal Parliament passed legislation designed to collect gapital gains tax (CGT) from non-residents selling certain Australian property from 1 July 2016.
Although the law is targeted at foreign Sellers, given the way the legislation was drafted, all Sellers of property (resident or non-resident) may be impacted. The new law required that for all property sales of $2 million or more, the Buyer was required to withhold 10% of the sale proceeds and remit that amount to the ATO without delay – unless the Seller obtains a Clearance Certificate from the ATO before settlement.
The legislation doesn’t just apply to individuals but also Companies, Trusts, and Superfunds. Further to this, it is the Buyer that can then be penalised by the ATO for failing to withhold and remit the withholding tax.

What’s Changed?
In the May 2017 Federal Budget, the Government made the following two changes:
  • Increasing the CGT withholding rate for non-residents from 10% to 12.5% from 1 July 2017, and
  • Reducing the real property exemption threshold from $2 million to $750,000 from 1 July 2017.
These changes mean that many more txpayers will be impacted by the new regime. Given this, we now examine the law in detail.

Conditions
The new withholding regime applies to contracts entered into on or after 1 July 2016 where the following three conditions are met:

1. THE BUYER ACQUIRES CERTAIN ‘TAXABLE AUSTRALIAN PROPERTY’
This includes
  • Real property in Australia – land, buildings, residentail and commercial property
  • Lease premiums paid for the grant of a lease over real property in Australia
  • Mining, quarrying or prospecting rights
  • Interests in Australian entities whose majority of assets consist of the above such property or interests (e.g. shares in a company or units in a trust) or
  • Options or rights to acquire the above property or interest.

2. THE SELLER IS A NON-RESIDENT OR HASN’T PROVIDED A CLEARANCE CERTIFICATE FROM THE ATO
Note that where there are multiple Sellers in the one tansaction, this condition will be met where any of the Sellers is a non-resident.
This condition is the ‘kicker’. The rules can catch Australian resident Sellers if they do NOT obtain a Clearance Certificate from the ATO.

3. NONE OF THE FOLLOWING EXCLUDED TRANSACTIONS ARE THE SUBJECT OF THE SALE
(a) Real property transactions with a market value of less than $750,000 (downd from $2 million). As well as sales of real property, this exemption………..

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Immediate Deduction for SBE Start-up Expenses

IMMEDIATE DEDUCTION FOR SBE START-UP EXPENSES

This allows taxpayers who are not in business or are a Small Business Entity (SBE) (turnover of less that $10 million) to immediately deduct certain expenses relating to the proposed structure or operation of a business. The expenses must relate to a business that is proposed to be carried on, including certain Government fees and charges and costs associated with raising capital, where these expenses would otherwise be deductible over five years. Eligible expenses generally fall into two categories:

  • Expenditure on advice or services relating to the structure or operation of the proposed business.
  • Payments to Australian Government agencies.

Allowing SBE’s to deduct their start-up expenditure in the year it is incurred provides them with a cash-flow benefit. The deductions are brought forward rather than spread out over a number of years. Cash-flow is one of the main killers of start-up businesses.

TAX TIP
Given that the threshold increase is backdated to 1 July 2016, if your business incurred these expenses but failed to claim them in full in the 2016/2017 tax return, you may wish to amend that return.

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ATO Debt Alert

From 1 July 2017 the ATO is cracking down on businesses with large debts owed. This could have far-reaching consequences for affected businesses. As a result, action may need to be take before this deadline.

BACKGROUND
The ATO is currently owed more than $19 billion in overdue tax. Of this, approximately two-thirds is owed by small businesses (those with a turnover of less than $2 million). This presents a delicate balance for the ATO and Government with the need to protect Government revenue coming up against the desire not to send businesses ‘to the wall’ and the flow-on costs that come with that (unemployed staff etc).
However, in the Mid-Year Economic and Fiscal Outlook (MYEFO) it would seem that the Government has had enough, announcing a rather dramatic debt measure that all business taxpayers should take note of.

DETAILS
In MYEFO,which is the Government’s mid-year Budget update in December, it was announced that where an entity meets the following criteria in relation to an ATO debt, the ATO will be permitted to disclose this debt to Credit Reporting Bureaus:
  • You or your business has an ABN
  • Your debt is more than $10,000
  • Your debt is more than 90 days old and
  • You have not engaged the ATO in respect of repaying the debt.

This is a big shift from current practice where the consequences of not paying ATO debt have no real tangible impact on your day-to-day operations other than the incurring of a General Interest Charge (currently 8.75% compounding daily) and the issuance of a Director Penalty Notice requiring company directors to personally pay outstanding PAYG Withholding and Superannuation Guarantee Charge. By contrast, the implementation of this new policy (which at the time of writing (March) is set to go ahead) could have profound effects for a small business. Credit default ‘black marks’ last for five years. In the worst of cases, support from financiers may be withdrawn and supplier credit stopped.

ACTION POINTS

This change does not require legislative passage through the Parliament. As such the ATO is free to implement this policy from 1 July without Parliamentary approval. Given the profund consequences of a 5-year credit ‘black mark’ on a business (potentially drying up finance) we would strongly recommend that businesses who meet the above criteria with respect to a current ATO debt either (a) repay the debt to at least below the $10,000 threshold or (b) enter into a payment arrangement with the ATO before 1 July 2017. Indeed, irrespective of whether the above conditions are met, it’s always best practice to engage with the ATO by entering into a payment arrangement. Having a record of cooperation and compliance can assist in future ATO dealings in respect of extensions/leniency etc.

The good news is that the ATO is very flexible with payment arrangements – they will generally make every effort to accommodate your requirements. The ATO can also offer interest-free repayment plans to some small businesses in relation to Activity Statement debt. To enter into a payment arrangement, you should phone the ATO on 13 28 66 or get your Accountant to contact them on your behalf.
The ATO provide further guidance on help with paying debts at https://www.ato.gov.au/general/paying-the-ato/help-with-paying/ 

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https://www.ato.gov.au/general/new-legislation/in-detail/other-topics/improve-the-transparency-of-tax-debts/

2017 Federal Budget Highlights

2017 Federal Budget Highlights

The 2017 Federal Budget was handed down last night. Following is a brief summary of some of the headline measures that may impact you and your business.

Small Business

  • Instant Asset Write-Off – The $20,000 instant asset write-off will be extended by 12 months to 30 June 2018, for businesses with an aggregated annual turnover of less than $10 million. To access the $20 000 write-off, assets must be acquired and installed ready for use in your business by this date. Almost all business assets are eligible (except for buildings, horticultural plants, and in-house software).
  • Access to the CGT Small Business Concessions Tightened – Access to the CGT Small Business concessions will be tightened from 1 July 2017 to deny eligibility for assets which are unrelated to the small business.
  • Foreign Worker Levy – As an incentive to employ Australian workers, from March 2018 businesses that employ foreign workers on certain skilled visas will be required to pay a levy of up to $5 000. This levy will in turn provide revenue for a new Skilling Australians Fund.

Individuals

  • Medicare Levy Increased – From 1 July 2019, the Medicare levy (as distinct from the Medicare levy Surcharge for high-income earners) will be increased from 2.0% to 2.5% of taxable income. Other tax rates that are tied to the top marginal tax rate, such as the FBT rate, will also be increased.
  • HELP Repayments Cut In Earlier – A new set of repayment thresholds and rates under the Higher Education Loan Program (HELP/HECS) will be introduced from 1 July 2018. A new minimum repayment threshold of $42,000 will be established with a 1% repayment rate. Currently, the minimum repayment threshold for 2017/2018 is $55,874 with a repayment rate of 4%.
  • Deficit Levy Expiration – The Government will allow the 2% Deficit Levy for high-income earners to expire on 1 July 2017. This means that the top marginal tax rate which applies at $180, 000 will decrease by 2% to 45% (not including Medicare levy).

Housing Affordability Measures

  • Access to Super for First Home Deposits – Individuals will be able to make voluntary contributions to superannuation of up to $15,000 per year and $30,000 in total, to be withdrawn subsequently for a first home deposit. The contributions can be made from 1 July 2017 and must be made within an individual’s existing contribution caps.  From 1 July 2018, an individual will be able to withdraw these contributions and their associated deemed earnings for a first home deposit. The withdrawals will be taxed at an individual’s marginal tax rate, less a 30% tax offset. Couples saving for a first-home deposit can access this measure and double the benefit.
  • Super Contributions from Downsizing – Individuals aged 65 or over can contribute up to $300,000 from the proceeds of the sale of their home as a non-concessional contribution into superannuation, from 1 July 2018.
  • Travel Deductions Limited – Deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential rental property will be disallowed from 1 July 2017.
  • Plant and Equipment Deductions Limited – Plant and equipment depreciation deductions will be limited to outlays actually incurred by investors in residential real estate properties from 1 July 2017.
  • Main Residence Exemption Denied – Foreign and temporary tax residents will be denied access to the CGT main residence exemption from 9 May 2017. Existing properties held before this time will be subject to transitional arrangements until 30 June 2019.
  • Foreign Owners Taxed – An annual levy of at least $5,000 will be imposed on foreign owners of under-utilised residential property, for example where the property is not occupied.
  • CGT Discount IncreasedSubject to various conditions, the CGT discount for Australian resident individuals investing in qualifying affordable housing will be increased from 50% to 60% from 1 January 2018.
  • Negative Gearing – Despite pre-Budget speculation, the negative gearing rules remain unchanged.

GST

  • New Residential Properties – Purchasers of new residential properties or new subdivisions will be required to remit the GST directly to the ATO (rather than pay it to the seller) as part of settlement from 1 July 2018.
  • Bitcoin Changes – The GST treatment of digital currency (such as Bitcoin) will be aligned with that of money from 1 July 2017. This measure will ensure purchases of digital currency are no longer subject to GST.

Superannuation

  • Related Party Transactions – Opportunities for SMSF members to use related-party transactions on non-commercial terms to increase superannuation savings will be reduced from 1 July 2018.
  • Fund Merger Relief – The current tax relief for merging superannuation funds will be extended until 1 July 2020.

Broader Business Conditions

In good news for the business community, the Budget papers forecast that the economy will rebound and grow at 2.75% in 2017/2018 (up from the current 2.4%); jumping to 3% in 2018/2019. To provide some historical context, average annual economic growth in Australia has been 3.47% from 1960 to 2015.

More Information

Although we’ve covered most of the headline measures, the Budget Papers run into hundreds of pages. To access the papers in full, go to www.budget.gov.au

We will also provide a more detailed coverage in our upcoming July/August bi-monthly magazine as part of your subscription.

It’s FBT TIME

31 March marks the end of the Fringe Benefits Tax year. This article aims to assist employers to get their affairs together with a view to ascertaining and minimising their 2016/2017 FBT liability.

COLLATION AND SOFTWARE FILE
While it will generally fall to your Accountant to:
  • Determine whether a fringe benefit has been provided by you to an employee or their associate (e.g. spouse)
  • Determine whether an FBT exemption applies
  • Determine the taxable value of your fringe benefits
  • Ascertain your FBT liability
  • Complete and lodge your FBT return….

… there is something you can do to assist with this process.You may wish to collate/detail all the instances where a private expense of an employee has been paid for by the business. If you or one of your employees is responsible for maintain the accounting software file (entering and coding each transaction undertaken by your business) ensure that the file is in good order. From an FBT perspective this involves coding personal expenses paid by the employer to an “employee benefits (FBT)” account in the management accounts. This will alert your Accountant to the existence of a potential fringe benefit.

CAR FRINGE BENEFITS
Operating Cost Method
If you use the Operating Cost Method to calculate FBT on motor vehicle usage, in order to calculated the private use percentage (and therefore the FBT payable), you will need to maintain a valid log book recording your usage of the vehicle over a 12-week sample period. Failure to do so, will result in the entire use of the vehicle being subject to FBT (therefore, it’s vital to have a valid log-book). Provided there has been no substantial change in the usage of your vehicle (in terms of the mix between work and personal use) a new log book mush be prepared it one was not prepared for any of the previous four years.

Therefore, if you first kept a log book for 2011/2012 FBT year, you are required to have kept a new log book for the current 2016/2017 FBT year. Leading up to the end of March, if you do not yet have a valid 2016/2017 log book, don’t panic! Although we are now right at the end of the FBT year, it is not too late to keep a log book to substantiate the private use of the vehicle for 2016/2017.

Log books can commence as late as right at the end of the FBT year even though the end of the 12-week period for which it needs to be maintained may extend beyond the end of the FBT year in which the log book commenced. You can purchase a log book from you local Newsagent or you can download one of the innumerable log book apps on the market, either from the AppStore or Googleplay as the case may be.

Upon completion, ensure the log book contains the following information, in English:
  • Car details, including registration number
  • The date the journey began and the date the journey ended
  • Odometer readings at the commencement and conclusion of each journey
  • Number of kilometres travelled by the card in the course of the journey
  • A description of the purpose or purposes of the journey (generic descriptions such as ‘business trip’ are not adequate)
  • Business and private kilometres travelled (although this is not a legislative requirement, it may help with collating data for FBT purposes).

Also ensure that if using the Operating Cost method, you capture the odometer reading at every 31 March. Furthermore the Statutory Formula Method is the default option therefore to use the Operating Cost Method the employer should have an election in place.

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New Year Issues and Strategies

The New Year is a time to reflect, but also look ahead. Following are some of the issues business owners and individuals may turn their minds to as we enter 2017.

STAFFING LEVELS
Employing – If you determine you need additional staff – perhaps you are adding additional services/product lines to your business; you have a shortfall in the number of staff required to undertake current work in your business; or are replacing staff who have left your business – there is a myriad of obligations and procedures to be followed, both at a State and Federal level. To assist employers, the Government in conjunction with small business owners, Tax Agents, and industry associations, has created a Taking on Employees Checklist www.business.gov.au/info/run/employ-people. Irrespective of which State or Territory you are located, this comprehensive checklist covers off on all the Federal and State laws that apply when taking on a new employee – from pay entitlements, superannuation, insurance, withholding tax, and more. It’s a one-stop shop.
Redundancy – On the other hand, if your year-end review of staffing levels determines that there is excess staff, an employee may be made redundant. From a taxation perspective, a redundancy occurs when the employee is dismissed because the job they are doing no longer exists in your business – it has become redundant, and nobody is required to perform that specific role. Where this is the case, the employee is afforded concessional tax treatment on payments such as: payments in lieu of notice, severance payments of a number of weeks’ pay for each year of service, and gratuities or golden handshakes. Any payments that meet the conditions of a genuine redundancy are tax-free up to a limit based on the employee’s years of service with you. The tax-free limit is a flat dollar amount ($9,936 for 2016/2017), plus an amount for each year of completed service ($4,969) with the employer. Indexation changes the tax-free limit on 1 July each year. Note that for this concessional tax treatment to apply, the employee must be less that 65 years of age a the time the redundancy payment is made.
The following payments are not included in a genuine redundancy payment – salary/wages/allowances owing for work already done or leave already taken for work completed; lump sum payments of unused annual leave or leave loading paid on termination of employment; lump sum payments of unused long service leave paid on termination of employment under a financial arrangement; or payments made in lieu of superannuation benefits.

SUPERANNUATION CHANGES
Upcoming superannuation changes will impact many thousands of Australians in 2017, and may require some forward planning on your part. The changes which have now been passed by Parliament are:
  • From 1 July 2017, only those with a superannuation account balance below $1.6 million will be able to make non concessional contributions
  • If you are eligible to make no-concessional contributions from 1 July 2017 (i.e. have an account balance below $1.6 million) you will be limited to $100,000 per annum (or $300,000 over three years using existing bring-forward rules). Up until this date, the cap remains at $180,000 or $540,000 over 3 years. Thus over the coming months taxpayers, who are contemplating making large non-concessional contributions may wish to consider bringing forward those contributions to before 1 July. If making a large contribution (e.g. you may have received an inheritance, or sold a property) this will enable you to deposit more money into the concessionally  taxed superannuation environment sooner, and enjoy those tax concessions from an earlier date.
  • Concessional contributions limit will from 1 July 2017 be reduced to $25,000 for all taxpayers. Currently, the limit is $30,000 (or $35,000 for taxpayers aged over 49)
  • Allowing all individuals eligible to contribute to superannuation a deduction for their personal contributions up to the concessional contributions limit, from 1 July 2017.
  • Taxing the earnings in respect of Transition to Retirement Income Streams (TRIS) at 15% (up from 0%) from 1 July 2017.
  • Reducing the income threshold at which taxpayers are charged an extra 15% tax on the concessional contributions from $3000,000 to $250,000 from 1  July 2017. 
INSTANT ASSET WRITE-OFF
With a sunset date of 30 June 2017, small businesses may wish to start considering bringing forward any planned asset investments to the next few months – particularity in this current low interest-rate environment. Up until 30 June 2017, Small Business Entities (SBE’s) can claim an immediate write-off for the acquisition of most depreciating assets used in their business if the asset cost less that $20,000.

PENSION AND ALLOWANCES CHANGES
On 1 January 2017, new rules for pension access will be applied. It is estimated more than 300,000 Australian will have their benefits reduced as a result Some forward planning may be required to replace any lost income. To be clear, these changes will affect all pensioners who are assets tested, or who are currently income tested but become asset tested including recipients of the Age Pension, Carer Payment, Disability Support Pension, Widow B Pension, and Wife Pension. The Asset Test Free Area is the amount of assets above which allowances are not paid and pensions are reduced. From 1 January 2017, the Full Pension Thresholds will increase. Only if your assets are below the thresholds will you be eligible for a full pension under 2017 assets test.

For the complete article, including case studies, please see your Jan/Feb 2017 ATR BiMonthly Update magazine, or log into your exclusive Members Area to read this article online. www.taxreporter.com.au/login

ATO Focus on Rental Property Owners

With Tax Time now here, the ATO is encouraging rental property owners to ensure that their deduction claims are accurate. It will be paying close attention to:

Excessive Interest Expense Claims
Your interest claim must be limited to interest you have actually paid from 1 July to 30 June on borrowed funds used to purchase the rental property.

Incorrect Apportionment of Rental Income and Expenses Between Owners
The way that rental income and expenses are divided between co-owners varies depending on whether the co-owners are joint tenants or tenants in common or there is a partnership carrying on a rental property business.
Co-owners who are not carrying on a rental property business (generally, it is very unlikely that a business is being carried on) must divide the income and expenses for the rental property in line with their legal interest in the property. If they own the property as:

  • Joint tenants, they each hold an equal interest in the property (therefore 50% of income, and 50% of expenses)
  • Tenants in common, they may hold unequal interests in the property. For example, one person may hold a 20% interest and the other an 80% interest.
Rental income and expenses must be attributed to each co-owner according to their legal interest in the property, irrespective of any agreement between co-owners, either oral or in writing, stating otherwise.

Homes That Are Genuinely Not Available For Rent
To claim rental property deductions, your property must either be being currently rented out, or be genuinely available for rent. In the case of the latter, the property must be habitable (for example, if you were carrying out major renovations this may render the property uninhabitable), and it would also be expected that you could produce evidence to show it being genuinely made available for rent (e.g. advertisements in newspapers, or listings with local real estate agents).

Incorrect Claims For Newly Purchase Properties
You cannot claim as a deduction acquisition costs such as Stamp Duty, conveyancing expenses, legal expenses). These costs form part of the property’s cost base and can only be taken into account for capital gains tax (CGT) purposes when you dispose of the property.
The other common expense that is not claimable as a deduction is initial repairs made to the property. If the repairs are performed just after the purchase of the property in preparation to rent it out, then they are considered to be initial repairs. These cannot be claimed as a rental property expense on your tax return. Instead they will form part of the cost base of the property and will reduce your capital gain (or increase your capital loss) when you sell the property.

REAL LIFE ATO CASE
Nancy recently purchased a rental property and had her tax return amended by the ATO to remove deductions for repairs, capital works and incorrectly apportioned borrowing expenses. Nancy had inappropriately claimed a deduction for repairs to defects present in a newly purchased property and the capital works, and borrowing expenses should have been spread over several years. Nancy also provided false receipts for property management fees undertaken by a family member.
Nancy was required to pay more than $57,000 back to the ATO as well as over $10,000 in penalties for making a false statement in her tax return.