This article offers readers a range of tax tips. Areas covered include CGT tips for home-based business owners, improved depreciation rules for primary producers, the key to applying the small business CGT concessions and more.
For the many of you that have home-based businesses, the ATO has recently updated information on its website regarding claimable expenses. Only if you have a home-based business are you permitted to claim occupancy expenses such as mortgage interest, rent, house insurance, rates etc. To qualify as a home-based business you will need to meet one of the following criteria:-
- You work at home – that is, you carry out most of the business' work at your home. For example, a dressmaker who does all their work at home, with clients coming to their home for fittings.
- You work from home – that is, your business does not own or rent any premises other than your home. For example, a tiler who does most of their work on clients' premises but does not have any other business premises.
In addition to this you would also need to show that an area of your home was set aside exclusively for business purposes. The downside of claiming occupancy expenses (mortgage interest, rent, house insurance, rates etc) is that when it comes time to sell your home you may lose the main residence exemption from CGT on the portion of your property used in your business. To this end, if you're contemplating buying a new family home, consider acquiring it in your spouse's name if you are intending to use it for business purposes. By doing so, you may be able to retain the full CGT exemption. However, in these circumstances, interest expenses incurred on monies borrowed by the spouse (or other family member) to acquire the property (or an ownership interest in it) will not be deductible, because the spouse (or other family member) is not using the property themselves for income-earning purposes.
As announced in the 2015 Federal Budget, non-residents who have a HELP debt (formerly known as HECS) will from 1 July 2017 be forced to make compulsory repayments as though they were a resident. As under the HELP regime for residents, the more the person earns, the larger the compulsory annual repayment amount will be. To date draft legislation to enact this measurement has not been released, thus there is little detail as to what income test will be used (it will need to be different to that which applies to residents) & what enforcement mechanisms will be put into place.
However, what is known to date is that:
- The new non-resident regime applies to all existing or future HELP debts
- Legislation will commence on 1 January 2016, with the first compulsory repayments to be made from 1 July 2017, based on 2016/2017 income.
- Debtors must register with the ATO through MyGov. Those already overseas have until 1 July 2017 to register. Those leaving for Australia after the measure commences (1 January 2016) will need to register before they leave.
On a broader level, for those who have HELP debts (whether residents or non-residents) we offer the following tips on managing your debt:
- The bonus for making a voluntary repayment (in contrast to a compulsory repayment which may be deducted from your salary each pay period) of $500 or more is now down to just 5% (it once stood at 15%). That is, if you make a voluntary repayment of $1000 for example, the ATO will deduct $1,050 off your debt ($1000 +5%).
- No interest is applied on your outstanding debt, however debts are indexed on 1 June each year in line with the Consumer Price Index (CPI). Last year for instance, the CPI figure was 2.1% (thus outstanding debts increased by this amount). Therefore, your debt will increase each year on this date. This itself provides an incentive to pay your debt off as quickly as possible – perhaps by making a voluntary payment.
- If you are contemplating making a voluntary repayment, we recommend doing it in a single large lump sum rather than smaller amounts over multiple payments. The bigger the single voluntary repayment, the bigger the 5% bonus (provided the payment is $500 or more).
- Compulsory HELP repayments can be a significant impost. If you are a relatively low income earner of $55,000 for example, you may be required to pay an extra 4% tax under the current repayment thresholds. If you earn over $100,000, compulsory HELP repayments can be as high as 8% of your income. What is not known by many people is that you can defer your compulsory repayments if making those repayments would: (a) cause you serious financial hardship or (b) there are other special circumstances affecting you (e.g. natural disasters, or death or serious illness in the family that requires you to travel). To apply for a deferral, you should contact the ATO.
- The amounts that are deducted from your salary each year are subtracted from your debt balance when you lodge your tax return following the end of the previous financial year. Therefore, if you are contemplating paying out your HELP debt by making a voluntary repayment, we recommend doing so before you lodge your tax return, otherwise you may not get the benefit of the 5% bonus – as per the following example:
EXAMPLEIn June 2016, Doug has a remaining HELP debt of $6,000. In 2015/2016, Doug's income for HELP repayment purposes is $90,000, and accordingly he has had $6,300 withheld by his employer during the year. Nearing the end of 2015/2016, Doug decides to pay out the full $6,000 via a voluntary repayment of $5,715 (+5% bonus of $285). The timing of the voluntary payment is important as follows:A) PAYMENT MADE FOLLOWING LODGEMENT OF 2015/2016 TAX RETURNIf Doug makes the voluntary payment following the lodgement of his tax return, the debt will have been reduced to nil as the $6,300 PAYG will have been applied. There is no 5% bonus applied to compulsory repayments. Therefore, Doug has missed out on the $285 bonus, and his voluntary repayment of $6,000 will be refunded.B) PAYMENT MADE BEFORE THE LODGEMENT OF THE TAX RETURNIf Doug makes the voluntary payment before lodgement of his return, then Doug will get the benefit of the $285 bonus, and the $6,300 PAYG that has been withheld will be applied as a credit on his tax assessment and, all other things being equal, may be refunded to him when his tax return is lodged. By receiving the 5% bonus, Doug is $285 better off than under Scenario A.C) PAYMENT MADE BEFORE 1 JUNE 2016Doug will avoid indexation if he makes the payment before this date. Assuming an annual indexation rate the same as last year, this would mean Doug would save $126 more compared to Scenario B (or $411 compared to Scenario A).
CGT CONCESSIONS – STARTING POINT
Last income year alone, more than $12 billion of concessions were claimed under the CGT Small Business Concessions, allowing business owners to dramatically reduce & in some cases eliminate CGT on the sale of business assets (including their entire business). There's no doubt, particularly where there are multiple entities involved, applying the concessions can prove complex. However, you can make this process considerably easier if you establish the following two points right from the outset:
1. Who Actually Owns the CGT Asset That Has Given Rise to the Capital Gain?
This question is important in determining whether the taxpayer qualifies for the concessions in the first place by satisfying either the $6 million Net Asset Value Test or the $2 million Turnover Test. These two tests require the aggregation of the net value of assets or turnovers of the taxpayer plus affiliates & connected entities respectively. Without first determining who owns the asset, it is impossible to work your way through these concepts. Therefore, when starting out, it's essential to correctly establish ownership of the asset giving rise to the gain – is the asset owned by an individual, a trust, a beneficiary of the trust, a company, or a shareholder of the company?
2. What is the Asset That Gives Rise to the Capital Gains?
This sounds obvious. But, for example, is the asset being sold, owned by a company, or is its shares in the company owned by the shareholder? In the latter case, additional conditions will need to be met before the concessions can be applied. Being clear on this question is also important for the purposes of establishing any entitlement to the time-based concessions such as the 50% discount, the Active Asset Reduction & the 15-Year Exemption.
Without being clear in your mind about the above two questions, applying the CGT Small Business Concessions correctly becomes impossible. Use these two key questions as your starting point – and refer back to them when applying the concessions.
BONANZA FOR PRIMARY PRODUCERS
While much of the attention in the recent Federal Budget surrounding depreciation was focused on the $20,000 small business write-off, primary producers were also big winners on the depreciation front. The following table summarises the new rules that apply to assets that primary producers start to hold, or to expenditure incurred, at or after 7.30pm on 12 May 2015 which have now been passed by Parliament.
|OLD LAW||NEW LAW|
Primary producers may deduct capital expenditures on a fodder storage asset (1) over the effective life of the asset (this could be between 10 to 50 years depending on the asset)*
Primary producers may deduct capital expenditure on a water facility (2) over three years*
Primary producers may deduct capital expenditure on a fencing asset (3) over the effective life of the asset (this could be up to 30 years depending on the asset)*
Primary producers may deduct capital expenditure on a fodder storage asset over 3 years
Primary producers may deduct capital expenditure on a water facility in the year in which the expenditure is incurred
Primary producers may deduct capital expenditure on a fencing asset in the year in which the expenditure is incurred
*Primary producers that are small business entities may be able to choose to depreciate this expenditure over a shorter timeframe
- Fodder storage asset is defined as an asset that is primarily & principally for the purpose of storing fodder (including extensions & improvements). Common examples of fodder storage assets include silos, liquid feed supplement storage tanks, bins for storing dried grain, hay sheds, grain storage sheds & above-ground bunkers for silage. 'Fodder' refers to food for livestock, usually dried, such as grain, hay or silage.
- Water facilities include dams, earth tanks, underground tanks concrete or metal tanks, tank stands, bores, wells, irrigation channels or similar improvements, pipes, pumps, water towers, windmills (or extensions or improvements to any of these).
- Fencing asset is an asset or structural improvement that is a fence, or a repair of a capital nature, or an alteration, addition or extension, to a fence. The term 'fence' takes its ordinary meaning & includes an enclosure or barrier, usually of metal or wood, as around or along a field, or paddock. It also extends to parts or components of a fence including, but not limited to, posts, rails, wire, droppers, gates, fittings & anchor assemblies.
TAX TIP – INTERACTION WITH SMALL BUSINESS DEPRECIATION RULES
Instead of using the above new rules, primary producers that are small business entities (SBEs) may choose, on an asset-by-asset basis, to claim depreciation on the above expenditure by using the standard SBE depreciation rules – whichever results in a more favourable outcome.