Changes to rental property deductions

The 2017 federal budget introduced a number of changes to rental property deductions. The proposed changes are to prevent taxpayers from exploiting certain deductions and also to decrease the impact of negative gearing.

From 1 July 2017 deductions for travel expenses for inspecting and maintaining a residential property will not be allowed. This includes all types of travel whether it be via car to collect rent or travel interstate to the property for an inspection. This proposed change will only affect travel by the owner. Costs undertaken by a property manager to inspect the property is still deductible.

Also as of 1 July 2017 there will be a limit to plant and equipment depreciation deductions incurred by investors in residential real estate. Investors who purchase plant and equipment after 9 May 2017 will be able to claim depreciation over the useful life of the asset (as per normal). However, after 9 May 2017 you must have purchased the asset yourself to be able to claim depreciation on the asset. This means if you received the asset on purchase of the property and the previous owner paid for the asset, you can no longer claim depreciation on those assets. This proposed change only applies to ‘plant & equipment’ items, this usually means the asset can be easily moved and is not fixed to the property e.g. dishwasher & ceiling fans.

The proposed two changes will only apply to residential properties. Travel to non residential investment properties (business facilities, factories) is still claimable as before.

Author: Rhys Frewin
Email: rhys@faj.com.au

Employee travel expenses

Employees can claim a deduction for travel expenditure if they incur the expense in gaining and producing their assessable income and if the expense is not of a capital, private or domestic nature.

To work out if you might be eligible to claim a tax deduction for your employee travel expenses answer the below questions:
a) Do your work activities require you to undertake the travel?
b) Are you paid directly or indirectly to take the travel?
c) Are you subject to the direction and control of your employer whilst you are travelling?

If you answered yes to all of the above questions, then you are considered to be undertaking work related travel from a tax perspective.

The types of expenses you can claim for work related travel include meals, accommodation expenses and the cost of transport whilst undertaking the travel such as taxis, ubers and parking expenses. It is essential to keep your receipts of all such expenses in order to claim these in your tax return.

PRO TIP: Travel taken to commence work is considered to be preliminary to the work and therefore not deductible. This is one of the common misconceptions when it comes to travel deductibility. Travel taken by FIFO workers usually falls into this category.

Paid a travel allowance while away?
If you are paid a travel allowance that is expected to cover your expenses while travelling you may be able to rely on the tax offices daily rates for food, accommodation and incidentals without needing to maintain original receipts however only under the circumstance that you are legitimately incurring those expenses.

PRO TIP: Keep a record of the days spent away and the locations you traveled to if you were paid a travel allowance and even if you have kept all your receipts we can determine which method will net you the highest claim.

Author: Brianna Barrett
Email: brianna@faj.com.au

Allowing catch up concessional contributions

Tax deductible contributions made into super are known as concessional contributions and are subject to an annual limit (cap). Concessional contributions include those made by your employer under the super guarantee system, contributions made as part of a salary sacrifice, or personal contributions where you are entitled to claim a tax deduction.

From 1 July 2017, the concessional contributions cap has been reduced to $25,000 for all individuals, regardless of their age. Even individuals aged 50 or more (who were subject to a $35,000 annual concessional contributions cap under the old rules) will now be subject to the lower $25,000 concessional contributions cap.

Additionally, effective from 1 July 2018 – if your superannuation account balance (or combined balances if you have more than one superannuation account) is $500,000 or less at the end of a financial year, then you will have the opportunity to utilise the unused portions of your concessional caps from previous years (up to 5 years worth) in the following financial year, or future years. These are known as catch up concessional contributions.

Carrying forward unused portions of concessional contributions may benefit many individuals, especially those who have had breaks in employment and wish to catch up on previous years.

For example – Jessica has a combined superannuation balance of $200,000 but did not make any concessional contributions in the 2018/2019 financial year as she took time off work to care for her newborn child.

In the 2019/2020 financial year she has the ability to contribute up to $50,000 of concessional contributions into her superannuation account – $25,000 under the annual concessional cap and $25,000 from her unused 2018/2019 cap which has been rolled over.

PRO TIP:

Catch up concessional contributions can be particularly effective to reduce income tax payable in higher income years – for instance when a capital gain exists following the sale of an asset.

Author: Natasha Woodvine
Email: natasha@faj.com.au

The sharing economy and taxation

What is the sharing economy?
The sharing economy connects buyers (users) and sellers (providers) through a facilitator who usually operates an app or a website. There are many sharing economy websites and apps.

Common platforms/situations include:
• Uber and other ride sourcing services
• Uber Eats
• Airtasker
• Deliveroo
• Air BnB
• Stayz
• Privately renting out a room or your whole home
• Renting out parking spaces
• Creative and professional services – eg graphic design or creating websites

What are your income tax obligations?
If you use any of the above platforms or have similar situations you are obliged to declare the income in your tax return. The flipside to this is when you declare the income you can also claim expenses incurred to produce this income.

Do I need to register for GST?
If your annual turnover is below $75,000 you do not need to register for GST. If your turnover is, or is projected to be, $75,000 or more per year, you will need to get an ABN and register for GST. However an exception to this rule is if you are carrying on a ride sourcing service. These are considered a taxi service and subsequently you must register for GST as soon as you start operating, i.e. from the first $1 you earn.

What deductions can I claim?
You can claim income tax deductions relating to income you earn.
To claim a deduction:
• you must have spent the money and not been reimbursed
• the costs must relate to doing your job and can’t be a private expense (such as travel from home to the job)
• work out how much of the total expense is for your business and how much is for personal use
• you must keep appropriate records to prove your claim.

Any fees or commissions charged by a sharing economy facilitator can be claimed as a deduction.

Other deductions will depend on the goods or services you are providing.

What records do I need to keep?
• statements showing income from your facilitators
• receipts of any expenses you want to claim deductions for
• logbooks of odometer readings

Consider using the FAJ app to maintain digital copies of deductions. This can be downloaded from the Play Store and the App Store.

Author: Tessa Jachmann
Email: tessa@faj.com.au

Reducing FBT with the otherwise deductible rule

Non-cash benefits given to an employee by their employer are known as fringe benefits. These benefits are generally subject to Fringe Benefits Tax (FBT) which the employer pays but will often factor into the employee’s package. However there are exemptions and concessions that can reduce or eliminate the amount of FBT payable. An example of one of these concessions is known as the otherwise deductible rule.

The otherwise deductible rule allows the FBT to be reduced to the extent that the employee would have been entitled to claim a tax deduction for the benefit, had the employer not paid for it.

Examples of benefits that the otherwise deductible rule might apply to include expense payments, loan interest, airline transport, board, property, and residual fringe benefits. For instance, your employer might pay for the interest on a loan that relates to your rental property.

In most cases, to be able to utilise the otherwise deductible rule a logbook or some other declaration is required to be maintained and provided to the employer for lodgment of the annual FBT return.

The true benefit of using the otherwise deductible rule can come about in a situation where an employee has a high amount of negatively geared property or investments. Investment losses are added back by the ATO for the purposes of Div 293 tax, health insurance rebates and a number of other income thresholds, which can result in a higher tax assessment.

In some circumstances an employee may be able to save tax by salary sacrificing wages and asking their employer to pay interest on an investment loan. This results in no change to your taxable income, but eliminates the “add-backs” for the adjusted income used for the various thresholds.

PRO TIP:
A crucial part of the application of the otherwise deductible rule is that the tax deduction must be a once only deduction – meaning a deduction spread over a number of years won’t qualify. Therefore if an employee would have claimed a deduction for depreciation for a benefit provided by their employer, the otherwise deductible concession won’t be available for that benefit.

Author: Tessa Jachmann
Email: tessa@faj.com.au

Medicare levy increase

Changes will be made to the Medicare Levy starting from July 1, 2019 when it will rise from the current 2% to 2.5%. The Medicare levy increase will raise an estimated $8.5 billion across the first three years from induction to ensure the National Disability Insurance Scheme is sufficiently funded.

However, there will be continued relief for low income earners. Increases to the low income threshold (where no levy is payable) are as follows, $21,655 for singles, $36,541 for families and $34,244 for seniors (effective from the 1st of July 2017). These changes are to adjust for increases in CPI.

Pro Tip:
Looking to reduce the impact of the Medicare levy increase? If you can bring forward income such as capital gains prior to July 1, 2019 or hold expenses till after July 1, 2019 you may be able to avoid the additional levy.

Author: Lachlan Hunn
Email: lachlan@faj.com.au

Changes to small business concession thresholds

As of the 1st of July 2017, several of the small business concession thresholds that allow small businesses access to a range of concessions have increased, allowing more businesses to take advantage of various small business tax concessions.

The turnover threshold level used to determine whether you are considered to be a small business entity has increased from $2 million to $10 million for the 2017 financial year. An entity is considered to be a small business if the aggregated turnover for the current year is actually or likely to be less than $10 million, of if the turnover was actually less than $10 million in the previous year. You must also satisfy the criteria of having carried on a business during the year to be recognised as a small business.

Small businesses have access to the simplified depreciation rules if their turnover is under $10 million.  This means they can immediately write off the value of assets up to $20,000 (until 30th June 2018). They also have access to lower company tax rates, simplified trading stock rules and an immediate deduction for prepaid expenses.

However the $10 million threshold doesn’t apply for all available concessions. For example access yo the small business CGT concessions are only available to small businesses whose turnover is under $2 million.

Also small businesses that have an aggregated turnover of $5 million or less are entitled to claim the Small Business Income Tax Offset. This offset reduces the amount of tax payable on business income. The rate of this offset has increased from 5% to 8% in the 2017 financial year, but it is still capped at $1,000.

Pro Tip:
If you are a sole trader or partnership and the income you received is considered to be Personal Services Income, you are not eligible for the Small Business Income Tax Offset, unless you are considered to be a Personal Services Business.

Author:  Tessa Jachmann
Email:  tessa@faj.com.au

First home buyers super saving scheme

Buying your first home is a milestone in anyone’s life. However, with housing prices, saving a large enough deposit can seem unmanageable. This is why in the 2017 Budget the Government announced a scheme to help first home buyers boost their deposit savings through superannuation.

How will the Scheme work?
From 1 July 2017 first home buyers can make voluntary contributions of up to $15,000 per year and $30,000 in total into your super. The contributions can be made through a salary sacrifice arrangement or if you are a sole trader, a personal contribution for which you claim a deduction. Voluntary contributions must still be made within existing superannuation caps – $25,000 for concessional contributions in 2017/18 (i.e. Contributions from super guarantee and salary sacrifice contributions). From 1 July 2018 you will then be allowed to withdraw the contributions, along with deemed earnings, to use on a first home deposit.

Where does the boost in savings come from?
The contributions are effectively pre-tax income. However, when the contributions hit your super fund they are taxed at 15%. The withdrawal of the contributions will be taxed at your marginal tax rate less 30% offset. This effectively means you will not pay any more than 15% tax on your income that is used for a deposit. Compare this with someone earning $60,000 and is in the 32.5% tax bracket. The savings they will put towards their deposit is taxed at 32.5%. Using the super scheme could result in a few extra thousand for a deposit.

Don’t contribute just yet?
Although you could have started contributing from 1 July 2017; the government have not yet legislated the scheme and it is unclear if it will pass through parliament. If it does not pass, those using the savers scheme might have their contributions held in super until retirement. However, if you don’t mind taking the risk, talk to your payroll to discuss salary sacrificing into super.

Author: Allan Edmunds
Email: allan@faj.com.au

Working holiday makers

People who come to Australia on a “working holiday” are taxed at higher rates than Australian residents, meaning they do not get the same benefit of the tax-free threshold.

However, from 1 January 2017, working holiday makers will pay tax at 15% for taxable income up to $37,000, instead of the higher non-resident tax rates.

Am I a Working Holiday Maker?

You will pay tax at the working holiday maker rates if you hold either a:
1. Subclass 417 Working Holiday Visa
2. Subclass 462 Work and Holiday Visa
3. Certain bridging visas.

Which bridging visa’s allow me to pay tax at working holiday maker rates?

A bridging visa that permits you to work in Australia will allow you to access the lower rates if:

  • The bridging visa was granted in relation to a subclass 417 or 462 visa, and
  • you are still waiting for a decision to be made on your application, and
  • your most recent visa (other than your bridging visa) was a subclass 417 or 462 visa.

What is my “working holiday taxable income”?
Your working holiday taxable income is derived from all assessable income from sources in Australia while qualifying as a working holiday maker, less deductions relating to working holiday income.

PRO TIP:
As the working holiday maker tax rules only apply from 1 January 2017, the rates of tax payable will differ for working holiday makers, depending on whether or not Australian sourced income was derived before or after 1 January 2017. If a working holiday maker worked for the same employer before and after 1 January 2017, the employer will need to issue two separate PAYG summaries for the employee for the 2017 financial year to distinguish the income earned in each period.

Author: Rhys Frewin
Email: rhys@faj.com.au

Work related expense crackdown by the ATO

The Australian Taxation Office’s (ATO) ability to check work related expense claims (including incorrect and unusually high claims) has become more sophisticated through the use of technology and data analysis which increases its audit coverage of individual taxpayers. This is predominantly through the ATO’s data matching programs (for example matching data from state titles offices to capital gains declared in tax returns).

In identifying higher than expected work-related expense claims, the ATO will be comparing a taxpayer’s claims on the return against claims made by taxpayers in similar circumstances (i.e., taxpayers working in a similar occupation and earning a similar level of salary income).

Where the ATO identifies that a taxpayer’s work-related expense claims are unusually high, the ATO may contact the taxpayer’s employer to obtain more information about the taxpayer’s circumstances, including:

  • any allowances paid by the employer to the employee;
  • the nature of the employee’s duties relative to their claim;
  • whether the employee was required to undertake any travel in relation to their work; and
  • whether the employee was reimbursed by their employer for the relevant expenses.

Where information provided by an employer indicates that a taxpayer’s claims were incorrect, the taxpayer’s claims will be further investigated and adjustments potentially made. So it’s important to make sure that all claims are reasonable, but it’s equally as important that all legitimate claims are made and that supporting evidence is available to support your claims.

Author: Shaun Coelho
Email: shaun@faj.com.au