Less known rental deductions

Please note that there have been amendments to law since this blog was posted, please refer to our blog Changes to Rental Property Deductions posted 29/11/17 for more information.

There are many common deductions that property owners are aware of, but here are a few of the less known rental deductions.

Special body corporate levies & contributions to strata sinking fund
Strata bodies sometimes charge additional amounts on top of the standard fees in order to pay for certain common area expenditure. These may be deductible, depending on the purpose of the levies.

Lenders mortgage insurance
Mortgage insurance is often required by banks where an investor has low equity in a property. The cost of the insurance is deductible over five years.

Package fees on borrowings
Lenders will often slug you with annual bank charges that are deductible in addition to the interest you are also paying.

Travel & airfares
Travel (especially airfares) comes under close attention by the Australian Taxation Office, but is a valid claim if the trip has the sole purpose of inspecting or repairing a property. If the travel also has a purpose outside of visiting the rental, you should keep a diary of events, and apportion some of the costs.

Phone cost and internet usage
A portion of your phone & internet may be deductible if you find yourself using both services in order to manage and maintain the property.

Prepaid interest
Lender’s allow you to prepay interest on your loan. This can be an effective tool in reducing tax in high income years. Note that the most you can deduct is up to 12 months of prepaid interest.

Depreciation & capital works 
Sole owners of property can claim capital expenditure items (new assets like fridges & dishwashers) outright if they cost less than $300. Where property is jointly owned, this doubles to $600 per item. If the property is relatively new, has some sizable renovations or is filled with furniture and appliances you paid for yourself it might be advantageous to have a professional depreciation report prepared.

Pro tip:
Many small business owners would be aware that they can claim assets costing up to $20,000 outright in the year that they purchase them. But many wouldn’t know that this deduction extends to assets they purchase for work related purposes or investment assets. So if you are a small business owner who also has a rental property, you may be entitled to these generous tax concessions for assets you acquire for your property.

Author: Nick Vincent
Email: nick@faj.com.au

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Capital Gains Tax and Building a House

There are a few tricks when it comes to capital gains tax and building a house on vacant land.

The vacant land can be treated as a main residence (therefore exempt from CGT) prior to the time you build, subject to a few conditions;

1) Within 4 years you construct your home
2) You move in as soon as practically possible
3) You live in the property for at least 3 months
4) Land is less than 2 hectares (20,000 square meters, 4.942 Acres)

The usual other rules apply such as not having more than one main residence at a time.

How do you make this election?
You don’t. When you ultimately sell your home you decide on how to treat the capital gain calculation. This means you will have the benefit of hindsight.

Pro Tip – Caution
Moving in as soon as possible is important. If you are overseas at the time the house is finished the ATO have deemed that not to be considered as soon as practically possible. The ATO will often consider ‘practical completion’ by a builder to be indicative of the time you can move in.

Author: Heather Cox
Email: heather@faj.com.au

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New audit rules for Clubs and Associations

From 1 July 2016, new audit rules for clubs and associations in WA will come into effect.

Are you ready? Do you need help understanding the rules?

Smaller incorporated associations – that is, clubs and associations with less than $250,000 revenue per annum – will have no requirement to undertake a review or audit of their financials (unless members vote otherwise).

Clubs and associations with a turnover between $250k to $1m will need their financials either reviewed or audited by a member of CPA Australia (CPA) or Chartered Accountants Australia and New Zealand (CA).

Clubs and associations with a turnover of $1m or more cannot select a review and must have an audit, and this audit must be performed by either a CA or CPA that holds a Public Practice Certificate, or a Registered Company Auditor.

It may seem like additional time, effort and expense to have an annual audit, but there are a number of reasons and benefits for having an audit conducted –

  • an audit of the financial records of the association ensures greater accountability to the members
  • the audit gives assurance that all funds received by the organisation have been correctly collected, documented and banked. It shows that all monies spent by the organisation were for the purpose of the association, approved by the management committee, and documented. Apart from anything else, this helps to protect management committee members against unfounded allegations of misconduct;
  • the audit provides an account of the assets of the association and verifies that records and registers are properly maintained;
  • the audit functions as a check and balance. It requires that the financial statements of the association be kept to a standard in order for the audit to occur and will indicate areas that may require improvement.

The FAJ Auditing team can complete your club’s audit quickly, professionally and at competitive cost.

Pro Tip

For additional information contact me directly via the email below. You can also refer to the following link that contains Questions and Answers in relation to the New Association Law – https://www.commerce.wa.gov.au/publications/new-association-law-questions-and-answers

Author: Daniel Papaphotis
Email: Daniel@faj.com.au

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Corporate or natural SMSF trustee?

Every Self Managed Super Fund (SMSF) must have a trustee (or trustees), but you need to make a choice as to whether to have a corporate or natural SMSF trustee.

One option is to have individual or “natural” trustees (i.e. the members). This comes with cheaper initial setup costs and marginally cheaper annual filing fees.

The second option is to appoint a corporate trustee (a company). Conversely this comes with a higher setup cost and marginally higher annual filing fees.

However there are some other key advantages with having a company as the trustee that far outweighs the additional costs. These include:

  • Ease of adding or reducing members. With a corporate trustee this is as simple as completing a member form and lodging a form with ASIC. With individual trustees, you will need to change the title of every asset (every shareholding, property, bank account etc.) and failure to do so can result in penalties.
  • Single members funds. Single member funds can have a corporate trustee with only one director, but a fund with individual trustees must have 2 trustees, even if there is only one member.
  • Separation of assets. SMSF law demands that the assets of a super fund are clearly kept separate from the assets of members. This is easy to do when the assets of the fund are in the name of a trustee company. However with natural trustees this is far more difficult, and means you must show the name of the super fund on titles as well as the name of the individual trustees. Currently land titles in WA do not allow this to happen, so further costly legal documentation may be required to satisfy the rules.
  • Reduced penalties. After recent changes penalties for non compliance have increased substantially. For example, a breach of the separation of assets rules (see above) for a fund with a corporate trustee will result in a total penalty of up to $1,800 per breach. Comparatively, individual trustees would receive a penalty of $1,800 per trustee (and note that the individual trustees must pay this personally, not from the assets of the fund). Penalties for other breaches (like lending to members) can be as high as $10,800 – so for a fund with 4 natural trustees, that’s $43,200 between them.
  • Succession. Funds with companies as the trustee can easily continue after the death of the members, whereas it’s more difficult and costly to keep funds with individual trustees continuing after death.

Pro tips

Having a company act solely as trustee for your super fund (i.e. not acting as trustee for any other trusts or businesses) reduces the current annual ASIC filing fee from $246 to $46.

It may be tempting to save initial costs by using an individual trustee, but our experience says it is far better to have a corporate trustee right from the start. Changing at a later date is possible, but comes with a cost and a frustrating administrative experience.

Author: Natasha Piccoli
Email: Natasha@faj.com.au

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Wine tasting – can it be tax deductible?

Generally the Australian Taxation Office considers the purchase of wine for tasting purposes to be a private expense and therefore non deductible.

For expenses to be considered deductible they need to follow two general rules:

• Firstly, was this expense incurred in gaining or producing assessable income? Or
• Was this outgoing relevant to the gaining of assessable income?

If the answer is no, then your expense is likely to be considered as private and therefore non deductible.

The courts have considered this in various cases over the years. In one case a food and beverage analyst, who’s main role was compiling new wine lists for restaurants was denied a deduction for several mixed cases of wine purchased for wine tasting at home. The taxpayers employer did not require them to incur the expenditure (although they did help to arrange a discount price). The taxpayer consumed a quarter of the bottle for tasting and the remainder for private use. The court determined even though the tasting may help the taxpayer perform their duties, the expenditure was not necessarily incurred in order to earn their income, and did not have a sufficient connection to earning that income.

Where a business (e.g. a licenced restaurant) owner incurs expenses for wine tasting, it is more likely to have a connection to business income and be deductible, especially where the wine is tasted at the business premises, whether by the business owner or their staff.

Author: Georgia Burgess
Email: Georgia@faj.com.au

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New tax rules for property sales above $2m from 1 July 2016

Edit – these rules have changed from 1 July 2017 and now apply to property valued at $750,000 or more, and the withholding rate is 12.5%.

The ATO has introduced a new rule for Australian residents buying or selling property valued at $2 million or more.

So how does this work?

The ATO wants any Australian Resident who purchases Australian property to withhold 10% of the purchase price and remit this to the ATO.

The exception to this is if the seller provides the purchaser with a “clearance certificate” on or before the day of settlement.
The clearance certificate is designed to provide the ATO with the information to determine the seller’s tax residency status and whether or not the 10% withholding tax should apply.

How do you obtain a clearance certificate?

A PDF version of the form is available through the ATO website and once completed, the original should be faxed or posted to the ATO and a copy retained. Clearance certificates are valid for 12 months from the date of issue.

How will the credit for the withholding tax be claimed?

Assuming the purchaser pays the amount to the ATO, the ATO will notify the seller that the payment has been received. If the seller provides their TFN to the purchaser then the ATO can easily match the payments when the purchaser lodges the “purchaser payment notification”. The purchaser payment notification is the form the purchaser lodges with the ATO along with the 10% withholding tax.

In Summary.

  • Sellers and purchasers of Australian property or other CGT asset on or after the 1st July 2016 will have to comply with these new rules.
  • Whether or not an amount needs to be withheld and the entire process that follows will depend entirely on the tax residency of the seller.
  • The 10% withholding amount is calculated based on the market value of the property.
  • Ignorance of the rules doesn’t appear to be an excuse and if a purchaser fails to remit to the ATO the amount they should have withheld, the ATO will apply a penalty equal to that amount. (also subject to interest)
  • If the purchaser doesn’t remit the amount withheld to the ATO then the seller will not be entitled to a credit when they submit their tax return.
    The ATO would then pursue the seller for any amount not remitted to the ATO by the due date

Further information can be sought from the ATO directly, real estate agents, conveyances’ or legal practitioners.

Author: Adrian Wardlaw
Email: adrian@faj.com.au

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Personal Property Securities Act (PPSA) – friend or foe (part 2)?

My accountant set up a separate company to own equipment, so I am safe…aren’t I?
If your equipment is not registered under the Personal Property Securities Act (PPSA )it is not safe. If you operate a trading business using equipment owned by another related entity under a hire or lease arrangement you are still at risk of these assets forming part of the pool of assets to be liquidated. If the insolvent trading business is in possession of the related entities equipment, its administrators will treat the equipment as ‘fair game’ and it will be sold off to pay the trading businesses creditors.

In house asset holding entity arrangements do not attract different rules or special treatment. The asset holding company needs to record its interest in the equipment on the PPS Register. If the trading entity on-hires the equipment, the trading company also needs to register its interest in the equipment.

I have correctly registered my equipment and goods. My client becomes insolvent. What happens next?
The appointed Insolvency Practitioner will perform a search of the PPS Register and will identify your registration of your interest in your property. If your registration is correct the Insolvency Practitioner will contact you to ascertain the interest you have in the property you’re claiming.

You will need to produce a written agreement between you and the insolvent customer (hire or sale agreement, terms of trade etc). You will also have to identify your equipment/goods and be able to match them to unpaid invoices or other agreements.

If all is in order the Insolvency Practitioner will return the hire equipment to you.

The recovery process for suppliers retaining title to the goods they’ve sold may be more complicated. Such suppliers have a secured interest in:
• any goods still on hand;
• any work in progress where the supplied goods have been attached to, comingled or manufactured with other goods;
• any debts due to the insolvent customer from the sale of the suppliers goods.

For example, First Steel supplies $75,000 of steel to a fabricator. On the fabricators collapse First Steel is:
• Now a secured creditor over the $10,000 steel stocks still on hand;
• Now a secured creditor over the fabricated work in progress of $15,000.
• Now a secured creditor over the fabricators outstanding debtors where First Steel’s steel was used.

How much does it cost to register and how do I register?
Most suppliers can obtain 7 years protection for $6.80 per customer (less than $1/year). One registration is enough to cover all future supplies, so it couldn’t be simpler. You prepare the registrations on line. First you need to create an account and then register assets/customers on line.

A word of warning: the PPSA is not a DIY project. Many businesses doing it themselves may be doing it incorrectly.

For more complex registrations you may need to use a consultant. We recommend EDX (WA) Pty Ltd who are experts in the personal property securities area. Contact simon.read@edxppsr.com.au

Author: Adrian Wardlaw
Email: Adrian@faj.com.au

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Personal Property Securities Act (PPSA) – friend or foe (part 1)?

You hire equipment to a mining company which goes into administration. The Administrator then sells your equipment and uses the proceeds to pay the mining company’s creditors. Can they really do this? The answer is yes, unless you have fully complied with the Personal Property Securities Act (PPSA).

What is the PPSA?
The PPSA introduces legislation enabling business’ to take security over the equipment you hire out or the goods you sell on credit terms with the ultimate goal of protecting your interest in your goods and equipment in the event your customer becomes insolvent. Your customers and your equipment will then be listed on the Personal Property Securities Register (PPS Register). Similar to how a bank registers a mortgage on a title to a property that they have lent money for.

Why do I need to register?
The main question is, “Why do I need to register my ‘equipment on hire’ or the customers who I have sold goods to”? The answer is to retain ownership in your property and protect your property from forming part of the pool of assets which may be lost in the event your customer becomes insolvent.
If liquidators are brought in, they would salvage what they can and pay the debts first to people and entities with priority and finally to unsecured creditors. If you have not registered under the PPSA you will be an unsecured creditor. If you have registered you’ll be one of the priority creditors.
For example a business hiring equipment is critically exposed to the PPSA and faces the loss of its equipment on the insolvency of the customer. The solution is simple, comply with the PPSA.

A business selling goods on credit terms can now take security over the goods.

Who does this apply to?
This can be relevant to potentially anyone who is in business and sells goods, has hire arrangements, has equipment loan arrangements or even businesses who provide equipment as part of a service.

Unfortunately the PPSA has changed the concept of ownership to one where possession will often trump ownership.

The most vulnerable are businesses who hire equipment out beyond one year or in an open ended agreement. For such businesses the PPSA creates a high degree of risk. A failure to comply with the PPSA when you should will result in the loss of your equipment, even though you own it. If your customer collapses whilst in possession of your equipment it becomes their property.

Whilst the PPSA is bad news for hirers it is fantastic news for anyone selling goods on credit. The PPSA has given legislative backing to the historical ‘retention of title’. Suppliers complying with the PPSA significantly improve the likelihood of recovering goods or their value on the insolvency of a customer.

Any of these types of businesses who have customers in vulnerable industries are particularly at risk. At the moment the natural resource sector is generally unstable. Similarly, the construction industry is having its own challenges. The scary thing is that, most of us do not know what types of business will be in trouble tomorrow. Simple law changes can decimate an industry. The downfall of the mining industry can have flow on effects in other industries that are heavily reliant on the mining sector. On that basis I would consider the business that makes the machinery that supplies the equipment to the mining entities vulnerable.

In my next blog I’ll discuss equipment hired to related parties, what happens when a client becomes insolvent and how to register.

Author: Adrian Wardlaw
Email: Adrian@faj.com.au

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You need to act soon with collectables in your Super Fund

From 1 July 2016 the rules are changing for SMSFs that hold collectables, and you might need to act soon to avoid some significant penalties (up to $1800 per breach).

The rules apply where funds hold assets like artwork, jewellery, rare coins or sporting memorabilia. From 1 July 2016 the fund must document the decision on where the item is stored (it can’t be displayed or used by anyone related to the fund), and it must be insured in the super fund’s name.

Additionally the existing rules still apply – the asset can’t be leased to anyone related to the fund, and it can’t be stored at a private residence of anyone related.

The rules are not impossible to comply with, but for most funds, especially those with low value collectables, it’s probably going to be easier to sell the asset out of the fund before this date.

The sale can be to a related party, as long as it is valued independently by someone qualified (but not necessarily licensed) to make the valuation.

Pro tips

If the collectables in your super fund were acquired before 1 July 2011 the asset can be sold without an independent qualified valuation, but still must be at market value.

If a member is over preservation age, the asset can be transferred to the member as a lump sum or pension payment.

Author: Natasha Piccoli
Email: Natasha@faj.com.au

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Sole Trader Contributing to Super

As a sole trader you do not have an obligation to contribute money into super each year for yourself, but if you choose to contribute you may be entitled to a tax deduction.

To be eligible to claim a super deduction you need to contribute to a complying super fund and advise your super fund that you intend to claim a tax deduction equal to your super contributions.

Under current laws you also need to ensure that less than 10% of your income for the year comes from salary and wages (the 10% rule). This is tested on a yearly basis, so you can get caught in a situation where your employment income increases at the end of the financial year to the point where it disallows your contributions made earlier.

Pro Tips:

  • The easiest way to side-step the 10% issue is to salary sacrifice any wages you have to super. This is a safe way of making sure you get the tax benefit of contributing to super.
  • At the recent budget the government announced changes to scrap the 10% rule from 1 July 2017. Until then you will still need to ensure you meet these rules.

Author: Brigette Liddelow
Email: brigette@faj.com.au

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