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Christmas reminders for the Festive Season


W
ith the well-earned December/January holiday season on the way, many employers will be planning to reward staff with a celebratory party or event.
 
While keeping it fun and festive, we encourage you plan appropriately for any possible FBT and income tax implications of providing entertainment (including Christmas parties) to staff and clients.

FBT and 'Entertainment Expenses'

Under the FBT Act, employers must choose how they calculate their FBT meal entertainment liability, and most use either the 'actual method' or the '50/50 method'.

Under the actual method, entertainment costs are normally split up between employees (and their family) and non-employees (e.g., clients and suppliers).

Such expenditure on employees is deductible and liable to FBT.  Expenditure on non-employees is not liable to FBT and not tax deductible.

Using the 50/50 method instead?

Rather than apportion meal entertainment expenditure on the basis of actual attendance by staff, etc., many employers choose to use the more simple 50/50 method.

Under this method (irrespective of where the party is held or who attends) – 50% of the total expenditure is subject to FBT and 50% is tax deductible.

Here are the "traps" to consider: 

1 - Even if the function is held on the employer's premises – food and drink provided to employees is not exempt from FBT;
2 -  the minor benefit exemption* cannot apply;   and
3 -  the general taxi travel exemption (for travel to or from the employer's premises ) also apply.

(*) Minor benefit exemption
The minor benefit exemption provides an exemption from FBT for most benefits of 'less than $300' that are provided to employees (and their family/associates) on an infrequent and irregular basis.

The ATO accepts that different benefits provided at, or about, the same time (such as a Christmas party and gift) are not added together when applying this threshold.

However, entertainment expenditure that is FBT exempt is also not deductible.

Editor:  And 'less than' $300 means no more than $299.99!  A $300 gift to an employee will be caught for FBT, whereas a $299 gift may be exempt.

Example: Christmas Party

An employer holds a Christmas party for its employees and their spouses – 40 attendees in all.

The cost of food and drink per person is $250 and no other benefits are provided. 

If the actual method is used: 

·         For all 40 employees and their spouses – no FBT is payable (i.e., by applying the minor benefit exemption), however, the party expenditure is not tax deductible.

If the 50/50 method is used:

·         The expenditure is $10,000, so $5,000 (i.e., 50%) is liable to FBT and tax deductible.

 CHRISTMAS GIFTS

Editor:  When rewarding employees and loyal clients/customers/suppliers it is important to understand how gifts to staff and clients, etc., are handled 'tax-wise'. 

Gifts that are not considered to be entertainment

These generally include, for example, a Christmas hamper, a bottle of whisky or wine, gift vouchers, a bottle of perfume, flowers, a pen set, etc.  

Briefly, the general FBT and income tax consequences for these gifts are as follows:

  • gifts to employees and their family members – are liable to FBT (except where the 'less than $300' minor benefit exemption applies) and tax deductible; and
  • gifts to clients, suppliers, etc. – no FBT, and tax deductible.

Gifts that are considered to be entertainment

These generally include, for example, tickets to attend the theatre, a live play, sporting event, movie or the like, a holiday airline ticket, or an admission ticket to an amusement centre. 

Briefly, the general FBT and income tax consequences for these gifts are as follows:

    - gifts to employees and their family members – are liable to FBT (except where the 'less than $300' minor benefit exemption applies) and tax deductible (unless they are exempt from FBT); and
    - gifts to clients, suppliers, etc. – no FBT 
    - and not tax deductible.

Non-entertainment gifts at functions

Editor:  What if a Christmas party is held at a restaurant at a cost of less than $300 for each person attending, and employees with spouses are given a gift or a gift voucher (for their spouse) to the value of $150?

Actual method used for meal entertainment

Under the actual method, for employees attending with their spouses, no FBT is payable, because the cost of each separate benefit (being the expenditure on both the Christmas party and the gift) is less than $300 (i.e., the benefits are not aggregated). 

No deduction is allowed for the food and drink expenditure, but the cost of each gift is tax deductible.

50/50 method used for meal entertainment

Where the 50/50 method is adopted:

·         50% of the total cost of food and drink is liable to FBT and tax deductible; and

·         in relation to the gifts:

                             the total cost of all gifts is not liable to FBT because the individual cost of each gift is less than $300; and

                             as the gifts are not entertainment, the cost is tax deductible.

To Sum Up
We understand that this can all be somewhat bewildering, so if you would like a little help, just contact our office.

Please Note: Many of the comments in this publication are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information's applicability to their particular circumstances.

 

Getting your ducks lined up for the ATO



The ATO have announced they will visit 10,000 businesses over the next 12 months. Business owners should ensure they have their records in order. The ATO state that "What we can see is that businesses that do really well keep good records, seek advice when needed and do use technology to help run their business, whether that is a point of sale software system, a cloud-based accounting system, or a mobile app."

To make sure you stay off the ATO's radar we recommend businesses ...undertake a systems review where we can look over your businesses accounting and record keeping systems and make recommendations on any improvements that may be necessary.

Book an appointment with us today at http://www.clarkemcewan.com.au/conta…/request_an_appointment or phone our Sunshine Coast office on 54754300 or our Brisbane offices on 38423128 or email to info@clarkemcewan.com.au and one of our team will be in touch.
#taxaccountants #sme #businesssystemreviews #auditproof #businessaccountants

SMSFs, Business real property and the small business CGT cap

 

Small business clients often want to transfer their business premises into their SMSF as an in-specie contribution to take advantage of the tax effective superannuation environment.

To facilitate the transfer, some clients have sought to utilise the CGT small business concessions and make an in-specie contribution to super using the lifetime CGT cap - simultaneously.

However, the ATO has indicated via a number of private binding rulings that in-specie contributions of active assets, such as business real property, may not qualify for the lifetime CGT cap where the in-specie super contribution is also the CGT event that qualifies for the small business CGT concessions. 

As a result, a client's ability to access these valuable concessions may be impacted and careful planning is required to ensure they structure their contributions to meet these complex rules.

Lifetime CGT cap 

When a small business owner disposes of an active asset, they may be eligible to disregard some or all of the capital gain resulting from the disposal under the CGT small business concessions.  In addition, they may be able to contribute some or all of the sale proceeds to superannuation and elect for the contributions to count towards the lifetime CGT cap.

The lifetime CGT cap for 2018-19 is $1.48 million (indexed annually).  Contributions that count against the lifetime CGT cap are neither concessional nor non-concessional contributions.

Broadly, to access the lifetime CGT cap it is necessary for an individual, company or trust to qualify for the 15-year exemption or the $500,000 retirement exemption. 

The following table outlines the types of contributions that can be contributed under the lifetime CGT cap:

Contribution type

Amount that counts against lifetime CGT cap

Individual able to disregard capital gain under retirement exemption

Amount of capital gains disregarded under the retirement exemption (up to maximum of $500,000)

Individual able to disregard capital gain under the 15 year exemption

Amount of capital proceeds

Company or trust able to disregard capital gain under retirement exemption

Amount of payment to CGT concession stakeholder of their share of the exempt amount (up to maximum of $500,000)

Company or trust able to disregard capital gain under the 15 year exemption

Amount of payment received by CGT concession stakeholder of their share of capital proceeds

 

When making small business CGT contributions, depending on the circumstances, the contribution must be made within strict timeframes.

Case study - contribution under the lifetime CGT cap:

  • Matthew and Lily (both age 70) are farmers who have been running a primary production business for over 15 years. They run their business on a farm they own jointly which qualifies as a business real property.
  • They decide to retire and sell the farm for its market value of $1.4 million to a third party purchaser.
  • As Matthew and Lily meet all the basic conditions for small business CGT exemptions as well as the 15 year exemption, they can disregard any capital gains as a result of the sale.
  • Subject to satisfying the work test, they can then each contribute their share of the capital proceeds ($700,000) from the sale into superannuation under the lifetime CGT cap.

Note – this applies regardless of whether the value of Matthew and Lily's total superannuation balance at the end of the previous financial year exceeds $1.6m, as the contributions are not non-concessional contributions.  

In-specie contributions and the lifetime CGT cap

In the Matthew and Lily example, the active asset of the farm was sold and a cash contribution made into superannuation under the lifetime CGT cap.  However, the situation is more complex when the transaction involves an in-specie contribution.

For example, if Matthew and Lily transferred their farm into their SMSF as an in-specie contribution, they may not be able to qualify for the lifetime CGT cap as the super contribution is also the event that qualifies for the small business CGT concessions.  That is, the ATO has indicated in a number of private rulings[1], that the contributor is not able to utilise the lifetime CGT cap in the event of an in-specie transfer of an active asset into a SMSF, where the small business CGT exemption is applied for the same CGT event.

The Commissioner has stated that the legislation does not contemplate the CGT event, choice (if paid from a company or trust) and contribution of the CGT exempt amount all happening simultaneously. Therefore, the CGT event must occur before a contribution is made and not at the same time.

This view has important implications as in-specie contributions that do not count against the lifetime CGT cap will instead be treated as personal non-concessional contributions and count against the non-concessional cap (assuming the member does not claim a tax deduction for some or all of the contribution), which may result in excess non-concessional contributions.

Due to these issues, advisers should encourage clients to seek a private binding ruling if they are looking to utilise the lifetime CGT cap for an in-specie transfer where the small business CGT exemption is applied for the same CGT event.

Potential solutions

Below we outline three possible alternative strategies that achieve the goal of moving the asset into the SMSF, without the in-specie contribution issue outlined above applying.

  1. SMSF purchasing active asset from client

The SMSF could purchase the active asset from the client (or their trust/company) where they have the required funds available.  This achieves the goal of moving the asset into the SMSF, as well as providing cash proceeds to the client (or their company or trust) which can then be contributed to super under the lifetime CGT cap.

Coming back to the example of Matthew and Lily, if their SMSF had cash reserves of $1.4 million, the SMSF could purchase the farm from them. Matthew and Lily could then use the cash proceeds to make contributions under the lifetime CGT cap.

When implementing this strategy, there are a few important things to be mindful of:

  • A SMSF is only allowed to acquire certain assets from a related party[2], e.g. business real property that's used wholly and exclusively in any business. Generally active assets other than business real property e.g. goodwill of a business, shares in a private company or units in a related trust, cannot be acquired[3].
  • The purchase must be on arm's length terms and at market value. The SMSF may need to obtain an independent professional valuation to determine the sale price, refer to ATO's Valuation guideline for SMSFs
  1. SMSF uses limited recourse borrowing arrangement (LRBA) to purchase active asset from client

In situations where the SMSF does not have the required funds available to purchase the active asset from the client, an alternative is for the SMSF to borrow the money via an LRBA to complete the purchase.

The cash sale proceeds could then be re-contributed to the fund under the lifetime CGT cap and used to extinguish the outstanding LRBA loan amount. However, it is important to note that this arrangement will incur additional costs as the fund will be required to establish a complying LRBA including the required bare trust arrangements.

Where a fund borrows from a related party, additional care needs to be exercised to ensure the loan complies with the safe harbour guidelines as specified in ATO PCG 2016/5. Otherwise the trustee will need to demonstrate that the loan is on arm's length terms – otherwise any income earned from the asset may be taxed as non-arm's length income.

  1. In-specie contribution of an asset for a different small business CGT event

If a client is disposing of multiple active assets, they could consider triggering a CGT event in relation to one of those assets and then making an in-specie contribution under the CGT cap of a different asset in lieu of the capital proceeds they received.  

For example, in ATO ID 2010/217, the ATO confirmed that where a taxpayer sold an asset that qualified for the $500,000 retirement exemption, the taxpayer could contribute a separate asset under the lifetime CGT cap in lieu of the cash proceeds actually received. This is important as it may allow a client to contribute an allowable asset via an in-specie transfer direct to their SMSF under the lifetime CGT cap.   

Case study: Winston

Winston (aged 60) ran a successful real estate agent business for more than two decades and has now decided to sell his business and retire. The real estate business operated through a company structure.  Winston owned 100% of the shares and the commercial premises. Details are as follows:

Asset

Owner

Ownership period

Cost base

Market value

Shares in SuperAgent Pty Ltd

Winston

20 years

$0

$600,000

Commercial office

Winston

10 years

$200,000

$800,000

Winston wants to sell his shares in the company, but retain ownership of the commercial office within his SMSF which will then be leased to the new business owner.

Sale of shares in the company (CGT event no.1)

Winston sold the shares in SuperAgent Pty Ltd to an unrelated purchaser for $600,000. As he meets the basic conditions for small business CGT exemptions and qualifies for the 15 year exemption, he can fully disregard any capital gains associated with the sale of these shares. He is also eligible to contribute the capital proceeds up to $600,000 into super under the lifetime CGT cap[4].

Small business CGT contribution strategy

While Winston could use the cash proceeds from the sale of shares to make a contribution under the lifetime CGT cap he instead chooses to contribute his commercial office into his SMSF under the lifetime CGT cap instead – as per the scenario in ATO ID 2010/217.

In-specie transfer of commercial office (CGT event no.2)

When Winston in-specie transfers his business real property into his SMSF it will trigger an assessable capital gain of $600,000. However, as the commercial office qualifies for the 50% individual exemption the assessable gain is reduced to $300,000. Winston can then apply the $500,000 retirement concession to fully offset the remaining $300,000 assessable gain - assuming he skips the 50% active asset exemption.

In this case, Winston is then eligible to contribute an additional $300,000 under the lifetime CGT cap – being the amount of the gain offset by applying the retirement concession to the transfer of the commercial office to the SMSF. In this case, Winston could then use $300,000 of his original cash proceeds from the sale of the shares to contribute to super under the lifetime CGT cap.

Mixed contributions

In the above scenario, it is important to note the market value of the BRP ($800,000) contributed in lieu of the share sale proceeds exceeded their value ($600,000) by $200,000. Therefore, only $600,000 of the property can be contributed under lifetime CGT cap. However, as Winston is under 65 years of age (and hasn't previously triggered the bring forward provision) the additional $200,000 could be treated as a non-concessional contribution. He can then make additional non-concessional contributions of up to $100,000 under the bring forward rule.

Summary of contributions:

  • In-specie transfer of BRP valued at $800,000:
  • Cash contribution of $300,000:

The end result is that Winston could make total contributions of $900,000 under the lifetime CGT cap (relating to two separate CGT events) and a non-concessional contribution of $200,000. He also has the option of making a further non-concessional of $100,000 to maximise his NCC cap.

The following diagram illustrates the strategy:

 

Important note

The above example is for illustrative purposes and does not consider the application of the anti- avoidance measures in Part IVA of Tax Act. As this is a complex area of tax law, clients should seek advice from a registered tax agent or obtain a private binding ruling from the ATO before making any decisions relating to the sale of their active business asset, and in-specie transfer of business real property into their SMSF.

 [1] Private ruling PBRs: 1013008906784; 1013054081138; 1013021531190; 1012862148885

[2] Section 66 of the SIS Act prohibits a SMSF from acquiring assets from a related party unless an exception applies. A related party is defined as: a member of the fund; a standard employer-sponsor of the fund; and a Part 8 associate of either of these two entities.

[3] Note – SMSFs can acquire units or shares in related companies and trusts under the 5% in-house exemption.

[4] CGT cap election form must be submitted at or before the time of contribution

Disclaimer: This article is not legal or personal financial advice and should not be relied on as such. Any advice in this document is general advice only and does not take into account the objectives, financial situation or needs of any particular person. You should obtain financial advice relevant to your circumstances before making investment decisions. Where a particular financial product is mentioned you should consider the Product Disclosure Statement before making any decisions in relation to the product. Whilst every reasonable care has been taken in distributing this article, Australian Unity Personal Financial Services Ltd does not guarantee the accuracy or completeness of the information contained within it. Any views expressed are those of the author(s) and do not represent the views of Australian Unity Personal Financial Services Ltd. Australian Unity Personal Financial Services Ltd does not guarantee any particular outcome or future performance. Taxation Information in this document should not be relied upon without seeking specialist advice from a tax professional. Australian Unity Personal Financial Services Ltd ABN 26 098 725 145, AFSL & Australian Credit Licence No. 234459, 114 Albert Road, South Melbourne, VIC 3205. This document produced in October 2018. © Copyright 2018

 

 

Increased scrutiny of Home Office claims

Last year, 6.7 million taxpayers claimed a record $7.9 billion in deductions for 'other work-related expenses', which includes home office expenses.

Reportedly, due to a high number of mistakes, errors and questionable claims for home office expenses, the ATO has recently advised that it will be increasing attention, scrutiny and education on these claims this tax time.

In particular, the ATO has flagged their concerns relating to taxpayers who are claiming:

  •    expenses they never paid for;
  •    expenses that their employer has reimbursed them for;
  •    private expenses; and
  •    expenses with no supporting records.

Whilst additional costs incurred as a direct result of working from home can be claimed, care must be taken not to claim private expenses as well.

The ATO has indicated that one of the biggest issues they face is people claiming the entire amount of expenses (e.g., their internet or mobile phone), rather than just the extra portion relating to work.

Provided the taxpayer is able to demonstrate that they have incurred additional costs of running expenses (e.g., electricity for heating, cooling and lighting), then these are generally deductible.

In contrast, employees are generally not able to claim any portion of occupancy-related expenses (e.g., rent, mortgage repayments, property insurance, land taxes and rates).

Taxpayers are warned that the ATO may contact their employers to verify expenses claimed for working from home.

In addition, the ATO expects to disallow a lot of claims where the taxpayer has not kept adequate records to prove that they have legitimately incurred the relevant expense and that the expense was related to their work.

As with the claiming of deductions in general, supporting records must be kept when claiming work-from-home expenses, which may include receipts, diary entries and itemised phone bills. 

Importantly, only the additional work-related portion of the relevant expense is deductible.

Advancement in technology has allowed the ATO to deploy sophisticated systems and analytics to spot claims that do not 'add up' and claims that are out of the ordinary compared to others in similar occupations, earning similar income.

Finally, the ATO has reminded taxpayers of the 'three golden rules' to follow when claiming work-from-home deductions, being:

  • the taxpayer must have spent the money themselves and have not been reimbursed;
  •  it must be directly related to earning the taxpayer's income, not a personal expense; and
  •  the taxpayer must have a record to prove the expense.

Need more information on this Tax Topic ?  Click here for a guide to the ATO's list of misunderstood tax deductions

 

The Australian Taxation Office has hit out at cash-only businesses, citing internal research that proves customers find such firms to be "inconvenient" and potentially dishonest.

Research conducted by Colmar Brunton, commissioned by the ATO, found that almost half of Australian consumers are inconvenienced by businesses that do not accept electronic payments.

Even more (around two-thirds) suggested businesses that do rely solely on cash are likely to be dodging their tax liabilities – regardless of whether or not this is true – suggesting that reputational damage can also arise in addition to lost sales.

"The real cost of cash to business seems to be twofold. Consumers are twice as likely to associate 'cash only' as negative rather than positive. While the majority of businesses are run by honest Australians who want to do the right thing, being cash-only may have a direct impact on reputation," said Matthew Bambrick, the ATO's assistant commissioner.

"Secondly, time is money for business. Tap-and-go payments cost an average of nine cents less than cash payments, and are nearly twice as fast. This research suggests cash-only businesses take a hit to their bottom line by not offering electronic payment."

Mr Bambrick added: "While cash is legal tender and we know that some businesses may be used to dealing only in cash, this research suggests that business owners may want to think about the benefits electronic payments can bring and consider what might work best for them."

Surprisingly, the research found that of the businesses polled that are cash-only, 42 per cent have "never" investigated the use of electronic payments, while 20 per cent cited the cost of electronic payments as their reason for maintaining cash-only payments.

However, the ATO did not include a sample size for the poll, nor did it reveal the full research. A request has been made for both to be provided.

Last month, the tax office released separate research that suggested only one in five shoppers continue to use cash to make purchases.

It comes as the government is attempting to crack down on tax dodgers and the black economy, including a proposal to limit all cash transactions to a maximum of $10,000.

 

 

 A focus on work-related clothing and laundry expenses this Tax Time will see the ATO "more closely examine taxpayers whose clothing claims don't suit them".

 

Do you need to wear a uniform to work? Or perhaps you need to wear industry specific clothing? 

You may be eligible to claim a deduction for work clothing or a uniform, but in order for your claim to be eligible it must fall into one of the following categories for which there are specific tax rulings.  These are: 

  1. a compulsory work uniform (for instance, clothing that identifies you as an employee of an organisation with a strictly enforced policy such as a flight attendant),
  2. a non-compulsory work uniform (a uniform that has an AusIndustry registered logo on the top, skirt or slacks and one that may not be worn as everyday clothing - which excludes black slacks or skirts),
  3. clothing specific to your occupation (such as a chef's checked pants), or
  4. protective clothing (like non-slip shoes for a nurse or steel capped boots for a labourer).   Items such as shoes, socks and stockings can never form part of a non-compulsory work uniform, and neither can a single item such as a jumper.

 According to Assistant Commissioner Kath Anderson, around 6 million people claimed work-related clothing and laundry expenses last year, with total claims adding up to nearly $1.8 billion.

 Commissioner Anderson went on to say:  "While many of these claims will be legitimate, we don't think that half of all taxpayers would have been required to wear uniforms, protective clothing, or occupation-specific clothing."  With clothing claims up nearly 20% over the last five years, the ATO believes a lot of taxpayers are either making mistakes or deliberately over-claiming.  Common mistakes include people claiming ineligible clothing, claiming for something without having spent the money, and not being able to explain the basis for how the claim was calculated.

"Around a quarter of all clothing and laundry claims were exactly $150, which is the threshold that requires taxpayers to keep detailed records.  We are concerned that some taxpayers think they are entitled to claim $150 as a 'standard deduction' or a 'safe amount', even if they don't meet the clothing and laundry requirements," Ms Anderson said. 

 "Just to be clear, the $150 limit is there to reduce the record-keeping burden, but it is not an automatic entitlement for everyone.  While you don't need written evidence for claims under $150, you must have spent the money, it must have been for uniform, protective or occupation-specific clothing that you were required to wear to earn your income, and you must be able to show us how you calculated your claim."

 

Ms Anderson said the ATO also has conventional clothing in its sights this year. "Many taxpayers do wear uniforms, occupation-specific or protective clothing and have legitimate claims.  However, far too many are claiming for normal clothing, such as a suit or black pants.  Some people think they can claim normal clothes because their boss told them to wear a certain colour, or items from the latest fashion clothing line.  Others think they can claim normal clothes because they bought them just to wear to work.  Unfortunately they are all wrong – you can't claim a deduction for normal clothing, even if your employer requires you to wear it, or you only wear it to work". 

Tax Health

What is Tax Planning?

Tax planning is a process we use toward the end of the financial year  to structure our clients business and personal  affairs to legally reduce tax liability and make savings. This is achieved by a review of the past 11 months of trading or earnings and by using deductions, exemptions and where practicable, using structures to reduce taxable income.

According to the Australian Taxation Office we all have the right to arrange our financial affairs to keep tax to a minimum – this is often referred to as tax planning, or tax-effective investing.

"Tax planning is legitimate when you do it within the letter and the spirit of the law." ATO

 

Who Can Benefit From Tax Planning?

It's simple - All taxpayers can benefit from tax planning and the savings that are created. search shows that 95% of taxpayers are paying more tax than they are legally required to.

Approximately 50% of Australian taxpayers use legal tax planning strategies to minimise their tax with the most popular strategies being negative gearing of residential properties (2.1 million taxpayers), and salary sacrificing super contributions (4 million taxpayers).

Need some end of financial year help?  Contact us.

How does the ATO treat Uber, Airbnb style services? What you need to know

 

Uber is calling for drivers, Airbnb is seeking more hosts but what are the implications of becoming part of the sharing economy? 

With the ATO increasingly relying on data matching and other online resources to target untaxed income and the cash economy, it is important to understand the tax implications of your arrangement.

 

The basics of tax apply regardless of how you earn money. That is, even though you may be earning income from different sources or using different platforms to generate income, the fundamental tax issues remain the same. You don't have to be carrying on a business to pay tax on income you earn.

 

And, given that so many of these services are through sharing platforms, the Australian Tax Office (ATO) has the capacity to data match money flowing through to financial institutions specifically from these platforms.

 

'Sharing' a room or an entire house

Sharing a room or your house through services such as Airbnb can be a great way to earn income from an existing asset. The tax treatment of what you earn from these services is the same as any other residential rental property arrangement. This means you must include the rental income in your income tax return. For example, if a husband and wife jointly own a property that they rent out through a sharing service, whatever they earn needs to be declared on their income tax returns in the same proportion as the ownership of the house in the year they earned the income.

Hosts can also claim tax deductions for expenses associated to the rental, such as the interest on your home loan, professional cleaning, fees charged by the facilitator, council rates, insurance, etc. But, these deductions need to be in proportion to how much and how long you rent your home out. For example, if you rent your home for two months of the financial year, then you can only claim up to 1/6th of expenses such as interest on your home loan as a deduction. This would need to be further reduced if you only rented out a specific portion of the home.   GST does not generally apply to residential rental income.

Be aware that renting out your home may have a direct impact on your tax-free main residence exemption for capital gains tax (CGT) purposes. In general, your home is exempt from CGT when you sell it. However, if you use your home to earn assessable income, then you might only qualify for a partial exemption on the sale unless special concessions apply. If you are renting out part of your home while still living in the property, then it is unlikely that any gain you make on your home will be fully CGT-free. You might also need to obtain a valuation of your home at the time it was first used to generate rental income.

 

Hosting for investors

A number of investors are generating income from renting residential investment properties exclusively on sharing services rather than traditional longer-term rental arrangements – rental income can be higher for short-term accommodation and the host has the capacity to increase prices easily for peak periods. Just a quick look at properties available around the world on sharing sites shows how quickly this style of arrangement has attracted investors, particularly where the property is located in high demand tourist areas.

But what are the tax implications if you own one or multiple investment properties and rent them on a sharing service? Firstly, it's important to get good advice as this can be a complex area and being on the wrong side of the tax law can have significant implications. For example, if the ATO deems you to be providing commercial residential accommodation, they will treat your activities in the same way as hotels and motels meaning that the rent could trigger a GST liability for you (although you might be able to claim back some GST credits on expenses you pay). Broadly, accommodation falling into this category would have multiple occupancies such as a block of apartments, central management of the properties, and provide services to the guests beyond the accommodation such as breakfast or room servicing.

Finally, check if there are council restrictions, and ensure that you have the right insurance in place and if in doubt be sure to Contact us  before you start hosting or driving.  

Will your business be audited?

How the ATO identifies audit targets

The ATO is very upfront when it comes to their compliance activity. Every year they publish small business benchmarks that outline what a typical business 'looks like' in different industries. If your business falls outside of those benchmarks, the ATO is likely to take a closer look at why that is.

 

Falling outside of the benchmarks might not indicate a tax related problem. It might mean that your business has a different business model to the norm or is performing poorly relative to others in the industry. If your business does fall outside of the benchmark however, it is important to ensure that the reasons why can be clearly articulated (preferably documented) and the reason for those differences is not tax evasion. If there is no proof as to why the business is outside of the benchmarks, the ATO is likely to simply apply the benchmark ratio and issue a revised tax assessment.

 

The ATO look at:

·         cost of sales to turnover (excluding labour)

·         total expenses to turnover

·         rent to turnover

·         labour to turnover

·         motor vehicle expenses to turnover

·         non-capital purchases to total sales, and

·         GST-free sales to total sales.

 

For example, for a veterinary practice with a turnover between $300,001 and $800,00, the cost of sales to turnover ratio is expected to be between 25% and 29% (averaging at 27%), and average total expenses are 78%. The cost of labour to turnover ratio is between 21% and 29% and rent is between 5% and 8%.

 

The benchmarks are also a useful tool for anyone wanting to understand what is typical in their industry and how they perform against the average. It might also indicate opportunities for improvement and where the business is falling behind its competitors.

 

If you have any concerns about your record keeping, please contact us for advice or consult our website under the Client Resources section and Compliance.

 

Given the state of the property market in Australia these days, a not-uncommon situation can arise where a residential property owner seeks to demolish and subdivide the block containing the family home and build residential units.T implications of subdividing and building on the family property.

If a taxpayer has the available land of course, this can be a solid strategy. However it can cause headaches from a tax perspective - and in some cases the ability to access the main residence exemption and even the CGT discount can be lost.

Divvying up the backyard
A question that arises every now and then concerns the effects on the CGT main residence exemption where the owner decides to subdivide the land containing their principal place of residence, in some cases demolishing the existing home, and build residential units.

The scenarios that are typically raised involve one of the following choices:

  • demolish the main residence, subdivide the land, build two home units, sell one and live in the other
  • subdivide the land, build a home unit on the newly created previously vacant portion, and sell the new unit (with the original residence staying intact)
  • subdivide the land and sell the non-main residence block (with original dwelling staying intact on the remaining block).
  • When dealing with these situations, the following pertinent tax questions may need consideration:

    1. Whether demolition of the original main residence would trigger a capital gain or loss (if any)?
    2. What are the CGT implications of subdividing the property?
    3. Is the sale of the home unit or vacant land a "mere realisation" or is there is a profit-making activity conducted?
    4. How would the original dwelling/unit, retained and lived in by the taxpayer, be treated for CGT purposes?

    Note that there may be some GST implications that are not dealt with in detail here. Suffice to say that any venture undertaken by home owners in building units for the purposes of sale would, from the ATO's viewpoint, most likely constitute an "enterprise" and in some cases, depending on the circumstances, may necessitate an ABN and registration for GST.

    For a consultation about building on the family property and the possible tax implications contact us or  Book an Appointment.

     


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