Monthly Archives: September 2017

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Checklist: Are you carrying on a business of letting residential rental properties?

This checklist can be used in order to assist an individual in whether they are carrying on a business of letting residential rental properties.

Whether an activity constitutes the carrying on of a business is a question of fact to be decided on a case by case basis.

The checklist should be used for illustrative purposes only, and shouldn’t be used to make a concrete decision. The checklist is designed to provide you with the correct tools to argue whether you are or are not carrying on a business.

All legislative references are to ITAA 1997 unless otherwise stated.

 

Note:
Determining whether a taxpayer is carrying on a business of letting residential rental properties is only relevant when considering income tax situations. Where there is a business operation, the negative limb of s 8-1 would allow a taxpayer to claim additional deductions as they relate to the business.

Examples of these types of deductions may include (but would not be limited to):

  • self-education expenses relating to rental properties
  • seminars and professional courses relating to rental property businesses
  • deductions relating to research for future rental properties, and
  • travel deductions and “purchased” plant & equipment depreciation from the 2017/18 income year onwards (subject to the passing of proposed legislation).

The use of the trading stock provisions in Div 70 would only be relevant in situations where a taxpayer is operating a business of property development. This checklist does not go into property development situations.

The GST status of a taxpayer does not change if they move from being an investor to a carrying on a business, as letting residential rental properties is input-taxed for GST purposes.

The CGT small business concessions of Div 328 do not necessarily apply to the assets held in a business of letting residential rental properties. This is due to the fact that most likely the assets are not active assets as the residential properties are not wholly and exclusively used by the lessee in carrying on a business.

 

Are you carrying on a business of letting residential rental properties? Yes No Ref
1 Over the past few years have you been renting out three or more rental properties at any one time?
If “Yes”, it may be considered that you are operating a business of letting residential rental properties. In determining whether you are operating a business, six indicators are considered relevant in making the decision. It is noted here that not one indicator is stronger than any of the others, and there is no determining number of the six that concludes in a business being operated. All of these tests listed from Steps 2 to 7 are subjective, and the decision whether you are carrying on a business should be made with a holistic viewpoint.
If “No”, it is unlikely that the scale of your rental property operations would constitute carrying on a business. Specifically, the amount of three or fewer rental properties is discussed in ATO guide for rental properties, where it said in Example 3 that a couple owning three properties were not considered to be running a business (p 5). That being said, if you think your operations are still to be considered as a business, go to Step 2.
2 Does the nature of your activities have the purpose of profit-making?
Factors for yes: A partnership agreement in writing as suggested by the Partnership Act is an indicator that you are operating with a purpose for profit-making. In particular, where a partnership agreement specifically states that a higher contributing partner is to receive more income (or loss) based on their workload (suggested in ATO — Rental Properties 2017 Example 4, p 5).
Factors for no: Claiming tax losses (ie substantial negative gearing) has been deemed not for the purpose of profit-making. A taxpayer with 10 years of losses in the last 14 was not carrying on a business (PBR 1012963811905). Are you paying down the mortgages or just interest-only?
If “Yes”, this can contribute to the argument that you are carrying on a business of letting residential rental properties. Go to Step 3.
If “No”, it could be difficult to argue that you are carrying on a business of letting residential rental properties. It may be arguable that you are merely a passive investor. However, the other steps may indicate that, holistically, it is determinable that you are operating in a business-like structure. Go to Step 3.
3 Does the undertaking have a high degree of complexity and magnitude?
Factors for yes: An individual that derives rent from a number of properties or from a block of apartments may indicate the existence of a business (IT 2423 para 5). In Case 1/2014, the AAT stated that the use of a real estate agent to manage nine separate properties did not preclude the owner from running a business (para 23).
Factors for no: The ATO has suggested that undertaking of minor repairs and maintenance to avoid external contractors does not change the character of the rental property activities from investment to business (PBR 1013061618147).
If “Yes”, this can contribute to the argument that you are carrying on a business of letting residential rental properties. Go to Step 4.
If “No”, it could be difficult to argue that you are carrying on a business of letting residential rental properties. It may be arguable that you are merely a passive investor. However, the other steps may indicate that, holistically, it is determinable that you are operating in a business-like structure. Go to Step 4.
4 Is there an intention to engage in trade regularly, routinely or systematically? How often are the owners purchasing new properties or re-financing loan agreements?
Factors for yes: Properties that are close to the owner’s principal place of residence can be used as an argument that regular trade of rental receipts and property management occurs. In Cripps case, the fact that properties were interstate was used against the taxpayer in determining a business-like operation (para 10e).
Factors for no: Compiling all financial information such as rent received and expenses from agents, as well as collating interest payments and expenses for forwarding to an accountant is not enough to consider a business operation (PBR 1012900599828). This activity is no more involved than a mere investor who owns a number of properties.
If “Yes”, this can contribute to the argument that you are carrying on a business of letting residential rental properties. Go to Step 5.
If “No”, it could be difficult to argue that you are carrying on a business of letting residential rental properties. It may be arguable that you are merely a passive investor. However, the other steps may indicate that, holistically, it is determinable that you are operating in a business-like structure. Go to Step 5.
5 Is the operation being conducted in a business-like manner with a high degree of sophistication involved? Did the owners employ other agents, such as purchase agents, to assist in finding additional properties to purchase?
Factors for yes: There is a common law partnership in writing which states the amount of work to be completed by each partner with appropriate compensation involved. In Cripps case, a common law partnership did not apply as second spouse was not actively involved in running operations of business (para 7).
The owners have a business plan in writing which shows how the profits will be made by owning and re-investing properties, including reduction of mortgages.
The owners have a contingency plan in place for unforeseen circumstances. The Commissioner was able to successfully argue in Case X86 (share trading) that this was a critical factor in determining that a business was not being conducted (para 25).
Factors for no: Having a business plan is not a decisive factor in whether a business is being run, as a mere investor may also have a business plan (PBR 1012963811905).
If “Yes”, this can contribute to the argument that you are carrying on a business of letting residential rental properties. Go to Step 6.
If “No”, it could be difficult to argue that you are carrying on a business of letting residential rental properties. It may be arguable that you are merely a passive investor. However, the other steps may indicate that, holistically, it is determinable that you are operating in a business-like structure. Go to Step 6.
6 Whether any profit/loss is regarded as arising from a discernable pattern of trading?
Factors for yes: The owners of the property actively involved in managing the properties, including advertising for tenants, collecting rent and everyday maintenance (ATO — Rental Properties 2017 Example 4, p 5 and Case 1/2014).
Factors for no: Everyday maintenance of the properties is not a sole factor which will decide this section (PBR 1013061618147).
If “Yes”, this can contribute to the argument that you are carrying on a business of letting residential rental properties. Go to Step 7.
If “No”, it could be difficult to argue that you are carrying on a business of letting residential rental properties. It may be arguable that you are merely a passive investor. However, the other steps may indicate that, holistically, it is determinable that you are operating in a business-like structure. Go to Step 7.
7 Does the volume of the owner’s operations contribute to a substantial amount of capital being employed in the operations?
Factors for yes: Many taxpayers could demonstrate that the sheer amount of capital employed compared to overall wealth is substantial in a rental property business operation. The taxpayer may also have rental income as their sole income.
Factors for no: The operations may be small compared to other assets owned by the taxpayer. For example, a large share portfolio which is held for investment purposes may be a factor indicating that the rental properties are also passively held.
If “Yes”, this can contribute to the argument that you are carrying on a business of letting residential rental properties. A review of all the steps and arguments in its entirety would be considered prudent. In situations where a business operation is likely, further advice from a legal tax professional (ie a solicitor) would enhance confidence in this.
If “No”, it could be difficult to argue that you are carrying on a business of letting residential rental properties. It may be arguable that you are merely a passive investor. However, the other steps may indicate that, holistically, it is determinable that you are operating in a business-like structure.

 

The source of this content is CCH‘s professional information services. Thompsons Australia has a professional subscription with CCH providing access to in-depth quality technical information and commentary used by Thompsons Australia in keeping staff and clients currently in formed.

Checklist: 2016/17 year end — allowable deductions for individuals

Use this checklist to determine your eligibility for the most common work-related tax deductions for individuals.

2016/17 year end — allowable deductions for individuals Yes No Ref
D1 Car-related expenses (work-related daily travel expenses)
Do you travel between two work sites?
Number of kilometres: __________________
Do you travel for work?
Number of kilometres: __________________
Do you travel between home and work carrying bulky equipment or bulky items for sale?
Number of kilometres: __________________
You can only claim this if you don’t have locked storage at work.
All log books from before 1 July 2012 will need to be updated for the current tax year.
All cents per kilometre method claims are at a rate of 66 cents per kilometre.
You cannot claim:
a trip consisting of home-work-home
travel between work and home more than once a day
trips if you are on call, and
trips outside normal business hours.
D3 Clothing expenses
Do you wear clothing to protect yourself from the risk of illness or injury posed from your working environment?
Cost of safety-coloured clothing: ____________
Cost of steel-capped boots: ____________
Are you required to wear a distinctive uniform by your employer?
If “Yes”, is this policy strictly enforced?
If “Yes”, list type and cost of clothing:
______________________________
If “No”, has your employer registered the design with AusIndustry?
If “Yes”, list type and cost of clothing:
______________________________
Have you incurred laundry and dry-cleaning expenses for any of the above items?
If “Yes”, list the cost: __________________
Tip
You can have clothing expenses from prior years, and laundry expenses for such clothing this year.
You cannot claim:
purchasing and cleaning of:
plain uniforms or conventional clothing
sports clothing
clothing worn for medical reasons
everyday footwear (ie dress or casual shoes)
items that were purchased or reimbursed by your employer, and
a deduction just because you received a clothing, uniform and laundry allowance.
D4 Self-education expenses
Did you undertake a course of study designed to lead to an increase in income from your current employment?
If “Yes”, list the details:
Type of course of study: ____________________________________
Educational facility: ____________________________________
Cost of course fees: ____________________________________
Cost of textbooks: ____________________________________
Cost of stationery: ____________________________________
Cost of equipment/computers: ____________________________________
Cost of subscriptions: ____________________________________
Cost of travel from work: ____________________________________
Tip
You cannot claim a self-education course for the purposes of finding new employment or starting a new income-earning activity.
D5 Other out-of-pocket, work-related expenses
Did you pay union or professional association fees?
If “Yes”, list the cost: __________________
Did you pay fees for professional seminars, courses, conferences or workshops?
If “Yes”, list the cost: __________________
Did you pay for reference books, technical journals or trade magazines?
If “Yes”, list the cost: __________________
Did you pay for safety items such as hard hats, safety glasses or sunscreen?
If “Yes”, list the cost: __________________
Did you use your personal telephone and/or internet service for work?
If “Yes”, what is the work-related percentage: ____________% and cost __________________
Do you have itemised phone bills?
If “Yes”, number of months: __________________
Do you have a four-week diary of calls made?
Do you work from home and incur electricity costs?
If “Yes”, list number of hours per week you work from home: __________________
Do you have a four-week diary of the hours worked?
A notional claim for electricity when working at home is $0.45 per hour.
Did you receive an “overtime meal allowance” as part of your award or industrial agreement?
If “Yes”, did you actually work overtime on those occasions?
If “Yes”, was the amount you received equal to or less than the Commissioner’s reasonable amount ($29.40 in the current year)?
If “Yes”, did you spend it on overtime meals?
If “Yes”, list the cost or number of days: __________________
If you answered no to any of the above, you cannot claim a tax deduction for overtime meals.
Did you pay for tools and equipment (under $300 each)?
If “Yes”, list the cost: __________________
Tools and equipment note
No immediate deduction is available for tools and equipment costing $300 or more. For items purchased between $300 and $1,000, they may be placed in a low value pool in Item D6 and depreciated so long as individual remains employed in the industry. Purchases over $1,000 to be depreciated of their effective life until its written down value is less than $1,000. Then it may enter the low value pool.
NB: All items only depreciable on work-related portion.
Tip
You cannot claim:
child care expenses
driver’s licence fees
fitness costs
meals during a normal working day
newspapers or online subscriptions
removal/relocation costs, even if you are transferred by your employer, and
rent or mortgage interest.
D9 Gifts or donations
Did you make any gifts or donations of $2 or more to a deductible gift recipient?
If “Yes”, list below:
____________________________________
____________________________________
____________________________________
____________________________________
Tip
Your receipt from the approved organisation will show whether your donation is tax-deductible.
You cannot claim time spent volunteering for an organisation.

 

The source of this content is CCH‘s professional information services. Thompsons Australia has a professional subscription with CCH providing access to in-depth quality technical information and commentary used by Thompsons Australia in keeping staff and clients currently in formed.

Tax changes for small businesses 2016/17 year end

This is a guide only to a selection of 2016/17 year-end tax changes affecting small business

 

Additional entities now considered small business

For 2016/17, the aggregated turnover threshold for a small business entity is increased to $10m. All of the income tax rules for small businesses now apply including:

  • the lower small business corporate tax rate (27.5% for the 2016/17 tax year)
  • immediate deductibility for small business start-up expenses
  • simplified depreciation rules (low-value pools), including the instant asset write-off threshold of $20,000 available until 30 June 2017
  • simplified trading stock rules
  • option to account for GST on cash basis and pay GST by instalments
  • simplified method of paying PAYG instalments calculated by the ATO, and
  • other tax concessions such as the extension of the FBT exemption for work-related portable electronic devices from 1 April 2016.

The increased $10m threshold will not be applicable for accessing the small business capital gains tax concessions.

 

Change in company tax rate — Small businesses

The 2016/17 corporate tax rate will be 27.5% for companies that carry on a business and have an aggregated turnover of less than $10m. This turnover threshold will be increased to $25m for the 2017/18 financial year.

 

Change in company tax rate — franked dividends

From the 2016/17 income year, the imputation system for corporate tax entities is to be based on the company’s corporate tax rate for a particular income year. This is worked out in regard to the entity’s aggregated turnover for the previous income year.

Therefore, with the change in the definition of small business above, an entity with between $2m and $10m in the 2015/16 income year can fully frank a distribution based on the tax rate of 27.5%.

 

Small business restructure roll-over

Small businesses still under $2m in aggregated turnover have the ability to change their legal structure without incurring a capital gains tax liability. The new roll-over applies from 1 July 2016, and is available for small business (under $2m) where a genuine restructure has occurred.

Genuine restructure is not defined but protection comes in the form of a safe harbour rule, which provides that it will be considered that a genuine business restructure has taken place in relation to a transfer if:

  • there is no change in ultimate economic ownership of the transferred asset in the three years after the transfer
  • there is no significant or material use of the asset for private purposes.

 

Similar business test

This year legislation has been enacted to allow a company to claim a prior year loss against business profits as long as it satisfies the similar business test. This test replaces the same business test, which was less flexible to pass, and is backdated to the 2015/16 financial year.

The current same business test is failed unless the company carries on the same business and has not derived income from any new kinds of business or transactions. The new test makes it easier for companies to pass where early investors have entered the company ownership.

 

Simpler BAS

Small businesses will have a simpler BAS after 1 July 2017. After this date, a small business (under $10m) will only need to report the following on a BAS:

  • GST on sales (1A)
  • GST on purchases (1B), and
  • Total sales (G1).

 

 
Primary producers

Income averaging

Primary producers are allowed to access income tax averaging 10 income years after choosing to opt out, instead of that choice to be permanent from 2016/17 and later income years.

 

Farm management deposit reforms

New rules for farm management deposits apply from 1 July 2016, which:

  • increases the maximum amount that can be held as an FMD to $800,000
  • allows primary producers experiencing severe drought conditions to withdraw an amount within 12 months and not be penalised, and
  • allows amounts held in an FMD to offset a business loan against the primary production business.

 

Other items

Queensland primary producers have access to a government grant up to $2,500 to help tackle family business succession planning.

Stamp duty relief for NSW primary producers allow an SMSF to own the farm and sell it to a family member, removing previous barriers of large transaction costs.

 

The source of this content is CCH‘s professional information services. Thompsons Australia has a professional subscription with CCH providing access to in-depth quality technical information and commentary used by Thompsons Australia in keeping staff and clients currently in formed.

Travel deductions for rental properties removed

After 1 July 2017, the deductions for travel to residential rental property will be disallowed. In particular, the travel cost of attending inspections, maintaining the property or collecting rent will be excluded. This includes travel for meetings at the property agent’s office or attending a strata meeting.

It is important to note here that the expenses will relate to travel only. A landlord can still claim a deduction for repairs undertaken to their residential rental property.

The list of non-deductible expenditure relating to travel includes motor vehicle expenses, taxi or hire car costs, airfares, public transport costs and any related meals or accommodation.

 

Excluded entities

In the Exposure Draft to the legislative change, the following entities are excluded from this change, and will continue to be allowed a travel deduction:

  • a corporate tax entity
  • a superannuation plan that is not an SMSF, or
  • a large unit trust (300 or more unit holders).

The legislators have determined that a company is usually an institutional investor of property, and as such is at a lower risk of non-compliance. A company may not be able to make a payment on behalf of a director or an employee for travel, as fringe benefits tax may apply (ie not “otherwise deductible”).

 

Carrying on a business

The changes in the travel deduction from 1 July 2017 will not apply to entities that are “carrying on a business”. Various examples included are property investing, providing retirement living, aged care, student accommodation or property management services.

The deduction will still be available for entities which are carrying on the business of “letting rental properties”. The ATO has provided guidance in various publications as to “how many properties” constitutes carrying on a business. Also, there is Case 1/2014 from the Administrative Appeals Tribunal where the taxpayer was able to argue that they were carrying on a business.

 

 

Dual purpose property

 

The change in legislation will not prevent an investor from claiming a deduction where a property has a dual purpose. Examples of a dual purpose include where the property has another source of income and where the property is both a commercial and a residential premises.

In both instances, each travel expense will need to be scrutinised to determine an appropriate proportion between deductible expenditure and non-deductible expenditure. Such calculations can be determined by the reason for the travel to the property in question.

The indication from the Exposure Draft is that travel relating to repairs or maintenance to common areas of a building will no longer be deductible. For example, the travel of a DIY investor completing some gardening on common property in front of their block of flats will not be allowable. However, if they are carrying on a business or the investor hires a business operator the full expense (including travel) will be deductible.

This change applies to individuals who are “do-it-yourself” property managers. Often times, a DIY investor will need to make running repairs to their property over the ownership period to maintain the value of the rental property. The associated travel expenses are not deductible in these instances. As mentioned above, motor vehicle expenses is listed in the Exposure Draft as being not deductible. There is no mention of whether this provision extends to other vehicles.

 

Construction

It should be noted that where a person is constructing a property as an income-producing asset, the travel expenditure will not be deductible under s 8-1 or as a capital work in Div 43. The only expenditure which may be deductible would be as operating a business of property development, which is outside the scope of this event.

 

The source of this content is CCH‘s professional information services. Thompsons Australia has a professional subscription with CCH providing access to in-depth quality technical information and commentary used by Thompsons Australia in keeping staff and clients currently in formed.

What is payroll tax in NSW?

Payroll tax in NSW is a tax imposed on employers and is calculated based upon the amount of taxable wages paid. The tax is payable when an employer’s total Australian wages exceed the payroll tax-free threshold. Australian wages comprise of NSW wages and interstate wages.

 

When do you need to register in NSW?

Your clients are required to register as soon as their monthly Australian taxable wages exceed the payroll tax-free threshold. The 2016–17 monthly thresholds are:

  • 28 day month – $59 426
  • 30 day months – $61 475
  • 31 day months – $63 525.

If your annual taxable wages exceeded $750 000 for the year ended 30 June 2016, you have until the 21st of July 2016 to register. The annual threshold for the year ended 30 June 2017 is also $750 000.
The full annual threshold is only available to employers who:

  • employ for a full financial year
  • do not pay wages outside NSW
  • are not grouped with other businesses.

What payments are considered to be wages?
For payroll tax purposes, wages include:

  • gross wages and salaries
  • bonuses
  • directors fees
  • allowances
  • payments to certain contractors
  • superannuation contributions paid to employees and directors
  • fringe benefits.

How are businesses grouped for payroll tax?

If you are a member of a group for payroll tax purposes, you need to aggregate all Australian wages paid by each group member in order to establish if the monthly threshold has been exceeded.
Businesses may be grouped for payroll tax by:

  • common control
  • being related corporate bodies within the meaning of the Corporations Act 2001
  • common employees
  • tracing of interests in corporations.

Two businesses are grouped by common control when the same person or set of persons, together either as a director(s) or shareholder(s) of a corporation, partner(s) of a partnership or beneficiaries of a trust, have greater than 50 per cent control of each business.

It is important to note that the same person or persons can control two or more businesses by any combination of the above common control types. Related corporations are those that have a holding and subsidiary relationship because one company holds greater than 50 per cent of the share capital of the other, or the board of one corporation can control the other corporation, or one company can control the voting power of the other at a general meeting of shareholders.

Businesses can also be grouped from the use of common employees and the tracing of interests in corporations.

 

Common payroll tax errors made

A review of OSR audit program results have found the most common errors made when calculating payroll tax include:

  • Superannuation:
    Not including any payments in excess of the super guarantee or additional payments made to directors of the business outside the payroll system.

 

  • Apprentice/trainee rebates:
    Claiming rebates for apprentices and trainees not registered with the NSW Department of Industries (DOI). Claiming the rebate for the whole year when the employee is only eligible for a part period or claiming the rebate for an employee classified as an “existing worker trainee” by NSW DOI.

 

  • Fringe Benefits Tax (FBT):
    Including only the FBT tax paid or not aggregating Type 1 and Type 2 amounts and multiplying by the Type 2 grossed up rate.

 

  • Grouping businesses:
    Not being aware businesses can be grouped for payroll tax purposes therefore having to share a single threshold.

 

  • Liable contractors or consultants:
    Not being aware payments made to contractors or consultants may be considered wages for payroll tax purposes even if they hold an ABN or provide tools and/or equipment.

 

  • Interstate wages:
    Not including wages paid in other States or Territories and declaring these payments as ‘interstate wages’ in NSW payroll tax returns.

Medicare levy to increase from 2.0% to 2.5%

An increase to the Medicare levy has been announced in federal parliament on 17 August 2017. The levy for individuals will increase from 2.0% to 2.5% effective 1 July 2019. All individuals above the Medicare levy threshold will have an increase in their overall tax liability.

The additional Medicare levy for most individuals is a flat rate of tax on every dollar earned. Therefore, if an individual earns an additional $10,000 in income after the Medicare rate change, their tax liability increases by $50.

Parallel to this change in Medicare levy for the 2019/20 income year, the temporary Budget repair levy will end in the 2016/17 income year. This allows an opportunity for high income-earning individuals to transition income to the two income years where the highest marginal rate will be at its lowest.

As at the introduction of legislation on 17 August 2017, here is the top marginal rates of tax including all levies:

2013/14 income year 46.50%
2014/15 to 2016/17 income year 49%
2017/18 to 2018/19 income year 47%
2019/20 income year and beyond 47.50%

Please note: In the previous two Federal Budgets there have been no announcement that the top marginal rate of individual tax will stay at 45% beyond 2017/18.

However, an opportunity exists to reduce an overall liability where high-earning individuals are preparing for large income events such as capital gains or employee share scheme receipts. By focusing those income receipts (where achievable) into the 2017/18 and 2018/19 income years, the overall rate of tax will be marginally lower than other years.

The same will also apply for fringe benefits tax and other areas where the top levy is applied.

Increase of Medicare levy low-income thresholds

On the other end of the scale, an increase in the levy will be offset by an increase in the low-income thresholds for Medicare levy. As such, for the 2016/17 income year:

  • the singles threshold will increase to $21,665
  • the family threshold will increase to $36,541 plus $3,356 for each dependent child or student
  • the single seniors and pensioners threshold will increase to $24,244, and
  • the family threshold for seniors and pensioners will increase to $47,670 plus $3,356 for each dependent child or student.

It is expected that further increases will be announced as we get closer to the change in the overall rate.

 

The source of this content is CCH‘s professional information services. Thompsons Australia has a professional subscription with CCH providing access to in-depth quality technical information and commentary used by Thompsons Australia in keeping staff and clients currently in formed.

Cents per kilometre claims in your tax return

Under the current rules of substantiation, the maximum distance that a taxpayer can claim without receipts for car expenses is 5,000 kilometres per year. Under this amount, a taxpayer may claim a deduction under ITAA 1997 Div 28 by the cents per kilometre method.

The cents per kilometre method caps the distance limit to 5,000 kilometres, or otherwise at 66 cents per kilometre, at $3,300 per year. If a taxpayer wants to claim an amount above this, additional substantiation is required. Usually, all receipts are required for a deduction, reduced by an amount relating to private use calculated using a current log book.

Recently, the Australian Taxation Office has issued a warning to taxpayers, in particular individuals, who claim right at the maximum limit of $3,300 using the cents per kilometre method. Specifically, they have said that amounts at or near the limit will be deemed at a higher risk for review.

Risk mitigation steps

For taxpayers that are at or near the cents per kilometre limit, there are specific substantiation requirements for this claim.

When using the cents per kilometre method, there is no specific requirement to keep records for substantiation of the claim. The number of business kilometres claimed, however, must be based on a reasonable estimate.

Business kilometres under the cents per kilometre method is determined by ITAA 1997 s 28-25(3). These are kilometres the car travelled in the course of:

  • producing assessable income, or
  • travel between workplaces.

The idea of “reasonable estimate” does not have any further clarification in the tax law and takes its ordinary meaning. From a practical perspective:

  • irregular work-related travel would need to be specifically listed down in a written record, and
  • regular work-related travel (say between two work sites) may be calculated with reference to the number of trips made.

The written evidence of business kilometres travelled for an income year under the cents per kilometre deduction must be retained for five years. There is no need to lodge it with the income tax return, however, details relating to the calculation will be the initial question asked by the ATO in a review.

 

The source of this content is CCH‘s professional information services. Thompsons Australia has a professional subscription with CCH providing access to in-depth quality technical information and commentary used by Thompsons Australia in keeping staff and clients currently in formed.

First home super saver scheme

Individuals who are yet to purchase their first home will be able to withdraw voluntary contributions from the superannuation account for the deposit from 1 July 2018. This new measure was announced as part of the 2017/18 Federal Budget, delivered on 9 May 2017.

The new measure will start on 1 July 2017, meaning voluntary contributions made after this date will begin accumulating to prop-up the withdrawal balance on the first home deposit. The contributions will grow by a deemed earnings rate, being the Shortfall Interest Charge rate.

 

First home eligibility

If the home is being purchased by two first home buyers, both partners can access the scheme. If one of the partners who is purchasing the property is a first home owner, they are able to utilise this scheme. The only barrier is that the amount withdrawn from super is not more than the price of the property in total (which is very unlikely).

 

Eligible contributions

An individual will be able to make voluntary contributions into their superannuation of up to $15,000 per year and $30,000 in total. The contributions can be either concessional or non-concessional, but the voluntary contributions will count towards the contributions cap in the year they are contributed.

Voluntary contributions are written to mean not mandated contributions, meaning that amounts above 9.5% from an employer under an industrial award or enterprise agreement are not eligible to be withdrawn. Also, spouse contributions, government co-contributions and contribution splitting is not eligible.

The earliest time an individual can withdraw these funds are from 1 July 2018. This means an initial deposit in the 2017/18 financial year will have some time accumulating before it can be withdrawn.

As the contributions can be either concessional or non-concessional, an option exists to salary sacrifice amounts into superannuation to add voluntary contributions using pre-tax dollars.

Example
An individual with a salary of $50,000 with superannuation guarantee of the standard 9.5% (totalling $4,750) has a salary package of $54,750.
If the individual salary sacrifices $10,000 of their salary package into superannuation, a pre-tax super contribution of $14,750 is made. This brings the individual’s salary down to $40,000.
The superannuation guarantee contribution is based on the new salary which is 9.5% of $40,000 which is $3,800. The difference between the super contribution of $14,750 and the required SG contribution of $3,800 is a voluntary contribution of $10,950.
No salary sacrifice Salary sacrifice
Salary package $54,750 $54,750
Gross salary $50,000 $40,000
Superannuation (balance paid) $4,750 $14,750
Super guarantee (9.5% salary) $4,750 $3,800
Voluntary contribution $0 $10,950
In conclusion, a salary sacrificed contribution actually equates to a higher voluntary contribution. Note: There is currently legislation in progress to remove the additional voluntary contribution. It was an unintended consequence of the super guarantee legislation.

Withdrawal of funds

When the individual wants to withdraw their super saver amount, they must ask the Commissioner of Taxation for a release form. In this way, the system is the same as excess contributions.

The Commissioner of Taxation will inform the individual of the amount they may be able to withdraw, after calculating an amount to withhold. As it appears in the Exposure Draft, it appears that the superannuation fund will make the payment via the Commissioner of Taxation to the individual.

Upon withdrawal, salary sacrificed contributions and the deemed earnings will be taxed at marginal rates of taxation less a 30% rebate. For contributions that are non-concessional, the withdrawal will be tax-free on the contribution and the deemed earnings taxed at marginal rates less a 30% rebate. The rebate is a non-refundable rebate in the individual tax return.

The payment is made available to the individual, who can use the amount for a deposit for a first home. The individual utilising the scheme will then have 12 months to either:

  • purchase their first home
  • re-contribute the amounts back into superannuation, or
  • pay a balancing tax of 20% flat rate of the withdrawn amount.

As mentioned above, amounts that are not used within 12 months of receipt will be subject to a “first home super saver tax” being a 20% flat rate on the assessable receipt.

 

Home ownership rules

As the directive to pay the first home saver scheme amount is from the individual to the ATO, it is a self-assessment system. However, there are rules which must be followed in order to remain eligible to receive the scheme amount, they must:

  • be purchasing their first home. The contract will need to be sent to the Commissioner
  • intend to occupy the home as soon as practicable, and
  • occupy the home for at least six of the first 12 months of ownership.

Failure to do so may result in penalties levied by the Commissioner of Taxation, including additional taxes that will circumvent any benefit originally received from holding the amounts in super.

 

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