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Well its tax time again! Now is a good time to dig out your receipts to prepare your 2009 tax returns. People with a tax refund should get their tax returns in early – it is better in your hands rather than sitting in the ATO’s coffers.
One new deduction available this year is the Education Tax Refund.
This allows families to claim a 50% refund for the first $750 for each child in primary school and $1,500 per child in high school. This covers items such as home computers, laptops, education software, text books and stationary.
However, it does not cover school fees, uniforms, tutoring or other extra curricular activities.
Any expenses above these amounts can be transferred to another child or carried forward to the next financial year.
This year the ATO will be paying special attention to high-income earners, rental property deductions and capital gains tax claims. Occupations highlighted for increased scrutiny this year are sales and marketing managers, sales representatives, electricians and truckies.
Tax Tip 1 - Get your structure right
Tax Tip 2 - Salary packaging options
Tax Tip 3 - Claim all work related deductions
Tax Tip 4 - Maximise motor vehicle deductions
Tax Tip 5 - Travel expenses
Tax Tip 6 - Home office expenses
Tax Tip 7 - Rental properties
Tax Tip 8 - Interest expenses
Tax Tip 9 - Small business tax break
Tax Tip 10 - Education tax refund
Tax Tip 1 - Get your structure right - To Top
It is critical for individuals and businesses get their structure right. If you get this wrong, it can be very expensive and complicated to fix in the future – so getting this right is very important.
This means owning your assets in the right entity such as:
• Individual or joint names
• Companies
• Trusts
• Partnerships
• Joint ventures
Which is right for you? It amazes us how many high income earners own high interest bank accounts in their own name or jointly with their spouse. This means the high income earner will be taxed at up to 46.5% on interest, rental or dividend income whereas a spouse might be taxed at a lower tax rate.
Some people buying their 1st investment property will purchase it in joint names to keep everything even. If the property is negatively geared, the higher income earner will only be able to deduct 50% of the net loss on the investment property. However, when the property is sold the higher income earner will also be taxed on 50% of the capital gain. So tax planning here is very important.
It is equally important for businesses to get their structure right. Many businesses are set-up as companies to cap the tax rate at 30%. However, this might not be the best solution as profits will still be taxed at the individuals’ marginal tax rate when they are distributed to shareholders.
Trusts can often give business owners the best of both worlds. Income can be efficiently distributed to individuals (taxed at marginal tax rates) or a corporate beneficiary (taxed at 30%). This also gives the business owner with much the same asset protection as a company – but with greater flexibility.
Getting your structure right can also help with claiming the small business tax concessions when selling your business. Again, this is an important consideration when setting up a new business.
Tax Tip 2 - Salary packaging options - To Top
Salary packaging is commonly referred to as a salary sacrifice arrangement. This is an arrangement whereby the employee agrees to forgo part of their future entitlement to salary or wages in return for the employer providing them with benefits of a similar value. This can be an effective way to obtain tax savings, particularly if you are on the top marginal tax rate.
Some of the most common items that can be salary packaged include:
• Superannuation
• Motor vehicles
• Laptop computers
• Expenses ‘otherwise deductible’ to the employee
Special care should be taken to ensure that the arrangement provides you with some after-tax savings. Typically this will only occur where the benefit is concessionally taxed or is FBT exempt.
For example, the amount of tax savings on packaging a car will vary for each taxpayer, depending on the cost of the car, the total work versus private kilometres travelled and the car's annual running costs. Further the potential tax saving available may have reduced in recent years as tax rates have been progressively cut, and less taxpayers are in the highest income bracket.
Where an employer is FBT-exempt, a wide range of salary sacrifice benefits are tax effective within specified limits. For example, this commonly applies to public hospitals and the ambulance service.
Employers are not required to offer salary packaged benefits to employees. So the best place to start is to ask your employer if it offers salary packaging, and what benefits can be included.
Tax Tip 3 - Claim all work related deductions - To Top
Typical work-related expenses that are allowable include:
• award transport allowance claims
• bank and government charges on deposits of income, and deductible expenditure
• bridge/road tolls (travelling on business)
• car parking (when travelling on business)
• conventions, conferences and seminars
• depreciation of library, tools, business equipment, incl. portion of home computer
• financial advice fees (but not up-front advice fees to set-up a financial plan)
• gifts or donations
• home office expense
• income protection insurance (excluding death and total/permanent disability).
• interest on loans to purchase equipment or income earning investments
• laundry expenses
• magazine and newspaper subscriptions
• motor vehicle expenses (business)
• rental property expenses
• seminars and conferences
• subscriptions to trade, professional or business associations
• superannuation contributions by sole traders or substantially unsupported taxpayers
• sun protection items
• tax agent fees
• telephone expenses (business)
• tools of trade
• uniforms (subject to specific rules)
Where you don't have the necessary receipts on hand you can still claim up to $300 of work-related expenses (excluding items covered by allowances and car expenses) provided the claims relate to outgoings you necessarily incurred in your job or business.
The task of compiling all work related deductions may appear daunting especially given the need to collate all the required tax receipts for any significant claims. However, taking the time to understand what work-related expenses are potentially deductible can save you considerable cost.
Tax Tip 4 - Maximise motor vehicle deductions - To Top
You can claim a tax deduction for motor vehicles expenses using one of the following methods:
• Cents per kilometre
• Logbook method
• 12% of original value (if you travel more than 5,000 business kms)
• 1/3 of actual expenses (if you travel more than 5,000 business kms)
Where your claim for business kilometres for the year does not exceed 5,000 kilometres, you can claim a deduction for your car expenses on a cent per kilometre basis as follows. You should ensure that any claim for work related travel is based on reasonable estimates.
The cents per kilometre rates for 2008/09 (updated by the ATO each year) are:
Engine capacity Cents per kilometre
|
Cents per kilometre |
| Ordinary car |
Rotary engine car |
2008-09
income year |
1600cc (1.6 litre)
or less
|
800cc (0.8 litre)
or less |
63 cents
|
1601cc - 2600cc
(1.601 litre - 2.6 litre)
|
801cc - 1300cc
(0.801 litre - 1.3 litre) |
74 cents
|
2601cc (2.601 litre)
and over |
1301cc (1.301 litre) and over |
75 cents |
The log-book method may be used if you have used your motor for a significant amount of work related travel during the year. Such expenses would include registration, insurance, repairs, depreciation of the vehicle, fuel and maintenance. Such claims are only available where you have maintained the required log book, odometer readings of each trip and receipts.
On the other hand where business travel exceeds 5,000 kms, it may be possible to claim one-third of the actual car expenses of 12 per cent of the original values of the vehicle without a log book. You may wish to compare which of the above four methods gives you the maximum deduction.
You may wish to compare and use the above method that gives you the maximum deduction.
Tax Tip 5 - Travel expenses - To Top
Work-related travel includes travel between two places of work or employment, or travel to shifting places of employment. It may also be available where you have to carry bulky tools or equipment with you to work. However, it does not apply to travel from home to work or work to home.
Travel expenses you may be able to claim include:
• motor vehicle expenses
• air, bus, train, tram and taxi fares
• bridge and road tolls
• parking and
• car hire fees
• accommodation expenses
• meal expenses
Travelling expenses aimed at obtaining new agencies or assets, or otherwise expanding the business structure, are non-deductible. However, travel expenses in seeking new marketing or manufacturing trends (i.e. keeping abreast or ahead of business practices) would usually be deductible.
Trips partly for pleasure will usually be deductible where the main purpose of the trip is work related. No deduction is available where the business purpose was only incidental to the holiday, and 50% deduction is generally allowed where work and private purposes have equal importance.
You will generally need to maintain the following records for domestic and overseas travel:
| |
Domestic travel
|
Overseas travel
|
| |
Written evidence |
Travel Diary |
Written evidence |
Travel Diary |
| Travel less than 6 nights in a row |
Yes |
No |
Yes |
No |
| Travel 6 or more nights in a row |
Yes |
Yes |
Yes |
Yes |
So you need written evidence for travel expenses regardless of the length of the trip. You also need a travel diary where you are away from home for 6 or more consecutive nights. The travel diary should show the dates, places, times and duration of your activities and travel. It is also a good idea to get business cards and presentations from the business you visit to help substantiate your trip.
Tax Tip 6 - Home office expenses - To Top
Different rules apply for home office expenses as opposed to using your home as a place of business.
Home office expenses
Home office expenses apply where a person maintains an office or study at home as a matter of convenience (i.e. so that he or she can carry out work at home which would otherwise be done at his or her regular place of business or employment). Examples of this include:
• a barrister who reads client briefs at home
• a teacher who prepares lessons or marks assignments at home
• an insurance agent who maintains client files and/or interviews clients in a home office
The ATO will accept a claim for home office expenses at a rate of $0.26 cents per hour. This is to cover heating, cooling, lighting and depreciating of furniture. A separate calculation can be made for depreciation on other home office equipment, such as a computer, printer of copier.
To claim the deduction using this method you need to kept a diary for at least 4 weeks of the hours you worked at home. This amount is then used to work out your total hours worked for the year.
In this case, no deduction is available as home office expenses for occupancy expenses such as mortgage interest, rent, insurance and rates unless you conduct a business from your home.
Home as a place of business
A wider range of expenses can be claimed where the home is a place of business. This will be extended to include interest (on home loan), rent, insurance, council and water rates, land tax, cleaning costs, , heating, lighting, pest control, telephone and repairs and maintenance etc.
To qualify the ATO will consider the following factors:
• whether the area is clearly identifiable as a place of business
• whether the area be used for private or domestic purposes
• whether the area is used exclusively or almost exclusively for business purposes
• whether the area is used regularly for visits by clients or customers.
For example, a doctor or dentist who has a surgery, consulting or waiting rooms at home or a tradesperson who has a workshop from home would qualify as a separate place of business.
One downside of this where the home is a separate place of business and the home is sold, is that CGT will apply to the sale to the extent the home was used as a separate place of business.
Tax Tip 7 - Rental properties - To Top
Rental property owners can generally claim the following:
• advertising
• bank charges
• body corporate fees
• cleaning
• council and water rates
• deprecation
• electricity and gas
• gardening
• insurance
• interest on loans
• land tax
• lease preparation expenses
• legal expenses
• pest control
• property agent fees
• repairs and maintenance
• travel undertaken to inspect the property or to collect rent etc
Depreciation is one of the easiest and most valuable ways to save money at tax time, and yet 80% of property investors don’t claim it! To claim this as an expense you simply need to organise for a depreciation report from a quantity surveyor. This typically costs around $500-600 but you get the benefits back tenfold with tax savings over the life of the property.
You are able to claim a deduction for repairs on your property. A repair is generally defined as ‘restoring something to a working condition’. So getting one of your broken hotplates on your stove fixed is grounds for a legitimate repair claim, however buying a brand new stove to replace the ‘tired and old’ looking one cannot be claimed as a repair – but can be depreciated.
You are also entitled to a tax deduction for travel expenses where the sole purpose of the trip related to the rental property. If your travel was combined with a private purpose such as a holiday, you will need to consider an apportionment of expenses as appropriate.
Tax Tip 8 - Interest expenses - To Top
Interest payments represent one of the largest single cost areas so it is not surprising that this is also an area where many investors make incorrect claims. It is important to set-up the loan correctly from the outset and to make sure you separate loans used for investment and personal purposes.
Interest on funds used solely to acquire an investment can generally be claimed as a deduction. Where a loan is used for investment and private purposes, the interest must be apportioned. Similarly, where a loan is partly repaid, a subsequent re-draw of funds will only give rise to a tax deduction for the additional interest if the re-drawn funds are also used for producing income. We recommend separating private and investment loans and treating them accordingly.
For example, a taxpayer borrows $150,000 to buy a rental property. Over time the loan is reduced to $100,000. The taxpayer then re-draws $20,000 for an overseas holiday. Interest on the $20,000 portion of the loan is not deductible. It is the purpose for which the funds are borrowed that is considered, not the security for the loan. However, if the money had been used to finance renovations to the rental property, the interest would be deductible.
Similarly, a couple may fully own their existing family home. They then decide to buy a new home and rent out their existing home. They use the first house as security for the loan to purchase their new home. In this circumstance, no interest can be claimed as a deduction against the rental income even though the funds are borrowed against what is now a rental property. The purpose of the new borrowing is to buy a private residence, not an income producing property.
Tax Tip 9 - Small business tax break - To Top
In the Federal Budget the government announced it would increase the small business tax break as part of its economic stimulus package for the economy.
To qualify for the 50% tax break, you must:
• be a small business (have an annual turnover of less than $2 million)
• buy an eligible asset between 13 December 2008 and 31 December 2009
• meet the $1,000 minimum threshold
• use or install or improve the asset by 31 December 2010
• use the asset principally in Australia and principally for business, and
• be able to claim a deduction for the asset's decline in value
A 30% tax break applies to businesses with turnover greater than $2m. To qualify the business must spend meet a $10,000 minimum threshold and install or improve the asset by 30 June 2010.
This represents a tremendous opportunity for small business investing in new equipment. As well as claiming the tax break, businesses can also fully depreciate the asset as would normally apply.
The business tax break is an extra tax deduction available on the plant and equipment you need to buy to keep your business running. The tax break covers new, tangible, depreciating assets. It also covers improvements or additions you make to existing assets.
So if your business needs to get some new equipment you can take advantage of this great tax break of an extra 50% deduction for small business (or 30% for large businesses).
But be careful as this is not a 50% cash rebate. You need to multiply the deduction by your marginal tax rate to get the cash flow benefit. Beware of potential FBT for cars purchased via companies and don’t just spend or get into further debt for the sake of a tax deduction. Also note that even if you order & pay for it this year, you only get the tax deduction in the financial year that you first get use of the new asset (i.e. if delivery is on 1 July then tax deduction is in 2009/10 year not 2008/09).
Tax Tip 10 - Education tax refund -To Top
The Education Tax Refund is a new government initiative to help with the cost of educating primary and secondary school children. It means parents can get 50% back on some education expenses. This includes items like computers, educational software, textbooks and stationery.
This will entitle you to claim 50% of eligible education expenses up to:
• $750 for each primary school child – that’s a maximum refund of $375
• $1,500 for each secondary school child – that’s a maximum refund of $750
Eligible education expenses for the rebate include:
• laptop computers and home computers
• computer-related equipment such as printers, USB flash drives, etc
• computer repairs
• home internet connections
• computer software for educational use
• school textbooks and other printed learning material, including prescribed textbooks, associated learning materials, study guides and stationery, and
• prescribed trade tools for secondary school trade courses
The Education Tax Refund does not cover school fees, school uniforms, tutoring costs, extra curricular activities, sporting equipment, musical instruments, waiting list fees, or transport etc
Where an eligible education expenses has been incurred for more than one eligible child, the expense can be shared between the children. However, this is subject to all the children having access to the purchased (i.e. home based computer). This is called pooling.
If you spend over the maximum claimable amount in one financial year you can claim the excess eligible education expenses the following year. Eligible expenses that are not claimed within two financial years are lost and cannot be claimed in later years.
If you would like any more information or to book an appointment with KAS Tax & Business Solutions please contact:
Telephone:(07) 5585 2100
Facsimile: (07) 5585 2111
Email: admin@kasolutions.com.au
Address: Suite 14, 240 Varsity Parade, Varsity Lakes QLD 4227
Mailing: PO Box 964, Robina DC, QLD 4226
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