Archive for September, 2009

Many taxpayers invest in property as a strategy to reduce their tax bill. To do this they ‘negatively gear’ their rental property, which means a loss is made and is a deduction against other income earned, such as salary, wages or business income.

Some of the expenses incurred for the period in which the property is rented or available for rent are offset against any income produced by the property. If these expenses are greater than the rental income, a loss is made and the property is negatively geared. One of the major, and most attractive, expenses for negative gearing is the interest paid on the loan taken out for the purchase of the rental property. As the interest rates are very low at the moment some financial planning may be needed to ensure your property is geared in a tax effective manner.

Other expenses which may be included as a deduction include repairs, travel expenses, advertising, cleaning and the list goes on. You must however, apportion the expenses if the rental property is ever used as a private ‘holiday’ home.

Another trap for the unwary is the cost of repairs. A new Hot water service creates a tax deduction, a new bathroom does not. A new stove creates a tax deduction, a new kitchen does not. Remember it is better to speak to your accountant before investing in order to get the right advice.

Tax payers who use their rental property losses in order to gain certain tax offsets by reducing their taxable income need to be aware that from 1 July 2009 any investment loss will now be considered in determining whether that taxpayer is eligible for the tax offsets. For example, the Senior Australian Tax Offset (SATO), Dependent Spouse Offset, Family Tax Benefits, the Pensioner Offset and the low income earners rebate. It will also be considered in determining whether the tax payer has an obligation to pay the Medicare Levy Surcharge and repayments of accumulated HELP debts. This basically means that the investment loss will now be added back on to the taxable income.

A word of advice. Tax deductions are over rated. Why pay $10,000 to a bank in loan interest in order to receive a $3,000 tax refund. It is better to pay $3,000 tax and keep the $7,000. Talk to us before you take that step into property to ensure the most tax effective choice is made.

The ATO has announced that it will be undertaking a number of data matching programs in the 2009-10 tax year, and perhaps ongoing, to identify taxpayers who may not be meeting their taxation obligations.

Information collected will include details of motor vehicle purchases for vehicles costing over $10,000. This is collected from the RTA, or similar organisation in each state. It is estimated that information on some 2.5 million taxpayers will be collated.

Where individuals quote an ABN to a labour hire firm such as Hays, Drake Recruitment, Infosys, Link Recruitment & Michael Page International etc, details of payments will be forwarded to the ATO so that, even though the individuals do not have a group certificate, the ATO will still know how much they have been paid. It is estimated that around 30,000 records will be obtained by the ATO.

Mining companies such as BHP Billiton, Rio Tinto, Xtrata Ltd, Woodside Petroleum etc will also be required to notify the ATO of payments made to contractors and sub contractors. It is estimated that records relating to approximately 100,000 individuals and entities who have received contract payments from the listed mining companies will be matched.

This data-matching program is designed to identify personal services income payments made to a Company, Partnership or Trust. As part of its data matching process the Tax Office has indicated it will also identify associated individuals. Among other things, this process aims to identify compliance risks, trends and patterns that may be completely outside the tax system, and also provide opportunities to satisfy the ATO’s wider compliance objectives in the areas of superannuation, GST, PAYG, FBT, excise and income tax.

This just goes to show how computerization is changing the face of tax compliance and data matching. The ATO already collects information from banks on interest earned, employers on salaries and wages paid, from the Land Titles office on sale and acquisition of investment properties etc.

Perhaps George Orwell was right, Big Brother is watching.

The Tax Office identifies the most common mistakes made by taxpayers who choose to prepare and lodge their own tax returns. If you are one of these then have a read. It is also important to note that if you are a self preparer then the amount of time available to you to prepare and lodge your tax return is considerably shorter than that available to tax payers who utilize the services of a registered tax agent, such as the award winning team at Leslie M Coulcher Pty Ltd.

The end of the financial year is a busy time for most people, with paperwork to sort through and the stress of having tax returns to prepare. With so many things to remember, it’s easy to make a simple mistake in the preparation of your return.

The most common mistakes people make when filling out their tax return, which can be avoided, include forgetting to:

• include income such as interest from a bank account, or income from a previous job;
• claim tax offsets or deductions such as rental property expenses;
• sign the return or include your date of birth;
• include distributions from sources such as trusts, investments, and capital gains;
• include additional information about the Medicare levy or Medicare levy surcharge.

How to reduce tax time stress.

As mentioned above, if you are a self preparer and choose to prepare and lodge your own tax return then it must all be completed by 31st October each year. What if you owe the tax man? When will the tax be payable? Can you get extra time to pay?

No problem with any of this. By having a registered tax agent prepare your tax return you no longer have to get it done by 31st October.  You come under the umbrella of the tax agent’s lodgement program. The tax agent must lodge a percentage of his client’s tax returns each month and, in most cases, has until June the following year to complete his lodgement program. I say in most cases because if the tax agent is lax and does not meet his lodgement program then he is put on a tighter leash and must lodge earlier than most agents. In some cases all the tax returns for that agent may need to be lodged by January.

If you think you will have a large tax bill, through capital gains or investment income, then see a registered tax agent. We can not only review the return and confirm the debt but by registering you as a client, can defer lodgement of the return until a later date. You should however see the tax agent before 31st October so that you can be included in his lodgement program.

In our last column we spoke about some workers being eligible to claim a deduction for motor vehicle usage. This week we will concentrate on the different methods you can use. Hopefully this will give you an idea of which method to use for the best tax deduction.

Cents per kilometre – a good method where the actual business use is low. This method allows you to claim up to 5,000 kms at a set rate. The rate varies depending on the engine size of your car. You do not need to keep receipts or log books however you must be able to justify your claim.* Although the maximum you can claim under this method is 5,000 kilometers per year, you can travel more than this on business but the claim is limited to 5,000 kms.

12% of original cost – as the title suggests the deduction is 12% of the original cost, provided the business use of your motor vehicle exceeds 5000 kilometres, (pro rated if used less than a year). You do not need written evidence for this method* however the value of the car is subject to luxury car limits (2009 luxury car limit is $57,180).

*It’s a good idea to keep a diary of allowable work kilometres. You may need to justify your claim five years down the track, and remembering how you came to the kilometres claimed may not be easy.

One-third of actual expenses – the deduction is based on 1/3 of actual expenses. The car has must have traveled more than 5000 kilometres in the year for allowable work activities (pro rated for part year use). You will need written evidence for expenses and odometer records for the start and the end of the period you owned or leased the car in the income year. **

Log Book Method – the claim is based on a business use percentage, a good method for say the traveling salesman, you will need to keep a log book for all travel and keep all receipts associated with running your vehicle,**  however fuel and oil can be calculated using odometer records. You need to keep a log book for each car for 13 weeks every five years (provided the business percentage does not vary) this is used to work out an allowable deduction based on a percentage of expenses. You also need odometer readings for the start and the end of the period you owned or leased the car in the income year.

**When calculating the running cost of a car, include such items as; lease payments, interest on loans; registration; insurance, repairs and maintenance. Odometer readings can be used to calculate fuel & oil expenses.

The above methods cannot be used for claiming a deduction for utility trucks or panel vans with a carrying capacity of one tonne or more, vehicles with a carrying capacity of nine or more passengers, motorcycles and somebody else’s car. Refer to the ATO website, or to us, for more information.

The use of a motor vehicle for work is often over looked by employees due to the uncertainty of deductibility and the confusion surrounding the ways a claim can be calculated. This article should help you determine if you are entitled to a claim. As this is only a brief outline we encourage you to talk further with your tax agent about your individual circumstances.

One of the main points is the car should be owned by the taxpayer and be registered in the name of the taxpayer. This is the main rule, but there are  exceptions, so please ask when completing your tax return.

The ATO recognises the need for some employees to use their car in the course of their work and allows a deduction for this provided:

• It is not travel to and from work which is considered private in nature even if done more than once a day for example if you are on call and get called in to work for a second or even third time.
• The car is not provided to you by your employer,
• Tasks performed were more than minor in nature. Minor tasks include tasks such as collecting the mail on the way to work.
• Your home was a place of business and you traveled directly to a place of employment

A point to remember is there is no deduction allowable just because there was no public transport available or you worked outside normal working hours.

A deduction is allowable in the following circumstances

• You carried bulky/heavy work equipment to and from work and you could not leave the equipment at work.
• You have a shifting place of employment, for example a building worker who travels regularly to more than one site in a day before returning home
• Your home is the base for your employment, you started work at home and then went to a place of employment to continue that work
• You travel directly from one place of employment to a second place of employment or to a place of study where that study is related to your job.

There are four methods you can use when claiming a deduction for motor vehicle use and they will be discussed in our next column.

Whichever method you choose, you can change the method each year. If you own two or more vehicles, and use them all for business, you can claim a deduction using one or more of these methods for each vehicle.

However if you cannot wait you can read more on these on the ATO website or if you have a question and cannot find the answer throw us an email and we will get back to you. Email info@coulcher.com.au