Archive for October, 2009

We have mentioned a lot about tax deduction. Here is a reminder of what you need to keep for next year’s claims.

A work related tax deduction is any expense incurred by an employee in the course of earning assessable income, No written evidence is required if the total of all work expenses (excluding travel and meal allowance expenses) is $300 or less, although you still need to justify your deductions.

Generally you need to have receipts (or expect to have them in a reasonable time) for deductions claimed on your tax return, whether they be for donations or work expenses. Deductions must be claimed in the income year they were incurred and receipts kept for generally a period of five years from the date you lodge your tax return with the ATO.

The last decade has seen a lot of technological advances where receipts are not just issued by retailers and bills are not all paid at the post office, so what is an acceptable receipt?

Generally written evidence of an expense must show the following;

Name of supplier; the amount of the expense; description of goods or services provided andthe date the expense was incurred. If this is not on the receipt it can be added by you in pen.

The ATO has advised the following can satisfy the substantiation rules where the above information is shown:

• Bank & credit card statements
• BPay reference numbers combined with a bank statement and/or tax invoice
• Receipts generated by the internet or received by email
• Electronic receipts
• And the good old paper receipts.

If you have small separate expenses that each are less than $10 in value and together do not exceed $200 there is no requirement to hold receipts however there should be some documentation to support these claims such as a diary note.

Expenses where you are not likely to be given a receipt (e.g. car parking) can be claimed where they are recorded in a diary, these expenses can be more than the $10 limit listed above and do not count towards the $200 limit.

Deductions that are made using ‘reasonable amounts’ as declared by the ATO may also be excluded from the receipts requirements, such as allowable meal expenses; travel expenses: laundry expenses and motor vehicle expenses.

Where an item is being used for not only work related activities but also private use you need to keep receipts and also a log book of all use for a period of 3 months. This is then used to determine a percentage of expenses that can be claimed. Keep this in mind for equipment such as computers, the internet, telephones and the like. A claim can be made for electricity based on an hourly basis, the ATO is not very generous here (about 20 cents an hour) but it’s better than nothing.

The question has been raised many times, do I need to be in a health fund in order to save on tax. These days, the answer is not always clear cut.

The way the system works, if you are single and earn over $70,000 per year, and do not have Hospital Cover through a Health Fund, then you will be taxed an extra 1% of your taxable income. The cost of being in a health fund, and you only need Hospital cover to avoid the Medicare Levy Surcharge, can be less than $10.00 per week, or around $500 per annum. This can be worth the effort to save over $700 in extra tax.

If you are married, or one half of a couple, then the total partnership income must be less than $140,000 to avoid the 1% Medicare levy surcharge.

One anomaly with this is if you are in a fund and earn $150,000 per annum, then no Medicare Levy Surcharge applies. However, if you get married and your new spouse is not in a fund, and, if your spouse lodges a tax return and indicates that they are not in a health fund then, unless you have already changed the fund cover from single to Family, you could be hit with an extra $1,500 tax bill because the tax return contains the following words: “For the whole period 1 July 20## to 30 June 20## were you and all your dependants (including your spouse) – if you had any – covered by private HOSPITAL cover?”

This means that unless you have family cover, or each member of the family has single cover, you will be liable for the 1% surcharge.

In addition to this, when you join a health fund, you can agree to pay an excess on admission to Hospital. This excess can be any amount agreed to by the fund, however the Tax Office takes a dim view of any excess deemed too large.

To quote the Tax Office website, “Private patient hospital cover is cover provided by an insurance policy issued by a registered health insurer for some or all hospital treatment provided in an Australian hospital or day hospital facility. However, an insurance policy for hospital cover taken out after 24 May 2000 that has an ‘annual front-end deductible’ amount or excess of more than $500 in the case of a policy covering only one person, or more than $1,000 for all other policies, does not provide private patient hospital cover for Medicare Levy Surcharge purposes.

So if you agree to pay an upfront fee on admission to Hospital, and that fee exceeds the $500 (single) or $1,000 (family) threshold, then you are deemed by the tax office to not be in a health fund and will be liable to the 1% surcharge.

The other day I received a quote for some work to be done in the office.

Business Owners

The price quoted was $489.50 including GST or $445 cash. Now for some people this may seem like a good deal but for a business it could not be worse. Problem 1, there is no receipt therefore no tax deduction. This means I have to earn $635.71 in order to pay $445 cash to someone, so why would I bother. Problem 2, there is no warranty and if the work is sub standard you have no come back on the tradesman.

Employers

The same applies to people in business that pay their staff cash in hand, without putting them through the books. You pay young Johnny $200.00 per week. For this there is no tax deduction. If your tax rate is 30% then you have to earn $285.71 in order to cover Johnny’s wages.

If you put the $200.00 through the books then you would only need to earn $230.00 to cover the wages, meaning you are around $55.00 per week better off. Where does the $230.00 come from, you pay 9% super = $18.00 and about 6% workers compensation insurance = $12.00.

Employees

From an employee point of view, he may think he is better off, but no way. The worker can be sacked at a moments notice; there is no cover for workers compensation in the event of an accident at work, or even on the way to or from work. There are no paid holidays and no superannuation. The other point is that on $200.00 per week there is no tax payable.

Home Owners

For the home owner if you are given two quotes, one for say $2,000 and the other for $2,400 including GST, then take the $2,400 job. You get a receipt and have some peace of mind regarding follow up if something goes wrong. If, in this case the materials cost $1,000, the tradesman receives $1,400 after expenses. He pays $127 GST and, on 30% tax, pays around $382 tax, giving him a net profit of $891.00.

If you paid the cash price the tradesman would have made a profit of around $1,090.00 some $200 more. So unless the tradie wishes to share this with you, get a receipt.

In the same example, if the materials only cost $500 the two profit figures would have been $1,209 in the case of a receipt and $1,945 in the cash instance. So, if the Tradie is making an extra $700 out of you because you paid cash, then he needs to cut his price by a lot more.

When can you claim a deduction for work related clothing? This area seems to cause some confusion and here we hope to clear this up.
 
Compulsory Uniforms

As stated by the ATO ‘You can claim the cost of buying, renting, repairing and cleaning occupation-specific clothing, protective clothing and certain work uniforms.

You cannot claim the cost of purchasing or cleaning a plain uniform or clothes you bought to wear for work that are not protective or specific to your occupation even if your employer tells you to wear them – for example, a bartender’s black trousers and white shirt or a manager’s suit or stockings.’

A deduction is allowable where the wearing of uniform or specific clothing is compulsory and the clothing readily identifies a particular organisation with the use of such things as logos, initials, insignias on buttons or pockets. These should be of a sufficient size to be clearly visible to the observer. Clothing is unique when it has been designed and made for only one employer and is not available to the public. You may be able to claim a deduction for shoes, socks and stockings where they are compulsory and an essential part of the distinctive uniform which is specified in your employer’s uniform policy.

Specific Clothing
This is clothing that is specific to your occupation and would allow the public to easily recognise your occupation – for example, the checked pants a chef wears.

Protective clothing
Clothing that provides a sufficient degree of protection against risk of injury or illness that may be encountered during your duties at work are claimable. Examples of these include steel capped boots, gloves, safety coloured vests, fire resistant and sun protection clothing, non-slip nurse’s shoes, heavy duty shirts and trousers.

Overalls, aprons and other clothing worn so as not to damage or soil your normal clothes is also considered protective. Keep in mind jeans and other clothing that offer no extra protective qualities are not considered protective clothing.

Non Compulsory Work Clothes

You cannot claim expenses incurred for non-compulsory work uniforms unless your employer has registered the design with AusIndustry – if you are unsure check with your employer or go to www.ausindustry.gov.au.

Remember shoes, socks and stockings or single items of clothing can never form part of a non-compulsory work uniform.

Laundry

Where a deduction for work clothing is allowable you will generally be able to claim the cost of laundry. You may use a reasonable basis to work out your claim if it does not exceed $150. The ATO considers reasonable $1 per load, including washing, drying and ironing if no other clothes are included in the wash. Where other clothes are in the wash the rate is reduced to 50 cents.

Allowances

You cannot automatically claim a deduction simply because you received a uniform, clothing, laundry or dry-cleaning allowance from your employer.