Archive for the ‘Tax Deductions’ Category

Last week we started our expose on Year End Tax Planning. It seems that in June each year we get all these newspaper articles advising us on how to reduce our tax bill. For the salary & wage earner this is almost impossible to achieve if you leave it to the last minute. The best way to save on tax is to take a pre-active approach, implement a plan in July and follow that plan all year. 

We have clients coming every year who acknowledge that they are aware of the records they needed to keep and promise to do better next year. So what approach needs to be taken, and can we do anything in the next few weeks. At this time of year we need to assess what we have done during the course of the past 12 months to see if there is any way we can generate a tax refund when we have our tax return prepared.

Depending upon your occupation, you can claim such items as tools of trade, purchase and maintenance of protective clothing, cleaning of that protective clothing, union fees, membership of professional bodies, subscription to professional journals, education expenses related to maintaining job skills whereby the education may be a refresher course related to a specific part of the job. In my industry my staff and I attend regular tax schools whereby we are brought up to date on changes to tax rules, tax forms etc. It may be that you need to be aware of changes to occupational health & safety rules etc so you pay to attend updates on this subject. The cost of the course is tax deductible as is the cost of travel and if the course is in another city then the cost of overnight accommodation and meals may also a tax deduction.

Other self education may be deductible if it is relevant to the earning of your wages and is relevant to your current duties. Education to get a promotion or another job is not tax deductible, however the cost of education to help you perform your current tasks is an allowable tax deduction. The fact that this helps in you gaining a promotion is a tax free bonus. The cost of uniforms is usually a tax deduction but if you work for a fashion shop and the boss expects you to buy clothes from that shop then the purchase of the clothes is not a tax deduction (what a bummer). If your job requires you to travel or work outside, then the purchase of a good pair of sunglasses and perhaps some sunscreen may be allowable.

If you travel between job sites on a daily basis or the place of work changes from day to day or week to week then the cost of travel may be a tax deduction.  With any of the claims for travel you must ensure that you keep accurate records. If you use a motor vehicle then document the odometer reading at the start and finish of each journey. It is amazing how many people rip themselves off by not keeping accurate records. If you go to TAFE as an apprentice, log the distance travelled, this is a tax deduction. The trip from home to TAFE and return is a tax deduction. The distance will not vary so measure it once and you have that measurement for all time. Also with TAFE students, keep a record of what you spend on books, stationery etc. It all adds up.

When can you claim a deduction for work related clothing? This area causes a lot of 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. For example a Nurses non slip shoes and white stockings.

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, 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.

 It should also be noted that even if you work for some Yummy Boutique and the boss expects you to wear the clothes they sell, this is not considered a uniform and no tax deduction is available.

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.

Some time last year I presented this argument and I thought it a good time to revisit this area as there are a lot of taxpayers out there that have the mistaken idea that any money spent to gain a tax deduction is money well spent. Well they are wrong, and so is anyone who tells you that spending your hard earned dollars on a tax deduction is the correct way to go.

Rather than spending your money to get a tax deduction look at how you are spending your dollars and if you can turn that spend into a tax deduction that that is the way to go. Do not spend just to get a tax deduction.

 The real estate agent will try to talk you into buying a property through negative gearing. He tells you that you can save heaps on tax and make a fortune on the property market with the tax man being a big contributor.

 Let’s look a bit closer at this.

 You earn $75,000 per year. The spouse earns $30,000 per year. You buy a property in equal shares for $325,000 and borrow $300,000. Rent received is $350.00 per week which equates to $18,200 per year. Rates, insurance and maintenance cost you $3,200 per year. Interest on an interest only loan at 7% per annum is $21,000 per year. This investment has cost you, in cash flow terms $6,000.

 What if rent was only $250 per week ($13,000) and interest 7%. ($21,000) your negative gearing situation is now losing $11,200 per year. Tax relief is around $3,000 per annum so you are losing almost $8,000 per year and if the property has not increased in value by more than this you have lost money. This example only looks at a small loan, the numbers get real scary as the loan increase.

On $75,000 for every $1,000 in interest you give the bank the Tax Office gives you back $315.00. On $30,000 income, for every $1,000 you give the bank in interest the Tax Office gives back around $165.00 so you really need to look at the benefit of spending money. Here you have spent $2,000 to get back less than $500. Add a zero and,spend $20,000 in interest to get back $5,000. Not so happy now is it.

 The best approach to this is to consider the question when spending money “can I turn this spend into a tax deduction?” Do not spend just to get a tax deduction. Your accountant may be able to help in making this choice.

 In business you may need new tyres for the truck but not for a couple of months. Tax planning means that in June you pay for the tyres and arrange for them to be fitted in September. This way you get you tax deduction early.

 An employee taxpayer needs a new briefcase for work but the old one will still last a few months. Do not rush out and buy one, no, check the Christmas specials. Why spend $200 on a briefcase to get back $63.00 a cost to you of $157.00 when if you wait for the January sales you can get the same item for $145.00, get a tax refund of $45.00 a net cost to you of $100. This way you save $57.00. Look for the bargains because, given the low tax rates now applicable, tax deductions are overrated.

Last week we mentioned a few items that would assist in generating a tax deduction. This week we will look at a few specific areas.

The Education Tax Refund allows you to get back up to 50% of what you have spent (up to a certain amount) on your children’s text books, pens, pencils, etc, computer stationary, education computer programs, internet connection fees etc.  It is important that you retain all receipts for these books, , printer cartridges  etc.

Investment properties.  If you own a rental property there are many items that can be claimed as a tax deduction against the rental income. By the same token, there are a lot of expenses that cannot be claimed.

Items that can be claimed against the rental income include agent fees, insurance, council and water rates, some lawn maintenance, minor repairs, depreciation on items such as ceiling fans, floor coverings such as carpets, linoleum and floating timber, gas heaters, hot water systems (excluding piping), surround sound systems, ducted vacuum cleaning systems etc. If the property is rented furnished then there are many more items available for depreciation.

Items that are not tax deductible include major renovations such as a new kitchen or bathroom. Parts of the renovation may be allowable such as cook tops, dishwashers, freezers, ovens and range hoods but the cost of the cupboards and bench tops is not allowable.

When purchasing an investment property it is always advisable to consider the long term benefits/ detriments of such an acquisition. It may be purchased 99% in the name of the primary income earner so as to maximise the tax deduction but on sale can cost more in capital gains tax.  Talk to us about ways this may be used to your advantage.

If you are thinking of moving and want to keep your current home as an investment property, this can be done tax effectively if you talk to your accountant first.

Superannuation contributions can generate a tax refund in some instances. Contribute to your non working spouse’s super fund. A contribution of $3,000 may get you a $540 refund. A contribution of $1,000 can generate a co-contribution of $1,000 if you earn less than $31,920. This is money for nothing and can certainly help to put something aside for the grey years.

If you salary sacrifice to super you should ensure that your contribution does not exceed the maximum contribution allowable, otherwise you could be paying another 46.5% tax on that contribution.

The rules have changed again this year and any losses on rental income (negative gearing), salary sacrificed superannuation and interest on geared shares are to be added back to income to determine eligibility for various government payment such as Family Tax Benefit Part A or B.

This add-back also impacts on your ability to claim the superannuation co-contribution.

If you have any questions on any of this please send us an email to info@coulcher.com.au.

Last week we looked at work clothing, whereby a uniform may be compulsory or non compulsory. With compulsory uniforms you can claim the cost of buying and maintaining those uniforms. With non compulsory uniforms each case is treated on its merits.

Protective clothing is different in that in the main it is tax deductible, an example would be steel capped boots or wet weather gear worn when using chemicals or high pressure hoses. Sun glasses, sun screen and hats are protective clothing for outdoor workers and other taxpayers required to spend part of their day out of the office. The ATO have advised that drill trousers, shorts, shirts and conventional footwear such as sports shoes and joggers are not considered protective clothing, they are of a private nature.

Protective clothing is the clothing and footwear that you wear to protect yourself from the risk of illness or injury posed by your income earning activities or the environment in which you are required to carry them out. To be considered protective the items must provide a sufficient degree of protection against that risk. Examples of protective clothing include: fire resistant and sun protective clothing; safety coloured vests; non slip nurses shoes; rubber boots for concreters; steel capped boots; gloves; overalls; and heavy duty shirts and trousers.

The tax office also considers that dust coats, smocks and aprons you wear to avoid damage or soiling to your ordinary clothes during the course of your income earning activities to be protective clothing. Ordinary clothes such as jeans, drill shirts and shorts, trousers and socks that lack protective qualities designed for the risks of your work are not protective clothing.

I often have clients ask about claiming for the purchase of clothing that must be purchased as a condition of employment. This usually occurs when someone works for a fashion boutique, whereby the sales staff must purchase their clothing from that shop and this is part of the employers advertising campaign. “My staff wear these clothes so they must be good” type of exercise. The fact that the staff would not be seen dead in that type of garment outside of the shop is irrelevant. The employer in some cases encourages the employee by offering a discount on the clothing purchase. I have been told that the generous employers offer a 55 discount. (wow). Unfortunately, the purchase and laundering of these clothes is not a tax deduction.

For more information about claiming a deduction for expenses associated with your work related clothing you could refer to Tax Rulings TR 94/22; TR 97/12; TR 2003/13 and tax determination TD 1999/62. Reading of these publications is also a cure for insomnia.