Archive for 'Tax'
It’s a simple, step-by-step process used by many Australians to increase their income. Borrow money from a financial institution, invest in a second property and pay off the loan with the profit accrued from the investment property (ie. rent from tenants).
But did you know that the interest on a home loan for the purchase of an investment property can be claimed as tax-deductible?
To clarify – claiming a tax deduction on the interest of a loan can only be used on the loan that was used to purchase the investment property. It also must be used to earn income, because a property that is solely residential isn’t eligible for any tax deductions (except in certain situations where the residence may be used to produce income, like home business or office).
Here are a few examples of when tax deduction claims on your property are not allowed:
- If the secured property is being used for living as a primary residence, and no income is made from it.
- Refinancing your investment loan for some other purpose (like buying another property).
- Using the loan for a private purchase, other than the purchase of a home.
- If the investment property is a holiday home that is not rented out, then deductions cannot be claimed as it doesn’t generate rental income.
As an example, if borrowing against your main residence for the purpose of purchasing an investment property, then the interest on that loan is tax-deductible. Conversely, if the loan was against the investment property to buy a car for your personal use, then the interest from that loan will not be tax-deductible.
The only way that a tax deduction on a home loan’s interest is possible, is if there is a direct, unbroken relationship between the money borrowed and the purpose the money was used for. Any money that resulted from a home loan, for instance, should have been invested into a property.
If you happen to redraw (make extra repayments into your loan that reduce the loan balance) against an investment loan for personal use, the tax-deductible interest is watered down. This is because the new drawdown (transfer of money from a lending institution to a borrower) is deemed to not be for investment purposes.
It is important that any investment loans are quarantined from your personal funds to maximise tax deductions on interest. Though it may be tempting to pull additional funds from the loan for additional finances, it’s also shooting yourself in the foot.
A better strategy (if there is only investment debt that has been incurred, and you wish to pay it off), is to place funds in an offset account (a bank account that is linked to your home loan) and then redraw those funds for your personal use. It’s also important to ensure that the offset account is a proper offset – a redraw that is disguised as an offset account can be a major drawback for investors looking to capitalise on their tax threshold.
If you or someone you know has recently purchased an investment property with a home loan, speak to your accountant or financial advisor to see how your tax return can benefit from it.
As an employee in a business, often there are perks that can come with the job. A company car, fuel money, perhaps some technology to help make things easier. Small business owners however have to be a lot more mindful of how they use the money from their business.
Any money or assets that a business has earned or possesses, is solely the property of that business. That means that there are numerous issues that can arise from dipping into these company funds.
As a business owner, it’s important to keep records and correctly report transactions if using company money or assets (e.g, company car). These can include instances such as
- taking money out of your company for yourself or your family
- receiving money from it (for example, as a director, shareholder or an associate)
- using your company’s assets for private purposes.
For small businesses, this can be easily done through:
- Salary, wages or director’s fees
- Repayments of a loan you have previously made to the company
- A fringe benefit, such as an employee using a company car
- Dividends (formal distribution of the profits)
- A loan from the company
If a business does not report correctly or keep appropriate records for transactions, an unfranked deemed dividend could be included in their assessable income (this is a bad thing) during tax time.
Here are some easy ways to avoid being put into this situation:
- Always ensure that any company money issued is accounted for as per the previous categories.
- Have a separate bank account for the company to pay for company expenses (not private ones!)
- Keep proper records of all company transactions
- Repay any loans from the company before the tax return date to avoid unwanted income tax
Luxury car tax or LCT is a 33% tax on cars that have a value (including GST) above the set threshold. However, the tax is only on the value which is above the threshold.
Businesses and individuals that sell or import luxury cars are required to pay LCT.
You can make LCT payments in instalments or annually. If you choose to report your payments in instalments, they will be included in your GST instalments. If you choose to pay GST annually, then you don’t need to worry about reporting monthly or your quarterly BAS.
You may be able to defer paying LCT by quoting your ABN. You are able to do this if you are only going to be using your car to:
- Hold it for trading stock (doesn’t include holding it for hire or lease)
- Carry out research and development for the car’s manufacturer
- Export it GST-free
If and once you stop using your car for the above purposes, then you will need to start paying LCT.
When you own a rental property, keeping records is important. These will help you meet tax obligations. Generally, only individuals with their name on the title deed declare income and claim expenses.
Remember that the records must be kept in English or should be easily translatable into English, and kept for a minimum period of 5 years.
The records you need to keep include:
- Dates and costs of buying the property: These will help work out any capital gain or loss when the property is disposed of – the date entered into the contact is the purchase date, not the settlement date.
- Any rent and rent-related income: This will be required to report tax return.
- Expenses associated with the property: These are important to claim deductions you may be entitled to. These records should include the name of the supplier, the amount of the expense, nature of the goods or services, the date the expense was incurred, date of the document
- Significant changes: These include repairs or improvements or partial or all sale of the property – the cost of repairs and improvements should be kept separate from depreciation costs so that deductions and capital gains and losses can be calculated correctly.
- Costs of selling or disposing of property: To be able to work out any capital gain or loss
Amounts which are not classified as income are split into 3 categories.
This is income that you do not pay tax on, although, some exempt income may be taken into account when determining:
- Tax losses of earlier income years that you can deduct
- Adjusted taxable income of dependants
Some examples include certain Government pensions, certain Government allowances, certain overseas pay, some scholarships, etc.
Non-assessable, non-exempt income
This is also income that you don’t pay tax on – it does not affect your tax losses.
Some examples include the tax-free component of an employment termination payment (ETP), genuine redundancy payments, super co-contributions, etc.
There are also other amounts that are not taxable.
Some examples include: Rewards or gifts received on special occasions, prizes won in ordinary lotteries, child support and spouse maintenance payments, etc.
The Australian weather can be unpredictable, resulting in intense weather conditions. Bushfires, severe storms or floods can cause personal properties and assets a lot of damage. In the case that this does occur, individuals need to determine the tax treatment of any insurance payouts or relief payments that they may receive.
Usually, individuals are unlikely to experience tax consequences for payments for personal property or assets. Personal property or assets include your home and household assets.
On the other hand, if an individual’s income-producing assets incur damage, then they will need to determine the proper tax treatment of the payouts or relief payments that they receive and the costs involved in repairing or replacing the assets.
If you have been working from home and using personal assets to produce income (such as a personal laptop you are repurposing) then determining which tax treatment applies could get complicated. You may have to talk to the ATO or an advisor to clarify the specificities of your situation.
Trusts have their own tax file number (TFN) that should be used to complete tax returns. Trusts are also able to apply for an Australian business number (ABN) on the condition that the trust is carrying on an enterprise. If a trustee applies for a TFN or ABN, then this is in the capacity of a trustee and is separate from any other registration the trustee may require for other capacities.
The trustee is responsible for managing the tax affairs associated with the trust. This includes registration of the trust in the tax system, lodgement of trust tax returns, as well as paying certain tax liabilities.
For beneficiaries, their share of the trust’s net income is included in their tax returns. Further, payments on the expected tax liability may need to be made, for which the pay as you go (PAYG) instalment system can be used.
When your job ends, whether there has been a termination of employment or redundancy you will receive a payment for unused leave. This payment will be taxed differently from your normal income.
The taxation will vary depending on the reason why you left the job and any unused entitlements that have been accrued over your employment (long service leave or sick leave).
Lump sum payments that you receive for unused annual leave or unused long service leave are taxed at a lower rate than other income. These lump sum payments will appear on your income statement or payment summary as either ‘lump sum A’ or ‘lump sum B’.
These payments may also be taxed differently if you lost your job as a result of Covid-19.
The government provides fuel tax credits for businesses with a credit for the fuel tax (excise or customs) that is included in the price of fuel used in machinery, plant, equipment, heavy vehicles, and light vehicles travelling off public roads or on private roads.
Fuel tax credits a business receives depend on when the fuel was acquired, which fuel you used, and what it was used for. Since fuel credits change regularly, it is necessary to check rates each time the business activity statement (BAS) is filled out.
- Certain fuels and activities are not eligible
- Must be registered for GST when fuel was acquired
- Must be registered for fuel tax credits when you lodge the claim
Businesses that are registered for GST are required to lodge a business activity statement (BAS). These assist in the reporting and payment of:
- Goods and services tax (GST)
- Pay as you go (PAYG) instalments
- PAYG withholding tax
- Other tax obligations
ATO will automatically send businesses who are registered for an ABN and GST a BAS when it is due for lodgement.
Businesses are given various options to lodge their BAS:
- Online services for individuals and sole traders – which may be accessed through myGov
- Business Portal – which is a secure website created by the ATO to assist businesses in managing their tax online
- SBR-enabled software – which allows access to lodgement from different financial, accounting and payroll software and can be integrated to industry-specific business software.