Posts Categorized: Tax
We have addressed in previous blogs and our newsletter that former Australian residents selling their former family home will pay tax on the whole gain if the property is sold after 30th June 2020 whilst they are still living overseas. There is no reduction for the period it was their family home. There is however an exemption to some non-residents selling their former Australian home after June 2020; but hopefully those circumstance don’t eventuate.
Former Australian tax residents who have lived overseas for less than 6 years can claim an exemption for what are referred to as life events.
Life events include such things as:-
Being diagnosed with a terminal medical condition by the individual or a family member.
The death of certain family members.
A marriage or de facto relationship breakdown.
We should add that it doesn’t matter whether one still holds an Australian passport. Residency for tax purposes is a separate concept. Whilst there are numerous considerations, the basic position is that one ceases to be a resident of Australia for tax purposes once one has lived overseas for two years or more.
If a former home is sold by an Australian now living overseas and there is no life event exemption, then:-
The whole gain will be taxable – there is no reduction for the period in which it was the family home.
The capital gains tax general discount of 50% is not available to non-residents. In other words the whole gain is taxable.
Tax is payable from the first dollar at 32.5% as non-residents do not receive the tax free threshold nor the 19% marginal tax rate.
Under the new non-resident property withholding tax, 12.5% of the proceeds must be remitted to the ATO – meaning only $1,750,000 from the sale of a $2,000,000 property will be received at settlement; the balance will offset against the capital gain within the Tax Return.
Please refer to previous blogs for strategies to not paying this rather hefty and unfair tax. Or better yet, calls us to discuss your situation.
An often over looked way to reduce the tax paid on the sale of a former home is to use the six year absence rule.
The net rent you receive is assessable (or deductible if negatively geared) but the gain itself can be disregarded.
However, you must take care when choosing to use this method when you live in another home. One is only entitled to one principal residence (family home) exemption so choose carefully
We would welcome the opportunity to discuss what is best for you. We welcome your call.
Non-residents have a house sized problem ahead!
The bill to deny non-residents the principal residence (family home) Capital Gains Tax (CGT) exemption that elapsed before the May Federal election has now been reintroduced and passed by Parliament.
What this means that if an Australian working overseas sells their former home, they will pay tax on the entire gain. There will be no reduction for either:-
The time they lived in the home nor
The 50% CGT general discount (which is not available to non-residents since 2012).
And was non-residents tax on the first dollar at a tax rate of 32.5%, this could equate to a huge tax bill.
Yes, it doesn’t matter how long you lived in the property, a former resident will pay tax on the whole gain. And they will do so at comparatively high tax rates.
So, let’s take an example of Fred, a born and bred Australian who decides to sell their former Melbourne home of say 12 years and decides to buy a home in London where they have been for living for the last three years:-
Home bought for $750,000.
Home sold for $1,500,000.
Gain made of 750,000.
No reduction for the 12 years that it was their home.
No CGT 50% general discount as they had become a tax non-resident of Australia.
No six-year absence rule.
Will result in tax payable of $319,000!
There are two important carve-outs:-
Houses sold before July 2020 which were owned since May 9, 2017. Please note that CGT is based off contract dates, not settlement dates.
In the above scenario, there would be no tax payable by Fred if he returned to Melbourne and occupied the property as his home before selling it. This would still appear to be the case after a 20 year stay in London.
Full analysis of this new law is currently light on the ground . We do however invite any query you may have.
The end of the year is fast approaching. So amongst your festivity planning, make sure you maximise your health insurance entitlements.
Health funds re-set their limits for extras come January. If you have an unused cap for things such as dental, physios and the like, you may wish to use up your health insurance entitlements before they are lost.
Seeing the physio might be a good move if, like me, you seem to be carrying and lifting a lot of heavy things over the next 30 days!
In order to claim car travel in your personal Tax Return:-
You must own the car.
You must have undertaken a trip for either your business or your employer.
You can claim under two methods:-
Log book, or
Cents per kilometre
You can use a log book kept for three months in the current year or in the last four years (provided the pattern of travel hasn’t changed significantly).
You must have a properly kept log book. You can do so by buying one in a stationers or you can access an electronic one form our firms app.
You can claim 68 cents per kilometre under the cents per kilometre method for up to 5,000 work/business strips. This means you can still claim 5,000 km where you travel say 5,500km. Some people choose to do so as it gives them a better claim than under a log book. All you need is a reliable estimate of all trips undertaken during the year.
Want to know what works best for you – call us. We even have a salary sacrifice calculator so we work out the best way to package up a work car and minimise the Fringe Benefits Tax.
Last month, the ATO wrote to 17,700 self managed super funds (SMSFs) trustees and threatened fines of up to $4,200. The letters were sent to trustees where their SMSF had more than 90% of its assets in one asset class.
It has now come to light that the vast majority of those letters went to those funds where property was the main asset and there was a limited recourse borrowing arrangement (permissible borrowing with super).
The point remains though there is nothing wrong with borrowing nor buying a property within a SMSF. Both are permissible (as long as all relevant requirements are satisfied).
This includes documenting your decisions to do so within an Investment Strategy.
The only thing that appears to have changed is that the ATO has now re-defined a 23 year old requirement and are now expecting trustees to document the decision why you have decided to do so.
Accountants can’t advise on where you should invest your super (they can only provide a template for you to fill in and complete). If you need assistance with the process and/or want to know the long term ramifications of your strategy (and options) then you should speak to a financial planner.
When can I claim a bad debt as a tax deduction?
You have to satisfy a few conditions:-
There must have been an enforceable sale.
All reasonable attempts have been made to collect it.
The decision to write off it off is evidenced in writing.
The customer hasn’t already gone into liquidation or you haven’ t accepted a deal to be paid only x cents in the dollar.
That all said, if you declare income on a cash basis then there is no deduction to be claimed for a bad debt as there wasn’t any taxable income in the first place.
So how do you avoid the cost of a bad debt? Look out for future blogs including what the real costs of a bad debt can be.
Or better yet, ask us.
We have dozens and dozens of ideas and strategies from dealing with hundreds of clients from many different industries.
Are you a share trader or share investor?
It’s an important distinction as it can make a world of difference.
Both declare dividends as income (with a tax credit for any imputation/franking credits). However:-
A share investor is assessed on realised gains (i.e. when a share is sold). Only 50% of the gain is assessed if the share is held for more than 12 months. No deduction is available for realised losses; they can only be offset against capital gains.
A share trader is assessed on both realised and unrealised gains (and losses). The cost of shares bought are deducted as purchases, the sales treated as income and the value of shares at 30th June is treated as closing stock (and therefore income).
So are you a share trader?
Well that depends on matter such as:-
The amount invested.
The frequency of trades.
The amount of trades.
Whether it is being carried on in a business like manner. In this regard, the ATO always places great weight on the existence of a business plan.
Time and money spent on research.
The sophistication of the operation including software programs.
It must also be said that the ATO take particular interest in taxpayers who change from one status to the other. Particularly so in years where there are large market movements.
Not sure where you sit?
The ATO has a useful short summary at https://tinyurl.com/y3s8nure
We would be happy to discuss your situation at greater length with you.
Income splitting refers to ensuring income is legally earned by a partner or family member and taxed at their lower tax rate.
In respect of share investments, we often find that new clients have done that.
It often surprises me though, indeed just as it is with a new client, how often the high income earner has all the bank accounts and term deposits earning interest in their own name. Having such accounts in joint names is half as bad. The tax burden would be a lot less if held in the name of the spouse name on the lower marginal tax rate (and almost always will still be treated as a joint asset for family law purposes). Same income, better tax result.
Negatively geared properties however require detailed consideration. Negative gearing refers to the situation where the interest and other expenses incurred on an investment exceed the income from that investment. The tax break on negative gearing often dictates that the investment be made in the name of the high income earner. That said, with the 10 year bond yield under 1%, interest aren’t going up in a hurry – which means that properties become more quickly positively geared than they have in recent years. In other words, getting a tax break doesn’t last for that long and actually becomes a tax problem relatively quickly.
The other factor for consideration is when will the property be sold.
If in retirement, the tax burden may be low; if whilst working the tax could be eye watering.
We welcome any tax question you may have.
With 30th June fast approaching, here is a list of common tax planning strategies that we have been discussing with clients:-
- Prepaid revenue can be deferred to the extent that it relates to next financial year and where a customer has the contractual right to cancel the contract at any time.
- Buying items such as stationery, printer cartridges, stamps, etc by Sunday 30th June. Those of you who entered the Simplified Tax System (STS) by 30th June 2005 (who are therefore automatically assessed on a cash basis) may wish to pay any bills not due until July like your phone bill, rent, printing and stationery, etc. Paying your accounting fees is also recommended!
- STS taxpayers are now known as Small Business Taxpayers (SBTs). SBTs now include taxpayers with an annual turnover under $10,000,000. As we have previously highlighted, SBTs can claim a full deduction for any assets acquired costing less than $30,000 excluding GST – but note lower limits of $20,000 for assets bought before 29th Jan and $25,000 before 2nd April.
- The $30,000 limit will apply to assets bought ad installed rady for use by 30th June 2020.
- The $30,000 asset write off has also been granted to businesses with annual turnover up to $50,000,000.
- SBT taxpayers can claim half a year’s depreciation on acquired assets that cost more $30,000 – even if the asset is purchased on the last day of the year. If a business owner buys a business asset costing $40,000 today, then they get to claim depreciation of $6,000 in this financial year followed by $10,200 in 2019/20. Buy that same asset in July 2019 and the claim by 30th June 2020 is only $6,000.
- For more on the instant asset write-off, refer to recent blogs titled Parts 1, 2 and 3.
- SBT taxpayers can also claim a full deduction for payments such as insurances, rent and the like which cost more than $1,000 even though the service period runs past 30th June and into the next financial year.
- For those of you who receive this e-mail that are employees or rental property owners, you can claim a complete write off for assets costing less than $300.
- If a property is jointly owned, then you can claim the full cost of assets costing less than $600 (meaning you claim less than the $300 limit each).
- Investors can claim prepayments in full. An investor with a property or share loan can claim a deduction for 12 months prepaid interest. Please note that the ATO requires that for the prepayment to be claimed, one must benefit through a lower interest rate (for which you need to keep proof).
- For those who have already generated a large capital gain, consideration should be given to selling other investments that have an unrealised capital loss. Those with no or minimal employer SGC support should consider making a deductible contribution into superannuation to offset the tax on the capital gain (but speak to a financial planner first).
- If you are about to sell an asset which will generate a capital gain, consideration should be given to selling it after 30th June. This will defer the payment of any capital gains tax liability until after 30th June 2019.
- Companies can accrue a director’s fee which is not payable until the following financial year. Why? – the company gets a deduction in this financial year but the director is not assessed on the income until the following financial year in which it is received. The trick is to document it correctly.
- If you have stock, count it (a separate e-mail will be sent to business clients with stock). As stock can legally be valued differently from item to item and from year to year, it can result in some advantageous outcomes.
- Donations are deductible. It must be a genuine donation so you can’t receive anything in return. Raffle tickets can’t be claimed.
- Our tax planning checklist also considers other items such as writing off bad debts, making Division 7A loan repayments, distributing to a new beneficiary, varing PAYG Instalments, super rule changes that you may benefit from (after receiving financial planning advice) valuing stock by using costs or net realisable selling method. How these and other opportunities are employed depends on your circumstances.
All of the above tax planning tips are explained to our clients in any easy to read Tax Planning Report.
We welcome any query about these tax planning tips but also in respect of your preparation for Singe Touch Payroll (for which our clients have been receiving weekly preparatory updates ahead of the start date of 1st July 2019).