Holding costs and the impact on Capital Gains Tax


Holding costs are expenses associated with the continuing ownership of an asset like real estate or share investments. These costs help to reduce the amount of any taxable capital gain when the asset is eventually sold.

Examples of expenses that may be considered as holding costs include:

  • Council rates
  • Interest on loans used to finance the investment
  • Insurance
  • Land tax
  • Repairs & Maintenance

But holding costs do not include costs previously claimed as a tax deduction. So if you have a rental property and normally claim council rates as a tax deduction against rental income, the rates cannot form part of the cost base. However if you incur council rates on vacant land, you are not entitled to a tax deduction and could therefore record these as holding costs.

Importantly, to be eligible to add holding costs to the cost base of a CGT asset, the asset must have been acquired after the 21st of August 1991.

The concept of holding costs and their significant effects can be better understood through an example.

Mr and Mrs Smith purchased a holiday home in Margaret River on 1 July 2012 for $500,000. The property is considered a CGT asset as their main residence exemption is being utilised on a separate property in Perth. The holiday home was sold on 30 June 2017 for $800,000 which would ordinarily result in a $300,000 capital gain.

Mr and Mrs Smith incurred the following holding costs over the 5 years of ownership.

  • Insurance $10,000
  • Council Rates $15,000
  • Interest $75,000

As the residence was a holiday home (Purchased after 21 August 1991) and a deduction was not allowed during the time of ownership, these costs are eligible to be included in the cost base of the property. Therefore, the cost base will increase to $600,000 and the capital gain will reduce to $200,000.

Pro tips:

  • holding costs cannot be used to increase a capital loss
  • ensure that records of these costs are kept in the form of receipts, bank statements etc.

Other related blogs:

Capital Gains Tax and Building a House
Capital Gains Tax – Main Residence Series: Rent out your House
CGT Main Residence Exemption and Moving Overseas
Subdividing you main residence and selling the ‘backyard’

 

Author: Georgia Burgess
Email: georgia@faj.com.au

 

 

 

 

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What should be on my tax invoice?

It’s a question we’re often asked – what should be on my tax invoice?

I’m sure you know that an invoice is a record of purchase and allows your customers to pay for goods or services you’ve provided them. Invoices give details of the purchase and price that’s agreed to. This allows you to maintain the correct records and meet your tax obligations. If you are not required to be registered for GST then your invoices are known as regular invoices. If you are registered for GST then your invoices must include the words “tax invoice.”

So what should be on your tax invoice?

Your tax invoice must include enough information to clearly determine the following seven details.

  1. that the document is intended to be a tax invoice
  2. the seller’s identity such as your business name or trading name
  3. the seller’s Australian Business Number (ABN)
  4. the date the invoice was issued
  5. a brief description of the items sold, including the quantity (if applicable) and the price
  6. the GST amount (if any) payable – this can be shown separately or, if the GST amount is exactly one-eleventh of the total price, as a statement such as ‘Total price includes GST’
  7. the extent to which each sale on the invoice is a taxable sale (that is, the extent to which each sale includes GST)

In addition, tax invoices for sales of $1,000 or more need to show the buyer’s identity or ABN.

Author: Kay Giles
Email: kay@faj.com.au

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New Guidelines for FBT Exempt Motor Vehicles

It is a commonly held belief that if an employer provides a ‘Ute’ or similar commercial vehicle to an employee, that it is 100% tax deductible and will not attract Fringe Benefits Tax (FBT).

However most people are not aware that in this situation the ATO has always required that the employee’s private usage must be ‘minor and infrequent’ and the vehicle must be an ‘eligible vehicle’ for that exemption to apply.

In an attempt to clarify the rules around FBT exempt motor vehicles, the ATO has released new guidelines that provide ‘safe harbour’ to those employers that work within the ATO’s guidelines.

In a nutshell:

Eligible vehicles include either:

  1. A road vehicle designed to carry a load of at least 1 tonne (other than a vehicle designed for the principle purpose of carrying passengers) or more than eight passengers; or
  2. The vehicle has a designated load capacity of less than 1 tonne but is not designed for the principle purposes of carrying passengers

To meet the ATO’s safe harbour relief the conditions below must be met:

  1. The Employer provides an ‘eligible’ vehicle to a current employee;
  2. The vehicle is provided to the employee for business use to perform their work duties;
  3. The employer has a policy in place that limits private use of the vehicle and obtains assurance from the employee that their use is limited to that
    described below;
  4. The GST inclusive value of the motor vehicle is less than the luxury car tax threshold when acquired;
  5. The vehicle is not provided as part of a salary packaging arrangement and the employee cannot elect to receive additional remuneration in lieu of the
    use of the vehicle;
  6. Employees must provide written assurance each year that private use of the motor vehicle provided is limited to travel:
    a. Between their home and their place of work and any diversion adds no more than two kilometers to the ordinary length of that trip;
    b. No more than 1,000 kilometers in total for each FBT year for multiple journeys taken for a wholly private purpose; and
    c. No single, return journey for a wholly private purpose exceeds 200 kilometers.

If you are an employer and would like some assistance to reduce you potential FBT exposure in this area, please us on (08) 93355211 to make an appointment.

Other related blogs:

Reducing FBT with the otherwise deductible rule

Author: Heather Cox
Email:heather@faj.com.au

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First home super saver scheme – now legislated

The First Home Super Saver Scheme (known as FHSS Scheme) that was initially introduced by the Australian Government in the Federal Budget 2017-18 has passed through parliament and is now law. Its purpose is to make it easier for home buyers to save for a deposit on their first home. This is achieved by saving for a home deposit inside a super fund which has low tax rate. It’s also possible that a super fund may have a higher rate of return over a standard savings account.

So here’s how it works. From 1 July 2017, first home buyers can make voluntary contributions (both before and after tax) of up to $15,000 per year up to a total of $30,000 across all years, to their superannuation account in order to purchase a first home. These contributions along with the earnings can then be withdrawn for a home deposit in the future.

You can use this scheme if you are a first home buyer and both of the following apply:
• You either live in the premises you are buying, or intend to as soon as practicable.
• You intend to live in the property for at least six months of the first 12 months you own it, after it is practical to move in.

The Australian Tax Office provide further information on their website.

Other related blogs:

First home buyers super saving scheme

For advice and assistance with your home loan:

FAJ Home Loans

Author: Nick Vincent
Email: nick@faj.com.au

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Super contributions from downsizing your home

The 2017/18 federal budget introduced a downsizing superannuation contribution scheme starting from 1 July 2018. It may be available to you if you’re over 65, your downsizing your home and you choose to contribute some of the proceeds from the sale into your super fund. The contribution is capped at $300,000 per person (so $600,000 for a couple).

The Government’s aim is to encourage the older population to downsize their larger than needed homes to free them up for the younger generation looking to buy their family home.

The eligibility requirements are:

– You must be 65 or over (there is no maximum age limit)
– The sale contract of the property must be dated on or after 1 July 2018
– You (or your spouse) must have owned the property for 10 years or more prior to sale
– The home must have been your main residence for at least 10 years
– The downsizer contribution must be contributed to the super fund within 90 days of receiving the sale proceeds (usually 90 days from settlement)

The good thing about the downsizing contribution is that it does not count towards any of your yearly contribution limits and can be made by anyone over the age of 65. Moreover, the work test is ignored for this contribution, so it is a great way for someone who is over 65 and fully retired to put more money into their super fund where they otherwise could not.

The downside is that it could affect your eligibility to receive the age pension. Age pension eligibility takes into account all financial assets including money in super, but the family home is exempt from age pension eligibility calculations. So by shifting value from a non-assessable home to an assessable super investment you may exceed the age pension asset or income thresholds and reduce your pension eligibility.

Before considering using the downsizing contribution it is highly recommended that you speak to your accountant or financial planner. This way you can confirm your eligibility for the contribution and whether it will affect your age pension.

Other related blogs:

Contributing to super – options for employees
What are the benefits of super salary sacrifice?
Allowing catch up concessional contributions

Author: Rhys Frewin
Email: rhys@faj.com.au

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Changes to Depreciation for Rental Properties

The 2018 federal budget introduced changes to depreciation deductions in relation to residential rental properties. These changes aim to limit the ability to claim the depreciation deduction to the investor who initially purchased the asset.

Previously property investors could claim expenses for depreciation of certain items in a rental property, regardless of whether they were purchased new or second-hand.

From 1 July 2017 you cannot claim depreciation of second-hand equipment in residential rental properties if it was acquired on or after 7:30 pm on 9 May 2017. This means that if you entered into a contract to purchase a property prior to 9 May 2017, as per the previous rules you can continue to claim depreciation deductions on any pre-existing assets in that property. However if purchased after the date, you must have purchased the item new and not second-hand to be able to claim depreciation on the asset.

Additionally, you cannot claim depreciation on items installed on or after 1 July 2017 if they has ever been used for a private purpose. Therefore properties which have been lived in and turned into an investment property by their owners before 1 July 2017 are not affected, and owners can continue to claim plant and equipment depreciation.

Plant and equipment items are assets that can normally be easily removed or relocated, such as floor coverings, appliances and air-conditioning.

Any investor who purchases a brand new property can continue to claim depreciation for plant and equipment items as normal. Similarly depreciation can still be claimed on eligible new assets regardless of when the property was purchased.

The legislation states that these changes will not affect depreciation of plant and equipment for non-residential/commercial properties. The changes will also not apply to assets held in residential properties owned by an entity carrying on a business of property investing, or an excluded entity being a corporate tax entity, superannuation plans other than a Self-Managed Super Fund, public unit trust, or a managed investment trust.

The changes will not affect the ability to claim capital works deductions, which are the deductions on fixed items and structural improvements such as new kitchens and bathrooms.

However when purchasing second-hand assets, the cost of the plant will form part of the cost base of the property disposed and by extension will reduce the capital gain tax liability upon sale.

Other related blogs:

 

Author: Danielle Pomersbach
Email: danielle@faj.com.au

 

 

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CGT Main Residence Exemption and Moving Overseas

What is the CGT main residence exemption?

Broadly, the CGT main residence exemption allows homeowners to pay zero capital gains tax (CGT) where profits are made upon selling their primary place of residence (their home).

The CGT main residence exemption rule also provides a partial exemption from CGT if the dwelling was the individual’s main residence for only a part of the ownership period i.e. if the property was used to produce assessable income like rent.

In scenarios where individuals do not treat any other home as their main residence they may be able to treat their previous home as their main residence for up to 6 years beyond when they moved out if their main residence is rented out or an unlimited amount of time if the home is left vacant.

What’s changing for foreign residents?

In the 17-18 Federal Budget the government announced changes to prevent Australian home owners who are deemed to be foreign residents at the time of sale from accessing the CGT main residence exemption. The change is not yet law at the date of this blog. If the law is passed the exemption can still be accessed if you sell your home on or before 30 June 2019 so long as the property was not purchased after the 9th of May 2017.

If you acquired the property after that date you will be subject to the new rules regardless of whether or not you sell before 30 June 2019 (assuming the law is passed).

What defines a foreign resident?

For the purpose of the legislation ‘foreign resident’ means someone who is not a tax resident of Australia. Foreign residents or those living outside of Australia including Australian Citizens and Permanent Residents should seek professional advice as to whether or not these changes affect them.

Pro tip:

If the law passes, and you are already or it is likely that you will become a foreign resident in the future it may be worthwhile considering selling your primary residence before 30 June 2019 rather than after, to benefit from the main residence exemption.

Further reading

Other related blogs:

Author: Georgia Burgess
Email: georgia@faj.com.au

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Do I need to pay payroll tax?

Payroll tax is one of those taxes that can slip under the radar of small businesses. Employers don’t need to pay this tax until their wages reaches a threshold, and then the onus is on the business to register and pay the tax.

Payroll tax is a state and territory tax based on the taxable wages you pay as an employer. Types of payments defined as ‘taxable wages’ include salaries and wages, allowances, fringe benefits and super contributions.  A common misconception is that contractor payments are not included in taxable wages. However, if there is an employee/employer relationship that exists between a contractor and their client then the contractor payments may be included. Generally, if the contractor is providing predominantly labour only and is being paid an hourly rate, it is likely that these payments will be considered taxable wages and will be assessed for payroll tax.

Not all businesses with employees are required to pay payroll tax. There will only be a payroll tax liability where taxable wages exceed the relevant thresholds in the state or territory you are employing from (or in some cases where your employees perform the work). The current Western Australian threshold is $850,000 per year at which point a tax rate of 5.5% applies. Other states’ thresholds can be lower; for example South Australia’s threshold is $600,000 annually, so it is important to be aware of the different state and territories’ thresholds each year.

Payroll tax is self-assessed which means employers have the responsibility of assessing if they are liable to pay the tax. Employers should check with the revenue office in the state or territory they employ from and assess the threshold that applies. If you are over the threshold you will need to register for payroll tax in the state or territory and lodge a payroll tax return. Payroll tax is generally lodged and paid monthly and then reconciled and adjusted annually based on the full years wages.

Even though it is a self-assessed tax, the state and territory revenue departments conduct regular audits to assess if the correct payroll tax has been paid. They also receive information from other sources which can prompt them to audit a taxpayer such as a large salary and wages or contractors amount reported in an employer’s tax return.

Pro tip:

Most types of wages payments are assessable as taxable wages but look out for exemptions for workers compensation receipts, disability wages, certain apprentices and trainees and parental leave.

For more information visit www.payrolltax.gov.au or call us on 93355211 for assistance with any payroll tax queries.

Related blogs:

What is single touch payroll?
Do I need to pay super for contractors?
Making sense of superstream for employers

 

Author: Allan Edmunds
Email: allan@faj.com.au

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How do I register a business name?

Registering a business name is one of the fundamental steps in starting a new business. Before you register a business name, you will need to obtain an ABN through the Australian Business Register. Australian Securities and Investment Commission (ASIC) also recommends you apply for an AUSkey, as it allows you direct access to ASIC and the Tax Office however, it is not essential to enable you to register a business name.

In order to register the business name, you need to know if your desired name is available. You can find out on the ASIC Connect website by searching the Business Names Register. If your name is already registered, then you will need to come up with a different name that is available. Once you have found a name that is available with ASIC, you should check with IP Australia to ensure that the name is not a trademark.

Registering a business name can take between 15 to 20 minutes. Before you commence ensure you have your ABN and the address of your proposed business. To commence the registration log in or sign up to ASIC Connect.

Once you have logged in, go to the Licences & Registrations tab at the top of the page and select apply for Business Name Registration. You will then need your ABN or ABN reference number to link your business name to the business number. On completion of this step, you will be required to confirm that your business name is available.

ASIC then requires you to provide the addresses for the services of documents, principle place of business address and an email address. It is also mandatory to declare that you are eligible under the Corporations Act 2001 to manage a corporation and eligible under the Business Names Registration Act 2011 to register a business name. You are able to secure your business name in the final step by paying for the registration.

Once your business name appears on the ASIC Business Name Register you will now be ready for trading.

Pro Tips:

  • You can register your business name for either one or three years, please note different fees apply
  • If you choose to trade under your own name as a sole trader e.g. Brianna Barrett, you are not required to register a business name.

Author: Jenny Ridley
Email: jenny@faj.com.au

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Contributing to super – options for employees

If you are an employee, salary sacrificing to super is an attractive option to boost your super balance, as well as getting a tax saving. Though did you know that if you salary sacrifice to super, you could be missing out on part of your super guarantee?

The super guarantee is a compulsory system of superannuation that employers pay on behalf of their qualifying employees. Employers are obligated to contribute 9.5% of their employee’s salary or wage into super. As well receiving the super guarantee, some employees choose to make super contributions through a salary sacrifice agreement. However, an issue that some employees face is that their employers do not pay the super guarantee on their entire salary – they only pay the super guarantee on their reduced salary (their salary less the salary-sacrificed amount). This is where some employees miss out on part of their super guarantee.

Luckily, there is another option for employees. As of 1 July 2017, employees are able claim a deduction for personal super contributions they make to their superfund. If employees choose to do this rather than salary sacrifice, they will still reduce their taxable income, but they also will receive the super guarantee on their total salary (which may not be the case if you salary sacrifice to super).

It is important to note that your employer may not be obligated to pay the super guarantee on your entire salary if it does not state that they must do so in your salary sacrifice agreement. If you want to know whether you are receiving the super guarantee on your entire salary, check with your employer or your payroll department.

Pro Tip:
Be careful of how much you contribute to super – the contributions that you claim as a deduction will count towards your concessional contributions cap, and so does the 9.5% super guarantee. If your combined super contributions exceed the $25,000 cap, you will be liable to pay extra tax.

Author: Tessa Jachmann
Email: tessa@faj.com.au

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