Making a family trust election

Many trusts have the words “family trust” in the title but just because a trust is called the Smith Family Trust doesn’t mean it meets the ATO definition of a family trust. To be considered a family trust you must specifically make a family trust election on your trust income tax return.

There can be numerous benefits to making the family trust election, some of these are:
– More relaxed tests for claiming tax losses
– More relaxed tests for injecting other income into a trust (to utilise tax losses)
– Ability to claim over $5,000 in franking credits

However as a consequence of making the family trust election you can then only distribute income within your family group. If your trust distributes income outside of your family group the distributions are taxed at the highest tax rate (currently 49%).

The family group revolves around a main person (nominated as the “test person”) which is chosen when you make the family trust election.

For more information on individuals that are part of the family group, click here.

Additional members of the family group can include:
• Estates of the individuals above
• Family Trusts with the same test person
• Companies or Unit Trusts 100% owned by the above
• Certain other entities (less common)

If you have losses in your trust or receive franked dividends of $11,667 or more for the year, you may need to consider whether a family trust election needs to be made.

Pro tip: Family trust elections can be back-dated to 1 July 2004 or later as long as distributions have not been made outside the family group during that time.

Author: Stacey Walker
Email: [email protected]

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When do I need to pay super for contractors?

It’s easy to assume that if you use contractors in your business that you don’t have to worry about paying super, but unfortunately this is not the case.

The Australian Taxation Office (ATO) looks more to whether the contract you employ them under is mostly related to labour. Where this is the case the ATO will consider the worker to be an employee, and you will need to pay super for contractors.

The ATO provides three different types of exertion that it considers labour:

1. Physical labour
2. Mental effort
3. Artistic effort

What happens if the contractor provides a mix of services?

Under the contract the ATO states that you only need to pay the super guarantee portion of the contract that is related to labour.

The ATO provides guidance on how to work the portion of the contract related to labour where it hasn’t been specifically mentioned. As per the ATO website:

“If the values of the various parts of the contract are not detailed in the contract, the ATO will accept their market values and will take the normal industry practices into consideration. If the labour component of a contract cannot be worked out you can use a reasonable market value of the labour component of the contact to represent the salary and wages of an employee”.

What do I need to do know?

First you need to determine whether or not this is applicable to you. The ATO provides a number of tools for business to use which clarify your position as provided below.

Employee/contractor decision tool
Superannuation guarantee (SG) eligibility decision tool
Superannuation Guarantee (SG) contributions calculator

What penalties can I incur?

If you don’t pay your eligible employees super, or pay it late you are liable for the super guarantee charge and will need to lodge additional forms with the ATO.

Save yourself some hassle and if unsure give us a call and we will guide you through.

Author: Adrian Wardlaw
Email: [email protected] 

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Thinking of suspending your private health insurance while you travel?

Thinking of doing some travel and suspending your private health insurance? Cancelling your private hospital cover may have a detrimental effect on your refund at tax time.

If you have earned over the threshold amount, ($90,000 for singles $180,000 for families) and suspend your policy whilst you travel overseas, you won’t have adequate private hospital cover for that period.

Having inadequate private hospital cover means that you may be liable for the Medicare levy surcharge for the number of days you weren’t covered.

Depending on your income level it could be more effective to pay the premiums and not suspend the policy in order to avoid the surcharge.

If you need help deciding whether suspending your private health insurance is right for you give us a call on 9335 5211.

Author: Adrian Wardlaw
Email: [email protected]

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Is there any GST when buying a commercial property?

Clients often ask if there is any GST when buying a commercial property. The GST treatment will depend upon the GST registration status of the seller.

Normally attached to the offer and acceptance is a GST annexure. This annexure will stipulate how the GST will be applied. On commercial properties there are 3 possible outcomes.

1) The seller may not be GST registered and therefore no GST would be applied.

2) The seller is registered and they advise that GST will be charged in addition to the price

3) The seller is registered and both parties agree to use the GST Margin scheme.  This means that the price is inclusive of GST but the purchaser is unable to claim any GST back and

4) If the seller and purchaser are registered for GST and the property is being sold with an existing tenant, then the contract may agree that the property is being sold as a ‘going concern’ and therefore no GST would be applied on the transaction

If you are buying the premises for business purposes and will be registering for GST then any GST you pay will be claimable as a refund from the ATO on the next Business Activity Statement.

Pro Tip
Transfer Duty is charged on the total value of the transaction including GST. This means that a purchase of a property GST free is going to be cheaper than purchasing another property of the same value plus GST even though ultimately you are refunded the GST later.

Author: Stacey Walker
Email: [email protected]

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Subdividing your Main Residence and Selling the ‘Backyard’

If you subdivide your main residence and sell the newly created block, any profit from the sale of the vacant land is treated as a capital gain, and therefore subject to capital gains tax.  The main residence exemption does not apply to vacant land that is sold separately to the dwelling (your family home).

There is an exception where the family home is accidentally destroyed (e.g. by fire), and the land on which the family home originally stood is sold without another house being constructed on that land. You can choose to continue to treat the vacant land as your main residence from the time of destruction up until the time the ownership of the land ends.

Calculating the Cost Base of the Subdivided Land

As the original property has been split into two assets, the cost base of each block is calculated by reasonably allocating the original cost of the property between the subdivided lot and the remainder of the property at the time of subdivision.

The ATO states that it will accept any apportionment approach that is appropriate in the particular circumstances. For example, where the new blocks are of equal size and value, then an apportionment based on the area would usually be appropriate. If the new blocks are of unequal size or value, then an apportionment based on the market value of each block at the time of subdivision can be used.

Apportionment of Subdivision Costs

Subdividing the family home will often incur subdivision-related costs. These can include survey fees, legal fees, subdivision application fees, and cost of connecting electricity and water to the vacant block.

Many people get caught in the trap of thinking that these costs are solely attributed to the cost base of the new property. However, most subdivision costs must be apportioned between both blocks, based on the same apportionment method used to allocate the cost base of the original property.

On the other hand, the costs of connecting electricity and water to the subdivided block can be solely attributed to the new block, as these costs only relate to the vacant land, and do not relate to the original dwelling.

Pro Tip:
If your family home was acquired before the 20th of September, 1985 (i.e. pre-CGT), the sale of any subdivided land from your main residence will generally be exempt from capital gains tax. This is because subdivision does not trigger any CGT event and therefore the subdivided land retains its pre-CGT status.

Author: Tessa Jachmann
Email: [email protected]

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FAJ Launches Client Portal

Over the last few years, the accountants at FAJ have been working towards preparing tax returns without the need to print them. If you have visited our office to have your tax return prepared, it’s likely you have used one of our I-pads to sign your return.

The next phase of this project is to use a secure portal that allows electronic signing.

Previously, we might have emailed your tax return to you for signing. You would then need to print the return, sign it, re-scan it and email back to us.

In future, once your return is done, you will receive an email to log into your client portal and electronically approve a document. This process is very simple and you can approve your tax return (or approve any other document) and send it back to us with only a couple of clicks of your mouse. If you have access to your emails on your smart phone, you can view and approve via your phone.

Once we have created a portal for you, documents that have been added to the portal will stay there indefinitely and you can access them any time. To access your portal (once set up) go to: https://francisajones.portal.accountants/login and use your email address and password to login.

Alternatively, you can use our FAJ app to link direct to the portal. For more info on using our app, go our website at https://www.faj.com.au/francis-jones-tax-tools/

We appreciate any feedback you might have about the client portal. Please feel free to call us on 9335 5211 if you have difficulties using the portal or wish to provide comments.

Author: Heather Cox
Email: [email protected]

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Removal of 5% HELP discount

Removal of 5% HELP discount: from 1 January 2017, the Australian Government will remove the voluntary HELP (previously known as HECS) repayment bonus.

What are the current arrangements?

You can currently make voluntary repayments to the ATO at anytime and for any amount. Voluntary repayments are in addition to the compulsory repayments made through your tax return. Currently and up until the 31st of December if you make a voluntary repayment of $500 or more, you will receive a bonus of 5%. This means your account will be credited with an additional 5 % of the value of your payment. Please note the bonus is 5 % of your payment amount, not 5 % of your outstanding debt.

Ensuring you get the bonus before it disappears:

If you’re intending to make a voluntary repayment, you will need your payment reference number (PRN). This can be found on your account information statements, through your myGov account or by calling the ATO on 13 28 61.

Note: The ATO will be closed from midday 23rd December 2016 until 3rd January. ATO online services will also be unavailable during this time.

What does this mean for you?

  • If you need to confirm your PRN, you must do so before the ATO shutdown; and
  • Ensure your payment is received by the ATO before the 31st of December 2016 to receive the bonus.

Pro tip

Check when your Financial Institution’s processing deadlines are and make sure that payment is received by the ATO by the 31st December to ensure that you get the 5 % bonus.

Author: Nick Vincent
Email: [email protected]

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$20k small business write off concessions

On the 2015 budget night it was announced that small business entities would be able to claim an immediate deduction for individual assets costing less than $20,000. What exactly does the $20k small business write off mean to you?

Prior to May 15 small business entities (SBE’s) making use of the simplified depreciation rules were able to claim an immediate write off for assets costing $1,000 or less. Assets costing more than $1,000 were added to a general small business pool where they were depreciated at a rate of 15% in the year of acquisition and then at 30% in each subsequent year.

Under the new rules that threshold has increased to $20,000 meaning any assets purchased on or after 12 May 2015 7:30pm AEST will be eligible for an immediate write off as long as they individually cost less than $20,000. For businesses registered for GST, the asset value is the GST exclusive cost. For businesses not registered for GST the asset value is the GST inclusive cost. The increased threshold will only apply until 30 June 2017.

The $20k small business write off also applies to an existing general small business pool. If the closing balance of that pool falls below $20k or less the pool balance must be written off.

Assets excluded from the write off:
• Horticultural plants – subject to their own ‘uniform capital allowance’ rules (UCA);
• Capital works – subject to their own ‘capital works’ depreciation rules;
• Assets allocated to a low-value pool or software development pool – subject to the deduction rates applicable under those rules;
• Primary production assets for which the entity has chosen to use the normal depreciation rules rather than the simplified depreciation rules; and
• Assets leased out to another party on a depreciating asset lease.

You can only claim a write off for a newly purchased motor vehicle if you’re using the logbook method or 1/3 of cost method. Under the log book method your deduction is limited to the extent of your logbook percentage.

The write off is limited to the extent that the asset is used for business, so be sure to factor in the private use component when considering how much of a deduction you will be entitled to claim. Also be mindful that if an asset costing more than $20k has a business use of under $20k (i.e. $30k car with a 50% business use) you will not be able to claim an immediate write off.

Unlike in the past businesses that have opted out of the simplified depreciation rules will not be subjected to the ‘lock-out’ rule. SBE’s that have opted out can now opt back and take advantage of the increased threshold.

Pro Tips

  • Be sure to check the dates you purchased your assets and make sure you’re considering how GST impacts the value of your asset.
  • Remember that you can opt back in to the simplified depreciation rules and take advantage of the increased threshold.
  • Be mindful of private use apportionments when considering how much of a write off you’ll be entitled to claim
  • Second hand assets are also eligible for the write offs
  • The write off is a choice. There may be circumstances (e.g. low income years) where it will not be beneficial to claim the immediate write off.

Author: Heather Cox
Email: [email protected]

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Why have my quarterly PAYG instalments increased?

Have you been paying quarterly PAYG instalments to the ATO for a while and suddenly get a notification that the amount has changed? Its a common question we hear – why have my quarterly PAYG instalments increased?

Firstly, make sure you’re reading the right document. When you have a change of circumstances (like lodging a tax return), the ATO recalculates your quarterly instalment and sends you a notice to inform you. The amount showing here is your annual liability which is an information notice, not a payment notice. You’ll get your payment notices separately on a quarterly basis.

Make sure you are looking at your quarterly payment notice (they are a pinky colour). If your instalments have increased substantially from the previous year, it will generally be as a result of a spike in income from one tax return to the next.

This happens because your instalments are calculated based on the previous tax return that the ATO has a record of. The minute you lodge a new tax return, with increased earnings (especially from an untaxed source like interest or business earnings), the ATO will increase your instalments to compensate for the increase when the next return gets lodged. This increase could happen during any of the four quarters of the year, depending on the timing of other events.

Pro tip
The timing of lodging your tax return can impact substantially on the calculation of your next PAYG quarterly instalment. Talk to your tax professional to understand this before making a decision on when to lodge.

Author: Nick Vincent
Email: [email protected]

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Less known rental deductions

Please note that there have been amendments to law since this blog was posted, please refer to our blog Changes to Rental Property Deductions posted 29/11/17 for more information.

There are many common deductions that property owners are aware of, but here are a few of the less known rental deductions.

Special body corporate levies & contributions to strata sinking fund
Strata bodies sometimes charge additional amounts on top of the standard fees in order to pay for certain common area expenditure. These may be deductible, depending on the purpose of the levies.

Lenders mortgage insurance
Mortgage insurance is often required by banks where an investor has low equity in a property. The cost of the insurance is deductible over five years.

Package fees on borrowings
Lenders will often slug you with annual bank charges that are deductible in addition to the interest you are also paying.

Travel & airfares
Travel (especially airfares) comes under close attention by the Australian Taxation Office, but is a valid claim if the trip has the sole purpose of inspecting or repairing a property. If the travel also has a purpose outside of visiting the rental, you should keep a diary of events, and apportion some of the costs.

Phone cost and internet usage
A portion of your phone & internet may be deductible if you find yourself using both services in order to manage and maintain the property.

Prepaid interest
Lender’s allow you to prepay interest on your loan. This can be an effective tool in reducing tax in high income years. Note that the most you can deduct is up to 12 months of prepaid interest.

Depreciation & capital works 
Sole owners of property can claim capital expenditure items (new assets like fridges & dishwashers) outright if they cost less than $300. Where property is jointly owned, this doubles to $600 per item. If the property is relatively new, has some sizable renovations or is filled with furniture and appliances you paid for yourself it might be advantageous to have a professional depreciation report prepared.

Pro tip:
Many small business owners would be aware that they can claim assets costing up to $20,000 outright in the year that they purchase them. But many wouldn’t know that this deduction extends to assets they purchase for work related purposes or investment assets. So if you are a small business owner who also has a rental property, you may be entitled to these generous tax concessions for assets you acquire for your property.

Author: Nick Vincent
Email: [email protected]

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