What is your rental property earning or costing you after tax?

A rental property is a popular investment amongst Australians, but some may be unaware of what return their investment is providing them. Calculating the total profit or loss after tax can provide insight to the actual monetary return.

Rental profit (income is greater than expenses) is treated as ordinary assessable income and is taxed at your marginal tax rate, whereas a rental loss (expenses are greater than income) will reduce your overall taxable income and tax payable (depending on your marginal tax rate).

An example is provided below which shows the total rent profit or loss after tax for a property that has a loan with deductible interest and one without. Calculating the profit or loss after tax can be broken down into 3 steps, which are set out below:

  1. Calculate net rental profit or loss

The net rental profit or loss is calculated as rental income received less rental expenses incurred. Some additional expenses which you may not know can be included are interest on loans used to fund the purchase of the investment property and a deduction for the construction cost of the building (depreciation). For the purposes of this example, depreciation has not been included.

  1. Calculate the tax payable or refundable

Calculating the tax payable or refundable is calculated as your marginal tax rate multiplied by the net rental profit or loss. The marginal tax rate will depend on your individual taxable income for that particular year. You may need check the current ATO tax brackets to determine which tax rate applies to you or speak to your accountant to confirm. For this example, a marginal tax rate of 32.5% has been assumed (taxable income between $45k and $120k). In most circumstances an additional 2% Medicare levy will also be applicable, making the effective tax rate in this example 34.5%.

  1. Subtract any tax from the net rent

The final step is to subtract the tax payable or refundable from the net rental profit or loss. See the table below for a practical example.

 

Financed Not Financed
1 INCOME   INCOME  
  Rent  $          20,000 Rent  $           20,000
 
  EXPENSES   EXPENSES  
  Advertising  $                350 Advertising  $                 350
  Council Rates  $            2,200 Council Rates  $              2,200
  Insurance  $                950 Insurance  $                 950
  Interest on Loan  $          13,500 Interest on Loan   $                 0
  Land Tax  $                650 Land Tax  $                 650
  Management fees  $            2,700 Management fees  $             2,700
  Repairs and Maintenance  $            1,300 Repairs and Maintenance  $             1,300
  Water Rates  $            1,250 Water Rates  $             1,250
  Water Use  $                460 Water Use  $                 460
  Total Expenses  $          23,360 Total Expenses  $             9,860
 
  NET RENT $           ( 3,360) NET RENT  $           10,140 
 
2 Tax at 34.5% $            1,159  $             3,498
 
Net Rental Profit or Loss $            (3,360)  $           10,140
3 Tax on Rental Profit or Loss $            1,159  –  $             3,498
Net Rental Profit or Loss after Tax $           (2,201)  $             6,642

For the property with a loan and where an interest deduction is being claimed, there is a net rental loss of $3,360. The net rental loss will reduce overall tax by $1,159. Therefore the net rental loss after tax is $2,201. Essentially the investment is costing this individual $2,201 for the year, and it is hoped that this cost will be offset by growth of the investment over time.

For the property that has not been financed, there is a net rental profit of $10,140 resulting in additional tax of $3,498, therefore the net rental profit after tax is $6,642.

As you can see from the example above, tax will affect your overall return on your rental property. Working through the steps above can help you determine overall what your rental property is making you or costing you.

Related blogs:

Less known rental deductions
Pros and Cons of negative gearing
Changes to depreciation for rental properties

Author: Caleb Datson
Email: [email protected]

 

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Tax consequences of short-stay accommodation

Over the past decade, short-stay accommodation sites such as Airbnb and Stayz have skyrocketed in popularity, prompting investors to consider the potential benefits of advertising their own property or room on a like-minded site. However, we here at Francis A Jones recommend that potential investors consider the tax consequences of short stay accommodations before doing so.

Similar to a residential or commercial rental property, an owner of a property rented out for short-stay accommodation must declare any rental income they have received in their tax return. They are also entitled to claim a deduction for expenses such as council rates, water rates, land tax, interest on investment loans, depreciation and capital allowances, to name a few.

Unlike a standard rental property, short-stay accommodation properties are sometimes used for private purposes. In this instance the owner must apportion the expenses to only claim the part that relates to income-producing activities. This is usually based on the number of days the property was available for rent during the year. For example, if a property is available for rent for 80% of the year, you can generally claim 80% of the total expenses incurred as a deduction. However, it’s important to note that expenses related entirely to the income, such as service fees and commission charged by short-stay accommodation sites are fully deductible. Further, the private portion of the expenses should not be overlooked, since these ‘holding costs’ can potentially be added to the cost base of the property, thereby reducing capital gains tax (CGT) owed when the property is sold by the investor.

Another common occurrence for holiday home owners is to rent the property to family and friends below market rates. The Australian Taxation Office (ATO) states, “If your holiday home is rented out to family, relatives or friends below market rates, your deductions for that period are limited to the amount of rent received”. This means you cannot claim a loss for the period you rented the property for below market rates, you can only breakeven. In comparison, if the property is occupied at no cost, it is considered to be 100% private and no deductions can be claimed. For more information and examples please refer to the ATO webpage https://www.ato.gov.au/Individuals/Investments-and-assets/Holiday-homes/.

Finally, it is worth mentioning if you are planning on renting out a room of your primary residence on a short-stay accommodation site, you will no longer be eligible for the full CGT main residence exemption which means when you sell your home, part of the sale will be subject to capital gains tax. For more information on the eligibility of the CGT main residence exemption please refer to the linked ATO webpage, https://www.ato.gov.au/Individuals/Capital-gains-tax/Property-and-capital-gains-tax/Your-main-residence-(home)/Using-your-home-for-rental-or-business/.

Other related blogs:

Holding costs and the impact on capital gains tax

Author: Amy Murphy
Email: [email protected]

 

 

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Can’t pay your tax bill?

Unfortunately, many of us have tax bills and sometimes we simply cannot pay the Australian Taxation Office by the due date. Whether it be an unexpected tax assessment or unforeseen cash flow problems, there are options available.

The first and best advice I can give you is – firmly implant in your mind that in one way or another, you are going to pay this tax debt.

So, what options do you have?

Option 1 – Borrow money from the bank to pay the amount owing to the ATO

  • This clears your ATO debt but creates another debt with the bank.
  • In many cases this might be considered to be ‘robbing Peter to Pay Paul’
  • If the bank charges a lower interest rate than the ATO (which is likely) and offers a longer repayment period, your cash flow may cope better and make the debt repayment more achievable.

Option 2 – Negotiate with the ATO and enter into a reasonable payment plan

  • Firstly, you should identify why and how you managed to be in this position of owing tax.
  • I won’t go into all the reasons why people owe tax, but what I will say, if you have been reckless, selfish, deceitful or intentionally created a tax debt the ATO will be less inclined to negotiate a payment plan.
  • If there are legitimate reasons that you are unable to pay your tax debt and you have a history of meeting your tax obligations on-time the ATO are likely to be reasonable and agree on a repayment plan.
  • The ATO want the debt repaid and they want you to continue meeting your ongoing obligations, so it’s in their best interests to assist with payment plans.
  • The ATO may remove the interest obligations on the debt if you stick to the payment plan and continue to meet your ongoing tax obligations.
  • Payment plans can vary depending on the amount payable and the circumstances. They can also be tailor made to coincide with your cash flow circumstances. The can be set for periods up to two years but not usually more than one year.

Option 3 – You can bury your head in the sand and hope that it will go away

  • Sorry, it’s not going away.

Option 4 – You could go bankrupt

  • However note that certain debt relating to employee PAYG withheld & employee superannuation will never be wiped from your slate.
  • Other amounts payable to the ATO can be cleared if you go bankrupt.
  • Going bankrupt has a whole lot of other implications that can be to your detriment, and should be your last option after you’ve considered everything else

The ATO website has further information about help with paying your tax.

Other related blogs:

What company debts can directors be personally liable for?

Author: Adrian Wardlaw
Email: [email protected]

 

 

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Super contributions and changes to the work test

As of 1 July 2022 if you are aged between 67 – 74 and want to contribute to super, it may have just become a whole lot easier.

Under previous rules, if you were aged between 67 – 74 and wanted to make a personal contribution to super, you would have been required to meet the ‘work test’ in the year you were making the contribution. This includes salary sacrificed contributions.

This is no longer the case.

The ATO have now removed the ‘work test’ requirement on personal super contributions. However, if you are aged between 67 – 74 and wish to claim a tax deduction for your personal super contributions, the ‘work test’ will still apply.

So, what is the ‘work test’?

To pass the ‘work test’ you must have been gainfully employed for 40 hours or more in any 30 day period in the financial year you are making the contribution. Gainfully employed means you must be employed or self-employed and actually receiving payment; this does not include voluntary work.

The 30 day period does not have to be in the same calendar month. For example, you could work 4 hours every Monday, Tuesday and Wednesday for four consecutive weeks to reach the 40 hour threshold.

It is important to check your eligibility before making personal super contributions. It is a continually changing space with rules catered around age, amount and timing of these contributions.

If you need to speak to an accountant, please reach out to us on (08) 9335 5211.

Other related blogs:  

New super contribution limits
How much do I need in super to retire?

Author: Allan Edmunds
Email: [email protected]

 

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New Super Contribution Limits

Welcome to a new tax year, and with all new years it is an opportune time to think about the future. And the future is Super. Superannuation are those savings designed to support us in our retirement, and we can make contributions to help our super balance grow. The main types of contributions to super are concessional and non-concessional.

Concessional Contributions

Concessional contributions are contributions into super for which a tax deduction has been claimed. This includes contributions by your employer as well as personal contributions.

  • Employer contributions consist of the super guarantee (SG) your employer is required to pay on your wage, as well as amounts they pay under a salary sacrifice arrangement you may have. From 1 July 2022 the SG payable by your employer is 10.5% of your wage (or ordinary time earnings).
  • Personal contributions are amounts you have paid into your super fund with the intention to claim a tax deduction in your personal tax return at the end of the financial year.

For 2022/2023 the annual cap on all concessional contributions made for you is $27,500. If you have more than one super fund all the concessional contributions made to all your funds are added together and counted towards your concessional contributions cap.

From 2019/2020 carried forward rules were introduced allowing you to make extra concessional contributions, above the annual cap, without paying additional tax. To be eligible your total super balance at 30 June of the previous financial year must be less than $500,000, and you must have unused concessional contributions from prior years.

Non-Concessional Contributions

Non-concessional contributions are contributions into super that are from your after-tax income, and are not taxed in your super fund. Non-concessional contributions can also include contributions made by your spouse into your super fund, transfers from foreign super funds and after-tax contributions from your employer.

For 2022/2023 the annual cap on all your non-concessional contributions is $110,000. As with concessional contributions if you have more than one super fund all the non-concessional contributions from all your super funds are added together and counted towards your cap.

If you exceed the annual non-concessional contributions cap you may be eligible to access future year caps. This is known as the bring-forward arrangement, and allows you to make extra non-concessional contributions without having to pay extra tax. Eligibility for accessing the bring-forward arrangement is dependent upon your age and your total super balance at 30 June of the previous financial year.

If your concessional and / or non-concessional contributions exceed the annual caps, and you are not eligible to access either the carried forward unused concessional contributions or the non-concessional contribution bring-forward arrangement you are liable for excess contributions charges and tax applied by the ATO.

If you have any questions about super contribution limits, including your eligibility for unused carried forward concessions and the non-concessional bring forward arrangement, then please do not hesitate to contact our us for assistance.

Other related blogs:

What is a withdrawal and re-contribution strategy?
Carry forward concessional contributions – what are the rules?

Author: Brigette Liddelow

Email: [email protected]

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Land Tax – what’s mine is mine and what’s ours might not be mine

State Revenue WA imposes land tax based on the total unimproved value as determined by the Valuer-General on all land held by the same owners each year.

The assessment is based on your ownership of land at midnight 30 June of the previous assessment (financial) year. If you own more than one lot, your land holdings will be aggregated. That means the land valuations will be added together before the tax is calculated, and as land tax is a progressive tax, a bigger aggregated value results in a higher tax rate. If you own lots in a different capacity, these should be assessed separately.

The tax is assessed separately on any land you own solely, and opposed to any land you own with another person.  So if you own one house by yourself and one with your spouse, each should be assessed separately.  Your main residence is exempt.  If you hold land in trust for different persons (as trustee), tax is assessed separately on the land owned for each separate trust.

Sometimes when you own land personally and as trustee, these are inadvertently combined on one notice.  This is incorrect and may result in additional land tax being paid at a higher rate.

If your assessment includes land that is held by a trust, you should advise State Revenue in writing (an objection) to ensure your assessment is corrected.

To lodge an objection, it is advisable to provide proof of trust ownership, including the trust deed and Offer and Acceptance from the purchase of the land.  You can do this by letter to:

  • Commissioner of State Revenue
    RevenueWA
    GPO Box T1600
    Perth WA 6845

An objection against your assessment must:

  • be lodged within 60 days of the date of issue shown on your assessment notice
  • be in writing with OBJECTION clearly written at the top of the letter and
  • state fully and in detail the grounds of your objection.

Other related blogs:

How does WA land tax work?

Author: Stacey Walker
Email: [email protected]

 

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COVID support grant is available

Hands up who’s heard of the Small Business Hardship Grant program? No one? Well, that’s not surprising as the State Government doesn’t seem to be making a heap of noise about it. But it’s a really big deal. Here’s why.

The WA Government is providing grants of between $3,750 and $50,000 for businesses impacted by recent health and social measures. Applications close on 30 June 2022.

This is not just for the hospitality industry. Any business that can show a decrease in business turnover of at least 30% for a consecutive 14 day period across a specified period is eligible to apply.

The specified period is 1 January to 30 April 2022. So you’ll need to find 14 consecutive days during that period where turnover is 30% lower than the same period in the year prior – i.e. compared to the same 14 day period between 1 January and 30 April 2021.

The grant has two tiers, so a 40% reduction in turnover commands a bigger grant than a 30% reduction.

The grant amount is also determined by the number of full-time employees a business had. A business with no employees can receive a grant of $3,750 or $5,000, a business with 20 or more full-time employees can receive either $37,500 or $50,000, and there’s a couple of levels in between.

There are some general conditions. Your business must have an annual turnover of at least $50,000, an Australia-wide payroll of less than $4 million and a valid and active ABN.

Not for Profit organisations are also eligible if they are a “commercial entity” – not well described but likely to mean the NFP must have a business operation component to its activities. If that is the case, it can include all income like grants and donations in its turnover reduction calculation.

A further quirk is that JobKeeper proceeds form part of the turnover calculation. This is likely to contribute to the turnover reduction for businesses and NFPs that received JobKeeper support in the March 2021 quarter.

There’s a similar rent relief grant available that’s worth a further $3,000 for businesses that operate from a leased premises. It’s based on a 30% turnover reduction, but over a 28 day period.

There is some evidence that needs to be uploaded with the application and there’s plenty more information available at the website of the Small Business Development Corporation. The SBDC have said clearly that businesses need to meet the criteria, but don’t need to provide a story as to why the reduction in turnover occurred.

You can follow the instructions on the SBDC website and lodge your own application, however there are some quirks and potential complexities in calculating the reduction in turnover. Please contact us as soon as possible if you require our assistance.

Author: Mark Douglas
Email: [email protected]

 

 

 

 

 

 

 

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GST on Rental Properties – When is it applicable?

When renting out a property, it is crucial to consider when GST is applicable. To do this, it’s important to understand whether you are providing premises which are residential or commercial for rent.

Residential properties are rented out solely for the purpose of being an individuals’ or families’ dwelling or home. GST is not applicable on residential rent, meaning tenants are not entitled to claim GST credits on the expenses provided, and landlords are not required to collect GST on the rental income. The same is true even if you are currently registered for GST for other business purposes.

Commercial rental premises are considered to be properties that are rented out and used for business or income producing activities, such as hotels, offices, caravan parks or warehouses to name a few. Commercial rental income is subject to GST as is the property when purchased or sold.

Purchasing or Selling a Commercial Rental Property

If you are registered for GST and purchase a commercial rental property, then you will be entitled to claim a GST credit equal to one-eleventh of the purchase price of the property, as well as on any expenses incurred to purchase the property such as legal fees. To qualify for these credits the following must apply:
– It was not a GST-free sale of an operating business
– The margin scheme was not used to calculate the GST

When it comes time to sell the property, you will also be liable for GST, calculated as one-eleventh of the sale price (unless it was a GST-free sale or the margin scheme was used). You will also be entitled to claim GST credits on all GST inclusive expenses related to selling the property, such as legal fees and agents fees.

Renting Out Commercial Premises

When renting out the commercial premises, you are required to be registered for GST where your GST turnover is expected to be $75,000. This means you will be liable to charge and declare GST on the rental income you receive. You will also be entitled to claim GST credits on all GST inclusive purchases and expenses you incur for the property.

If you are unsure about whether or not you should be registered for GST when renting out your property, or need assistance doing so, then please do not hesitate to get in touch with our office and we can assist you in this process.

Related blogs:

Is there any GST when buying a commercial property?
GST withholding on new residential property

Author: Molly Ingham
Email: [email protected]    

 

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A perfect storm

The latest inflation figures were shocking, but really just told us what we all know, that costs are going through the roof.

The Australian Bureau of Statistics recently released the March 2022 CPI figures. The headline was that inflation for the twelve months is at 5.1% across Australia, but in Western Australia it’s far worse at 7.6%. In bad news for households, the biggest increase was in non-discretionary goods like fuel, health, household and education. For the March quarter alone, WA prices rose 3.3%.

Consumer confidence immediately fell by 6% following the release.

Business owners are being hit on several fronts. Rising costs will challenge many small businesses. Add to this a serious skills shortage, supply issues, escalating interest rates and plummeting consumer confidence and you’ve just about got the perfect storm.

It can be difficult for small businesses to increase their prices to compensate because they often have intense competition from larger competitors.

Some factors are beyond the control of business owners but the challenge is to identify what can be contained, even if it initially seems small or insignificant.

The first thing to look for is unnecessary expenditure. Almost every business has something in this category, whether it’s a forgotten software trial subscription, some excessive entertainment costs or a work vehicle that’s more about form than substance. Locate these and eliminate them.

The next step is to eyeball essential expenses and find ways to shrink them. Are you getting the best interest rate or merchant charges from your bank? What about insurance, software, IT services, phones and maintenance contracts? The best way to approach this project is to take a deep dive into your general ledger and question every significant supplier relationship. If nothing else, service levels might suddenly improve as a result of the enquiry.

The third stage is to look for efficiency gains. Don’t blindly do what you’ve always done. Converting to electronic communications can save a small fortune in postage. Creating an on-line ordering system saves the disruption of taking phone calls and improves accuracy. What about putting solar panels on the roof to reduce power costs (or better still, talk your landlord into paying for it)?

Unless staff are excess to requirements, HR should be just about the last cost you trim. But if you have inefficient or under-performing staff, move them on and replace them with someone that wants to contribute.

Another cost that should not be cut is marketing, but review the effectiveness of your marketing spend to ensure you’re getting value for money.

This won’t be the last inflation shock or interest rate rise and the sooner you take action the better positioned you’ll be to manage the impact.

Related blog:

Why a small business should be using monthly budgeting
You need a business road map
Cash is king

Author: Mark Douglas
Email: [email protected]

 

 

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What is a non commercial loss?

If you’re an individual in business as either a sole trader or in partnership, and your business makes a loss, you may be able to offset the loss against other income such as salary and wages. This reduces the tax you would otherwise have paid, but first you must prove to the ATO that the loss is real, i.e. it’s not a non commercial loss.

To show that losses are real, you must meet an income requirement and pass one of four tests.

Eligibility

For your losses to be deductible, you first need to meet an income requirement. If you don’t meet this you cannot offset your losses regardless of whether you pass any of the four tests that follow (unless you apply for the Commissioner’s discretion).

To meet the income requirement for non-commercial loss purposes your other income must be less than $250,000.

Your other income includes:

  • taxable income (ignoring any business losses)
  • total reportable fringe benefits amounts (these should be shown on your payment summary from your employer)
  • reportable super contributions (e.g. salary sacrificed and personal deductible super contributions)
  • total net investment loss (e.g. negatively geared property or investment portfolios)

If you pass the income requirement, you must then meet one of the four tests unless either:

  • you are covered by an exception to the rules
  • the Commissioner exercises discretion to allow you to offset your loss against other income

The four tests

Once you meet the income requirement you must then pass one of the four tests. These are:

  • The assessable income test – the business has assessable income of at least $20,000 (can be earnings or capital gains).
  • The profits test – the business had a profit for tax purposes in three out of the past five years, including the current year (note that if a business makes a profit for three years running then it will pass the profits test for the next two years regardless of whether it makes a loss, since three out of five consecutive years will be profit years)
  • The real property test – the value of real property or of an interest in real property that you used in the business on a continuing basis was at least $500,000. This includes land & buildings, but nothing used for private purposes. It also includes leased property.
  • The other assets test – the value of assets (excluding real property, cars, motor cycles and similar vehicles) you used on a continuing basis in carrying on the business was at least $100,000. This can include leased assets.

Deferring losses

If you are not able to deduct your business activity loss in the current year because you don’t pass any of the non-commercial loss rules, you can defer your loss for use in a later year.  If your business makes a profit in a following year, you can offset some or all of the deferred loss against this profit, up to the amount of your profit.

You can also claim the deferred loss against other income in a following year if during that year:

  • you meet the income requirement and the business passes one of the four tests, or
  • the Commissioner has exercised the discretion to allow you to claim the loss

Exceptions

If you don’t meet the income requirement but you meet one of the four tests, you can apply for the Commissioner’s discretion if either:

  • special circumstances occurred that were outside your control such as drought, flood, bushfire or some other natural disaster, which prevented your business activity from producing a tax profit, or
  • due to the nature of the activity, there is
    • a lead time before the business will make a tax profit
    • an objective expectation, based on independent evidence, that it will make a profit in a time that is considered commercially viable for that industry

Summary

  • If you are a sole trader or in a partnership and your business makes a loss, you may be able to offset your business loss against other income (often wages), reducing your income in that financial year
  • To be eligible, you must pass the income requirement and pass one of the four tests
  • The income requirement is that your ‘other’ income must be less than $250,000
  • The four tests are:
    1. The assessable income test – the business has assessable income of at least $20,000
    2. The profits test – the business had a profit for tax purposes in three out of the past five years, including the current year
    3. The real property test – the value of real property or of an interest in real property that you used in the business was at least $500,000.
    4. The other assets test – the value of ‘other’ assets you used in carrying on the business was at least $100,000.
  • If you are not able to deduct your business activity loss in the current year because you don’t pass any of the non-commercial loss rules, you can defer your loss for use in a later year
  • If your business makes a profit in a following year, you can offset some or all of the deferred loss against this profit, up to the amount of your profit

Related blogs:

Company carry back tax losses – what are the rules?

Author: Caleb Datson
Email: [email protected]

 

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