What Small Business Qualifies for the CGT Rollover Relief?

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The Australian government has passed a law allowing small businesses to amend their legal structure without making them liable for capital gains tax (CGT).

According to Small Business and Assistant Treasurer Kelly O’Dwyer, small businesses that discover that their current legal structure no longer suits them don’t have to be stuck with it. With this legislation, they can restructure without incurring an instant CGT liability.

The law is intended to be enforced beginning 1 July 2016, and affects:

  • Handovers of depreciating assets, provided the balancing adjustment event as a result of the handover happens on or after 1 July.
  • Handover of trading stock or revenue assets, provided the handover occurs subsequent to 1 July; and
  • Handover of CGT assets, provided the CGT event from this handover is subsequent to the same date.

This relief can be claimed should a small business hand over an active asset to another small business unit as part of a “real” business restructure without affecting the asset’s economic ownership.

Gains and losses resulting from the handover of active assets that are CGT assets, depreciating assets, trading stock or revenue assets between business organisations will be covered by the CGT rollover relief.

To meet the requirements of the rollover relief, the handover of the asset or assets should be part of a “real” restructure of an existing business, versus “unethically tax-motivated strategies.”

The “genuineness” of the restructure will be determined using facts and situations. Some of the pertinent aspects are:

  • Whether it is an authentic commercial plan executed to improve the efficiency of the business;
  • Whether the re-assigned assets remain in the business; and
  • Whether or not it is an initial move to, as the legislation words it, “facilitate the economic realisation of assets.”

All parties to the handover should do either of the following to be eligible for the rollover:

  • A small business organisation with a turnover of $2 million or below for the income year when the transfer happens
  • An organisation that has an affiliate that is a small business unit for that income year
    “linked” to an organisation that is a small business unit for that income year, or
  • A partner in a partnership that is a small business unit for that income year

If you need tax advice or guidance, contact PJS Accountants. We offer expertise in managing your tax affairs with a complete range of compliance, corporate and individual tax services. Our clients include large companies, SMEs, family businesses and individuals. Putting nothing to chance! Talk to one of our team members now!

Tips to Write Off Bad Small Business Debts

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Before the financial year ends is the best time for small and medium sized businesses to assess outstanding invoices and bad debts. Many SMEs are no stranger to bad debts. As a business owner, you most likely have had customers who failed to pay for your goods and services.

You’ve performed the work, invoiced the customer, fixed a due date, waited for payment, but you waited in vain. You should write off these amounts.

A large business will typically have a payments team to pursue any invoices that are unpaid and receive payment. Small businesses may simply send out a few emails or make phone calls and then wait for payment.

What if the situation is your customer is unable to pay the money they owe you because of they are in a tough financial situation? Or if you had the misfortune of encountering a customer that makes it a habit to evade paying their debts?

You are not likely to be repaid because this is bad debt. So what remedies are available to you? One thing you can do is write it off as bad debt, as this may entitle you to a tax deductible expense.

Outstanding Invoices

If you own your own business you probably would have had experience problems in collecting payments on time. This kind of problem doesn’t just happen in Australia. In a survey performed by the Commercial Collection Agency Association in the USA, it was found that the chances of getting payment for the whole amount significantly decrease as time goes by.

The results showed that although most invoices are fully paid prior to the due date, the chances that you will receive payment at all has now declined by more than 50% by the time the due date arrives. After 30 days, this has declined even more to just 89.9% and 90 days following the due date, just 69.6% of invoice payments are received. It goes without saying that the number will go down from that point. Results showed that two year following the due date, the chances of getting paid for overdue invoices declines to just 9.3%.

An invoice blackhole is created, causing significant cash flow issues for businesses. This issue has been in existence ever since there have been standard business practices.

How to write off a bad debt

What are the steps for writing off bad debts? First, you must wait 12 months for the invoice to be overdue. After this period, the ATO will recognise that you are unlikely to get paid and let you write it off.

However, if you have recorded the amount as part of your assessable income either for the current year’s tax assessment return or for any past year, you may lodge the updated information about the non-payment to the ATO as part of your assessable income tax return. Make sure to lodge all the required papers prior to the conclusion of the financial year to avoid hindering the process.

Points to keep in mind

Per the Income Tax Assessment Act 1997, section 25-35:

“You can deduct a debt (or part of a debt) that you write off as bad in the income year if: (a) it was included in your assessable income for the income year or for an earlier income, or; (b) it is in respect of money that you lent in the ordinary course of your business of lending money.”

Don’t forget this when you are writing off bad debts. Below are some tips to help you through the process.

  • Finish the process of writing off bad debts prior to the conclusion of the financial year. Though this reminder may seem obvious, you can easily forget about it when you consider all your accounting and tax responsibilities.
  • You are only permitted to write off a debt that is bad to make sure you can claim a deduction. This means the debt is not likely to be paid.
  • You must have documentation to support all debts that you will write off.
  • The amount that you write off are subtracted from your profits, so be careful when writing off bad debts.
  • You may claim a refund of the GST paid to the ATO on sales if you report your income on an accrual basis.
  • When the amount has been overdue for over 12 months, it can be written off and GST credits claimed.

Before deciding to write off a bad debt, ensure you try all alternatives for collecting your Accounts Receivable balance. This is because it will affect profitability. Always remember to write off bad debts during the year and not when the financial year has ended.

Consult your accountant to help you in the process of writing off a bad debt. PJS Accountants offers accounting, taxation and other services to help you run your business affairs efficiently and in compliance with laws. Contact PJS Accountants for enquiries.

What you Need to Know About Inheriting Property

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Because of the relentless increase in property prices, many prospective home buyers could be excused for thinking that the only way they could own a home is through inheritance.

What occurs when you find out you’ve inherited property.

In Australia, unlike in other countries, there are no death duties or inheritance tax. However, it does not mean that the taxman will just simply allow you to have the property. Wills and inheritance are covered by state and territory laws, but they may also be subject to federal taxes and regulations. Capital gains tax (CGT) is the primary one.

The rules on CGT as it applies to inherited property vary significantly and are dependent on several factors:

  • How you are related to the individual from whom you inherited the property
  • When they died
  • What the property was used for – for instance, whether the property was the person’s residence or if you’re a co-owner of the property.

Viability of owning the property

Before making any decision, make sure to find out the value of the property you’ve inherited:

  • Get the property valued by a professional; it wouldn’t hurt to also have a building survey done on the property, or a strata survey, if the property is some type of common title like an apartment.
  • Instruct your accountant to familiarise you with the tax implications and go over how taking ownership of the property would impact your financial situation.
  • Adopt a tactical, long-term outlook of the property and if you are able to fund its maintenance. Certain short-term expenses may actually put you in good financial position in the long run.
  • Be level headed, especially if the person who left the property to you is close to you, such as a partner or a parent. The sense of obligation to keep the property may be strong, regardless of the financial cost to you. However, try to remove your emotional connection to the property and be objective when viewing it.

Unwelcome inheritance

You are not obligated to keep your inherited property. You have options: either sell it promptly as a deceased estate, or make it a renovation project (and possibly make a profit from selling it after renovations are done).

In case the property was the dead’s person’s main place of residence, you don’t need to pay any tax from selling it, if you’re able to sell it within two years from the date you inherited it.

You can also rent out the property. This option would earn you an income, or at least allow you to use the rent to fund the upkeep of the property.

Of course, you don’t have to do either of those things and just decline the inheritance. This is not common, but it absolves you of the obligation and expenses of becoming the owner of the property.

You don’t need to fear inheriting a property. Just don’t forget to factor in all implications of taking ownership and maintain records of the inherited property to reduce your tax obligations.

Inheriting a property comes with different tax and legal obligations. Aside from consulting with your lawyer, be sure by talk to your accountant to discuss the tax and financial side of things.

PJS Accountants, chartered accountants, offer a full range of services including accounting, taxation, business improvement, superannuation, business valuations, asset protection, succession planning, estate planning and bookkeeping. Contact PJS Accountants for enquiries.

Tax Changes for Small Business

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The Australian government announced some major changes as part of 2015’s federal budget. These changes, presented in May 2015, indicate huge benefits and incentives for small businesses.

Here are some notable changes in small business tax:

An immediate write-off of $20,000

  • Up to $20,000 for asset purchased can be claimed by small businesses. Though the number of assets that can be claimed is unlimited, the value of every asset purchase should not be more than $20,000, including installation costs or related items.
  • Eligible businesses are those with a yearly turnover of $2 million or less.
  • This new rule only applies to small businesses that are considering replacing or buying assets for business use.

Cut in tax rate

  • The present tax rate for unincorporated enterprises – single traders, partnerships and trusts – with a turnover below $2 million will be reduced by 5% to up to $1000, granted as a tax credit when employers submit their tax return.
  • The tax rate for incorporated small enterprises with turnover of less than $2 million will be cut from 30% to 28.5%.
  • Eligible small businesses will see the amount of tax they pay at the end of the financial year reduced because of this tax rate cut.

Start-up costs, capital gains and fringe benefit taxes

  • Capital gains tax will no longer be paid by small business that modify their legal structure (for instance, to an incorporation) beginning the July 2015 to Jun 2016 year. In addition, start-up costs incurred by a small business, specifically professional fees for accounting, advice and other professional services, can be claimed in its entirety as a tax write off.
  • Starting April 2016, fringe benefit tax exemption can be claimed by small businesses for one or more qualifying work-related portable electronic devices they provide to employees.

See a qualified tax advisor, accountant or bookkeeper for tax enquiries, including capital tax gains, fringe benefits, and more. PJS Accountants can help you organise your tax affairs. We work with large companies, SMEs, family businesses and individuals. For enquiries, contact PJS Accountants.

An Overview of the Major Changes in Tax Time 2016

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Some of the changes that are worth noting are the tax benefits for small businesses, the new tax procedure for managed investment trusts, and strengthening access to company losses.

Depreciation for small businesses made simple

Small businesses are entitled to an immediate deduction to the business part of most assets of they are valued below $20,000 and were purchased between 7:30 pm on 12 May 2015 and 30 June 2017.

The deduction can be claimed through the tax return of the small business. They can also immediately deduct the remainder in the small business pool if the amount is below $20,000 at the conclusion of an income year that terminates on or subsequent to the same period stated above including a current pool.

Depreciation for primary producers accelerated

Starting 12 May 2015, immediate deductions for the following costs are allowed for primary producers:

  • Fencing: withheld before over a period of as many as 30 years
  • Water facilities: withheld before over 3 years

Instead of over a period of up to 50 years, the cost of fodder storage assets can now be deducted over 3 years.

Small business tax concessions

For income tax years starting on or after 1 July 2015, the small business company tax rate will be cut down from 30% to 28.5%. This change covers small businesses identified as corporates, unit trusts and public trading trusts.

For companies that are not small businesses, or those earning a yearly accumulated turnover over $2 million, the tax rate remains at 30%.

Start-up costs now immediately deductible

Certain start-up costs, including expenses related to raising capital, can be immediately deducted starting on 1 July 2015.

Phase out of the net medical expenses tax offset

Starting 1 July 2015, taxpayers can only claim the net medical expenses tax offset if they have net expenses for disability aids, attendant care or aged care. The offset, which is income tested, will be phased out commencing on 1 July 2019.

Phase out of first home savers accounts

On 1 July 2015, the first home saver accounts (FHSA) were phased out and converted into ordinary savings accounts. Account holders are required to put earnings in their tax returns.
Account providers will no longer need to pay tax on FHSA earnings for any period subsequent to 30 June 2015.

Creation of new tax system for managed investment trusts

The ATO has created a new tax system for managed investments trusts (MITs) designed to modernise the tax laws for qualified MITs and improves certainty for investors.

If ratified, the proposed laws will commence on 1 July 2016. Qualified MITs can decide to start applying the new rules on 1 July 2015. The trust income can be assigned to beneficiaries based on a “fair and reasonable” manner per their ownership shares in the MIT. A qualified MIT choosing the system is identified as an attribution managed investment trust (AMIT).

In addition, the new system establishes provisos regarding amounts that impact the cost base of a member’s share in the trust.

Business services wage assessment tool payment

A person getting a lump sum in arrears business services wage assessment tool (BSWAT) payment may claim a lump sum in arrears tax offset.

The BSWAT lump sum arrears payment is not wages and salary or the government pension or allowance.

The lump sum tax offset can be claimed by taxpayers by reporting the payment at label 14 (other Australian income).

Entity tax information reporting

Starting December 2015, the following will be published by the Commissioner of Taxation, per the income tax transparency requirements:

  • Public and foreign held corporate tax entities with an overall income of $100 million or higher
  • Australian-owned private entities with an overall income of $200 million or higher

The data will be derived from tax returns on 1 September in the year after the income year being reported. The ATO intends to publish the information around December. For instance, data from the income year of 2014-2015 will be derived on 1 September 2016 and made available around December 2016.

Improving access to company losses

On 7 December 2015, the government announced that the existing “same business test” for company losses will be eased to let businesses retrieve previous year losses when they have engaged into new business activities or transactions.

The government will introduce a new “predominantly similar business test.” The new text will give companies access to losses where their business is the same relating to:

  • The degree to which the business make assessable income from similar assets and sources
  • Whether any modifications to the business are modifications that would be realistically be projected to have been generated to a similarly placed business.

This law is anticipated to be introduced starting 1 July 2015.

See a qualified tax advisor, accountant or bookkeeper to keep you in compliance with tax rules and policies. PJS Accountants can help you organise your tax affairs. We work with large companies, SMEs, family businesses and individuals. For enquiries, contact PJS Accountants.

Two SMSF Accounts May Benefit you More in your Retirement

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To save on fees, superannuation members are advised to consolidate their accounts. However, doubling up may sometimes be advantageous.

Utilising two or more funds could benefit some in relation to tax, estate planning and insurance. And there is no rule saying that it is not legal to have more than one fund.

A number of super strategies centre on two kinds of contributions that members make: concessional contributions like salary sacrifice that provide deductions and are taxed; and non-concessional contributions paid from after-tax money.

Pre-retirees can avoid a death benefits tax of a minimum of 15% being applied on SMSF willed to their adult children by splitting these kinds of contributions, because just the taxable part is taxed.

Estate planning is currently the primary driver, however, a future-proofing element is definitely present now. The reason is that both sides of government can’t help but get involved in super, and individuals who split their SMSFs may be able to act quicker when adjustments are made to the guidelines again.

If health problems are hindering you from obtaining adequate insurance to cover your family, an option available to you is to sign up with a number of funds, which automatically provides basic insurance to new members. For example, if the man of the house dies unexpectedly, he could leave his family with a $1 million life insurance payout, if he has not consolidated several funds that provide life insurance.

It is rather common for people who set up an SMSF to leave a balance in whatever fund they have joined before to keep the insurance intact.

Any of these strategies are great on paper, but when it’s time to put it into practice, there’s nothing better than seeking advice.

Some people benefit from being creative with their super, but it is largely smart to keep super as uncomplicated as possible. Carefully consider the pluses and minuses before messing around with your super.

Expect more additional fees and administration responsibilities when you set up or join a second fund.

In some cases, there are potential benefits to joining two super funds. Generally, this strategy is ideal for holders of SMSF, those individuals in their mid-50s and beyond, aiming to split concessional and non-concessional contributions to secure longer term tax savings.

PJS Accountants works with clients to open and manage a SMSF. Contact PJS Accountants if you’d like to talk to us about your retirement goals and help you strategize to get the most out of your super fund.

Tax Returns and Annual Reports Tips

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Tax time is here once again. Have you found time to evaluate your business to determine how it is performing? Or is your schedule to hectic to slot that task in? Being full of activity doesn’t always translate to profitability. For your business to grow, it’s important to evaluate performance regularly. It is also a smart move to review the accounts prior to the end of the year.

The availability of a great variety of cloud solutions had made it easy for business owners to be updated. Efficiency and productivity are also easier to achieve with cloud enablement. In addition, it is now easier to collaborate with accountants and bookkeepers because they can easily get a hold of data to help you with being prepared and up to date.

You can make your year-end smoother by being organised in advance and establishing good systems. Your tax planning will be easier because of your access to live information. You can ready your year-end tax planning well before the end of the year with the help of your accountant.

You can utilise your online accounting software to complete your payroll year end compliance task promptly and efficiently. You can also do your GST, PAYG, payroll and superannuation tasks more easily. And with access to reporting features found in the cloud solutions, you can get information quickly for your compliance filings.

Linking your live feed banks directly with your file allows you to keep your data updated. Setting up your bank rules will let you automate your data processing so it doesn’t accumulate. This will provide you with data that is up to date.

Do the following when preparing for Financial Year End:

  • Bank/credit card accounts must be reconciled
  • Loan accounts, including intercompany loans, must be reconciled
  • Receivables and Payables must be balanced
  • Bad debts must be written off
  • Stocktake must be completed by 30 June
  • Payroll/PAYG withholding and Superannuation Accounts must be reconciled
  • Payroll payments and the totals reported for Payroll tax and workcover must be reviewed
  • GST control accounts must be reconciled
  • The sums reported to the ATO in the Business Activity Statement and Instalment Activity Statement must be reviewed to make sure the totals reported for the relevant year is right
  • Profit and Loss and Balance Sheet reports must be run and reviewed

Other items that must be considered when preparing tax:

  • Expenses prepayment
  • Interest prepayment
  • Asset and Depreciation Schedule preparation
  • If you have executed the acquisition of minor assets properly – know the allowable cap for immediate write off from your accountant
  • Sale of assets
  • Deductions for motor vehicle expenses
  • Unpaid expenses that can be deducted
  • Donate to charities
  • Defer income
  • Make payments to you superannuation before 30 June if you wish to make a claim for the expense in the present financial year
  • Sales orders must be checked twice in the event they are completed and must be invoiced
  • Purchase orders must be checked twice in the event they are delivered and must be billed
  • Invoices must reviewed to make sure that the products or services have been delivered – in case the products or services haven’t been delivered by 30 June, chances are they can’t be treated as income in the relevant year.

Doing some of these things above before the end of the year enables you to lessen the chance of paying more than what you actually owe. This is the reason why it is not advisable to postpone completing the tasks that is important to your business.

Advance planning paves the way for improved business performance and growth. There’s no need for business owners to be buried in paperwork when they possess all the means to build such efficiencies in the marketplace.

With the availability of online accounting solutions and the help of your trusted accountant, you should avoid encountering cash flow problems. Reporting and live information will be right at your fingertips anywhere anytime.

PJS Accountants offers a full range of services, including tax planning and compliance, accounting and SMSF services, and bookkeeping. For enquiries regarding our services, contact PJS Accountants.

What You Need to Know About Small Business Tax

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It is important for business owners to know about their tax obligations.

The Structure of your Business

You probably have already chosen the structure by which to operate your business, whether as a sole trader, a partnership, a trust or a company. You may have already applied for and received your ABN with the Australian Business Register. It is vital to set up your business correctly.

If you are an Australian resident for tax purposes, you’re not taxed on the initial $18,200 of your income. This is termed as the tax-free threshold.

Allowable deductions for businesses

The list of expenditures or allowable deductions that businesses can claim is comprehensive. Here are some of them:

  1. Advertising
  2. Bank fees, charges and tax agent fees
  3. Business travel including transport and freight
  4. Depreciation of assets used in your business
  5. Electricity including other home office expenses
  6. Hired or leased equipment
  7. Interest on borrowed money
  8. Motor vehicle expenses
  9. Phone expenses

You need to keep:

  • a logbook to calculate the business use percentage
  • odometer readings for the start and end of the period you owned or leased the car, and
  • written evidence for all car expenses, except for fuel and oil costs.  Your logbook is valid for five years. You must have kept a logbook during the first year this method is used. The logbook must cover at least 12 continuous weeks

Applying for GST registration

A business with a turnover or gross income of $75,000 or higher, or a non-profit group with a gross income of $150,000 or higher, is required to register for GST. How do businesses collect GST for the government? It’s by including GST into the prices of their products or services. They then get their GST back from the ATO monies used on business expenditures.

Hiring employees

You may have to employ additional staff as your business expands. Hiring employees is quite clear-cut. However, if you are not familiar with payroll systems and laws, you may end up being penalised.

You may need to withhold taxes from monies you pay to your employees and other staff and disburse these sums to the tax agency. To perform this process, you use the Pay As You Go (PAYG) withholding system. It is recommended that employers register for PAYG withholding prior to making their first payment.

Making super contributions

The ATO is implementing a government initiative called SuperStream, which is designed to make the superannuation system more efficient. It is a new system for handling information and payments that employers have to follow when paying the superannuation contributions for their workers.

Business owners are now mandated to submit data and payments electronically in line with the SuperStream guidelines when making super payments on behalf of their workers.

If you employ 20 or more staff, you have to implement SuperStream contributions as soon as possible. If you have 19 or fewer workers, you have to implement SuperStream beginning 1 July 2015. For larger businesses, the ATO has given them a grace period of until 30 June 2016 to have a plan in place.

SuperStream offers many benefits. One of which is that you can make unlimited super payments fast and easy without leaving the online accounting software that you are using.

BAS submission

GST registered small businesses report and pay several tax duties by submitting activity statements. A form issued by the Australian Taxation Office, the Business Activity Statement (BAS), is submitted monthly or quarterly. Included in your BAS is a summary of the sums of GST that your business should pay and should recover in a specific period.

PJS Accountants can help you organise your tax, accounting and bookkeeping affairs. We work with large companies, SMEs, family businesses and individuals. For enquiries, contact PJS Accountants.

Learning About Capital Gains Tax

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The word “tax” never fails to make us feel scared or worried. Yes, it’s a bit stressful seeing a part of your hard-earned income vanish. But you don’t have to feel this way about paying taxes, in general – if you do it properly.

With regards to Capital Gains Tax (CGT), you have to know just how much you are obligated to pay and what percentage of your profits is considered taxable income.

CGT Explained

Any profits you earn from selling an asset are taxable. This form of tax is called CGT. One of the types of assets that trigger this form of tax, which is collected by the Federal Government through the Australian Taxation Office (ATO), is property.

With regards to real estate, CGT only applies to the property you own that isn’t your main place of residence, or where you live most of the time. Examples are investment properties and holiday homes. Your family home is exempted from CGT.

For properties that served as your primary residence for a period of time but you also leased, CGT is required only for those periods when you didn’t live there.

How to Calculate CGT

You can compute CGT in three ways, which are all based on the length of time you were an occupant in the property. You are charged at marginal tax rate at all three methods.

If you own a property for less than 12 months and you sell it, you are required to pay the maximum rate of CGT on any profits you earn from the sale. But if you owned it for over a year, even for one day more, you can claim a 50% discount in the CGT you are required to pay. So it is practical to consider that when making investment plans.

For people who’ve had a property since prior to 21 September 1999, the cost base for a property can be increased by using indexation, which results in the reduction of capital gain.

The ATO offers a lot of information for calculating capital gain and the amount you may have to pay. It also provides video guides on tax effects for lessors.

Complicated rules

One aspect that always brings misunderstanding is when an individual has occupied the property for just a time when they’ve owned it.

The rules on principal residence are rather complex and technical.

For instance, an individual bought property for $200,000 in 1995 and occupied it for 15 years. The property was rented out in 2009 when the individual migrated to the UK. In 2014, they occupied the property for six months before divesting the home for $850,000.

You can still claim for the principal residence exemption, if the owner occupies the home again for three months before selling it. This results in the owner not paying CGT for selling the property.

Clearly it would benefit you to hire a tax specialist to be in charge of your CGT affairs. Not forgetting that CGT doesn’t apply on family home is a first step towards understanding your tax obligations on any capital gains and always be compliant with ATO rules.

See a qualified tax advisor, accountant or bookkeeper for tax enquiries, including capital tax gains. PJS Accountants can help you organise your tax affairs. We work with large companies, SMEs, family businesses and individuals. For enquiries, contact PJS Accountants.

Understanding Taxation for Property Investors

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Property investors are aware of the various specialised tax breaks they are entitled to, but are also liable for some taxes that the majority of non-investor property owners are not, including land tax and capital gains tax (CGT).

In this article, we will talk about allowable tax deductions, CGT and purchasing property using a self-managed superannuation fund (SMSF) to help property investors gain more knowledge of their taxation duties.

Maximising deductions

A wide range of rental property deductions can be claimed by property investors, that is, if they keep the correct documentation and invoices.  Here are some of the common expenses that you, as a property investor, can claim in relation to owning a rental property:

  • Advertising for tenants
  • Cleaning expenses
  • Council and water rates
  • Electricity and gas
  • Gardening expenses
  • Insurance (building, contents, etc.)
  • Interest on the investment loan
  • Land tax
  • Real estate management fees
  • Repairs and maintenance
  • Reasonable travel costs (for inspection of property)

You can claim the money you spent on things such as white goods, furniture and air conditioners, but they will still be covered by depreciation. The useful life of the item in question is to be utilised to claim the appropriate deduction over a period of years.

Building, construction and borrowing costs

Though not deductible, you can claim building and construction costs under the special building write-off guidelines. Generally, for a rental property constructed after 15 September 1987, a part of the construction costs that is still unclaimed at the date the property was purchased can be claimed.

You can write off the cost at 2.5% every year over 40 years. However, you have to determine the cost of the construction work and the date it was carried out. You can obtain this information from the previous owner, or you can have an estimate provided by a qualified expert, such as a quantity surveyor. If it is a new property, you can get the appropriate cost information from the builder or a quantity surveyor.

Also considered as allowable tax deductions are loan procurement fees and other borrowing costs. However, you can usually claim them over five years.

Non-deductible

Some expenses cannot be claimed as a deduction, but are allowed to be included as part of the cost base of a property if it is sold, for CGT purposes.

Together with the original purchase price, below are some items you can add to the cost base:

  • Stamp duty on purchase
  • Valuer’s fees on acquisition
  • Legal costs that are incurred on the purchase and sale of the property
  • Advertising expenses on sale
  • Auctioneer’s fee
  • Capital expenditure on improvements that escalate or maintain the asset’s value (e.g. building a new garage)

Deduction tips for property investors

When negatively gearing, you may want to get an interest-only loan for your rental home because this type of loan guarantees that interest expenses are kept at high levels while not decreasing the loan’s principal. This can benefit you as it will let you offset the interest against your total taxable income. But the decision to take this loan should be determined by your financial situation at the moment and in the future.

If you travel to your property to manage it, you may deduct the travel costs while checking out the property. This would only include, for example, the costs of airline tickets to inspect the property one day and going back home the next day. If you travel to you property and stay for a week-long holiday, tax rules will require you to allocate expenses between deductible and non-deductible items.

CGT and investment property

You need to remember that an investment property that was used in the past as your primary residence can still be considered as primary residence and thus remain CGT exempt for a maximum of six years after the house has ceased to be your family home, as long as you do not own any other primary residence.

Sale of investment property and CGT

You may have to pay CGT for selling a rental property, provided that asset was purchased on or after 19 September 1985.

There will be a capital gain from selling the property when the proceeds from the transaction are higher than the cost base of the property. You will incur a capital loss if the proceeds are lower than the cost base.

If there is a capital gain, you have to apply any capital losses from the present or past year. You may further reduce any remaining net capital gain by using the 50% CGT discount for individuals who have had the home for over 12 months. If the home has been owned for less than a year, the 50% CGT discount can’t be claimed and thus the entire net gain is treated as income and is taxable.

To help pay a possible large CGT tax, always put aside part of the sale proceeds from your rental property.

The effect of building depreciation claims on the cost base of a property

Capital works deductions may decrease the property’s cost base for CGT purposes, if such deductions have been claimed in relation to a rental property. Any depreciable buildings sold with property are subject to special rules.

Investing in property through SMSF

It is not recommended that an SMSF be set up for the simple reason of wanting to invest in property without properly weighing all the risks, benefits and related expenses involved.

Because of the high cost of property, the SMSF may be heavily invested in one type of asset. In this case, it is the duty of the SMSF trustees to consider diversification as one of their investment strategies. If one type of asset underperforms, you can limit your risks with diversification.

There are several tax benefits from investing in property using an SMSF. First, you can claim a 15% maximum tax rate on net rental income when the SMSF is in accumulation mode and 0% while full pension mode. In addition, if the property is sold after being owned for over 12 months, any consequent capital gain will be subject to a maximum capital gains rate of 10% or 0% if in pension mode.

For any deductions for losses or expenses for a rental property acquired using an SMSF, the rate is a maximum of 15%.

For most investors, it may be more beneficial tax-wise to buy a rental property using other structures or under their own names rather than through an SMSF.

Common pitfalls to watch out for

It is common for investors to group different properties under one loan umbrella. For instance, one mortgage may have been taken to finance both the home and the rental property. In this situation, ensure that the loan is structured so that will make it easy for you (and the ATO in the event you’re audited) to identify what part of the loan is for the rental property. After this, you can identify which part of the interest you can claim as an outgoing against your rental income.

You also have to remember that you’re not entitled to a deduction for interest you pay or for any outgoing you gain after the property is no longer being rented, or the part of the loan utilised for private reasons.

Determine all qualified outgoings to be made part of the cost base of the property, because it could potentially cut down any capital gain and raise any capital loss that can be passed on indefinitely to be used against any capital gains incurred in the future.

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