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Archives for August 2017

PAYG System Advice for Employers

PAYG System Advice for Employers

In Australia, employers are required to assist their employees in meeting their taxation and superannuation obligations. The ATO has implemented a system which employers can use to make this task easier, known as PAYG, or Pay As You Go tax withholding. The PAYG system enables employers to use their existing payroll system to automatically deduct amounts from payments made to the following:
• Employees and staff
• Contractors or other temporary workers
• Businesses which do not quote an ABN on their invoices or receipts.

Bear in mind that the PAYG system is not the same as payroll tax, which is a separate state-level tax. PAYG is used to enable easier and more efficient withholding and reporting of income so that it can be used to meet an employee’s end of period tax liability. They may then claim deductions or discounts for which they are eligible, and this amount is deducted from the PAYG withheld amount and returned to them.

PAYG Registration
Employers, or others who may need to withhold tax from payments, are able to register for the system online through the ATO’s business portal, or by phone. Your registered BAS or tax agent can also assist you in setting up the PAYG system for your business, ensuring that you meet your obligations and that the system is appropriately geared to your business structure.

Employers or businesses required to withhold tax are required to establish their PAYG registration before they make any payments on which tax needs to be withheld. This means that if you are in the opening stages of starting a businesses, you will need to set up your PAYG account before you are able to pay any employees or businesses which do not quote an ABN.

What Sort of Payments Require Me To Withhold Tax?
Payments made to workers, one-off payees, and some other businesses are the most common types of payments which require tax to be withheld via the PAYG system. These requirements differ depending on the nature of the employment relationship or business structure that you use to employ workers; for example, if you run a small business and hire workers as independent contractors, you generally do not need to use the PAYG system to withhold tax on their payments, unless they actually request that you do so as part of their contract.

For tax purposes, contractors are seen as independent and to be running an enterprise of their own. This means that they are required to report their own income and pay the required amount of tax for that income, minus any relevant deductions or discounts.

Regular employees, those whose employment is governed by an employment contract and are not independent from your business, generally need to have tax withheld on their pay using the PAYG system. Employees are not seen as independent from your business, and are not carrying on an enterprise of their own or capable of delegating their work to others as part of their employment contract.

Other Payments Which May Require PAYG Withholding

If you operate your own business as a partnership, or by yourself as a sole trader, and you draw payments from the business to contribute to your income, this is not assessed as a wage, and therefore you do not need to withhold tax on these payments. These payments will need to be reported as income, however, and you pay tax on drawings through your income tax return.

Some other forms of payment, besides wages payed to employees and some other workers, require you to use PAYG to withhold tax on the payments. These additional payments that require your use of the PAYG system include the following:
• Interest, dividends, and royalties which you pay to someone who not a resident of Australia
• Income from an investment, paid to someone who has not provided a Tax File Number (TFN)
• Payments to annuities and superannuation income streams
• Payments or wages for Australian residents who are currently working outside Australia
• Payments made to the beneficiaries of certain trusts
• Payments made to residents of foreign nations for the purpose of entertainment, gaming, sports, and construction.

PAYG and Employee Wages
If you have set up a business and would like to hire employees or workers, you will first need to register for the PAYG system. If you are registered, you then need to ensure that those you hire have a tax file number. If your new employees do not yet have a TFN, you can provide them with a Tax File Number declaration which they then deliver to the ATO.

For some employees, you may need to ask them to complete a withholding declaration. This declaration is used to organize the withholding amounts for some employees with special conditions, such as:
• Those who have a Higher Education Loan Program debt, i.e. a university or education debt, or Trade Support Loan as well as Financial Supplement Debt.
• Those who wish to claim certain tax offsets for which they are eligible.

PAYG Summary

The PAYG system is used to assist employers and others who hire workers that pay tax in meeting their obligations. This system can be set up online, or you can have your accountant set up the system for you. Your accountant can also assist you in arranging the other details, such as employee TFN information and any relevant withholding declarations.
As always with regard to tax, it is very important that you keep detailed records of your payments and the details of your PAYG registration. If your business ceases to employ workers, you should withdraw from the PAYG system. If you are unsure of whether or not you need to withhold tax on some payments and not others, then you should speak to your accountant or tax professional today to obtain clarification and ensure that you meet your obligations. Meeting your tax obligations to employees or workers is an important part of taxation compliance, and is monitored closely by the relevant regulators. Ensure that your business does not encounter unnecessary disputes or difficulties by arranging your PAYG and other employment obligations at the earliest opportunity.

Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about our Melbourne accounting services, or email us at admin@kingstonknight.com.au.

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Tax Compliance – Selling Commercial Property

Tax Compliance – Selling Commercial Property

Tax compliance must be considered when selling commercial property in order to ensure that the transaction is as beneficial and efficient as possible.

A primary taxation consideration for those seeking to sell or dispose of commercial premises is capital gains tax, depending on whether you have incurred a capital gain or a capital loss. You are likely to experience one of the two, as it is very unlikely that a commercial property will sell for the exact value at which it was previously purchased by the vendor. If the property is sold for an amount that is greater than the amount the vendor payed for it, a capital gain is incurred by the vendor.

A capital gain, that is, the amount of profit derived from the disposal of certain assets, is subject to the capital gains tax (CGT). CGT discounts are available to trusts, small businesses, and individuals.

It is likely that a GST liability will also be incurred during the sale, as sale prices generally attract GST. If you are registered for the GST or required to be registered for it, you may be able to claim GST credits in relation to the sale amount. If you have a GST liability, you may be able to calculate it using the margin scheme; this scheme allows you to calculate the GST you owe as one-eleventh of the marginal value derived from the sale. That is, not one-eleventh of the overall sale price, but one-eleventh of the difference in value between what you paid for the property and the amount you sold it for.

Commercial property sold as part of the sale of a going concern, that is an operational business enterprise, generally does not attract a GST liability on the sale price.

Capital Gains Tax (CGT)
For taxation purposes, the marginal difference the value at which an asset was purchased and the value at which it was later sold, is known as either a capital gain or capital loss. A capital gain is incurred when the asset is sold for an amount greater in value than the seller paid for it, that is, they made a profit on the sale. For our purposes, a capital gain is a profit made on the sale of a capital asset.

A capital loss is incurred when an asset is sold for an amount which is less than the seller paid for it, that is, they made a capital loss on the sale.

When a property is sold, it is likely that the seller has incurred either a capital gain or a capital loss on the sale. If a net capital gain is made for the income year, this attracts capital gains tax (CGT), which you pay as part of your tax return. If a net capital loss is incurred for the income year, you are able to have the capital loss carried forward into future income years where it can be used to decrease your capital gains liability.

An important concept in the calculation of capital gains and losses and the subsequent tax requirements is the cost base. In this context, the cost base refers to the difference between what it cost to acquire and improve a property, and the amount obtained following its disposal. The value of claimed or eligible tax deductions are not included in calculations of a property’s cost base. This means that if you perform capital works such as the construction of additional features or improvements, and these works are eligible for deduction from your tax bill, that the value of these works is not included as part of the cost base used to determine capital gains and losses.

Premises Acquired Before 20 September 1985 – This is the date on which capital gains tax came into effect, so if a property was acquired before this date there is no requirement to calculate or report any capital gain or loss incurred following the sale of the property. Somewhat confusingly, however, any additional improvements that count as capital improvements made to the property after that date still attract capital gains tax if a gain or loss is made on their value during the property’s sale.

Capital Gains Tax: Discounts and Concessions
Existing legislation allows individuals who own a property (including as partners in a couple) to claim a fifty percent discount on any capital gain incurred during its sale. This discount also applies to capital gains incurred by trusts, but not those incurred by companies.

Small businesses that own the property they use as a business premises have access to four small business CGT concessions. If the sale of such a business premises results in a capital gain, small businesses are able to use one of these concessions to reduce their capital gain:
Capital gain rollover: A capital gain made on the sale of the business premises may be deferred until the gain is crystallized. This means that, if you were to purchase a new business premises with the amount obtained from the sale of your previous business premises, you are able to defer any capital gain until you sell the new business premises.
Retirement exemption: For those over the age of 55, capital gains from the sale of property are exempt from CGT to a lifetime maximum of $500,000. For those under the age of 55, this concession may be obtained and the conceded amount must be paid into a retirement savings account or superannuation fund that meets the ATO requirements.
15-year exemption: For small businesses that have owned the business premises for 15 years or more, capital gains will not be assessed if the small business owner is either permanently incapacitated, or over the age of 55 and planning to retire.
50 percent active asset reduction: If your small business premises qualifies for an active asset reduction, any capital gain incurred during its sale may be reduced by 50 percent.

GST Liability Incurred Following the Sale of Commercial Premises
As stated at the beginning of the page, the sale of any commercial property generally results in a GST liability. Commercial premises include property that is used to operate a business or enterprise.
In the event that a commercial property is leased to a commercial tenant at the time of sale, the sale may be treated as a GST-free supply of going concern.

Using the Margin Scheme to Calculate GST Liability

If the sale of a commercial property results in a GST liability, you may be able to use what the ATO calls the margin scheme to calculate the amount of GST owed on the sale price. In this context, the margin is the difference between the amount received for the sale of a property, and either the amount that was paid for the property by the seller or a suitably appropriate property valuation.

Under the margin scheme, GST liability is generally calculated as one-eleventh of the sale margin. Being able to use the margin scheme depends on when the property was purchased, and how it was acquired.

GST Registration
For tax purposes, you might be assessed as conducting an enterprise if you buy, sell, develop, or lease property, even as a one-off. If you are assessed as conducting an enterprise, you are likely to attract a GST liability and therefore might be required to register for the GST.

Whether or not you will attract a GST liability depends on whether you exceed the GST registration turnover threshold.
Sale of Businesses as Going Concerns

When a property is sold and it includes a commercial tenant operating a going concern, it is generally assessed as being GST-free, and the parties to the transaction are able to claim GST credits on transactions involved in buying and selling the property (conveyancing fees, etc.)
In order for the sale to be GST-free, all of the following must be satisfied:
• The purchaser is either registered, or required to be registered, for the GST;
• Payment is made for the supply of the property;
• The supplier continues operating the business until the day of supply;
• The supplier provides the purchaser or a chosen successor with everything required for the continued operation of the supplier’s business;
• Both the supplier and the purchaser have entered into a written agreement which states that the sale is for a going concern.
The following may be included as property in the sale of a going concern:
• A building which has all its space occupied by commercial tenants, and that all of the covenants, agreements, and leases between the supplier and these tenants are included as part of the sale
• A commercial premises which contains the operating framework and assets used in the operation of the business, and
• A building which is occupied by one or more commercial tenants but is partially vacant, so long as the vacant part is actively available and being marketed for lease and all leases are included as part of the sale. If the vacant part of the building is currently being repaired or refurbished, then it may be counted as property in the sale of a going concern so long as other parts of the building are leased to commercial tenants.

Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about our Melbourne accounting services, or email us at admin@kingstonknight.com.au.

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Renting and Leasing Commercial Property

Renting and Leasing Commercial Property – Tax Compliance

Depending on whether you are the owner (lessor), or tenant (renter), different reporting and or compliance measures will apply to you. This is with regard to income tax and GST, and the deductions claimed on relevant expenses with respect to position as owner or tenant. Income related expenses are calculated according to how you generate taxable income, and deductions from your tax liability are made on the basis of these income-related expenses.

For an owner/lessor, expenses that facilitate the derivation of rental income from the premises are income-related expenses. For a renter/tenant, rent payments themselves are income-related when they are renting their business premises, and therefore rent is an income-related expense.

Owners/Lessors
As the owner of a commercial property which you lease to a tenant or renter, payments received for rent or rent-related payments are included in your personal income. When lodging your personal income tax return, you will need to include the full amount paid to you by tenants in your income statement.

You may be able to claim tax deductions on certain expenses related to the acquisition of rental income from the property you own. These expenses are referred to as income related expenses.

You are able to claim a tax deduction on income related expenses incurred during the reporting period, so long as the property was rented or actively available for rent during that period. You are generally able to claim an immediate deduction for expenses related to the maintenance and management of your commercial rental property, this includes the interest paid on some loans.

Tax deductions on other expenses may need to be claimed over several years. For example, costs of depreciation are calculated over a number of years and claimed for the value of that depreciation at the time the claim is made. Depreciation costs that may be income related for lessors include the depreciation of an asset’s value, such as furnishings and fixtures, as well as some construction expenses that may be assessed as capital works expenses.

As the owner/lessor of a commercial premises, you are generally unable to claim tax deductions on the following:
• The costs of acquiring and disposing of the premises, though these costs may be used to calculate the cost base of the premises when determining any capital gains tax liability.
• Expenses paid by tenants/renters, including amenities like electricity and water, as well as maintenance or other works paid for by renters.
• Expenses with a private component or that otherwise do not relate to the property’s function of deriving rental income.

GST Liability for Owners/Lessors
If you are assessable as operating an enterprise, then you are required to register for GST. The details of this assessment depend on individual circumstances, but if you are involved in the purchasing, sale, developing, or leasing of property and the turnover derived from this exceeds the GST threshold, you will attract a GST liability.
In this case, you are able to claim GST Credits on expenses/purchases that allow you to derive rental income from your commercial property. These rules are the same general rules applying to GST credits for all enterprises, and they allow you to claim credits on GST included in expenses such as conveyancing or agent’s fees.

Renters/tenants

If you are renting a commercial property and using this as your business premises, you may deduct the amount paid in rent from your tax liability. If GST is included in your rent (both you and the owner/lessor are registered or required to be registered for GST) then you are able to claim GST credits for this.
For tax purposes, rent paid on your business premises is an income-related expense, as without it you are unable to carry on your going concern. Likewise for lessors, payments that are necessary in order for you to continue deriving rent income are income-related and potentially deductible.

Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about our Melbourne tax compliance services, or email us at admin@kingstonknight.com.au.

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Tax compliance – rental property income and capital gains

Tax Compliance – Rental Property Income and Capital Gains

A key issue for investors and multiple homeowners is tax compliance on rental property income and capital gains.

With the Melbourne property market charging towards unprecedented levels of growth and value, largely driven by investors who often do not occupy the property they buy, the fruits of selling your property could be greater at the moment than ever before. Different tax rules apply to different types of residential property, for example, property which is occupied by the owner or property which is rented out to tenants with the owner living at a separate address.
Capital Gains Tax in-particular is important for those selling a rental property, current regulations require those who sell a rental property to calculate any capital gain made on the sale and include it in their tax return. A tax concession is currently available for gains made on the sale of a property which qualifies as the owner’s main residence. For rental properties, this does not apply, and regulations state that the sale of property purchased with the intention of generating rental income constitutes a Capital Gains Tax event.

Property purchased with the intention of selling it to make a profit, or to develop or subdivide the property as part of a commercial venture, results in proceeds from such a sale being assessed as normal income acquired through a standalone profit-making venture.

On this page we will explore the requirements for recording and reporting your income and expenses derived from a rental property.

Record Keeping and Joint Ownership of Property
In the event that a rental property is purchased jointly by more than one party, it is very important that each party’s individual interest in the property is recorded for tax purposes as well as for distributing proceeds from rental income.

For individuals who own or co-own a property used to generate rental income, this income is usually assessed as investment income. This is the case for anyone drawing income from a rental property who is not generating the income as part of a registered rental property business, and according to ATO data, less than one in one hundred rental property owners are involved in a rental property business.

A rental property business is classified according to the following criteria:
• The number of hours devoted to management of the rental property/s, or related activities
• The scale and size of activities related to the properties used to generate income from rent
• The level of organization, planning, and operations involved in managing the rental property/s.
• The degree of personal involvement in the management of the rental property/s.

If the property has been negatively geared, it is very unlikely that it constitutes part of a rental property business, and so any income received from rent is likely to be assessed as investment income.
Records should be kept of all payments or transactions that relate to your capacity to derive rental income from the rental property. These records must be recorded in either plain English, or if in another language, be able to translate directly to plain English.

Any records or documentation used in the presentation of your income tax return must be kept for a period of five years from the date of lodging the tax return. These records may be stored by an appointed party such as your solicitor or accountant, though you should always keep copies for yourself and ensure backups are available.
These records will likely form the basis for the calculation of deductions for expenses, and/or to be used in the event of a dispute with the Australian Tax Office or other body. If you become involved in such a dispute, or if specific records are sought from you by the ATO, you are required to keep copies of the relevant records until the dispute or request for additional information has been resolved.

The following are examples of rental expenses for which records must be kept:
• Name and details of the supplier
• Amount, dollar value of the expense
• Description of the products, goods, or services for which the expense was paid
• Dates that the expense was incurred and when it was paid
• Record the date each time you make a record or modify your expenses records.

If you do not record the dates on which expenses were incurred and paid, you are able to use certain items of independent evidence, such as bank statements, to specify when an expense was paid for. Receipts or invoices can be used to specify when an expense was incurred.

Division of Income and Expenses

If a property used to generate income from rent, the income and any related expenses must be divided between owners based on their share of legal interest in the property. As an example, a couple who jointly owns an investment property used to generate income from rent would each list 50% of relevant income and deductions on their personal tax return.
Where the property is drawing rental income as part of a rental property business, income and deductions are split between the business owners based on the partnership agreement binding them in their business relationship.
Small businesses, including rental property businesses, are entitled to taxation concessions such as special depreciation rules. Investment properties are not entitled to these concessions, and investors are required to report the income as investment income rather than business income.

Note that you are not required to attach copies of these records to your personal tax return, or send these records in to the ATO. The reason that requirements for record keeping exist is so that they can be referred to or relied upon in the event of a dispute, or if clarification of certain matters is sought by the ATO.

In addition to the more detailed records described above, it is recommended that rental property owners maintain a succinct summary of their expenses. This can be done in the form of a list or document which does not contain all the details, but contains enough information to enable you to find the details if you need to at short notice. The information listed in your summary may also be sufficient for filling out the rental property schedule as found on the income tax return lodged each year by individual taxpayers.

Reporting Income Generated Through a Rental Property
When you generate income from a property you own that is being rented out, that income is reported as either rental income or other/rental related income. The income tax return document used to report personal income contains a schedule referred to as the rental property schedule. This is where any income from a rental property, or income related to a rental property, is to be reported.

Rental income – This type of income, for tax purposes, refers to money received as rent payments, or any barter, goods or services received in lieu of rent payments. If you receive a service or product other than money from a tenant in the rental property you own, the monetary value of this service or product must be reported as part of your rental income. As with income earned through work, you report the amount of rental income received during the current reporting period.

Other/rental related income – If you have received any form of booking or letting fee, such as through offering your rental property for short-term accommodation and taking a non-refundable fee during the booking process, this counts as rental related income. Also included in this income type are reimbursements, such as the retention of a rental bond due to damage or rent default, or when tenants pay for services or amenities which you then claim a deduction for. Insurance payouts for rent default may be reported as other rental income, but other forms of insurance payout are assessed as capital and need to be reported as such. Speak to your accountant if you are unsure about which income type is which and how they relate to your circumstances.

It is also important to note that investment or rental income must be reported when it is received, even if it is received by someone else on your behalf and you are not actually in possession of it during the reporting period. An example of such a situation may be that rent payments are collected by an agent on your behalf, you would be required to report those payments as rental income even if the money is still in the agent’s possession.

Additionally, income is derived where it is directed by you or on your behalf, even if you do not receive the money. For example, if you direct the tenant in a rental property you own to make rental payments into the account of a third person and not yourself, the money paid by that tenant to the third party forms part of your assessable income.

Expenses and Deductions
Many expenses incurred through the operation of a rental property are deductible, so long as they are connected to the earning of income through rent. Deductions may be claimed for certain expenses incurred during the period in which the rental property was available to rent or was occupied by a tenant.

If you purchase land upon which you intend to construct a rental property, than many of the applicable rates such as water, sewage, council, and emergency services rates are deductible. If at any time your intentions change and you decide to use the land for private purposes, other than for the production of rental or business income, then these deductions no longer apply.

Any private expenses are not deductible, expenses need to be connected to the production of income in order to be deductible.
Capital expenses are also non-deductible, so you cannot claim a deduction on the expenses incurred during the acquisition or disposal of your rental property. Borrowing costs, on the other hand, may be deductible, as are depreciations in value or certain capital works.

Apportionment of Expenses
In some cases, you may not be able to claim a deduction on the complete value of certain expenses. In these cases, the expenses need to be apportioned, that is, divided into deductible and non-deductible portions. The following are examples of situations in which expenses would need to be apportioned in order claim a deduction:
• If you rent a property out at rates considered to be significantly below market value, for example, if you allow friends or relatives to rent accommodation from you at a low cost. In these circumstances, deductions may be limited to the value of rent actually paid.
• If you are a part owner of a rental property, expenses and income must be apportioned to reflect your ownership stake or percentage.
• Where only part of a property is used to derive income from rent, only expenses directly related to the generation of rental income may be claimed. In such cases, apportionment of expenses is conducted on the basis of floor-area; by calculating the floor-area used to generate rental income you can apportion the deductible expenses as a ratio of rental floor-area to total floor-area.
• If more than one rental property is owned, some expenses need to be apportioned appropriately. If you wish to claim travel expenses, but you inspect two properties in a single trip, the expenses incurred during the trip need to be apportioned between the two properties you have inspected.
• Any expense which contains a private component, such as travelling to inspect a rental property you own but also enjoying a trip away at the same time. This also applies to properties which are not let out to tenants year-round. If you or your family occupy the property or it is left vacant and unavailable for let, expenses incurred during this time cannot be deducted.

There are two timing methods which can be used to calculate the period for which a deduction is claimed; the date paid, or the date incurred. Only one method can be used, as using both could result in a deduction being claimed twice.

Common deductions made on rental property income include:
• Borrowing expenses
• Interest
• Depreciation
• Body corporate fees
• Travel expenses
• Repairs and Maintenance of the rental property
• Capital works expenses

Money borrowed to purchase a rental property or carry out works that will allow rental income to be derived from the property provide an example of deductible borrowing expenses. Any money borrowed for private expenses, or expenses not related to the generation of income, are not deductible.

Borrowing Expenses
These included expenses incurred directly as a result of obtaining a loan for the purchase or improvement of a property used to generate rental income. Examples of deductible borrowing expenses might include:
• Title search fees
• Loan establishment fees
• Fees associated with preparing and filing mortgage documentation, this includes fees charged by mortgage brokers and stamp duty applied to the mortgage
• Other fees charged by the lender as part of the loan process, including lender’s mortgage insurance fees, valuation fees, documentation charges etc.

Deductible and Non-Deductible Travel Expenses
When you are required to travel in order to carry out inspections or maintenance on your rental property, or to collect the rent payments or other activities related to obtaining rental income from the property, you may be able to claim a deduction on the travel costs incurred.

In cases where you have engaged in private activities during your travel to or from the rental property, related expenses will need to be apportioned appropriately, as only those directly related to your income from rent are deductible.

There are also some circumstances where travel costs associated with a rental property are not deductible, for example:
• Travel costs incurred when you are collecting rent that is non-commercial, such as rent paid by a family member or friend whom you are letting the property to at a discount.
• If you are making private use of the property, for example travelling to the property and staying there as a holiday.
• Travelling to the property to conduct general repairs or maintenance during a time when it is unoccupied and/or unavailable for rent.
• Diverting your usual route to work or something similar so that you pass by the rental property, in order to check it out or keep an eye on things. This does not have a connection with earning rental income.

Typical expenses included as part of travel related to the management of a rental property include the cost of meals, accommodation, and the transportation (e.g. airfares or fuel costs). You are unable to claim a deduction on the cost of meals if your travel did not involve an overnight stay in the locality of your rental property.

It is a reporting requirement that, when six or more consecutive nights are spent away from your home, a travel diary be kept which lists your activities, places visited, and the duration of travel times and activities. By making notes in your travel diary and affixing the relevant receipts, you have the required evidence to claim deductions on expenses related to earning income from the rental property/s inspected during the travel.

Substantiation records are required to be kept for any car or vehicle-related expenses that you wish to claim as a deduction. There are four methods that may be used to keep the appropriate records, the best method will depend on your individual circumstances. Examples of these substantiation methods include the logbook method.

Claiming Deductions on Body Corporate Fees
Depending on the nature of your rental property, it may or may not be covered by a body corporate or similar entity which charges fees for the day-to-day maintenance and administration of the property. Body corporate fees may be charged to an ‘administration fund’ or other type of fund. Such payments are assessable as payments for the provision of services. Seeing as the body corporate is charging a fee that enables you to derive rental income from the relevant property, these fees or levies may be eligible for deduction claims.

In certain cases, a body corporate entity may request that you pay fees into a fund designated for use in capital expenditure projects. Such levies are not deductible, so be aware of special purpose or designated funds to which you are directed by your body corporate entity. Another circumstance which may limit your ability to claim deductions on body corporate expenses is this; instead of setting up a separate or designated capital expenditure fund, the body corporate may levy funds from their general purpose fund to use as a contribution towards capital expenses. When such payments are made, they constitute a special contribution, which is not deductible.

It is important to note that deductions cannot be claimed for expenses included in body corporate charges, levies, or fees. For example, building insurance, garden maintenance, or building repairs cannot be claimed as deductions if they are included in the body corporate fees you pay. You are able to claim a deduction on the fees paid to a regular body corporate fund, but are unable to claim separately for any expenses covered by the body corporate and paid for through the levy or fees that they charge.

Income Producing Components of Your Rental Property

For taxation purposes, a rental property comprises the building or buildings, land, fixtures, and any separate depreciating assets attached to the property which complement its ability to produce income. Different tax rules apply to different parts of the property, and it can be difficult to work out what is what. Some fixtures or depreciating assets may be assessed under capital gains tax rules, whereas others may constitute capital works. In order to identify what is a depreciating asset, and therefore eligible for relevant expenses related deductions, let’s go through some common examples.

Typical examples of depreciating assets that form part of a rental property include:
• Carpets, linoleum, tiles, and other removable floor coverings
• Internal blinds and window curtains
• Hot water systems.

Claiming the Cost of Depreciation

You may be able to claim a deduction on the cost of depreciation for each separate depreciating asset that comprises your income-producing rental property. In order to claim such deductions, the cost of each asset needs to be determined. The best way to do this is by using the purchase price, which may be evidenced by a receipt.
If you have purchased a rental property that came with such depreciating assets already installed, the purchase contract may have itemized a price for each of the depreciating assets. If this is the case, you can use the price listed for each asset in the purchase contract when claiming deductions.

If you do not have access to the purchase price for a depreciating asset, a valuation needs to be conducted if you are to claim a deduction. It is possible to conduct estimates, but you need to provide evidence which demonstrates that such estimates are reasonable and fair. Obtaining an independent valuation from a valuation practitioner is another way to go, especially if your rental property contains a number of unvalued depreciating assets. When an independent valuation is performed, this is often taken as sufficient evidence that a reasonable value has been ascribed to each depreciating asset.

Claiming the Costs of Construction: Capital Works Deductions
For tax purposes, certain types of construction which enable or enhance your ability to derive income from a rental property are referred to as capital works. You may claim deductions on certain construction expenditure, including:
• Alterations to buildings
• Construction of new buildings or extensions to existing buildings
• Structural improvements to buildings, commenced after February 27 1992
• Capital works which commenced after June 30 1997.

Certain construction or capital works expenditure is specifically excluded for tax purposes, meaning that deductions cannot be claimed for the following types of expenditure:
• The cost of land on which a rental property is built or established
• Capital amount for a loan
• Expenses for plant, though these may be assessed as depreciating assets which can be claimed
• Landscaping expenditure
• Expenditure related to the clearing of land on which the rental property is constructed

For tax purposes, construction expenditure refers to the actual costs incurred when constructing buildings or extensions. If you are selling a rental property, the Income Tax Act specifies that sellers disposing of capital works are required to provide the purchaser with a notice allowing them to calculate any remaining deductions on the relevant capital works. Once received, the purchaser must keep a copy of the capital works notice for five years following their disposal of the depreciating asset/s.

What to Do When the Construction Expenditure is Unknown
If you have purchased a rental property from which you plan to derive income from rent, you may wish to determine the construction expenditure in order to claim relevant deductions if they are still available. In cases where the seller or previous owner is unable to provide the required information, the purchaser may obtain an independent valuation from a qualified practitioner.

In cases where the actual construction expenditure figures are available, you are unable to choose between using those figures and obtaining an independent valuation. The actual figures must be used where they are available.
The following are examples of practitioners qualified to give a valuation on construction expenditure:
• Quantity Surveyors
• Clerk of Works, project organisers who work on significant construction projects
• Builders with experience in the estimation of construction costs for projects of a similar scale
• Supervising architects qualified to approve payments at stages throughout the development of major construction projects.

The following records are required to be kept in relation to capital works and construction expenses:
• Dates on which construction work was commenced and completed
• The specific type of construction performed, used in determining whether or not the construction satisfies the definition of capital works
• Details of the individuals or entities who performed the construction work
• Total expenditure of the construction, note that this is not the purchase price
• A list of dates showing when the property was used to derive income
• Sheets demonstrating the relevant deduction calculations.

If you sell a rental property, keep the above records for five years after the sale. This is important because deductions for capital works can reduce the cost base used to calculate your capital gains tax obligations.

Claiming Expenses for Repairs or Maintenance
For the purpose of claiming a tax deduction, repairs as assessed as the renewal or replacement of a damaged part. In relation to your rental property, this might include the replacement of sections of fencing or guttering following storm damage. Maintenance expenses, on the other hand, are expenses incurred as a result of work carried out to prevent deterioration or to renew existing deterioration. An example of a maintenance expense might be the costs incurred when repainting a rental property.

Some kinds of expenses might intuitively seem to relate to repairs or maintenance, but for tax purposes they are assessed as capital expenses. The following are examples of capital expenses for which deductions cannot be claimed, though they may seem to be related to maintenance and repair:
• Renovations, repairs, improvements and alterations that go beyond the simple restoration of the property to a level of efficient functioning. These are assessed as capital works where they change the nature of the property or asset involved, or if they add something new to the property.
• Repairs or maintenance works performed at the same time as improvements or renovations are being carried out, meaning that the costs cannot be separated between what is an improvement or what is a repair.
• Replacement of items regarded as separate to the property itself, typically fixtures such as a complete set of guttering, an entire fence, and cupboards and cabinets.
• Repairs carried out soon after the property was acquired, which remedy damage, defects, or deterioration that existed on the date the property was acquired.
• Repairs or maintenance works carried out when the property is not producing income from rent, or if the property was not producing income from rent for the duration of the income year in which you incurred the cost of these repairs or maintenance works.

Note that in some cases where you are unable to claim a deduction on capital expenses, you may instead be eligible for a deduction on decline in value for capital works deductions or depreciating assets.
It should also be noted that payments made to yourself in return for managing or maintaining a rental property are not deductible, nor are payments made to family members or friends. Payments made to agents may be deductible, where you use an agent to manage a rental property instead of performing checks and maintenance yourself.

Key Points When Lodging Your Tax Return and Rental Property Schedule
By keeping records of all the above expenses and income elements that influence your tax position, and having a summary of these records on hand at tax time, you should be able to quickly and easily complete your income tax return and the rental property schedule included in it with minimal fuss.

If you own more than property from which you derive income from rent, you need to complete a separate rental property schedule for each individual property. It may be tempting to list all the information in the section labeled Sundry rental expenses, but this may cost you more time later on should the ATO seek clarification. The rental property schedule contains separate labels for different kinds of income and expenses, so use your records to list the information in the appropriately labeled section and you will have minimized the chance of a dispute occurring.
For those that prefer to leave their tax return to a financial professional, they can rest assured that their accountant is complying with the above, thus minimizing the chance of follow up action by the ATO. If you are completing your tax return yourself, taking the time to correctly complete the rental property schedule and placing information under the correct labels will help you to avoid follow up action.

In the case that your expenses exceed the amount of rental income you have received from a property, but you also receive other taxable income such as a salary or wages on which your employer is required to withhold tax, you may be able to claim a tax refund on some of the withheld amount. The following options could suit a rental property owner in this situation:
• Lodge your income tax return and receive a tax refund later in the year
• If it is the start of the year, you may be able to lodge a withholding variation to the ATO. A withholding variation, if approved, would result in your employer withholding less of your income as taxation to reflect your losses incurred through the rental property.

In the event that you have incurred an overall loss, it is advisable that you report your losses in full and retain relevant records until the losses are recouped, and then for five years after the date on which you break even again.
If you are an Australian resident that receives income from a rental property located outside Australia, you are required to list this income at Label 20 on your individual tax return. Note that for tax purposes, income is ‘received’ even if it is held oversees and not able to be accessed by you in Australia.

It is also important to remember that the ATO requires you to list any foreign income or capital gains even if they have been taxed in the country of origin. There is an offset available for tax paid overseas known as the foreign income tax offset, this offset can be found at label 20 of your supplement tax return.
When reporting income derived outside Australia, or in currency besides the Australian dollar, all values and amounts need to be converted into Australian dollars.

Pay As You Go (PAYG) Options

The ATO operates a Pay As You Go system referred to as PAYG, which is available to businesses and individuals alike. Registering for the PAYG system allows you to make instalment payments towards your total income tax burden. The system can be accessed and registered through the ATO’s online system. Once you register, the PAYG activity page will indicate that you are paying a rate of nil towards your tax liability. You can increase this rate as required, meaning that paid instalments will be made regularly, therefore reducing your tax bill and preventing you from having to pay a large lump sum at tax time.

Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about our Melbourne accounting services, or email us at admin@kingstonknight.com.au.

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Trust Accountant Melbourne

Trust Accountant Melbourne

The process of establishing and effectively managing a trust account is complex, requiring the skills of a qualified professional accountant. Trustees are responsible for managing the tax obligations associated with trust accounts. This includes lodging a specialized trust tax return, which can be almost impossible with knowledge of trust processes and the relevant tax laws. Kingston Knight Accountants deliver a range of cost effective and efficient trust accountant services to the Melbourne community.

Trust Accountant Services Melbourne

There is a lot of complicated work involved in setting up a viable trust account, but Kingston Knight is prepared to do the hard work for you, ensuring that your trust account is established to professional standards and in line with compliance requirements.

For trusts that are new or established, we can assist you with the following trust accountant services in Melbourne:
• Preparing and lodging your Trust Tax Return
• Applying for your Australian Business Number (ABN) and Tax File Number (TFN)
• Preparing and lodging your GST registration
• Calculating your GST and other tax liability
• Preparing and maintaining detailed, complete accounting records and completed schedules for your trust account
• Advising you on tax deductions that you are eligible to claim, reducing tax burden whilst ensuring compliance with your tax obligations
• Corresponding with the Australian Tax Office (ATO) and other regulators, agencies, and compliance bodies on your behalf and ensuring the relevant records can be produced when requested

Kingston Knight trust accountants can handle all the work involved in establishing, managing, and reporting for your trust account here in Melbourne. As registered tax agents and experienced business accountants, we understand the relevant laws and accounting methods that are used to deliver a viable trust and efficiency for trustees.
It is vital for those seeking the services of a Melbourne trust accountant that you are aware of who are you dealing with. As the number of trusts in Melbourne continues to grow, regulators and compliance agencies are clamping down on poorly managed trusts, trusts that do not use the appropriate accounting methods, and other trusts established without the assistance of experienced trust accountants.

Trust Arrangements Are Subject to Growing Scrutiny from Regulators
As Melbourne property prices continue to grow and the number of new Melbourne property developments keeps on rising, the amount of money contained in trust accounts has attracted the interest of the ATO and other regulators who suspect that some property developers may attempt to use trust accounts to reduce their income tax obligations.
Government agencies and regulators are increasingly observant of the way trust accounts are established and managed, including the accounting methods used in calculating revenue, proceeds, payments etc.
In order to avoid a costly and time-consuming dispute with regulators or agencies, ensure that you use a qualified and reputable trust accountant such as Kingston Knight to establish and manage your trust. Our in depth knowledge of the relevant laws and accounting methods ensure that your trust account is compliant, allowing you to make the best use of it.

Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about our trust accountant Melbourne services, or email us at admin@kingstonknight.com.au.

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Tax Issues and Considerations in the Sale of Rental Property

Tax Issues and Considerations in the Sale of Rental Property

When it comes to tax compliance, rental property, or property used to derive income from rent, differs from residential or commercial property. We have previously covered the tax issues relating to income and expenses deductions for rental property owners, including capital gains tax considerations. However, it is important for rental property owners to be aware of the capital gains tax and other compliance issues that affect their ability to dispose of rental property.

The Australian Tax Office (ATO) has issued reports outlining various issues that they encounter in the reporting of rental income and disposal of rental property. It is our goal to inform clients and unfamiliar readers alike of these issues to ensure that they do not end up engaged in an unnecessary dispute with the ATO. Tax disputes or follow-up action by the ATO is incredibly time-consuming and stressful for all concerned, but by gaining a comprehensive insight into the cause of such disputes and follow-ups, they can be avoided by rental property owners seeking to dispose of their property.

In the ATO report into rental property income reporting and asset disposal, the most frequently cited problems are with the reporting, calculating, and record-keeping habits of those concerned, especially with regard to capital gains.

Allow us to introduce you to the most important capital gains tax considerations for those looking to dispose of rental premises, and how best to calculate and record capital gains. We will also examine record-keeping techniques designed to protect you from unnecessary audits or follow-up action by making sure that you have all the required information on hand in a form that is easily accessible and can be produced upon request.

Key issues examined in this report include:
• The calculation, recording, and reporting of capital gains or losses
• Proceeds of sale recording
• Cost base determination, used to calculate capital gain or loss
• Main residence concession and its effect on rental premises
• Key areas that the ATO focuses on in this context to ensure compliance.

Selling A Rental Property

A rental premises is one that is used to derive income from rent or rent-related payments. If you purchase a property in order to use it to earn income from rent, any subsequent sale of the property is a capital gains tax event and will require the appropriate records to be kept and reports to be made.

The sale of rental property attracts capital gains tax obligations where the seller intends to derive profit from the sale of said property, or the property is to be developed or subdivided as part of a profit-making venture. Property is an important asset, so it is highly likely that the sale of a rental property is initiated by a desire to derive profit from the sale.

Proceeds from the sale of rental property are reported as income, whether that income is earned as part of a property business (developing or subdividing the property) or as a one-off profit earning venture. For many property sellers, the latter is the most common, but for tax purposes this is still assessed as carrying on an enterprise. This is due to the fact that profit is likely to be derived from the sale, as well as the fact that the property was used to derive income prior to the sale.

It is very important to keep records of all relevant works and transactions which may be used to calculate your tax burden, and especially capital gains tax following the sale of the property. Such records include the stake of each owner, where a rental property is owned by more than one person, as well as details and records of any works or improvements made to the property whilst it was being used to derive rental income. Records of rental income should also be kept. When you decide to sell your rental property, it is very important that records are kept for any offer made and your resulting acceptance documentation. A list of depreciating assets should also be kept for tax assessment purposes.

Capital Gains Tax

When selling an asset such as a rental property, any gain made from the sale proceeds is referred to for tax purposes as a capital gain. If a loss is made, that is that the sale proceeds do not meet the amount paid for the property, then a capital loss is likely to have been incurred following the sale. Capital gains tax is part of the income tax assessment conducted by the ATO, and is not a separate tax in its own right. Capital gains and losses are used to calculate your total assessable income for the year in which the CGT event occurred.
If a rental property is owned by more than one individual, any capital gain resulting from the sale of the property is split evenly between the owners, as determined by each owner’s legal interest or stake in the rental property and the proceeds derived from its sale. A good example is this; if two partners in a relationship or marriage jointly own a rental property, and decide to sell it, then any capital gain from the sale is split evenly between them, meaning that 50% of the capital gain is applied to the assessment of each partner’s individual income tax return for the year in which the sale occurred.

This also applies to capital losses. If a capital loss is incurred following the sale of a rental property, the value of this loss is applied evenly to the personal income tax assessment conducted for each individual owner based on their legal interest or stake in the property. Capital losses may be used to offset capital gains made in the present income year, or deferred in order to offset gains made in future income years.

If the property was acquired by the seller prior to September 20th 1985, any capital gain or loss on the sale of that property can generally be disregarded, as this was the date in which capital gains tax was introduced and began to be enforced. If the property was acquired before this date, but you have carried out major works or development on the property since then, these may constitute capital works, and contribute to a capital gain or loss on the sale of that property.

The ATO has warned rental property owners about capital gains tax concessions for small businesses, which are eligible to make use of four concessions when disposing of property assets. Rental properties are not considered to be active enterprise assets, that is, your rental property activity does not constitute a going concern unless it is part of a registered rental property business. This means that small business capital gains tax concessions cannot be applied to the sale of rental property by private owners, even if you are running a small business enterprise.

A good example is negative gearing, if a rental property has been negatively geared, it is assessed as a passive investment and not part of any enterprise or going concern, therefore it is ineligible for any relevant concessions or discounts.

CGT and Your Assessable Income

Capital gains tax is used to assess your income which you pay tax on when you submit an annual income tax return. It is regarded as a component of income tax rather than being a separate tax in its own right. Whatever your marginal tax rate is, this is used to calculate the tax burden on any capital gains you make during an income year, unless these are offset by capital losses.

You attract a capital gains tax burden whenever your derive proceeds from the sale of an asset which exceed the value of the asset’s cost base.

When a capital asset is sold, the amount you receive is referred to as the capital proceeds of that sale. Capital proceeds are the amount of money or the monetary value of goods, services, or property that you receive or are entitled to receive from the sale of your asset.

When filling our your income tax return, the capital gain or loss amount you must include is calculated as:
• The total capital gain amount for that income year, that is, the combined total of your capital gains minus capital losses incurred through the sale of capital assets
• Any relevant CGT discounts may be applied to arrive at a final taxable capital gains figure.
Determining your Rental Premises Proceeds of Sale Figure

If you decide to sell a rental property, the tax burden is applied at the date the contract is signed and not the date of settlement. That is, if you sign the contract in April but settlement does not occur until July, you are taxed for the financial year in which the contract was signed (the financial year including April and ending in June, prior to the settlement date).

A typical contract of sale for a rental property, or other residential property, includes the following:
• The land on which the premises is located
• Buildings
• Depreciating assets.

It is standard practice for the land and any buildings attached to it to be assessed as a single asset and referred to as such, e.g. the rental property. Depreciating assets, elements of the property whose tax value is determined by depreciation rules, are assessed based on their value at the time or purchase or the value ascribed to them by a suitable and independent valuation practitioner.

The rental property itself, including the land and buildings, is a capital gains tax event in its own right regardless of the depreciating assets, which are treated separately. The contract of sale usually lists the amount offered (and accepted by the seller) for each asset, this includes the rental property (buildings and land) and depreciating assets.

In order to calculate the CGT attracting proceeds of sale, you need to identify the value of the depreciating assets as listed in the sale contract, and deduct this amount from the total value of the contract. For CGT purposes, depreciating assets to do not constitute part of the cost base for a rental property, and therefore are excluded. The final cost-base and capital proceeds is recorded as the amount received or which you are entitled to receive, for the rental property minus the amount attributed to depreciating assets.

If you decide not to include the depreciating assets in the contract of sale, i.e. you are giving them away to the buyer, then you are assessable as having obtained the market value of these depreciating assets at the time the CGT event occurred. This is referred to as market value substitution of capital proceeds.

An Example of Capital Proceeds Calculation

If the sale contract for a rental property is valued at $700,000, and the depreciating assets identified in the contract are valued at $5000, then the capital proceeds are calculated by deducting the $5000 offered for the depreciating assets from the $700,000 offered for the rental property itself. This results in a capital proceeds amount of $695,000.

Determining Your Rental Property Cost Base

This is the next step, as your total CGT liability is calculated as the proceeds of sale/capital proceeds (described above) minus the rental property’s cost base. An asset’s cost base is much more than just the amount which you paid for an asset, although that is an important determiner.

For CGT purposes, an asset’s cost base has five elements which are used when making the calculation. These first two are designed to cover the standard capital costs of acquiring and disposing of rental property:
• Up to ten listed incidental costs, costs associated with the acquisition or sale of the rental property, such as: solicitor, surveyor, or real-estate agent fees. Stamp duty costs, the cost of marketing the property for disposal, and the cost of borrowing money in order to acquire the rental property.
• Acquisition cost, the amount which you paid to obtain legal ownership of the rental property or asset. May be calculated as the asset’s market value in some cases, such as in the event that you acquired the property as a gift from some benefactor.

The remaining three cost base elements are related to the costs of owning, improving, or defending your title as the asset’s owner:
• If acquired after August 20 1991, the cost of ownership only includes costs which you are ineligible to claim as tax deductible expenses. If you are deriving rental income from the property, ownership expenses are likely assessable as income deductions. If you use or have used the rental property for private purposes, ownership expenses incurred during the period/s of private use may be used in the calculation of the property’s CGT cost base. Your cost of owning the rental property includes maintenance expenses, insurance and repair expenses, land tax, council rates, and interest on loans acquired for the purchase and/or improvement of the rental property.
• Capital costs incurred during an attempt to preserve or increase the value of the rental property. Such capital costs include the expenses associated with performing substantial renovations or improvements on the rental property which affect its market value.
• Capital costs associated with the establishment, preservation, or defense of legal title. Such costs are less common than the other contributors to a rental property’s cost base, as these are usually incurred through litigation or other disputes such as rezoning or compulsory acquisition of land.
Acquisition costs, capital improvement costs, and incidental costs (costs of ownership) are the most common and important elements to consider when calculating your rental property’s cost base.

An Example of Cost Base Calculation
If the sale contract for your rental property was valued at $500,000, you must first deduct the value of depreciating assets from this amount in order to give the acquisition cost. If the cost of depreciating assets was not listed on the sale contract, you may use an independent valuation practitioner to determine their value.
If those depreciating assets are valued at $4000, this amount is deducted from the sale price of $500,000, resulting in an acquisition cost of $696,000.

Incidental costs incurred during the acquisition of your rental property included solicitor and agent fees of $3000, stamp duty of $7000, and borrowing costs averaged to $1000.
If you used to the property to derive income from rent or rent-related payments for 10 years, and during that time you claimed deductions to the total of $5000 over 10 years, than the remaining $6000 in incidental costs should be added to the cost base for your rental property.

Any ownership costs which you are not eligible to claim as a deduction, such as the $1000 you spend on repairing the rental property’s roof during a time when you used it for private purposes, are also added to the cost base.
If you decided to protect the value of your rental property asset, or improve its value by building a large shed at the rear of the property at the cost of $50,000, you add this capital cost to the rental property’s cost base. Though this will need to be adjusted if you claimed capital works expenses as deductions to your income tax applied to income derived from rent.

The combined total of these cost base elements gives the rental property’s cost base, which is then used to calculate capital gains tax on the disposal of the property.
Calculating your Capital Gain
There are three prescribed methods for calculating your capital gain from the disposal of an asset such as a rental property. These are the:
• Other method
• Discount method, and
• Indexation method.
Generally you may use the calculation method that will provide you with the best tax burden result, though these methods are subject to regulatory change.

The other method is used to calculate the capital gain obtained through the sale of an asset which you have held for less than 12 months. To use this method, you simply deduct the cost base which we described above from the capital proceeds of the sale. The resulting difference is your capital gain or loss which may be applied to your income tax return.

Discount methods available for the calculation of capital gains on the sale of rental property are available to individuals, who are currently eligible for a 50% discount on capital gains. Discount methods are only applicable if you have held the asset for a minimum period of 12 months. If you have owned your rental property for more than 12 months, and you own it as an individual, then you may calculate your capital gain as you would using the other method and then deduct the 50% discount to give your total capital gain.

Indexation methods are only available for assets acquired before September 21 1999. This method uses an indexation factor (CPI) to increase the cost base, however, the indexation factor was frozen in the 1999 September quarter, so if you are eligible to use this method you can index the cost in line with the 1999 September indexation factor.

Main Residence Concession
The family home or an individual’s primary residence is not subject to capital gains tax, so if you are selling the home that you live in, it is not going to attract a CGT burden. This exemption can sometimes be applied to a rental property when that rental property is also your home or main residence.
To be eligible for the main residence concession, the rental property must:
• Have been your primary residence, i.e. your home, for the entire period that you owned the property.
• Land attached to the property must not exceed two hectares.
• Not have been used in the production of assessable income which is subject to another exception.
It is important to be aware of the main residence concession. Say for example that divided your home into two halves, and rented out one half of your property to a tenant and derived rental income from it. In the event that you sell the property, the half which you occupied may be subject to the main residence exemption, and the other half subject to CGT.

In short, if you use your home to derive income from rent or rent-related payments, you may apportion the proceeds of sale using the main residence exemption to reduce the CGT burden on the sale. If the rental property was only used to derive income from rent for a given period, but served as your main residence at the time of sale, then you may be eligible for a partial CGT exemption.

You are also able to nominate a dwelling as your primary residence even if you do not reside there, but you must have resided there at some point.

The Six Year Rule
You are able to use your main residence to derive rental income for up to six years, without you residing there, and still have it classified as your home/main residence and therefore qualify for the main residence exemption.
For example, if you decide to go travelling, or to move temporarily for work or leisure, and rent out your home while you are away, so long as you return to it within six years the property will be exempt from CGT even though it was used as a rental property.

Record Keeping
The ATO regularly lists poor record keeping as one of its primary concerns, and failing to maintain the required records can result in the ATO taking action against you. By keeping detailed and accurate records of your expenses, you will be able to correctly and effectively calculate the capital gains tax liability you will face when you sell your property. This ensures that you do not pay more tax than you have to, and that you do not face unnecessary action by the ATO.

Records are vital for calculating your cost base, and if the relevant records are not kept than the relevant items are excluded from your cost base, thus increasing your capital gains tax liability. By keeping records of all the transactions involved in the acquisition, ownership, maintenance, improvement, and disposal of your property, you will be able to deduct a sizeable cost base from your final CGT liability.
The ATO also requires that you keep records for a period of five years after the CGT event which those records relate to. Penalties apply for the failure to keep these records, as the ATO may conduct follow-up checks. If you have the records, then these checks will be over and done with in no time at all. If you do not have the records, you could face the penalties for improper record keeping and the possibility of further action or investigation by the ATO.

Important points in rental property record keeping:

• Keep copies of the purchase contract for your property, and keep receipts for all transactions and expenses that relate to the acquisition of your property, including legal fees, stamp duty, valuation fees etc.
• If a CGT event occurs, such as selling your property or performing capital works, keep records of all related transactions and expenses such as the sale contract and conveyancing costs. For capital works, keep receipts for work and the details of providers.
• Keep records of all expenditure on improving, maintaining, and repairing your property. Also include records of expenditure related to establishing or defending your legal ownership of the property.
It is vital that you keep records of all expenses and transactions that may be relevant to both income tax in the case of rental income, and capital gains tax in the case of acquiring, improving, and disposing of property. Tax rules are subject to change and the ATO may require more detailed information from you in the future, so it is best to have this on hand to reduce your potential liability.
The cost of reconstructing records which you did not keep can be significant, especially if this is done in compliance with ATO or other regulatory action. Good record keeping can also reduce the tax burden passed on to beneficiaries if you happen to leave them property or assets in your will.
If you own a property in conjunction with another individual or group, then keep records relating to your share of the ownership and expenses, as well as more comprehensive records which may be used in the event of a dispute or disagreement with the other owners.

GST
Property used for residential purposes generally does not attract GST burden, instead they are input taxed. Input tax means that GST is not charged against residential property, so therefore rental property owners are unable to charge GST to their tenants or to claim GST credits. GST should not be included in the sale amount of residential property, either.
Input Tax on residential premises means that:
• GST is not to be included in the sale of residential property
• GST credits cannot be claimed on the sale amount or rental income derived from residential premises
• GST cannot bet charged to tenants paying rent for residential premises.
Note that commercial rental properties ARE subject to GST rules as they apply to all business and enterprise in Australia. The above concerns residential premises, rental properties that are let to tenants who reside at the property or use it for private/non-income-producing purposes.
GST rules differ for residential property that is assessable as new, that is, developed and then sold without being sold by the party that ordered it to be built. Residential property is assessed as new when any of the following points apply in the circumstances:
• The premises have not been subject to sale as residential property
• The premises have been developed through substantial renovation or redevelopment
• Old buildings have been demolished and replaced with new buildings
The sale of a new residential property is subject to normal GST rules and GST credit requirements. If you are selling a new residential property, you are able to claim GST credits for purchases related to the sale, such as conveyancing fees and agent fees. You are also liable to pay GST on the sale of a new residential premises.

Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about our Melbourne accounting services, or email us at admin@kingstonknight.com.au.

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Tax Compliance Services

Tax Compliance Services

Kingston Knight’s tax compliance services offer a cost-effective way to improve the way that your business works by ensuring that it is structured appropriately. Our tax team is committed to delivering exceptional tax advice and due diligence services that minimize your costs and reduce the risk of costly disputes or audits.

Some of our key tax and compliance services include:
• Personal Income Tax
• Corporate Income Tax
• GST
• Stamp Duty and Property
• Employment Taxation, including PAYG advisory and payroll services
• Trust Taxation
• Fringe Benefits Tax
• Capital Gains Tax
• Compliance Services
• Tax Due Diligence

Registered Tax Agent

Kingston Knight Accountants are registered tax agents who are able to conduct your tax affairs on your behalf. We can do this by preparing and lodging your tax returns for you, and by giving you advice on tax matters. In Australia, only registered tax agents are able to charge fees for the preparation and lodgment of tax returns.
Registered tax agents undergo registration through the Tax Practitioners Board. The Tax Practitioners Board publishes a list of registered tax agents on their website, allowing you to verify whether a person is in fact a registered tax agent or not.

The Tax Practitioners Board requires all registered tax agents to abide by certain rules and standards of professional conduct, providing consumer protection through the following:
• Ensuring that registered tax agents comply with the Tax Practitioners Board Code of Professional Conduct.
• By maintaining a minimum standard of experience and qualifications that are required for registration with The Board.
• By ensuring that registered tax agents discuss the nature of the services they provide for clients so that both parties know what to expect.

Registered tax agents also have access to special tax return lodgment rules, which allow them to lodge tax returns on behalf of clients after the October 31 deadline. The extended due date depends on your circumstances, so contact us for advice if you believe you might not meet the normal deadline for lodging your tax return.

If you have missed one or more tax returns in previous years, that is, you did not lodge them with the ATO, then you will need to get back on track as quickly as possible to avoid any penalties. A registered tax agent is able to prepare tax returns relating to prior years, and lodge them with the ATO on your behalf. If you believe you have missed a tax return in previous years, contact us for advice, we may be able to lodge the missing return for you and avoid/minimize any penalties.

What Is Tax Compliance?

Tax compliance is the assurance that a taxpayers financial reporting, deductions claims, and tax return information is in line with their obligations as members of the Australian community. Not all those who receive an enormous tax bill, or a penalty for unmet tax liabilities, are deliberately avoiding their obligations. The system which sets out and enforces these obligations is subject to change, and it does change in significant ways almost every year. It can be difficult to stay up-to-date with the relevant changes and what they mean for your tax liability.

Investments and Tax Compliance

Return on investments is generally part of your assessable income, meaning that expenses related to the acquisition and maintenance of your investment may be tax deductible. In Australia, you may be taxed for investments which are held overseas, including the acquisition, ownership, and disposal of these assets.

By gaining an understanding of how your investment activity may affect your tax liability, you will ensure that you never pay more tax than required. We can discuss your investments with you and examine the appropriate records in order to calculate your liability, and discuss ways in which this may be offset or reduced as appropriate. If you do not meet your tax obligations on investment income, whether deliberately or because you were not aware of those obligations, you may face penalties or an increased liability. Speak to us today if you are unsure about how your investments might be affected by tax.

Tax for Businesses and Standard Business Reporting (SBR)

We are able to advise and assist businesses, brand-new or well-established, on tax matters relevant to their circumstances. We can assist you by preparing and lodging tax returns, as well as calculating and forecasting your overall tax liability and providing relevant advice.

Standard Business Reporting is the current standard approach to digital and online record keeping for business’ financial and tax records. As registered tax agents, we use SBR-enabled software, and can provide you with cloud access to our digital services. This allows us to collect and compile your reported information into a standardized form which we can submit directly to the ATO.

Standardized Business Reporting is a highly efficient means of preparing and submitting your tax details to the ATO. As we invest in the software, your cost is limited as we are not required to perform the administrative and paperwork tasks that were once required. This said, SBR may not be suitable for use in given situations, which is why the work of registered tax agents remains so important. We are able to sift through the details for you and give you the clearest picture of your tax obligations, and ways in which they can be met.

Claiming Tax Deductions

Many of the taxes listed above included exemptions or discounts for certain taxpayers in given circumstances. As registered tax agents, we are able to assist you in claiming all the discounts, deductions, and exemptions which you may be eligible for. If you are unsure about what you might be eligible to claim, we can assist you in identifying the tax structure of your business and/or the components of your assessable income and expenditure to give a clearer picture of your tax liability.

Income tax deductions are often much broader and unique to individual taxpayers, though the ATO does monitor benchmark expense levels for taxpayers in different income brackets. This means that if you claim an unusually high amount in income tax deductions, you may attract follow up action from the ATO. This is why it is important to enlist the assistance of our tax compliance practitioners.

Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about our Melbourne tax compliance services, or email us at admin@kingstonknight.com.au.

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