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Seven Mistakes Not to Make When Claiming Tax Deductions

Seven Mistakes Not to Make When Claiming Tax Deductions

Each year, the technological resources available to assist the Australian Tax Office in identifying and investigating discrepancies in financial and income reporting become more comprehensive and far-reaching. This enables the ATO to better meet their mandate of ensuring taxpayer compliance with their lawful obligations by being able to more accurately detect false deductions and other tax avoidance methods.

It is not unusual for the ATO to issue warnings around tax time about their growing capacity to detect false expense claims or income reporting, and with an ever increasing amount of data at their disposal, their capacity to do so is set to increase even further.

This is not a warning to high-flying executives or companies seeking to make use of tax loopholes or other avoidance methods, these warnings are issued to all taxpayers and workers. The ATO has the capacity to cross-check a worker or employee’s reported employment expenses with the employer, and they will do so if your claimed expenses exceed the benchmark for your industry or sector. You can check these income and occupation benchmarks online using the ATOs website, or speak to your accountant or registered tax agent.

Work-Related Expenses
Claims for tax deductions on work-related expenses are particularly suspect, with the ATO continually advising that it wishes for taxpayers to claim deductions on all the expenses they are entitled to deduct, no more and no less. Guides are issued for specific industries and occupations which list the expected deductions relevant to that kind of income, and the ATO publishes resources on their website to assist taxpayers in identifying the expenses they may be entitled to claim for their specific occupation.

There are three important things to consider when claiming work-related expenses, and if these are not satisfied, you likely are not eligible for the deduction:
• Is the expense directly related to the earning of your taxable income?
• Did you spend the money yourself and not receive a reimbursement? If the expense was already reimbursed by your employer or another stakeholder, they are entitled to claim the deduction and not you.
• Do you have a record to prove that you met the expense for which you are claiming a deduction? Receipts are the gold-standard, but bank statements or other financial records may be used to identify the expense, when it was paid, and who it was paid to.

Rule Number 1: Ensure that your claims are justifiable
If your expense claims appear to be unusually high, it is likely that the ATO will contact your employer and request information about the duties you are required to perform as part of your employment. This means that if you are claiming travel expenses, but it turns out that you live a five minute walk from your place of employment, or if you claim for safety gear despite all the required equipment being provided by your employer, you are likely to have your deductions disallowed.

So not only does the total amount for which you are claiming expense-related deductions need to be within the reasonable limit for your taxpayers with similar circumstances, they also need to be reasonable in relation to your individual circumstances. The ATO has the capacity to obtain more detailed information about your employment and personal circumstances, and will do so if they believe your deductions do not accurately reflect the expenses you are likely to have incurred.

Rule Number 2: Ensure that you haven’t been reimbursed already
While there are certainly cases of fraudulent deduction claims on expenses which were reimbursed prior to tax time by the employer or another stakeholder, this rule is more complicated than the first.
Say for example that you are required to travel interstate to conduct business on behalf of your employer, or to carry out your expected duties. It is likely that the employer will explicitly reimburse you for this expense, as they may be able to claim a deduction on it themselves. If you were to claim such an expense despite already being reimbursed, this is obviously an act of non-compliance with your tax obligations.

In some cases, the line can be less clear. For example, it may state in your employment contract that reasonable travel costs or other expenses are included as part of your salary package. You may have forgotten this, and claimed deductions on expenses that were stated as being part of your salary. If the ATO were to examine your claims and contact your employer, they may disallow your deductions in full when they find out that the expenses were already met.

For this reason, it is very important that you check with your employer about the expenses you incur during the course of your occupation. They may inform you that the expense is already covered by payments made to you, and in this case you would be unable to claim related tax deductions.

In the case of travel, you may take public transport to work every day. If you keep a record of your public transport expenses, and your employment contract makes no mention of reimbursement for transport expenses, then this may be a deduction that you are entitled to claim at tax time.

Rule Number 3: Get Good Tax Advice
As an accounting firm, we understand the important of professional assistance in lodging your tax return and other tax matters. However, it seems to be all too common for new or inexperienced tax agents to make unrealistic promises to some clients about the deductions that they may be entitled to. If you are using a tax agent to lodge your tax return, ensure that they are experienced enough to understand what is likely to be considered an eligible deduction and what is not. There are many cases where tax agents have submitted returns claiming unusually high deductions, which then draws the ATO’s attention to that agent and their clients. If you are unfortunate enough to have engaged an agent who is conducting business of such low standards, you may find that your deductions will be disallowed in full, yet you have still had to pay the tax agent.

By being aware of the other rules on this list, you are better able to identify instances where a tax agent may be trying to see how many deductions they can get away with, not necessarily to your benefit. The task of a registered tax agent is to ensure that you receive all the deductions you are entitled to, no less, but certainly no more. To see tax agents and accounting professionals as money magicians at tax time is to severely understate the importance and complexity of the duties they are required to perform.

Rule Number 4: Keep records to substantiate your claims
It is vital that you keep records of all your expenses and transactions related to claims, or potential claims, which you may lodge at tax time. Keeping these records will enable you to swiftly produce verification in the event of a follow up by the ATO, and even if you are found to be ineligible for the deduction, by keeping adequate records relating to your claims you are demonstrating due diligence and making the ATO’s job easier, potentially reducing your liability. If you are unsure whether or not you are eligible to claim an expense, you can show the records you kept to your tax agent or accountant and they can assist you in claiming the appropriate deductions.

Rule Number 5: Never make claims for private, or mostly private, expenses
If you are unable to demonstrate through the provision of written evidence that your claims relate directly to your earning of income, then they are not eligible claims. For example, if you claim travel expenses after deciding to travel first-class on an interstate rail service, your decision to travel first-class is a private one and is not determined by your employment obligations.

Likewise, if your employer does not provide you with a uniform, but instructs employees to wear neat business-appropriate attire, you may not claim related clothing expenses as these clothes may also be used for private purposes.

Rule Number 6: Understand the basics of what is and is not eligible for deduction
If you understand the fundamentals of tax deductions for income-related expenses as they apply here in Australia, then you are better able to judge what you are and are not eligible to claim. Do your homework before tax time, and speak with your accountant or tax agent about the typical expenses profile for someone with your income and occupation. Check online for resources, such as the ATO guides outlining common deductions by occupation, which you can use to see what you are expected to claim for. You may notice things that you weren’t even aware you could claim deductions on, and therefore find yourself with a more balanced tax return.

If you do not attempt to gain even a basic understanding of these rules, and leave the task of claiming deductions up to the cheapest and most convenient tax agent you can find, you may be in for much more hassle than its worth.

Rule Number 7: Create digital records, and back them up
When tax time approaches, it is a very good idea to create a file on your computer that contains the relevant documentation or records that you will use to verify your deductions claims. These could include electronic copies of your bank or credit card statements, as well as digital invoices and receipts. You can also add notes with the finer details that you may need to provide in the case of a follow up.

Back up your data by uploading it to a cloud-based service, this way you can access it from any device and there is minimal risk of losing it. Being able to provide written records promptly if requested to do so is an important part of meeting your tax obligations, and will assist you in obtaining the deductions you are entitled to receive.

Lodging Your Tax Return

When you lodge your tax return using an automated service such as the ATO’s MyTax system, any claims you make for expense deductions are compared against the claims of other taxpayers in your industry or occupation, as well as those who have a similar income. This comparison is performed automatically, and is shown to you during the MyTax reporting process so that you will receive a warning in real-time if you are claiming an unusually high amount in comparison to those in similar circumstances. Tools such as this are part of the standardization of the entire tax-return system here in Australia, meaning taxpayers are automatically assessed against the information reported by other taxpayers with similar circumstances.

There are also free online tools available to assist taxpayers in calculating the deductions they may be entitled to, such as the MyDeductions element of the official ATO app. You can use this tool to record your expenses as they happen, ensuring that you have a valid record of expenses which you intend to claim deductions for. This alleviates some of your burden at tax time by ensuring that you don’t have to sift through receipts or financial records to find evidence of your expenses.

Your registered accountant or tax agent is here to help. Kingston Knight has extensive experience in tax compliance and tax structuring, ensuring that you receive the deductions you are entitled to and that your tax return is processed as quickly as possible. We can also assist you in collecting and storing the required records, and will advise you if there is any cause for concern in the material you have provided to us. Ensuring your compliance with regulation is one of the greatest ways we can help you as registered tax agents, freeing you from unneeded disputes or follow-up action and allowing you to get on with business while receiving the deductions and discounts that are yours by right.

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

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ATO Audits – What You Need to Know

ATO Audits – What You Need to Know

Australia’s taxation and regulatory framework requires businesses, organisations, and individual taxpayers to comply with various laws and regulatory requirements. Broadly, these requirements relate to the reporting of correct financial information to the Australian Taxation Office in a timely manner, and compliance with requests from the ATO or other regulators for specific information or evidence to substantiate your reporting.

In proceeding with this article, we disclaim our writings and published content as making any legal claims with regard to the views, opinions, and information contained therein. This information is of a general nature, and the topics discussed are subject to variation in given circumstances or situations. Due care has been taken to only include information which is informative and that may serve to assist taxpayers in gaining awareness of their obligations and the regulatory requirements that may affect them.

The ATO may conduct an audit with relation to a number of tax issues, such as income tax, employment tax and employee obligations, Goods and Services Tax (GST), tax deductions, discounts, and concessions, and the production of statements and statutory documents just to name a few. Issues which may trigger an ATO audit or review could include the overstatement of deductions or the under-reporting of income, which both indicate a failure to comply with tax obligations.

For businesses and other organizations in particular, it is important to ensure compliance and minimize the risk of being audited, as facing an audit is seen as often seen as a sign of misconduct or negligence which has implications for the organization’s reputation. For any taxpayer, failing to comply may result in an enormous and unexpected tax bill which can have dire financial consequences, let alone the impact on professional status and credit viability.

As a business owner or the manager of an organization, or even as an individual taxpayer, maintaining an awareness of the record keeping and reporting requirements set out by the ATO and other regulators can ensure your compliance and reduce the risk of dispute or other action.

What Is an ATO Audit?
An audit is a detailed and comprehensive verification process, designed to assure the tax office that the audited party has complied with their tax obligations. The ATO has a number of methods which is may use to determine when an audit is to be performed on a party’s financial records. Detection systems, including data matching systems and systems that compare data from different public sources, such as government departments, with information obtained through the party’s tax returns or Business Activity Statements (BAS).

These methods may be used to conduct what is known as a risk review, which is basically a comparison of a given party’s financial reports and the standard industry figures or benchmarks. Such risk review processes may identify a discrepancy between the information reported by the party of interest and the data which represents the industry or sector benchmarks. If such discrepancies are identified, the ATO may conduct a review of the party’s financial statements or an audit, which is a more detailed investigation of the party’s financial position.

An ATO review may be the first step in this verification process, and involves an ATO-appointed reviewer checking relevant reports for misstatements or mistakes which may account for the discrepancy. This is why it is vital that all taxpayers keep records relevant to their tax liability, and that these records can be produced for the ATO in the event that a review is ordered.

If the ATO has grounds to believe that a standard review or follow-up would be unable to explain the discrepancies they have identified, or that the relevant party has not acted in compliance with their taxation obligations, they may then trigger an audit in to the party’s financial position.

How are ATO Audits Performed?

The tax office employs officers who specialize in the audit and review of financial information, known as ATO Audit Officers. If you are subject to a review or audit, an ATO Audit Officer may be assigned to examine your financial records and match this against the information that you have reported to the ATO. During this process, the auditor or reviewer may request information such as transaction lists, bank statements, receipts, or other proof of payments. The details may vary depending on the nature of the circumstances and the entity being reviewed or audited, as well as the nature of the discrepancy being investigated.

Following the initial review of this financial information, the appointed reviewer may be satisfied that the discrepancy can be explained by a mistake, or that the discrepancy does not reflect an attempt to avoid tax obligations. In this case, the review may be concluded and the reviewed entity or individual may receive important feedback on how they can minimize the risk of such action occurring again.

Should the reviewer conclude that the discrepancy cannot be explained through a review of financial information, or that the discrepancy indicates a deliberate attempt to avoid tax obligations, the matter may be referred to a department which initiates audits. If this happens, then the review will change into an audit, which is a much more thorough investigation.

What Is Targeted During an ATO Audit?
If the ATO decides that an audit is required to explain discrepancies in the information available to them, they may begin the audit process. This process involves the comprehensive analysis and verification of the audited party’s financial statements and other information. Generally, the focus of the audit will be on the source of the discrepancy which triggered the audit, but an audit should be considered as a thorough and complete examination of your financial position.

The Timeline of an ATO Audit
1. Once an audit has been decided upon as the appropriate method to determine the cause and nature of a discrepancy in financial reporting, you will receive written notification that an audit is underway. This notification may identify an Audit Officer who will conduct an interview with you face to face. You will be advised as to what to expect during this interview, and what information or documentation you may need to give to the interviewer.
2. At the interview, the Audit Officer may identify themselves and state their right to conduct the appropriate investigation, and may inform you about the reason for their investigation. The Audit Officer may provide you with their contact information, and ask that you forward them any questions or queries you have in relation to the audit. The Audit Officer may then spend time forming an understanding of the business, organization, or individual in question, and how it operates with regard to tax compliance and record keeping. This information may provide a blueprint from which the rest of the audit procedure may be derived.
3. Once the audit is underway, the ATO will make requests for any information or assistance they require from you to carry out their investigation. This will continue until they have obtained an appropriate amount of evidence to come to a conclusion on the matter and make a decision. Once the decision has been made, you will be informed of your rights, such as the right to bring a legal representative to the concluding interviews.
4. The final stage involves detailed questions and the answering of these questions, and will allow you to put your own questions to the auditors. Audit Officers may also make visits to business premises, these visits may or may not be announced. When the decision is formalized and the audit concluded, you will receive a written notice informing you of any adjustments made or penalties imposed, as well as the means by which you may object to or challenge the outcome of the audit.

The Importance of Tax Compliance
For businesses, individuals, and organisations alike, the task of tax compliance need not be a difficult one. Depending on the nature of your circumstances, you may need the assistance of a financial advisor or accountant to ensure that you are compliant with your tax obligations. Your accountant can advise you of these requirements and assist you in making the required reports and lodging documents with the ATO.
The best way to ensure compliance is to keep detailed records of your transactions and expenses, particularly if you wish to claim deductions on them. Record keeping can ensure that the required information is on hand should the ATO conduct a follow-up with you.

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

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GST Services

GST Services

The Goods and Services Tax is a tax of 10% that applies to most of the goods and services sold to Australian’s consumers. Businesses and organisations with a certain structure and turnover are required to register for the GST, which they then include in the price they charge to consumers for goods or services. If you are required to include GST in your prices, you are eligible to claim GST credits to offset the GST included in goods and services you purchase for your business.

The GST system contains some complex and time consuming registration, reporting, and credit-claiming procedures. Allow us, your accounting advisors and tax professionals, to take the hard work out of GST so you can focus on running your business.

Do I Need to Register for GST?
If you run an enterprise that generates a GST assessable turnover of $75,000 above, then you will need to register for the GST. For not-for-profit organisations, the turnover threshold is $150,000. You need an Australian Business Number (ABN) to register for the GST and claim any credits you are entitled to.

As registered tax agents, we can assist you in registering for the GST, as well as reporting your GST income and claiming GST credits.

Once you have registered for the GST, you will be required to report GST income and include relevant information in your Business Activity Statement, which will be due at certain intervals depending on the size and nature of your enterprise. BAS and other reporting requirements are among the most time consuming and difficult elements of the GST system, but these are easily managed with the appropriate tools, knowledge, and experience.

GST Credits
Once you have registered for the GST, you may be able to claim credits on the GST that you pay to other businesses, such as suppliers or service providers. These credits may allow you to claim the value of the GST your business pays as a refund from the ATO.

Our GST Services
As experienced accountants and registered tax agents, Kingston Knight works with small businesses, individuals, partnerships, companies, trusts, and superannuation funds to ensure that they meet the strict reporting and compliance requirements that apply under the GST system.

One of the most time and labor intensive components for those required to comply with the GST system is the Business Activity Statement (BAS) reporting requirement. Our cloud-based accounting software enables us to take the hard work out of BAS preparation and submission, whilst ensuring that the relevant data are compiled in perfect accordance with the prescribed requirements.

By ensuring that your reporting requirements are met with an efficient and personalized accounting service, you can get on with running your enterprise and doing what you do best.

Our GST Services Include:
• Assisting you in determining your GST obligations, and any adjustments to your business structure or procedures that may assist you in obtaining an optimal tax structure
• Assisting you with GST registration and reporting, including through the compilation and submission of your Business Activity Statement as required
• Assist you in identifying your GST expenditure and claiming any GST credits which you are eligible for.

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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Fringe Benefits Tax – FBT Advice and Assistance

Fringe Benefits Tax – FBT Advice and Assistance

Also referred to as FBT for short, fringe benefits tax is paid by employers in relation to benefits or other non-income payments or concessions made to employees, as well as the families of employees or associates of the enterprise. Fringe benefits may be incorporated into the wages or salary paid to employees, or they may be offered as extra incentives or bonuses. Another example of circumstances in which an FBT liability exists is when the director of a trust or company receives benefits, bonuses, etc.

Fringe benefits tax is not the same as or included in income tax, they are separate taxes. FBT is only calculated in accordance with the monetary value of whatever fringe benefits are provided, without relation to other income.

Do I Need to Pay Fringe Benefits Tax?
If you provide your employees or their associates with fringe benefits, you might be required to register for and pay FBT. For FBT purposes, the employee in question may be past, current, or future in relation to their employment with you. They may also be the director of a trust or company.

FBT also applies to benefits that are not provided directly by you, but by a third party through an arrangement you have made.

The following are all examples of fringe benefits which may attract an FBT liability:
• Giving an employee or their associate a loan at a discounted rate
• Paying the cost of a gym membership for an employee or their associate
• Allowing employees to make private use of work cars
• Reimbursing an employee or their associate for an expense that does not relate to their employment with you, such as school or medical fees
• Giving an employee or their associate access to paid entertainment by giving them free tickets to events
• Making a salary sacrifice arrangement with an employee which includes benefits.

For FBT purposes, it is important to determine a worker’s employment status. Whether someone is employed as a volunteer, contractor, or employee is what determines their employment status in this context. Contractors and volunteers usually do not attract an FBT liability on benefits provided by their employer. Those engaged in ongoing, formal employment are likely to attract an FBT liability if they are provided with such benefits.

If you think you may need to pay fringe benefits tax, but are unsure, speak to your accountant or registered tax agent to seek clarification. The ATO requires employers to assess their own FBT liability for each year, with the FBT year running from the 1st of April to the 31st of March.

FBT Exemptions
As an employer, not all benefits you provide to employees will attract an FBT liability. If the benefit is directly related to the employee’s work or duties as part of their role, it may be assessed as a work-related item and therefore exempt from FBT. The following are examples of benefits that are likely to be assessed as work-related items:
• Tools of the trade
• Computer software or hardware
• Electronic devices including laptops, mobile phones, GPS systems, printers, tablets etc.
• Briefcases or other containers
• Protective clothing.

There are limits on work-related benefits that are exempt from FBT. If you provide a mobile phone, for example, you cannot provide the employee with another FBT exempt mobile phone until the next FBT year. If the original item is broken and a replacement is ordered, the replacement may be exempt from FBT. Exempt items must be things which will primarily be used for work, not private use.

Small businesses were recently granted an extension on the work-related item extension, allowing them to provide more than one work-related item of a particular function within a given FBT year. This means that the above requirements pertaining to the one-item-one-year exemption limit does not apply to small business employers.

Property Fringe Benefits
If you provide an employee or their associate with goods or property at a discount, or for free, this may constitute an assessable fringe benefit that attracts FBT. Examples of property fringe benefits might include:
• Real-estate/real property, such as buildings or land.
• Goods such as appliances, clothes, entertainment products etc.
• Other property, such as bonds or shares.

Residual Fringe Benefits
Residual fringe benefits are those which are the hardest to define, yet still satisfy the criteria required to attract an FBT liability. Remember that for tax purposes, benefits are defined as being any item, privilege, right, facility, service etc. that is not work-related.
Examples of benefits that might be assessed as residual fringe benefits include:
• Provision of services, such as a plumber offering their services free of charge to an employee
• Allowing an employee to make use of items or property owned by the employer, such as a camera or entertainment system
• Allowing an employee to make private use of a work vehicle which is not assessed as a car in relation to FBT, such as a motor scooter or utility.

If you are unsure whether or not you may be attracting an FBT liability through residual benefits, speak to your registered tax agent or accountant.

How Do I Reduce My FBT Liability?

If you believe that you may be providing benefits that attract an FBT liability, you may decide to replace these fringe benefits with other things that do not attract FBT liability. For example:
• By replacing or making-up for the lost fringe benefits with additional wage or salary payments
• Choosing only to provide your employees with benefits that do not attract an FBT liability, such as work-related items
• Replacing fringe benefits with other benefits that your employees would be eligible to claim as deductions on their income tax should they be required to meet the expense themselves
• By using employee contributions to offset the FBT liability. An example of this would be that you require an employee who is allowed to make use of their work car for private purposes to pay the operating costs of the vehicle. Be aware however that employee contributions may be subject to GST and may contribute to your assessable income.

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

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Fringe Benefits Tax for Employers

Fringe Benefits Tax for Employers

Also referred to as FBT for short, fringe benefits tax is paid by employers in relation to benefits or other non-income payments or concessions made to employees, as well as the families of employees or associates of the enterprise. Fringe benefits may be incorporated into the wages or salary paid to employees, or they may be offered as extra incentives or bonuses. Another example of circumstances in which an FBT liability exists is when the director of a trust or company receives benefits, bonuses, etc.

Fringe benefits tax is not the same as or included in income tax, they are separate taxes. FBT is only calculated in accordance with the monetary value of whatever fringe benefits are provided, without relation to other income.
Do I Need to Pay Fringe Benefits Tax?

If you provide your employees or their associates with fringe benefits, you might be required to register for and pay FBT. For FBT purposes, the employee in question may be past, current, or future in relation to their employment with you. They may also be the director of a trust or company.

FBT also applies to benefits that are not provided directly by you, but by a third party through an arrangement you have made.

The following are all examples of fringe benefits which may attract an FBT liability:
• Giving an employee or their associate a loan at a discounted rate
• Paying the cost of a gym membership for an employee or their associate
• Allowing employees to make private use of work cars
• Reimbursing an employee or their associate for an expense that does not relate to their employment with you, such as school or medical fees
• Giving an employee or their associate access to paid entertainment by giving them free tickets to events
• Making a salary sacrifice arrangement with an employee which includes benefits.

For FBT purposes, it is important to determine a worker’s employment status. Whether someone is employed as a volunteer, contractor, or employee is what determines their employment status in this context. Contractors and volunteers usually do not attract an FBT liability on benefits provided by their employer. Those engaged in ongoing, formal employment are likely to attract an FBT liability if they are provided with such benefits.

If you think you may need to pay fringe benefits tax, but are unsure, speak to your accountant or registered tax agent to seek clarification. The ATO requires employers to assess their own FBT liability for each year, with the FBT year running from the 1st of April to the 31st of March.

FBT Exemptions

As an employer, not all benefits you provide to employees will attract an FBT liability. If the benefit is directly related to the employee’s work or duties as part of their role, it may be assessed as a work-related item and therefore exempt from FBT. The following are examples of benefits that are likely to be assessed as work-related items:
• Tools of the trade
• Computer software or hardware
• Electronic devices including laptops, mobile phones, GPS systems, printers, tablets etc.
• Briefcases or other containers
• Protective clothing.
There are limits on work-related benefits that are exempt from FBT. If you provide a mobile phone, for example, you cannot provide the employee with another FBT exempt mobile phone until the next FBT year. If the original item is broken and a replacement is ordered, the replacement may be exempt from FBT. Exempt items must be things which will primarily be used for work, not private use.

Small businesses were recently granted an extension on the work-related item extension, allowing them to provide more than one work-related item of a particular function within a given FBT year. This means that the above requirements pertaining to the one-item-one-year exemption limit does not apply to small business employers.

Property Fringe Benefits

If you provide an employee or their associate with goods or property at a discount, or for free, this may constitute an assessable fringe benefit that attracts FBT. Examples of property fringe benefits might include:
• Real-estate/real property, such as buildings or land.
• Goods such as appliances, clothes, entertainment products etc.
• Other property, such as bonds or shares.

Residual Fringe Benefits
Residual fringe benefits are those which are the hardest to define, yet still satisfy the criteria required to attract an FBT liability. Remember that for tax purposes, benefits are defined as being any item, privilege, right, facility, service etc. that is not work-related.

Examples of benefits that might be assessed as residual fringe benefits include:
• Provision of services, such as a plumber offering their services free of charge to an employee
• Allowing an employee to make use of items or property owned by the employer, such as a camera or entertainment system
• Allowing an employee to make private use of a work vehicle which is not assessed as a car in relation to FBT, such as a motor scooter or utility.

If you are unsure whether or not you may be attracting an FBT liability through residual benefits, speak to your registered tax agent or accountant.

How Do I Reduce My FBT Liability?
If you believe that you may be providing benefits that attract an FBT liability, you may decide to replace these fringe benefits with other things that do not attract FBT liability. For example:
• By replacing or making-up for the lost fringe benefits with additional wage or salary payments
• Choosing only to provide your employees with benefits that do not attract an FBT liability, such as work-related items
• Replacing fringe benefits with other benefits that your employees would be eligible to claim as deductions on their income tax should they be required to meet the expense themselves
• By using employee contributions to offset the FBT liability. An example of this would be that you require an employee who is allowed to make use of their work car for private purposes to pay the operating costs of the vehicle. Be aware however that employee contributions may be subject to GST and may contribute to your assessable income.

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

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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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