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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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Working holiday makers (backpackers)

Working holiday makers (backpackers)

Commissioner clarifies current practices whilst awaiting new laws: generally non-resident as they move around and 32.5% tax applies from $1

13 Dec 2016 Written by John Morgan
With a number of media reports circulating in relation to the tax treatment for working holiday makers and the tax that they pay, the ATO has sought to make clear the tax arrangements in place.
Tax Commissioner Chris Jordan said the amount of tax that a working holiday maker may pay will depend on their residency status for tax purposes, and in this regard, the ATO considers the individual circumstances that apply to each working holiday maker.
Mr Jordan said the reality is that the ATO sees that most working holiday makers are transient – they move around and do not establish residency in Australia during their stay. The ATO considers that most working holiday makers are non-residents due to their pattern of working and holidaying while in Australia. Therefore, as a non-resident for tax purposes, they will be taxed only on their Australian-sourced income, such as money they earn working in Australia, and they will commence paying tax on the first dollar of income they earn – at 32.5c in the dollar.
If the Bills currently before Parliament are not passed, the Commissioner said the ATO will continue to apply the current law.
[Those Bills are: Treasury Laws Amendment (Working Holiday Maker Reform) Bill 2016; Income Tax Rates Amendment (Working Holiday Maker Reform) Bill 2016; Passenger Movement Charge Amendment Bill 2016; and Superannuation (Departing Australia Superannuation Payments Tax) Amendment Bill 2016.]

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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SMSF Auditor Melbourne

SMSF Auditor Melbourne FAQ’s

Acceptance and continuance

Who can audit an SMSF?

Before 1 July 2013
SMSF audits must be carried out by approved auditors. An auditor is an individual who is currently:
• Registered as a company auditor; or
• A CPA Australia member; or
• An Institute of Chartered Accountants in Australia member; or
• An Institute of Public Accountants member; or
• An Association of Taxation and Management Accountants member or fellow; or
• A fellow of the National Tax and Accountants Association Ltd; or
• An SMSF specialist auditor from the SMSF Professionals Association of Australia Ltd; or
• The Commonwealth Auditor-General, or that of a state or territory.

From 1 July 2013
SMSF audits must be carried out by ASIC registered auditors, also known as approved SMSF auditors.

Competency requirements

A list of competency requirements for SMSF auditors was developed by CPA Australia as part of a joint initiative carried out with the regulator and other professional accounting bodies. These requirements were created as a result of market growth in the area of SMSFs, they require that SMSF auditors:
• Possess a practicing certificate issued by a professional accounting body such as the Institute of Chartered Accountants in Australia, CPA Australia, or the Institute of Public Accountants;
• Be covered by professional indemnity insurance;
• Meet the ongoing professional development requirements;
• If there are others undertaking work on their behalf, these individuals must have appropriate experience and knowledge and are to be supervised when conducting audits;

In addition to the above, an SMSF auditor must demonstrate competency in these areas:
• Planning the engagement;
• Acceptance and retention of clients;
• Substantive procedures;
• Evaluating controls and testing these controls;
• Forming an audit opinion.

These competency requirements can be found on the CPA Australia website. They continue to apply to members in addition to the ASIC auditor registration requirements which came into effect on 1 July 2013.
ASIC has introduced its own competency standards for approved SMSF Auditors. These standards are largely based on the CPA Australia requirements. ASIC has been monitoring compliance with these standards since 1 July 2013.

Auditor independence
As part of the new registration regime for SMSF auditors, the SISR now prescribe APES110 to all approved SMSF auditors. APES 110 is the code of ethics for professional accountants. Approved SMSF Auditors will be required to declare on the SMSF independent auditors report that they are acting in compliance with these requirements.

The Auditing and Assurance Standards Board has provided guidance in the form of Appendix 6 of Guidance Statement GS 009 which relates to threats to independence within a SMSF. This Appendix lays out a variety of safeguards and scenarios available to auditors in a variety of given situations. Safeguards found within an SMSF may be limited as SMSFs are generally small entities with limited segregation of duties.

If an audit client is assisted in the preparation of accounting records or financial reports, a self-review threat may be created should these reports and records be subsequently audited by the firm which assisted in the preparation. If the firm’s staff happen to be making management decisions for the SMSF (which may be the case if the firm is providing administrative services to the SMSF), there are no safeguards to reduce the threat of self-review to an acceptably low level. The only option would be to withdraw from administration or audit engagement.

There are safeguards which apply when accounting services of a routine or mechanical nature are provided. Such services may include the posting of transactions and entries approved by the SMSF, or the preparation of the financial report based on a trial balance which has been provided by the SMSF. These safeguards include:
• Implementing procedures and policies which stop an individual providing such services from making managerial decisions for the SMSF.
• Making arrangements so that routine accounting services are not performed by a member of the auditing team.
• Requiring the source of data for accounting entries to be originated by the SMSF .
• Requiring underlying assumptions to be approved and originated by the SMSF.
• Obtaining the approval of the SMSF for any journal entries or other changes which may affect the financial report.
• Obtaining the acknowledgement of the SMSF of their responsibility for any accounting work performed by the firm.
• Disclosing the firm’s involvement in both engagements to the trustees.

Generally, a threat to independence is not created by providing taxation services to an SMSF which is also an audit client.

Timing of auditor appointment
Trustees are required to appoint an auditor at least 30 days prior to the date on which the auditor’s report is due.

Engagement letter
Audit engagement letters should clearly set out the reporting responsibilities of the auditor for both components of the audit.

If you require an SMSF Auditor Melbourne or an SMSF Accountant Accountant Melbourne contact Kingston & Knight today on (03) 9863 9779 or email us at admin@kingstonknight.com.au.

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SMSF Auditor Compliance

SMSF Auditor Compliance

Objective

There are relevant auditing standards which apply to SMSF compliance audits. These standards are:

    • * ASAE 3000 Assurance Engagements Other than Audits or Reviews of Historical Financial Information;

and

  • * ASAE 3100 Compliance Engagements.

Compliance audits are carried out in order to form an opinion relating to five crucial areas:

  • * That the fund meets the required definition of an SMSF and has elected to be a regulated fund as per SISA s17A.
  • * The sole purpose of the fund’s maintenance is to provide benefits to its members upon their retirement, or to their dependents should death occur before retirement.
  • * The trustees have an investment strategy which complies with the investment restrictions laid out in SISR. 4.09.
  • * The trustees comply with benefit and contribution payment standards and SISR 6.17/7.04.
  • * And that trustees are performing their required administrative obligations as according to SISR s103.

There is always the risk that a breach of the SIS Act and Requirements may not be detected by the auditor. For this reason, it is important that the audit procedures are thoroughly planned and designed to cover the entire financial period, as well as specific compliance tests relating to relevant SISA requirements.

The regulations set out in the SIS legislation represent a minimum set of audit requirements for compliance. Auditors are able to expand the scope of an audit as they see fit (perhaps based on risk and other factors), but the audit must meet these minimum requirements in order to comply. An SMSF’s trustees should be consulted when determining the scope of an audit.Reporting obligations for the financial statement and compliance audits

Under the SISA, an SMSF auditor is required to:

  • * Provide an auditor’s report to the trustees detailing the SMSF’s operations for the year. The report must be in an approved form.
  • * An auditor will be required to submit a written report to a trustee if that auditor forms the opinion that:
  • * Any contravention of the SISR or SISA may be occurring, have occurred, or be likely to occur in the course of the SMSF’s operations.
  • * The financial position of the SMSF is unsatisfactory, or is likely to become unsatisfactory.

An auditor will be required to submit a written report to the ATO if the auditor forms an opinion that:

  • * A contravention is likely to have occurred, be occurring, or occur in the future, and that this contravention is of the requirements of the SISR or SISA specified in the ACR by the ATO.
  • * The SMSF’s financial position is, or is about to become, unsatisfactory.

An audit contravention report should be used when submitting the above written report. These forms are available on the ATO website.

The ATO has also published an auditor checklist (Approved auditors and self-managed super funds – role and responsibilities as an approved auditor) which sets out the responsibilities of approved SMSF auditors according to the SIS Act and Regulations. It offers a concise guide to the way in which the ATO expects audits to be conducted.

If a fund was established on or after July 1 2008 and has committed a reportable contravention in its first 15 months of existence, the auditor must report the contravention to the ATO regardless of the amount involved. This ensures that new trustees become aware of their responsibilities and obligations at an early stage.

Management letter

Trustees are to be provided with a management letter which details the findings and implications of an audit on their fund.

A management letter should include details of any contraventions of the SISR or SISA as well as recommendations as to how these mistakes might be rectified by the trustees.

Any weaknesses in internal controls identified by the auditor should also be reported to the trustees (even if they are not necessarily breaches of the legislation or requirements) so that they are able to improve their administrative procedures and systems where required.

Contact Kingston & Knight Accountants today for an Melbourne SMSF Auditor and/or SMSF Accountant on (03) 9863 9779 or email us at admin@kingstonknight.com.au.

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SMSF Accountant Melbourne

SMSF Accountant Melbourne

Kingston & Knight offer a range of SMSF accountant Melbourne services.

What is an SMSF Accountant

In order to understand what an SMSF Accountant is, you must first understand what SMSF is. Self Managed Superannuation Fund, or more commonly known as a Self Managed Super Fund is a superannuation trust structure developed as a pension for members and their beneficiaries upon retirement.
What separates an SMSF from other super funds is that an SMSF member is also the trustee of the fund. These funds are formed with one to four members who have full control of how the fund is managed. As opposed to other super funds designed to manage large groups, and the interest of a large group, an SMSF can be managed to the specific needs of individual members.

With this type of a super fund, SMSF, there are two trustee structure options:

  • Corporate Trustee: In this structure a company will act as trustee, while each member will manage the SMSF as a director.
  • Individual Trustee: Each member of the SMSF is a trustee

Regardless if a corporate or individual trustee is used, the responsibility of the trustee will remain the same. Trustees are responsible for:

  • – Implementing, and maintaining an investment strategy for the fund;
  • – Administratively manage the fund. This will require strict adherence to requirements governing SMSF management, such as maintaining records, providing financial statements, completing tax records, and organizing an independent audit.

Trustees and Superannuation Laws

In addition to required actions of the trustee, superannuation laws require that trustees maintain a level of ethical standards commiserate with the industry, which include:

  • – Honest representation of actions and all matters concerning the fund;
  • – Acting responsibly, diligent, and in the best interest of the fund and all of the fund’s members;
  • – Ensuring fund assets are kept separate from the trustees’ personal assets;
  • – Inform and maintain full-disclosure of fund, fund activities, and changes to all members.

Due to the administrative requirements, it is common for trustees to seek advice, or consult, an SMSF specialist, often an accountant.

How Can an SMSF Accountant Melbourne Help Clients

SMSF accountants tend to be the primary source for advice on the development, implementation and management of super funds.

While an SMSF Accountant is often called upon for advice, it is important to note that, without an Australian Financial Services License (AFSL), an accountant cannot provide financial information and are significantly restricted on what advice they can provide. Advice which an SMSF accountant Melbourne can provide is:

Essentially, accounting services and advice can be provided, but the accountant cannot provide any financial advice or suggestions which may lead a trustee to act upon such information.
While the practice of offering financial advice along with accounting services has been abused in a variety of degrees since the inception of super funds, it is considered a highly unethical practice, and one in which both the SMSF accountant, and trustee or directors can face significant consequences financially, or on a personal level.

Considering the complications and requirements a trustee faces in managing a SMSF it is highly recommended to seek a SMSF accountant with accredited training and qualifications. It is also important to realize the importance on whether or not your SMSF accountant is qualified to offer financial advice in managing a super fund.

Consequences for Unlawful Trustee Actions

Consequences for a trustee not properly managing a fund are managed by the Australian Taxation Office and can result in education direction, administrative penalties required of trustees and directors, trustee disqualification, and up to civil and criminal penalties based on the degree of mismanagement.
An SMSF accountant is specially trained to assist in legally and ethically managing these funds.

Contact Kingston & Knight today for the most trusted and professional SMSF Accountant Melbourne services on (03) 9863 9779 or email us on admin@kingstonknight.com.au.

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Small business tax accountant Melbourne

Small business tax accountant Melbourne

When considering whether or not to start a new business, there are a variety of taxation obligations which need to be considered. Most of the income generated by your business would be classed as assessable income – this means that it’s subject to tax and you will need to declare it on your tax return.

There are tax deductions which you can claim for most expenses incurred whilst running your business, but exceptions exist. You are not able to claim tax deductions for domestic or private purposes. Fines, entertainment, and some other specific expenses are also excluded.

Depending on the structure of your business, the rules for income and deduction will vary. Also taken into account is whether or not you hold/trade stock, and the nature of your expenses and income.

What to include as assessable income

Assessable income is any income that is subject to tax. Generally, to calculate the assessable income for your business, you are required to include any amounts you earn or receive in the ordinary course of operating your business, such as by providing services or selling stock.

Usually, you are also required to include the following:
– Commission income
– Amounts originating in isolated transactions outside the ordinary running of your business, where you intended to make a profit
– Amounts which exceed their written value if selling depreciating assets
– Compensation, including worker’s compensation or payments for trading stock losses, contract cancellations, or business interruptions
– Excise brewery refund
– Wine equalisation tax producer rebate
– Fuel tax credits, cleaner fuels grant and product stewardship (oil) benefit
– Franking credits (credits from company tax already paid), dividends on business investments
– Incentive payments, such as cash payment for a lease
– Grants, such as an amount received under the Apprenticeship Incentives Program
– If you are an Australian tax resident, income earned outside Australia
– Payments for selling know-how
– Interest on business investments and interest on early payment or overpayment of tax
– Hire changes and lease payments
– Net capital gains made from selling capital assets such as buildings or land
– Awards or prizes for your business, such as a money prize for winning a business competition in your region
– Personal services income (PSI) if PSI rules apply to you
– Recovered bad debts which you have received a tax deduction for
– Royalties, such as payments received for authorising other entities to use your intellectual property
– Rental income from properties owned by your business
– The value of goods you take from your business’s trading stock for your own personal use
– Subsidies for running a business
– The market value of transactions not involving money, including barter transactions
– The value of stock on hand at the year’s end if its value is greater than at the start of the year.

As exemplified by this list, you usually need to declare your gross proceeds and earnings, not just profit.

Amounts you should exclude when determining your assessable income

Some amounts, including the following, are not assessable. So you don’t need to include these when declaring your assessable income:
– Prizes that are not related to your business
– Amounts earned from a hobby
– Gifts or amounts given to you
– Goods and services tax (GST) collected by your business
– Any borrowed money
– Gambling or betting wins, unless your business is a gambling or betting business
– Payouts from personal income protection insurance policies (in most cases)

Record keeping and tax

As a business owner, you are legally required to keep complete and accurate records of all assessable income and any deductions you claim. Making misleading or false statements in these records or reports can result in the ATO doing the following:
– Applying penalties
– Determining your income based on other information, such as industry benchmarks, and issuing an amended tax assessment
– Prosecuting you in court

Keeping records for your business

You are required to keep records of all your business transactions, and these records must be stored by you in full for five years after the date on which the records were prepared or the relevant transaction completed.

These records are required in order to evaluate any expense claim you may make. Failing to keep records may result in an expense claim being denied or reduced, and can even result in penalties being applied by the ATO.

Examples of records which you are required to keep include:
– Cash register tapes
– Sales and expenses invoices
– Sales and expense receipts
– Credit card statements
– Bank account statements
– Bank deposit books and cheque butts
– Employee records, such as tax file number (TFN) declarations, time sheets, superannuation records, and wages books

The ATO has created a specific Record Keeping Evaluation Tool, which is hosted on their website. You can use this tool to identify what records you need to keep, and how to assess and/or improve your record keeping.

As well as those listed above, there are some other records which may need to be kept depending on the nature of your business. These income tax records also may need to be kept each financial year:
– Stocktake records
– Debtors and creditors lists
– Records of depreciating assets
– Records of any private use of business assets or purchases
– Records of assets for the purposes of assessing capital gains tax
– Motor vehicle expenses (includes logbooks)

All your financial records can be stored either in electronic or hard-copy form. But they all must be written in plain English and readily accessible. Bookkeepers often specialise in setting up book keeping systems for business records such as those required to be kept for tax purposes.

Accounting methods

The amount you should include as your assessable income depends on whether you account for income on a cash or accruals basis.

Cash basis

This refers to payments received during the year and does not require you to know when the work was done. If you are accounting on a cash basis, your assessable income only includes income which you have actually received during the income year.

Accruals basis

Accrual refers to income which has been earned during the year, even if the payment for this has not yet been received. If you account on an accruals basis, you need to include everything you earned during the income year, even if you are yet to receive payment.

Some people confuse these two assessable income accounting methods with the cash and non-cash goods and services (GST) accounting methods. Assessable income refers solely to income and has nothing to do with GST.

Concessions for small businesses

If your business has an aggregated annual turnover of less than $2 million, you may be able to receive certain concessions which reduce your taxable income. Aggregated annual turnover refers to the total sales made by your business and associated businesses during the financial year.

Examples of small business concessions include:
– Simpler trading stock rules
– CGT concessions
– Immediate deductions for prepaid expenses
– Simpler depreciation rules

Foreign income

As an Australian tax resident, you must include any income you have earned from foreign sources as part of your assessable income. Even if your income was already taxed in its country of origin, you must report it to the ATO. If your income has already been taxed, it may be eligible for Australian tax exemptions such as the foreign income tax offset.

You are required to convert foreign deductions and income into Australian dollars at the exchange rate which was current at the time the income or deductions were earned. You may also use an average exchange rate to convert your income as long as that rate is similar to the rate which applied at the time the income was earned.

Personal services income

Businesses involved in consulting or contracting may earn a type of income called personal service income (PSI). For these businesses, PSI tax rules apply and may alter the amounts included as assessable income, as well as eligible deductions.
The purpose of the PSI rules is to ensure that people earning PSI are taxed in a way which is comparable to employees performing similar roles to them. This ensures that they do not claim excessive deductions.

What is PSI?

PSI can be described as income which is generated through the application of your personal skills or efforts. Examples where PSI may be earned include:
– By professional practitioners operating a sole practice
– By consultants who provide personal expertise
– By professional entertainers and sportspeople
– Under contracts which are principally for your services or labour.

PSI generally does not include income earned by:
– Giving permission to use legal property
– Selling or supplying goods
– Through a business structure, such as a company or firm as opposed to a sole practitioner or trader working under a contract
– Using an asset, such as a truck, to generate income (these assets are known as income-producing assets)

Sole traders

Sole traders are subject to PSI rules which limit deductions they are able to claim. Examples of expenses where deductions are limited include:
– Mortgage interest, rent, rates, land tax on personal residences
– Car expenses for a spouse
– Super payments and wages for associates

Partnerships, companies, or trusts

These types of businesses are also limited in the deductions they can claim. If you operate one of these businesses, its income (minus some reductions) will be treated as your personal income, so you must report it on your tax return. In addition, your business will be subject to pay as you go (PAYG) obligations on your personal income.

Crowdfunding

Crowdfunding is a rapidly evolving industry and is subject to changing taxation regulations due to its growing popularity and value. Crowdfunding has different tax implications for individuals involved at different stages of the crowdfunding process.

Generally, there are three parties involved in crowdfunding arrangements:
– The promoter, who initiates the venture or project for which the funds are being sought
– The intermediary, which is the organisation or platform providing the crowdfunding services. These are usually websites
– Funders, individuals and entities who contribute money to the project

Each party can potentially have tax obligations as part of a crowdfunding arrangement.
If you happen to receive or earn money through crowdfunding, it may be assessed as taxable income. This means that you need to declare any money received via crowdfunding arrangements on your tax return.

If you are a small business owner it is highly advisable you utilise a qualified business accountant Melbourne, like Kingston and Knight Accountants to monitor your accounts. Contact us today on (03) 9863 9779 or email us on admin@kingstonknight.com.au.

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