Frequently Asked Questions

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Here are a few commonly asked questions from our clients about personal income and small business tax matters.

The Government has proposed to expand accelerated depreciation by allowing small businesses with an aggregated annual turnover of less than $2 million to immediately deduct each asset that cost less than $20,000. The measure will apply to assets acquired from 7.30pm, 12 May 2015 until 30 June 2017.

This will replace the previous instant asset write-off threshold of $1,000.

The balance of a small business pool can also be immediately deducted if the balance is less than $20,000 at the end of an income year that ends on or after 12 May 2015 and on or before 30 June 2017 (including existing pools).

The Government will also suspend the current ‘lock out’ laws for the simplified depreciation rules (these prevent small businesses from re-entering the simplified depreciation regime for five years if they have opted out) until 30 June 2017.

This proposed measure commences 7.30pm (AEST) 12 May 2015 and will cease on 30 June 2017.

Assets excluded from these depreciation rules include horticultural plants and in-house software allocated to a software development pool. In most cases specific depreciation rules apply to these excluded assets.

Assets that cost $20,000 or more (which can’t be immediately deducted under other provisions) can be deducted over time using a small business pool. Under the pooling mechanism a deduction for 15 per cent of the cost is allowed in the first income year with a 30 per cent deduction allowed for each income year thereafter.

The Government has also proposed changes to allow primary producers to immediately deduct capital expenditure on fencing and water facilities such as dams, tanks, bores, irrigation channels, pumps, water towers and windmills. A recent announcement now means this proposal will apply from 7.30pm, 12 May 2015.

Legislation and supporting material

The Tax Laws Amendment (Small Business Measures No. 2) Bill 2015 passed both Houses of Parliament on 15 June 2015 and is now awaiting royal assent.

Taxpayers with two or more income sources – beware of a possible tax trap caused by the new tax free threshold. Some taxpayers with two or more jobs or other taxable income sources may be caught in an unintentional tax trap as a result of the new increased tax free threshold.

The problem is caused as the first job attracts the tax-free threshold while second and subsequent jobs are taxed in line with the progressive tax tables supplied by the ATO. It causes taxpayers to be, in effect, under-taxed on their ordinary earnings, which can result in a tax bill at the end of the financial year.

For example, assuming a taxpayer has one job earning $60,000. Their employer would deduct their tax and Medicare Levy to the value of $11,960 dollars. This would leave them with no tax bill. If a taxpayer worked two jobs at $30,000 each and complied with all ATO tax scales, they would pay $2,652.00 in the first job and $7,956.00 in the second. This amounts to $10,608.00 and would leave them with a tax bill of $1,352.00

Method 1 – Cents per kilometre

  • Your car expenses claim is based on a set rate for each business kilometre you travel and you can claim a maximum of 5,000 kilometres under this method. If you travel more than 5,000 kilometres the claim must be limited to 5,000 or you need to use an alternative method of claim.

  • You do not need written evidence but you need to be able to demonstrate that you have incurred the expense. Diary records will suffice.

Method 2 – 12% of original value

  • Your car expenses claim is based on 12% of the original value of your car. Luxury car limits apply.

  • Your car must have (or would have) travelled more than 5,000 business kilometres in the income year.

Method 3 – One-third of actual car expenses

  • You claim one-third of your car’s expenses.

  • Your car must have (or would have) travelled more than 5,000 business kilometres in the income year.

  • You need written evidence of fuel and oil costs and for all other expenses for the car.

Method 4 – Logbook

  • Your car expenses claim is based on the business use percentage of each car expense which is determined by a log book that must have been kept for a minimum 12 week period. This log book must be updated every 5 years.

  • You need odometer readings for the start and end of the period that you owned or leased the car.

  • You need to detail all the kilometres you have travelled for the log book period.

  • You can claim all expenses that relate to the operation of the car and you will need to keep receipts to justify your claim.

Important Note: You must own the car to claim under any of these methods and the record keeping requirement is detailed for each method. If your car is provided by your employer, or as part of your salary package you cannot claim any of the car costs, whatsoever.

What can’t you claim?

  • You cannot claim the cost of normal trips between home and work because that travel is private even if:

  • You do minor tasks on the way to work, such as picking up the mail

  • You travel back to work for a security call out or parent teacher interviews

  • You work overtime and no public transport is available to use to get you home

Diary method/actual running expenses

You will need to keep a diary to calculate how much of your running expenses relate to doing work in your home office. The diary needs to detail the time you spend in the home office compared with other users of the home office. Keep diary records for a representative four-week period.

Tax Office rate per hour method

You can use a fixed rate of 34 cents per hour (updated for 2011 tax year) for home office expenses for heating, cooling, lighting and the decline in value of furniture instead of keeping details of actual costs. You just need to keep a record of the number of hours you use the home office and multiply that by 34 cents per hour. Under this method you can also include the decline in value of office equipment (i.e. computers, faxes, etc.) but not furniture.

As an employee, you are generally not able to claim a deduction for occupancy expenses, which include rent or mortgage interest, council rates, and house insurance premiums.

NB: These expenses are (proportionately) deductible to businesses operating from home.

  • Mortgage or interest costs

  • Rates and taxes

  • Depreciation on the home

Important Note: Ideally, you should have a room set aside as a home office. Whilst you do not need to have a room set aside for your home office tax deduction claim, if you are using a room with a dual purpose (e.g. dining room), or a room shared with others (e.g. lounge room) you can only claim the tax deduction expenses for the hours you had exclusive use of the area.

Rent

The income received is taxable to the owners of the property in the same proportion as the ownership interest as shown on the title. The rent received must be at normal market rates to be able to claim all the expense in full and must be declared in the year it is received.

Interest Claims

Interest paid on the loan used to purchase the property is deductible, provided that all the money borrowed was used to purchase the property. For accounts that are a line of credit and used privately as well, the interest claim needs to be apportioned for the private expenses

Tax Deductions

  • Repairs, maintenance, renovations and home improvements

  • Advertising for tenants

  • Insurance

  • Property agent’s fees, council rates and body corporate fees

  • Electricity, gas and water

  • and more

Building cost write off

If the building is under 25 years old you will be entitled to claim a deduction of 2.5% per year of the original cost of construction of the building for up to 40 years from the original date of construction.

Who can claim for Medical Expenses?

If you are out of pocket for medical expenses for you and your dependants in the 2014 financial year, you may be entitled to claim a tax offset.  To determine the out of pocket amount you must deduct any amounts reimbursed to you from the total of the eligible expenses.

The Net Medical Expenses Tax Offset is subject to income testing.  Taxpayers with an adjusted taxable income above $88,000 for singles or $176,000 for a couple or family in 2013-14 will be affected. The family threshold will increase by $1,500 for each dependent child after the first. These taxpayers can claim a reimbursement of 10% for eligible out of pocket expenses incurred in excess of $5,100 (indexed annually).

Taxpayers with an adjusted taxable income below these thresholds will continue to be able to claim a reimbursement of 20% for net medical expenses over $2,162 (indexed annually) when they lodge their tax return.

Net Medical Expenses Tax Offset Phase Out

The Net Medical Expenses Tax Offset is repealed from 1 July 2019.  The amending Act received royal assent on 18 March 2014.

The offset is to be phased out by way of two sets of transitional arrangements.  For these purposes the existing medical expenses that may be claimed have been placed into one of two categories:

  • Category A: From the 2013-2014 income year until the end of the 2018-2019 income year:

Taxpayers can only claim the Net Medical Expenses Tax Offset for medical expenses that both meet:

– the current definition and eligibility requirements, and

– relate to disability aids, attendant care or aged care.

  • Category B: For the 2013-2014 income year and 2014-15 income year:

Taxpayers will be eligible to claim the full range of medical expenses (as defined currently) but only if they have received an amount of the Net Medical Expenses Tax Offset in the previous income year (or in both 2012-2013 and 2013-2014 in respect to claims in the 2014-2015 income year).

There is no claim in this category for 2015-2016 and beyond.

The medical expenses must be for:

  • you

  • your spouse – married or de facto – regardless of their income

  • your children who were aged under 21 years, including adopted and stepchildren, regardless of their income

  • any other child aged under 21 years – not a student – who you maintained and whose Adjusted Taxable Income (ATI) was less than $1,786 for the first child and less than $1,410 for the second child and any subsequent children

  • a student aged under 25 years whom you maintained and whose ATI was less than $1,786

  • a child-housekeeper, but only if you can claim an amount for them as part of your Zone or overseas forces tax offset at item T5 on your tax return or could have claimed for them had your ATI or the combined ATI of you and your spouse not exceeded $150,000

  • an invalid relative, parent or spouse’s parent, but only if you can claim for them at item T5 or could have claimed a tax offset for them at item T5 had your ATI or the combined ATI of you and your spouse not exceeded $150,000

  • a dependant (invalid or carer), but only if you can claim for them at item T7 or could have claimed for them at item T7had your ATI or the combined ATI of you and your spouse not exceeded $150,000.

Medical expenses which qualify for the tax offset also include payments:

  • to legally qualified medical practitioners, nurses or chemists in respect of illness or operation on you or your dependants

  • to dentists, orthodontists or registered dental mechanics

  • to opticians or optometrists, including for the cost of prescription spectacles or contact lenses

  • to a carer who looks after a person who is blind or permanently confined to a bed or wheelchair

  • for therapeutic treatment under the direction of a doctor

  • for medical aids prescribed by a doctor

  • for artificial limbs or eyes and hearing aids

To help you save for retirement, the Government has an incentive program that rewards you for making eligible personal contributions to your superannuation fund. From 1 July 2015, if your total income for the year does not exceed $35,454 ($34,488 for 2014-15), the Government will match your eligible superannuation contributions by 50 cents per dollar up to a maximum of $500 pa.

The superannuation co-contribution phases down for eligible individuals with total income between the lower and higher income thresholds. The superannuation co-contribution is tapered by a rate of 3.333 cents for each dollar of total income for the year that exceeds the lower income threshold.

The superannuation co-contribution ceases once the upper threshold is reached. The upper threshold is $15,000 above the lower threshold making it $50,454 for the 2015-16 year ($49,488 for 2014-15).

You may be eligible for the Government Superannuation co-contribution if:

  • you make an eligible personal superannuation contribution to a qualifying superannuation fund during the financial year,

  • an eligible personal superannuation contribution is a non-concessional (after tax) contribution made to a superannuation fund. It does not include contributions that attract an income tax deduction. Other exclusions apply such as transfers from foreign superannuation funds and roll-overs.

  • your total income is less than $50,454 ($49,488 for 4014-15), made up of assessable income plus Reportable Fringe Benefits and Reportable Employer Superannuation Contributions reduced by eligible deductions (if any) from carrying on a business,

  • you are under 71 years old at the end of that tax year,

  • you lodged an income tax return for that financial year,

  • you have not held a temporary resident visa at any time during the financial year,

  • you earned 10 per cent or more of your total income from running a business, self-employed or from eligible employment or a combination of both.

What do you have to do?

1. Assuming you earn less than $50,454 (‘total income’) for the 2015/16 year ($49,488 for the 2014/15 year), you then make a non-concessional (after-tax) contribution to your superannuation fund.

2. You lodge your tax return.

3. Within 60 days, the Government pays the co-contribution into your superannuation fund.

NOTE: Your superannuation fund cannot accept after-tax contributions, or receive co-contributions on your behalf, if you have not provided your tax file number (TFN) to your fund.[/vc_toggle][vc_toggle title=”” el_id=”1434009712708-55e748a7-aa08″]You should lodge your outstanding tax returns as soon as possible and before the Australian Taxation Office takes any action to have you lodge these tax returns. Once they have begun any action, it could result in a court conviction. The ATO may charge a penalty of $170 for every 28 days that the return is outstanding. The maximum penalty is $850 even if you are due a refund.  In addition, the ATO will charge interest. This is called the general interest charge (GIC) and is levied on any outstanding monies.

ABA Tax can help get your tax matters up to date, fast and painlessly. We can also apply to the ATO for a remission of penalties and GIC under some circumstances.

You should lodge your outstanding tax returns as soon as possible and before the Australian Taxation Office takes any action to have you lodge these tax returns.

Once they have begun any action, it could result in a court conviction. The ATO may charge a penalty of $170 for every 28 days that the return is outstanding.

The maximum penalty is $850 even if you are due a refund.  In addition, the ATO will charge interest. This is called the general interest charge (GIC) and is levied on any outstanding monies.

ABA Tax can help get your tax matters up to date, fast and painlessly. We can also apply to the ATO for a remission of penalties and GIC under some circumstances.

If you operate a business that makes a loss, you can generally carry forward that loss and may be able to claim a deduction for it in a future year.

The rules differ for different business structures. If you’re a sole trader or a partner in a partnership, you may be able to claim business losses by offsetting them against other income – for example, income you earn from salary

There are some deductions you cannot use to create or increase a tax loss, including donations or gifts and personal super contributions.

Offsetting current year losses against other income – Sole-traders and individual partners in a partnership.

If you operate as a sole trader or an individual partner in a partnership, you may be able to claim business losses by offsetting them against your income from other sources, such as wages. However, you will need to meet the requirements of the non-commercial business loss rules

If you’re a sole trader or an individual partner in a partnership and you make a net loss from your business activity, you may be able to claim that loss by offsetting it against your other income (such as salary or investment income) for that year.

You may be able to offset the loss against your other income if one of the following applies:

  • your business is a primary production business or a professional arts business and you make less than $40,000 (excluding any net capital gains) in an income year from other sources

  • your income for non-commercial business loss purposes is less than $250,000, and either:

    • your assessable business income is at least $20,000 in the income year

    • your business has produced a profit in three out of the past five years (including the current year)

    • your business uses, or has an interest in, real property worth at least $500,000, and that property is used on a continuing basis in a business activity (this excludes your private residence and adjacent land)

    • your business uses certain other assets (excluding motor vehicles) worth at least $100,000 on a continuing basis.

  • you have been granted a Commissioner’s discretion allowing you to offset the loss.

If you do not meet any of these requirements, you cannot offset your business loss against any of your other assessable income for that income year. However, you can defer the loss or carry it forward to future years. If your business makes a profit in a following year, you can offset the deferred loss against this profit.

Your Business Structure Matters!

Companies can generally choose the year in which they claim a deduction for a carried forward tax loss.

However, if you operate as a sole trader, partnership or trust, you cannot choose the year or years in which you claim a deduction for your prior-year tax losses. Rather, your tax losses are simply carried forward from year to year and applied until they are exhausted.

Important to note;

  • If you operate your business as a trust and you incur a tax loss, you cannot distribute the loss to the trust’s beneficiaries.

  • There are also special rules that restrict when you can claim a deduction for a tax loss as a trust. We recommend that you seek further advice if you wish to claim this deduction.

  • If you operate your business as a company, you cannot distribute any loss to your shareholders. The company must carry the tax loss forward and offset it against assessable income in a later year

As a company, you cannot deduct a tax loss unless either of the following applies:

  • It has the same owners and the same control throughout the period from the start of the loss year to the end of the income year.

  • It carried on the same business throughout a specified period.

  • As a company, under certain conditions you may be able to:

  • choose the amount of a previous year’s tax loss you want to claim

  • carry forward to a later year a tax loss you would have incurred in a particular year had you not received income from franked dividends.

Unclaimed foreign losses

Special deduction rules apply to unclaimed foreign losses

Australian businesses with an annual turnover, or anticipated annual turnover, of $75,000 or more are required to register for GST. If your business has a lower turnover you are not required to register but you may do so if you wish. You will only be required to charge your customers GST if you are registered.

Small businesses with an annual turnover less than $2 million may be able to access a range of tax concessions. This applies whether you operate your business as a sole trader, partnership, company or trust.

Eligibility 

You need to work out whether your business is eligible for the concessions generally. Then you can choose one or more of the tax concessions that suit your business and check your specific eligibility. You should also check whether you are eligible each tax year.

Income tax concessions

Check whether you are eligible for the following income tax concessions, simplified trading stock rules, simplified depreciation rules, immediate deductions for prepaid expenses and a two-year amendment period.

Capital gains tax (CGT) concessions

Check whether you are eligible for the following capital gains tax (CGT) concessions: 15-year exemption, 50% active asset reduction, retirement exemption and rollover.

Excise concession

Check whether you are eligible to report and pay excise monthly rather than weekly.

Goods and services tax (GST) concessions

Check whether you are eligible for the following goods and services tax (GST) concessions: cash accounting, instalments and annual private apportionment.

Pay as you go (PAYG) instalment concessions

Check whether you are eligible for the following pay as you go (PAYG) instalment concessions: gross domestic product (GDP)–adjusted PAYG and GST instalment amounts, and PAYG instalments payment option choice.

Fringe benefits tax (FBT) concession

Check whether you are eligible for an exemption from FBT on car parking benefits.

Option 1. Buying a Vehicle Cash or Finance
A car or personal loan remains a popular form of vehicle finance because the interest is a tax deduction (proportionate to business usage of course). Finance also helps manage cash flow by retaining cash-flow. You make a set number of monthly repayments and at the end of the loan term,  usually three to five years, you own the car outright.

Option 2. Leasing & Hire Purchase Agreement
One of the big differences between commercial leasing and hire purchase is in the handling of tax deductions. With hire purchase, instead of claiming the whole monthly payment as a tax deduction as you do with a lease, you claim the depreciation of the motor vehicle and any interest charged.

Hire purchase
Under a commercial hire purchase agreement you do not become owner of the motor vehicle until all monies owed under the arrangement are paid. However, you can still claim a tax deduction for the depreciation on the motor vehicle as well as the interest component of the loan repayments to the extent that the motor vehicle is used for work-related purposes. That is, interest on the loan payments and depreciation up to the car limit.

Commercial Leasing
When you lease a car you’re paying for the use of the vehicle over a set term. Depending on the type of lease, you may have the option of buying the car once the lease expires by making a lump sum payment known as a ‘residual’.

If the vehicle is entirely for work purposes and not a luxury car, the lease payments are fully tax deductible but you cannot claim depreciation.

If the vehicle is a luxury car, you can claim a tax deduction for the finance component of the lease payments (interest) but not for the part of the lease payments that represent repayments of principal. You can also claim a deduction for depreciation subject to the car limit.

Broadly speaking there are two main types of lease – a ‘finance’ lease and an ‘operating’ lease.

Operating leases
An operating lease is like a rental agreement – once the lease term ends you hand over the vehicle and no longer make any payments.

Finance leases
Finance leases are a little more complicated. You pay a set monthly lease payment, and at the end of the lease term you can choose to pay the residual value of the car, or swap the lease over to a new vehicle and continue making monthly payments. Finance leases are popular among businesses because it’s a way of providing employees with cars without making a substantial investment in vehicles, which depreciate rapidly.

What is a Novated lease?
With a novated lease, you – not your employer, take out a finance lease on a vehicle, and your employer makes the lease payments out of your before-tax salary. This type of salary packaging can reduce your taxable income, making it cost-effective for both parties. The downside is that if you lose your job you become responsible for the lease payments, and there is no guarantee your new employer will agree to pay the lease payments on your behalf.

If you lease a car under a salary sacrifice novated lease arrangement, you cannot claim a deduction for the lease payments as these expenses are incurred by your employer. You also cannot claim depreciation.

If you account for GST on a non-cash (accruals) basis

You can claim the full GST credit on your hire purchase agreement in the tax periods when either:

  • you make your first payment

  • if before making your first payment, a tax invoice is issued to you.

If you account for GST on a cash basis

For hire purchase agreements entered into before 1 July 2012 you may claim one-eleventh of the principal component of each instalment in the period you pay it. If the supplier provides regular accounts or statements that show the principal and interest components for each instalment, you must use that information to work out GST credits in the relevant tax period. If you do not know the principal component for each instalment, you need to take reasonable steps to find out from the supplier.

For hire purchase agreements entered into on or after 1 July 2012, you may claim input tax credits upfront instead of waiting until each instalment is paid, in the same way as you would if you accounted for GST on a non cash basis. As mentioned above, all components of the supply made under a hire purchase agreement entered into on or after 1 July 2012 will be subject to GST. You may claim one-eleventh of all components, including the credit component and any associated fees and charges which have been subject to GST under the agreement.

Find out more

Tax Laws Amendment (2011 Measures No. 9) Act 2012External Link.

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