The reality of your rental property

The reality of your rental property

Your rental yield could improve by 13 percent.

Have you got a rental property and overwhelmed at tax time knowing what you can and can’t claim? It’s not uncommon for landlords to feel this way with what makes sense in the real world often not making sense for the Australian Tax Office (ATO).

Tax deductions in general can only be made in the period that you rented the property or during the time it was genuinely on the market for rent and actively looking for a tenant. If you are renovating for example, then you may not be able to claim expenses during this period, with some exceptions. A few common problem areas include;

Interest on bank loans

Only the repayments for the investment are deductible and not the loan itself, with some exceptions.

The sharing economy

The deductions made for renting out a room are like that of a rental property with tax deductions claimable for expenses such as the interest on your home loan, professional cleaning, council, insurance etc. However, these need to be in proportion to the lease period and in proportion to proportion of your house rented.

Repairs or maintenance?

Currently the ATO is looking very closely at deductions claimed for repairs and maintenance and is an area of major confusion. Repairs and maintenance can often be claimed independently with the deduction for capital works spread over several years. Repairs are defined as the wear and tear of the property as a result of being tenanted such as replacing fence palings or fixing a broken toilet. However, if looking to replace a whole fence, water system, improvements and extensions this falls under capital works as it goes beyond the general wear and tear.

However, with that said Australia’s renovation industry is profiting from weakened economic conditions and tighter lending standards. The Australian Bureau of Statistics (ABS) December building activity data showed a 6.6 per cent increase in alterations and additions in 2018, with renovation spending in the December quarter alone reaching $2.27 billion.

This indicates homeowners and investors are seeking to improve capital values and increase rental income, rather than purchasing anew. According to Corelogic’s quarterly rental review for 2019, gross rental yields are currently sitting around 4 per cent. In some scenarios however, renovators can achieve a 13 per cent return on their renovation investment.

Sounds a lot right? Let’s look at a case study by BMT Tax Depreciation, where an investor completed a $60,000 renovation.

Investor X purchased a $410,000 residential property in January 2018, originally built in 2004 and producing a rental income of $18,720 a year ($360 per week), producing a rental yield of 4.6 per cent.

In 2018 Investor X installed a new kitchen and appliances, split system air conditioner, blinds, lights, carpets and bathroom.

Post-renovation the property was now worth $565,000 and the rental income is now $26,520 per year ($510 per week).

Prior to the renovation Investor X was experiencing an annual cash loss of $1,207. Now, they have increased their rental income by $150, achieving a 13 per cent yield to their renovation costs and have a positive cash flow of $5,261.

This example shows the dream, it is important to be aware of some tips and traps. Choosing which assets to install can make a huge difference to what can be claimed upon completion of the renovation. Investors should stick to a budget when selecting items as it is easy to overcapitalise.

 

If all this just got you more confused, don’t hesitate to speak to your PrimeAccountant and make your property work for you, 02 9415 1511 or email us.

 

 

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EOFY Reminders For Business Owners – Annual Tax Returns

EOFY Reminders For Business Owners – Annual Tax Returns

Another financial year is about to finish!  As a business owner, there are many obligations that you need to consider and action just before and after 30 June.

Some of these will help to minimise your tax.  Others will reduce your exposure to an ATO tax audit.  We have outlined these action points below to assist you.

Please carefully consider this information and contact us immediately if you have any questions we can answer or if there is anything we can assist you with.

Pre 30 June 2019

Trusts: Trustee resolutions need to be in place to be able to distribute trust income for the 2019 financial year to beneficiaries.

Companies: Review shareholder loan accounts and make minimum loan repayments (may need to declare dividends).

Payment of superannuation by 25 June 2019 should have been made to deduct contributions in the current financial year.

Complete a stocktake where required.

Write off bad debts and scrap any obsolete stock or plant and equipment.

Ensure any inter-entity management fees have been raised.

1 July 2019

Single touch payroll is compulsory for all employers. Standard business reporting-enabled software must be used to report payments such as salaries and wages, PAYG withholding and superannuation information.

Taxable payments annual reporting extended to businesses providing road freight, information technology, security, investigation and surveillance services.

14 July 2019 (on or before)

PAYG Payment Summaries provided to all of your staff – or Single Touch Payroll Finalisation Declaration needs to be made by 31 July 2019.

28 July 2019

Quarterly super guarantee payment due (1 April – 30 June 2019).

31 July 2019

Single Touch Payroll Finalisation Declaration needs to be made.

14 August 2019

Annual PAYG Payment Summary to be lodged with the ATO if applicable (not required if you have lodged a Single Touch Payroll Finalisation Declaration). Penalties apply for late lodgement.

28 August 2019

Taxable payments annual report due for the building and construction industry, cleaning and courier service industries.

Key changes you need to be aware of

SINGLE TOUCH PAYROLL NOW REQUIRED FOR ALL EMPLOYERS

All employers are now required to use Single Touch Payroll (STP) from 1 July 2019.

STP is the direct reporting to the ATO of salary and wages, PAYG withholding and superannuation contributions.

Employers with 20 or more employees have been required to use STP since 1 July 2018.  Please note that the ATO has provided a small amount of leniency to smaller employers for a limited period of time.

There are a number of low cost or even free software payroll options for micro employers (1 to 4 employees).

The ATO has also stated that businesses with 20 employees or less can initially lodge STP in a quarterly BAS lodged by a registered Tax Agent.

NO TAX DEDUCTIONS IF YOU DON’T MEET YOUR TAX OBLIGATIONS

From 1 July 2019, if taxpayers don’t meet their PAYG withholding and reporting obligations to the ATO, they will not be able to claim a tax deduction for payments:

    • of salary, wages, commissions, bonuses or allowances to an employee;
    • of Director’s fees;
    • to a religious practitioner;
    • under a labour hire arrangement; or
    • made for services where the supplier does not provide an ABN.

If you make a mistake and voluntarily correct it before the ATO begins a review or audit, a deduction may still be available but penalties may still apply for failure to withhold the correct amount of tax.

PAYMENTS TO CONTRACTORS

From 1 July 2019, security providers and investigation services, road freight transport, and computer system design and related services businesses will need to collect specific information about payments made to contractors (individual payments and totals for the year).  A Taxable Payments Annual Report will need to be lodged with the ATO by 28 August 2020.

Businesses that operate in the building and construction industry, cleaning and courier services will need to report their payments to contractors for the year ended 30 June 2019 by 28 August 2019 to the ATO.

Your 2019 EOFY Reminders & Action Items

PAYG PAYMENT SUMMARIES

If you have not used STP for 2019, then you need to provide all of your employees with their PAYG Payment Summary on or before 14 July 2019.  This includes any employees that left your employment during the 2019 financial year.

The ATO imposes penalties for the late lodgement of PAYG Payment Summary Statements.  The annual PAYG Payment Summary Statement for the year ending 30 June 2019 needs to be lodged with the ATO on or before 14 August 2019. However, if we are preparing your Payment Summary for you and you only employ family members in your business (closely held employees), you may be eligible for an extension.

REPORTABLE FRINGE BENEFITS ON PAYG PAYMENT SUMMARIES

Where you have provided fringe benefits to your employees in excess of $2,000, you need to report the FBT grossed-up amount on their PAYG Payment Summary.  This is referred to as a `Reportable Fringe Benefit’ (RFB) amount and a label is included on the PAYG Payment Summary for this purpose.

STOCKTAKE

Businesses that buy and sell stock generally need to do a stocktake at the end of each financial year as the increase or decrease in the value of stock is included when calculating the taxable income of your business.

If your business has an aggregated turnover below $10 million, you can use the simplified trading stock rules.  Under these rules, you can choose not to conduct a stocktake for tax purposes if the difference in value between the opening value of your trading stock and a reasonable estimate of the closing value of trading stock at the end of the income year is less than $5,000.  You will need to record how you determined the value of trading stock on hand.

If you do need to complete a stocktake, you can choose one of three methods to value trading stock:

    • Cost price – all costs connected with the stock including freight, customs duty, and if manufacturing, labour and materials, plus a portion of fixed and variable factory overheads, etc.
    • Market selling value – the current value of the stock you sell in the normal course of business (but not at a reduced value when you are forced to sell it).
    • Replacement value – the price of a substantially similar replacement item in a normal market on the last day of the income year.

A different basis can be chosen for each class of stock or for individual items within a particular class of stock.  This provides an opportunity to minimise the trading stock adjustment at year-end.  There is no need to use the same method every year; you can choose the most tax effective option each year.  The most obvious example is where the stock can be valued below its purchase price because of market conditions or damage that has occurred to the stock.  This should give rise to a deduction even though the loss has not yet been incurred.

TRUST DISTRIBUTION RESOLUTIONS

Trustees (or directors of a trustee company) need to consider and decide on the distributions they plan to make by 30 June 2019 at the latest.  Decisions made by the trustees should be documented in writing, preferably by 30 June 2019.

If valid resolutions are not in place by 30 June 2019, the risk is that the taxable income of the trust will be assessed in the hands of a default beneficiary (if the trust deed provides for this) or the trustee (in which case the highest marginal rate of tax would normally apply).

ACTION STEP: If you haven’t already signed your Trust Distribution Resolution, please contact our office before 30 June 2019 so that we can properly prepare this document for you to sign.

PAYROLL TAX

Payroll tax applies to all entities that have an Australian payroll that exceeds state-based limits.

You should note that in addition to normal salaries and wages, the following items are generally also included in payroll expenses if payroll tax applies:

    • fringe benefits based on the grossed-up taxable value of fringe benefits;
    • all employer contributions to superannuation on behalf of employees; and
    • some contractor or sub-contractor fees.

For more detailed information about whether payroll tax applies to your business, please contact our office.

ACTION STEP: The Annual Return/Reconciliation for payroll tax must be lodged by 22 July 2019 with your State Revenue Office.

WORKCOVER / WORKSAFE

Your WorkCover/WorkSafe insurer sends an annual reconciliation to all registered employers at the end of the financial year.

In completing your annual reconciliation, you will need to include the following items in addition to normal salaries and wages:

    • fringe benefits based on the taxable value of fringe benefits (do not gross-up);
    • all employer contributions to superannuation on behalf of employees; and
    • some contractor or sub-contractor fees.

For more detailed information about what items to include in the reconciliation statement, please contact our office.

Once the reconciliation is received and processed by your WorkCover/WorkSafe insurer, you will be issued with a final assessment or a refund depending on the instalments you have paid during the year.

ACTION STEP: Complete and lodge the Annual Reconciliation with your WorkCover/WorkSafe insurer by the due date.

GOODS AND SERVICES TAX (GST)

A reconciliation of GST should be performed as at 30 June 2019 to determine if there has been an under or over-payment of GST in the 2019 tax year.  If a discrepancy has arisen, then it is possible to adjust a subsequent Business Activity Statement (BAS) to rectify the error, however there are limits imposed on adjustments that can be made in this way.

Income declared on your BAS should be reconciled to income declared on your income tax returns.

Also, please note that you are required by law to substantiate all Input Tax Credit claims with a complying Tax Invoice, and you need to retain these documents for a minimum of 5 years.

ACTION STEP: Complete the annual GST reconciliations, and check that you have all required tax invoices and other supporting documents.

ATO AUDIT ACTIVITY

Please note that the ATO and State Revenue Office are constantly increasing their audit activities.  There has been an increase in audit activity for PAYG Withholding, Payroll Tax, WorkCover, GST, Division 7A loan accounts from companies, and Trust distributions from Discretionary Trusts.

We can offer a review of your records and record-keeping procedures if you are concerned about your ability to satisfy an audit.

ACTION STEP: Please contact our office if you would like to request this service.

Last Minute Tax Minimisation Tips

Here’s a few final reminders about ways to reduce your tax for 2019:

    1.  Write-off Bad Debts.
    2.  Write-off any trading stock that is damaged or obsolete.
    3.  Review your Asset Register and scrap any obsolete plant and equipment
    4.  Pay for marketing materials, repairs, consumables, office stationery, and   donations before 30 June 2019.
    5.  Ensure employee superannuation contributions are made (and received by   your employees’ superannuation fund/s) by 30 June 2019 to allow a tax   deduction this financial year.
    6.  Realise any capital losses you have before 30 June 2019 to offset against any   capital gains you may have made.

WANT TO TALK?

Feel free to contact our office anytime  – We can’t wait to provide you with better advice to help you stay on-track.

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Thinking About Topping Up Your Super This Financial Year?

Thinking About Topping Up Your Super This Financial Year?

With the end of financial year fast approaching, it’s important to plan ahead to ensure you’re aware of key processing cut-off times that apply to your investment and superannuation platform accounts.

All reasonable efforts will be made to process your request before 30 June 2019 providing the request is complete and valid. However, if you are considering make a superannuation contribution (pre or post tax) you should be aware that estimated cut of times start as early as Friday 14th June. The cut-off times and dates are a guide and are subject to change depending on volumes and the turnaround times.

Please take this into account as you plan for the EOFY as platforms are unable to backdate transactions.

If you have any questions contact your Financial Advisor to begin the process as soon as possible.

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Meet The Super Stars of our Super Team

Meet The Super Stars of our Super Team

Recently we’ve had some changes to our team in our growing SMSF division.   We’re very excited to welcome Sadi Islam to PrimeAdvisory as our SMSF Manager, replacing Hugo Furzer.   Sadi joins the team at our Sydney office and has significant experience in SMSF management.

Sadi Islam, Prime Advisory SMSF Manager
Sadi Islam, Prime Advisory SMSF Manager

Sadi holds a Bachelor’s Degree in Finance and Accounting and a Master’s Degree in Professional Accounting. Sadi is also a member of the SMSF Association and joins our other SMSF Association members and SMSF experts: Guy Wall, Christian Borkowski, Ben Norval, Angus Rodgers, and Chathuri Nanayakkara.

Prior to joining PrimeAdvisory, Sadi has worked at a number of specialist Superannuation Accounting firms and has been responsible for the management, workflow and client relationships of over 750 individual SMSF funds.

Sadi is excited about the role at PrimeAdvisory and in particular working in a well-resourced, professional environment with the added benefit of an in-house financial advisory team.

Sadi is already receiving glowing praise from our clients.

 “Thanks for sending through the final accounts and tax returns. We have really appreciated your professionalism, advice and responsiveness during the preparation of the accounts and tax return.”

Paul, PrimeAdvisory SMSF client

At PrimeAdvisory we have extensive experience and expertise in the growing sector of Self-Managed Superannuation Funds (SMSF).

The Prime Advisory SMSF Team
The PrimeAdvisory SMSF Team: (L to R) Christian Borkowski, Angus Rodgers, Chathuri Nanayakkara, Sadi Islam, Guy Wall, Ben Norval,

Recently the ATO released their Self-Managed Super Fund quarterly statistical report to December 2018. The report’s key statistics highlight why there’s a growing need for experts:

  • The total number of SMSFs in Australia is now 597,009
  • The total number of members in SMSFs is now 1,127,304
  • The total estimated SMSF assets is now $726 billion
  • The top asset types held by SMSFs, by value, are listed shares and cash and term deposits, making up 28% and 24% of total estimated SMSF assets, respectively.

At PrimeAdvisory we know how important it is to be able to offer sound advice and strong experience around SMSF.

If you would like to find out more about services for Self-Managed Super Funds or discuss your own SMSF please contact us.

 

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Minimise Your Personal Tax – Tax Planning Guide

Minimise Your Personal Tax – Tax Planning Guide

Now’s the time to review what strategies you can use to minimise your personal tax before 30 June 2019.

Imagine what you could do with the personal tax saved!

  • Reduce your home loan
  • Top up your super
  • Have a holiday
  • Deposit for an investment property
  • Upgrade your car

The most important thing to remember is that there is no point in spending money to get a personal tax deduction, unless it’s going to result in something useful for you.

SUPERANNUATION CONTRIBUTIONS

While you might not be flush with cash now and able to put large amounts into superannuation, it’s important that you are aware of what is possible to maximise your super balance and possibly reduce your personal tax at the same time.

DEDUCTIBLE SUPER CAP OF $25,000 FOR EVERYONE

The tax deductible super contribution limit (or “cap”) is $25,000 for all individuals under age 75. Individuals need to pass a work test if over age 65.

Consider making the maximum tax deductible super contribution this year before 30 June 2019.

The advantage of this strategy is that superannuation contributions are taxed at between 15% to 30% compared to typical personal income tax rates of between 34.5% and 47%.

Ordinarily, self-employed individuals and those who earn their income primarily from dividends, interest and rent sources make super contributions close to the end of the financial year and claim a tax deduction.

Key Change: This is the first financial year that individuals who are employees may also use this strategy.

Individuals who may want to take advantage of this opportunity include those who:

  • work for an employer who doesn’t permit salary sacrifice
  • work for an employer who allows salary sacrifice, but it’s disadvantageous due to a reduction in entitlements, and
  • are salary sacrificing but want to make a top-up contribution to utilise their full CC cap.

SPOUSE SUPER CONTRIBUTIONS

You may be eligible for a tax offset of up to $540 on super contributions of up to $3,000 that you make on behalf of your spouse if your spouse’s income is $37,000 p.a. or less.

The offset gradually reduces for income above $37,000 p.a. and completely phases out at $40,000 p.a. and above (previously $13,800 p.a.).

ADDITIONAL TAX ON SUPER CONTRIBUTIONS BY HIGH INCOME EARNERS

The income threshold at which the additional 15% (‘Division 293’) tax is payable on super is $250,000 p.a. Where you are required to pay this additional personal tax, making super contributions within the cap is still a tax effective strategy.

With super contributions taxed at a maximum of 30% and investment earnings in super taxed at a maximum of 15%, both these tax points are more favourable when compared to the highest marginal tax rate of 47% (including the Medicare levy).

GOVERNMENT CO-CONTRIBUTION TO YOUR SUPER

If you are on a lower income and earn at least 10% of your income from employment or carrying on a business and make a “non-concessional contribution” to super, you may be eligible for a Government co-contribution of up to $500.

In 2018/19, the maximum co-contribution is available if you contribute $1,000 and earn $37,697 or less. A lower amount may be received if you contribute less than $1,000 and/or earn between $37,697 and $52,697.

10 ways to reduce your personal tax

OWNERSHIP OF INVESTMENTS

A longer-term tax planning strategy can be reviewing the ownership of your investments. Any change of ownership needs to be carefully planned due to capital gains tax and stamp duty implications. Please seek advice from your Accountant prior to making any changes.

Investments may be owned by a family trust, which has the key advantage of providing flexibility in distributing income on an annual basis and an ability for up to $416 per year to be distributed to children or grandchildren tax-free.

PROPERTY DEPRECIATION REPORT

If you have an investment property, a Property Depreciation Report (prepared by a Quantity Surveyor) will allow you to claim depreciation and capital works deductions on capital items within the property and on the property itself.

The cost of this report is generally recouped several times over by the personal tax savings in the first year of property ownership.

MOTOR VEHICLE LOG BOOK

Ensure that you have kept an accurate and complete motor vehicle log book for at least a 12-week period. The start date for the 12-week period must be on or before 30 June 2019. You should make a record of your odometer reading as at 30 June 2019 and keep all receipts/invoices for your motor vehicle expenses. Once prepared, a log book can generally be used for a 5-year period.

An alternative (with no log book needed) is to simply claim up to 5,000 business kilometres (based on a reasonable estimate) using the cents per km method.

SACRIFICE YOUR SALARY TO SUPER

If your marginal tax rate is 19% or more, salary sacrifice can be a great way to boost your superannuation and pay less tax. By putting pre-tax salary into super rather than having it taxed as normal income at your marginal rate you may save personal tax. This can be especially beneficial for employees nearing their retirement age.

PREPAY EXPENSES AND INTEREST

Expenses relating to investment activities can be prepaid before 30 June 2019. You can prepay up to 12 months of interest before 30 June on a loan for a property or share investment and claim a tax deduction this financial year. Also, other expenses in relation to your investments can be prepaid before 30 June, including rental property repairs, memberships, subscriptions, and journals.

INSURANCE PREMIUMS

Possibly your greatest financial asset is your ability to earn an income. Income protection insurance generally replaces up to 75% of your salary if you are unable to work due to sickness or an accident. The insurance premium is normally tax deductible, plus you get the benefit of protecting your family’s lifestyle if you cannot work due to sickness or an accident. It’s a small price to pay for peace of mind. Like rental property interest, income protection premiums can also be pre-paid for 12 months to increase your deductions.

WORK RELATED EXPENSES

Don’t forget to keep any receipts for work-related expenses such as uniforms, training courses and learning materials, as these may be tax-deductible.

REALISE CAPITAL LOSSES

Tax is normally payable on any capital gains. You should consider selling any non-performing investments you hold before 30 June to crystallise a capital loss and reduce or even eliminate any potential capital gains tax liability. Unused capital losses can be carried forward to offset future capital gains.

DEFER INVESTMENT INCOME & CAPITAL GAINS

If practical, arrange for the receipt of investment income (e.g. interest on term deposits) and the contract date for the sale of capital gains assets, to occur AFTER 30 June 2019.

The contract date (not the settlement date) is generally the key date for working out when a sale or purchase occurred.

IS AN SMSF SUITABLE FOR YOU?

Now is a good time to seek specific advice in relation to this question, as it may be appropriate to establish an SMSF in conjunction with other tax planning opportunities, to maximise the benefit of the SMSF in your circumstances.

Talk to us TODAY before the 30 June 2019 deadline for assistance to reduce your tax!

This article is provided as general information only and does not consider your specific situation, objectives or needs. It does not represent accounting advice upon which any person may act. Implementation and suitability requires a detailed analysis of your specific circumstances.  Last updated 8 May 2019

 

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