May 2024 Update

Welcome to our May newsletter. After concentrating on market-related updates in my previous communications, I’ve decided to shift my focus this month. We’ll be exploring key areas the Australian Taxation Office (ATO) is homing in on this year, along with recent actions taken by the Australian Securities and Investments Commission (ASIC) to address the issue of cold calling individuals to discuss their superannuation.

I’ve also added in some commentary on last night’s Budget, but in short, there weren’t any surprises and it’ll likely put pressure on inflation leading to interest rates higher for longer!

Key Focus Areas Highlighted by ATO for This Tax Season

With the tax season fast approaching, the Australian Taxation Office (ATO) is homing in on three prevalent issues that taxpayers often encounter. Assistant Commissioner Rob Thomson emphasised the ATO’s commitment to assisting individuals in accurately completing their tax returns on their first attempt. These areas of focus include:

  • Incorrectly claiming Work-Related Expenses: Many individuals inaccurately claim deductions for expenses that don’t comply with ATO guidelines.
  • Overstated Rental Property Claims: Taxpayers sometimes claim excessive deductions for rental properties.
  • Omitted Income: Failing to report all sources of income when filing taxes.
Thesan Financial services Australia
 

Work-Related Deductions

In the past year, an astounding 8 million Australians claimed work-related deductions. Of these, a significant number related to home office expenses, reflective of the changing workplace dynamics. With the ATO’s updated guidelines on calculating expenses for working from home, it’s crucial that taxpayers maintain detailed records to support their claims. Whether using the actual cost or the fixed rate method, keep a diary, calendar, or spreadsheet tracking hours worked from home and any associated expenses to ensure you can claim what you are rightfully due.

Assistant Commissioner Thomson warns against simply replicating last year’s work-from-home claims without the proper substantiation. “It may be tempting, but without the correct records, expect to hear from us,” he stated.

The Three Golden Rules

For all work-related expense claims, it’s vital to adhere to these three golden rules:

  1. Personal Expenditure: You must have incurred the expense yourself without reimbursement.
  2. Direct Link to Income: There must be a direct correlation between the expense and your income generation.
  3. Proof of Purchase: Always retain receipts or documents that validate your claim.

ATO’s Approach

While recognising that errors can often stem from genuine confusion, the ATO also remains vigilant against deliberate falsifications. “Our goal is to ensure everyone gets it right the first time by understanding what’s required,”stated Thomson. As the tax deadline looms, the ATO encourages taxpayers to review these areas closely, aiming for accuracy and compliance in submitting their returns. With careful attention to detail and adherence to ATO guidelines, taxpayers can navigate the tax season smoothly and efficiently.

Navigating the Complexities of Rental Property Taxation

As the income year draws to a close, it’s crucial to be vigilant about the potential pitfalls in preparing rental property information your income tax returns. The Australian Taxation Office (ATO) has emphasised its continued scrutiny on ensuring taxpayers accurately report all rental income and appropriately claim rental deductions. Notably, during Tax Time 2023, the ATO highlighted that an alarming ratio of nine out of ten rental property owners are incorrectly filing their returns.

This segment intends to shed light on the various legislative changes impacting residential rental properties (RRP) and pinpoint the common areas where taxpayers are most vulnerable to errors.

 

Adapting to Legislative Changes

The landscape of rental property taxation has been significantly reshaped by a series of legislative amendments from 2016 to 2020. These adjustments were primarily instigated by instances of improper conduct and erroneous claims by a subset of taxpayers concerning RRPs. Although these modifications aimed to rectify specific misconduct, they have broadly affected all RRP owners.

The ATO’s intensified focus underscores the importance of staying abreast of these changes to ensure compliance. As we continue to traverse the evolving tax landscape, prioritising accurate reporting and compliance becomes increasingly crucial. Ensuring that all RRP-related income and deductions are correctly disclosed not only aligns with legal requirements but also fosters a more transparent and fair tax system for all stakeholders.

To enhance the tax filing process for rental property owners, the Australian Taxation Office (ATO) has compiled a list of valuable tips. These are aimed at helping individuals steer clear of the most common pitfalls encountered when lodging tax returns:

  1. Understanding Initial Repairs and Capital Improvements: It’s essential to note that initial repairs are not immediately tax-deductible and should be included in the property’s Capital Gains Tax (CGT) cost base. However, you might be eligible for a capital works deduction.
  2. Interest Deductions on Loans: You’re entitled to deduct the interest on loans only if they directly relate to the rental property. If the loan serves dual purposes, part personal, you’ll need to apportion the interest accordingly.
  3. Spreading Borrowing Expenses: For borrowing expenses exceeding $100, the deduction should be spread over five years. Remember, the computation in the first year is adjusted based on how long you’ve owned the property, resulting in the deductions spreading over six tax years.
  4. Non-Deductible Purchase Costs: Expenses incurred during the purchase and sale of a rental property, such as stamp duty and conveyancing fees, are not deductible but are crucial in determining the property’s capital gain or loss.
  5. Capital Works Deductions: Certain construction expenses are eligible for capital works deductions at 2.5% per annum over 40 years from completion. This applies to extensions, alterations, and structural improvements.
  6. Body Corporate Fees and Capital Improvements: While body corporate fees are generally deductible, contributions to special purpose funds for significant capital improvements are not. These may qualify for a capital works deduction.
  7. Dividing Co-owned Property Income and Expenses: The way rental income and expenses are reported and claimed must align with the property’s legal ownership structure. The split varies between joint tenants and tenants in common, based on ownership proportion.
  8. Apportioning for Private Use: Deductions are limited to periods the property is rented or available for rent. Expenses must be proportionately allocated for partial rental use or if the property was rented only part of the year.
  9. Meticulous Record-Keeping: Maintaining accurate records of rental income, expenses, and the calculations of capital gains or losses is mandatory.
  10. Capital Gains Calculations: When selling the property, ensure the cost base calculation is accurate. Exclude any amounts previously claimed as deductions against rental income, such as depreciation and capital works deductions.

These guidelines are designed to clarify the tax obligations of rental property owners and facilitate a smoother, more accurate filing process.

Here are some crucial tips to help you avoid common pitfalls when filing tax returns and claiming rental deductions for your rental properties. By paying attention to these specific areas, you can streamline your tax filing process and maximise your deductions accurately:

  • Gross Up Net Rental Income: Make sure the income figure you receive from your property agent is grossed up. Avoid the mistake of only declaring the net rental income and then claiming expenses against it again, which constitutes double-dipping.
  • Fair Apportionment: When you’re offering rental rates below the market value (often referred to as ‘mates’ rates’), ensure you apportion the rental deductions accurately.
  • Capital Improvements vs. Repairs: Identify improvements correctly as capital expenses, especially for repairs that replace a depreciating asset in its entirety.
  • Depreciating Assets vs. Capital Works: Clearly separate the costs associated with depreciating assets from those of capital works.
  • Holiday Rentals: To legitimately claim deductions for a holiday rental property, ensure it is genuinely available for rent.
  • Personal Labour Costs: You cannot claim deductions for the cost of your own labour when it comes to cleaning, repairs, or construction on your rental property.
  • Prepaid Interest Deductions: Interest prepays are deductible immediately if the service period doesn’t extend beyond 12 months and concludes by the end of the next income year following the prepayment.
  • Negative Gearing: Negative gearing benefits continue to be applicable for rental real properties (RRPs).
  • Immediate Deductions for Assets: Assets costing $300 or less can be immediately deducted unless
    they are part of a set or similar to another asset purchased in the same income year, pushing the total cost above $300.
  • Third Element Holding Costs: For properties not used in a taxable manner (like a holiday home between rentals), holding costs post-28 August 1991 can be added to the cost base.
  • Cost Base Resets: The cost base of a RRP is only reset if it was purely a main residence before its rental income use began, and not every time it’s subsequently rented out.
  • Six-Year Absence Rule: To utilise this rule, you must stop considering the property as your main residence. Simply leaving for a short period does not suffice for a complete Main Residence Exemption upon sale but may allow for a partial one.
  • Tax Deductions for Land Tax and State-Based Taxes: State-based holding taxes, including land tax, vacancy taxes, or proposed levies, are fully deductible.
  • ATO’s Data Matching Protocols: With advanced data matching systems in place, including those for rental bonds and investment property loans, evading ATO attention is increasingly difficult.

My Thoughts

Navigating the complex rules surrounding rental property deductions can be challenging. It’s crucial to ask the right questions, maintain proper documentation, and possess a thorough understanding of tax laws to ensure accuracy in declaring rental income, claiming deductions, and reporting any capital gains or losses. The Australian Tax Office (ATO) continues to scrutinise these claims closely, so as tax time approaches, take the time to review your processes. 

Pace Yourself Before Lodging Your Tax Return

The Australian Taxation Office (ATO) advises against the temptation of submitting your tax return at the start of the new financial year on 1 July. It’s important to ensure that all income received from various sources is accurately pre-filled in your tax return before you lodge it.

According to Mr. Thomson from the ATO, early July sees a surge in errors due to overlooked income sources such as bank interest, dividend payments, other government payments, and details from private health insurers. “These oversights can lead to inaccuracies in your tax return, drawing unnecessary attention from the ATO,” he warns.

For the majority, income details will be automatically integrated into your tax return, typically by the end of July. This not only streamlines the filing process but also minimises errors, ensuring you submit your tax return correctly and efficiently.

Mr. Thomson highlights the risks associated with lodging tax returns early in July, noting the increased probability of errors. While many are eager to check off their tax return from their to-do list, postponing submission for a few weeks is advisable for accuracy.

Before lodging, taxpayers are encouraged to verify that their employer has marked their income statement as ‘tax ready’ and to check if their pre-fill information is available in myGov. “Taking these steps can prevent the need for amendments later on, avoiding unnecessary delays,”explains Mr. Thomson.

In summary, a little patience can go a long way in ensuring your tax return is complete and accurate.

Beware of Financial Advice Scams: ASIC’s Warning to Australians

In their latest alert, the Australian Securities and Investments Commission (ASIC) has issued a caution to Australians about the rise of financial scams. Untrustworthy financial advisors and telemarketers are misleading Australians into switching their superannuation to higher-risk and typically underperforming investment options, while unjustifiably charging excessive fees.

ASIC’s investigation discovered these scammers often use online ads and data brokers to gather personal information, subsequently using it to target individuals through cold calls. Particularly, those between the ages of 25 to 50 are at risk, with tactics that may significantly harm their retirement savings through inappropriate investments and additional costs.
ASIC Commissioner Alan Kirkland emphasised the danger these practices pose not just to individual savings but also to the integrity of the finance sector at large. Many of these schemes exploit loopholes in consumer protection laws, focusing on financial services instead of products.

However, ASIC is taking a stand against these misleading practices by pursuing legal actions against both unlicensed advice and advisors not serving their clients’ best interests. To protect yourself, Commissioner Kirkland advises hanging up on any unsolicited calls urging you to change your superannuation products. Always contact your financial institution directly, or though us for any financial queries or needs.

ASIC is committed to halting these pressures and scams, urging financial advice licensees and super trustees to play a part in identifying and eliminating these unethical practices. The organisation stresses the importance of protecting consumers from these high-risk schemes and will continue to enforce measures to safeguard Australians’ financial wellbeing.

For peace of mind, deal directly with your trusted sources. Your financial security should never be compromised by high-pressure tactics or unsolicited advice.

Federal Budget 2024-2025

On Tuesday 14 May, Labor handed down its third Budget. The announcements were concentrated around providing support to ease the cost of living. Below are some of the key items from the Budget and how these might apply to you if they become law.

Tax

Stage 3 tax cuts – Stage 3 tax cuts, which take effect on 1 July 2024, will put more money in the pockets of working Australians by ensuring that everyone will get a tax cut.
How much tax could I save? The table below compares the amount of tax payable in 2023/24 to the amount payable under the new tax rates from 2024/25. The last column shows the amount of tax saved.

Note, these amounts do not include Medicare levy. The largest tax saving of $4,529 applies to clients who have taxable income of $190,000 or more. However middle-income earners also receive a substantial tax saving. For example, clients with taxable income of $100,000 will save $2,179 per year.

Cost-of-living

  • Energy price relief for 10 million households.
  • Social security deeming rate freeze extended.
  • Rental assistance maximum lifted by 10%.
  • $3 billion to forgive student debt.
  • Australian small businesses will be able to claim an immediate tax deduction on the full cost of eligible assets costing less than $20,000 for another 12 months.

Super

Super to apply to paid parental leave – From July 2025, 12% super will be introduced on government-funded paid parental leave at a cost of $1.1 billion over five years. Previously super was not paid on paid parental leave. This change is particularly expected to benefit women, who generally retire with less super than men often due to taking time out of their careers to raise children.

Want to know more?

Thank you again for your trust in us and your loyalty, if you’d like to discuss any of the content in this update and how it may impact you, please call me on 07 3709 8485. If you know of anyone that you feel will benefit from meeting with us, please don’t hesitate to send them our details.

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