The Shortcut Method: Claiming Your Work From Home Deduction

There’s a new normal towards how Australians are approaching their work, with remote working now a more viable option for businesses and their employees, and it’s affecting the way that Australians now make claims for tax.

With many businesses affected by city-wide lockdowns during parts of the 2020-21 financial year, and some whose employees preferring to remain as work-from-home or remote workers after theirs had ended, it’s more important than ever for work tax deductions to be correctly claimed and the process duly followed.

Where once the expenses and claims that needed to be made during tax return season could be more clearly defined in terms of business or pleasure, work-related expenses or personal expenditure, remote working and work-from-home employees need to keep careful records of what they can and cannot claim as “home office expenses”.

To simplify the process of claiming these expenses, the ATO introduced a “shortcut method” applicable to the 2020-21 financial year as a result of the impact COVID-19 has had. This method is only applicable from 1 March 2020 through 30 June 2021. Depending on an individual’s circumstances, it may be a better alternative to employ when claiming home office expenses than the fixed rate method or actual cost method.

Essentially, individuals can claim a fixed rate of $0.80 per hour worked from home, with the aforementioned shortcut method covering expenses such as phone, internet, depreciation on furniture & equipment. No other expenses can be claimed for working from home if this shortcut method is employed.

To use this method to their benefit when claiming home office deductions, individuals must keep a diligent record of the actual hours worked at home. This is a simpler process than claiming on the actual expenses incurred. Claiming on the actual expenses incurred requires individuals to comply with the necessary and more complex record-keeping requirements outlined by the ATO.

It is important that Australians are aware of their entitlements and tax deductions when working from home/remotely. Speak with us to ensure that you are in compliance with your tax return obligations when claiming.

What Are The Consequences Of Improperly Lodged Tax Returns?

With tax return season approaching quickly this year, you may have already started looking into lodging your income tax return. Ensuring that your details are correct and that any information about your earned income from the year is lodged is the responsibility of the taxpayer and their tax agent. However, if during this income tax return process the tax obligations of the taxpayer fail to be complied with, the Australian Taxation Office has severe penalties that they can enforce.

Australian taxation laws authorise the ATO with the ability to impose administrative penalties for failing to comply with the tax obligations that taxpayers inherently possess.

As an example, taxpayers may be liable to penalties for making false or misleading statements, failing to lodge tax returns or taking a tax position that is not reasonably arguable. False or misleading statements have different consequences if the statement given results in a shortfall amount or not. In both cases, the penalty will not be imposed if the taxpayer took reasonable care in making the statement (though they may still be subject to another penalty provision) or the statement of the taxpayer is in accordance with the ATO’s advice, published statements or general administrative practices in relation to a tax law.

The penalty base rate for statements that resulted in a shortfall amount is calculated as a percentage of the tax shortfall, or in the case of no shortfall amount, as a multiple of a penalty unit. This percentage is determined by the behaviour that led to the shortfall amount or as a multiple of a penalty unit, which are as follows:

• Failure to take reasonable care – 25% of the shortfall amount or 20 penalty units
  • Reasonable care is not taken if the taxpayer failed to do what a reasonable person in the same situation would have done.
• Recklessness – 50% of the shortfall amount or 40 penalty units
  • Recklessness is determined as disregarding or showing indifference to a real risk of a shortfall amount arising that a reasonable person would have been aware of.
• Intentional Disregard – 75% of the shortfall amount or 60 penalty units
  • Intentionally disregarding the law occurs if there is full awareness of a clear tax obligation, and the obligation is disregarded with the intention of bringing about certain results (underpaying tax or over-claiming an entitlement).

If a statement fails to be lodged at the appropriate time, you may be liable for a penalty of 75% of the tax-related liability if:

• A document that is necessary to establish tax-related liability fails to be lodged
• In the absence of that document, the tax-related liability is determined by the ATO.

To ensure that the statements, returns and lodgements are done correctly, and avoid the risk of potential penalties, contact us today. We’re here to help.

The Sharing Economy And Your Tax Return – How You Could Be Affected

In Australia any income earned by a job may be considered to be taxable income. Those who receive their income via the sharing economy are no exception to the rule. In fact, there can be further complications that result from incorrect understandings of how the income tax and goods & services tax may apply to those individuals.

The sharing economy is a socio-economic system built around sharing resources, often through a digital platform like a website or an app that others can purchase the right to use for a fee.

Popular sharing economy services and activities that could be subject to income tax include

• Being a Driver for popular ride-sharing/ride-sourcing services and obtaining fares for those services
• Renting out a room, whole house or a unit on a short term basis
• Sharing assets (such as cars, parking spaces, storage space or personal belongings) through platforms such as Camplify, Car Next Door, Spacer, Toolmates or Quipmo.
• Creative or professional services provided by individuals through online platforms to fill a need of others (also known as the gig economy)

Here are some of the things you need to bear in mind about the income and goods & services tax for these popular sharing economy services.

Ride-Sourcing/Ride-Sharing

If you’ve ever caught an Uber or gotten a Lyft, you’ve been on the passenger side of ride-sourcing. The income received from ride-sourcing is subject to goods and services tax (GST) and income tax is applied to it. All drivers on ride-sourcing platforms in Australia must have an Australian business number and be registered for GST.

GST requires:

• An ABN
• GST to be registered from the day that you start, regardless of how much you earn.
• GST to be paid on the full fare.
• Business activity statements (BAS) to be lodged monthly or quarterly.
• To know how to issue a tax invoice (any fares over 82.50 must be provided one if asked).

Income tax needs to:

• Include the income you earn in your income tax return
• Only claim deductions related to transporting passengers for a fare, including apportioning expenses limited to the time you are providing a ride-sourcing service
• Keep records of all your expenses and income.

Renting out all or part of your home

Renting out all or part of your residential house or unit through a digital platform can be an easy way to supplement your income, especially if you aren’t using the property at that particular time. If you do this, you:

• Need to keep records of all income earned and declare it in your income tax return
• Need to keep records of expenses you can claim as deductions
• Do not need to pay GST on amounts of residential rent you earn.

Sharing Assets (Excluding Accommodation)

Assets that can be shared through a platform can include personal assets (e.g. bikes, caravans), storage or business spaces (e.g car parking spaces) or personal belongings like tools, equipment and clothes.

When renting out or hiring these (share) assets that you own or lease through a digital platform, you:

• Need to declare all income you receive in your income tax return
• Are entitled to claim certain expenses as income tax deductions
• Need to keep records of the income you earn and of the expenses you can claim as deductions

Providing Services

Providing time, labour or skills (services) through a digital platform for a fee requires you to report income in your tax return. Deductions for expenses directly related to earning this income can be claimed, and records need to be kept to support these claims.

The following services that can be provided are considered to incur assessable income that needs to be reported in your tax return:

• Delivering goods
• Performing tasks and activities
• Providing professional services

If the thought of trying to navigate your way through your tax return is a little daunting, consider speaking to us for assistance.

Interest On Your Home Loan Could Be Tax-Deductible

It’s a simple, step-by-step process used by many Australians to increase their income. Borrow money from a financial institution, invest in a second property and pay off the loan with the profit accrued from the investment property (ie. rent from tenants).

But did you know that the interest on a home loan for the purchase of an investment property can be claimed as tax-deductible?

To clarify – claiming a tax deduction on the interest of a loan can only be used on the loan that was used to purchase the investment property. It also must be used to earn income, because a property that is solely residential isn’t eligible for any tax deductions (except in certain situations where the residence may be used to produce income, like home business or office).

Here are a few examples of when tax deduction claims on your property are not allowed:

• If the secured property is being used for living as a primary residence, and no income is made from it.
• Refinancing your investment loan for some other purpose (like buying another property).
• Using the loan for a private purchase, other than the purchase of a home.
• If the investment property is a holiday home that is not rented out, then deductions cannot be claimed as it doesn’t generate rental income.

As an example, if borrowing against your main residence for the purpose of purchasing an investment property, then the interest on that loan is tax-deductible. Conversely, if the loan was against the investment property to buy a car for your personal use, then the interest from that loan will not be tax-deductible.

The only way that a tax deduction on a home loan’s interest is possible, is if there is a direct, unbroken relationship between the money borrowed and the purpose the money was used for. Any money that resulted from a home loan, for instance, should have been invested into a property.

If you happen to redraw (make extra repayments into your loan that reduce the loan balance) against an investment loan for personal use, the tax-deductible interest is watered down. This is because the new drawdown (transfer of money from a lending institution to a borrower) is deemed to not be for investment purposes.

It is important that any investment loans are quarantined from your personal funds to maximise tax deductions on interest. Though it may be tempting to pull additional funds from the loan for additional finances, it’s also shooting yourself in the foot.

A better strategy (if there is only investment debt that has been incurred, and you wish to pay it off), is to place funds in an offset account (a bank account that is linked to your home loan) and then redraw those funds for your personal use. It’s also important to ensure that the offset account is a proper offset – a redraw that is disguised as an offset account can be a major drawback for investors looking to capitalise on their tax threshold.

If you or someone you know has recently purchased an investment property with a home loan, speak to your accountant or financial advisor to see how your tax return can benefit from it.

Easy ways for your Small Business to Stay ahead at Tax Time.

As an employee in a business, often there are perks that can come with the job. A company car, fuel money, perhaps some technology to help make things easier. Small business owners however have to be a lot more mindful of how they use the money from their business.

Any money or assets that a business has earned or possesses, is solely the property of that business. That means that there are numerous issues that can arise from dipping into these company funds.

As a business owner, it’s important to keep records and correctly report transactions if using company money or assets (e.g, company car). These can include instances such as

• taking money out of your company for yourself or your family
• receiving money from it (for example, as a director, shareholder or an associate)
• using your company’s assets for private purposes.

For small businesses, this can be easily done through:

• Salary, wages or director’s fees
• Repayments of a loan you have previously made to the company
• A fringe benefit, such as an employee using a company car
• Dividends (formal distribution of the profits)
• A loan from the company

If a business does not report correctly or keep appropriate records for transactions, an unfranked deemed dividend could be included in their assessable income (this is a bad thing) during tax time.

Here are some easy ways to avoid being put into this situation:

• Always ensure that any company money issued is accounted for as per the previous categories.
• Have a separate bank account for the company to pay for company expenses (not private ones!)
• Keep proper records of all company transactions
• Repay any loans from the company before the tax return date to avoid unwanted income tax

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What you need to know about luxury car tax

Luxury car tax or LCT is a 33% tax on cars that have a value (including GST) above the set threshold. However, the tax is only on the value which is above the threshold.

Businesses and individuals that sell or import luxury cars are required to pay LCT.

You can make LCT payments in instalments or annually. If you choose to report your payments in instalments, they will be included in your GST instalments. If you choose to pay GST annually, then you don’t need to worry about reporting monthly or your quarterly BAS.

You may be able to defer paying LCT by quoting your ABN. You are able to do this if you are only going to be using your car to:

• Hold it for trading stock (doesn’t include holding it for hire or lease)
• Carry out research and development for the car’s manufacturer
• Export it GST-free

If and once you stop using your car for the above purposes, then you will need to start paying LCT.

Records you need to keep on rental properties

When you own a rental property, keeping records is important. These will help you meet tax obligations. Generally, only individuals with their name on the title deed declare income and claim expenses.

Remember that the records must be kept in English or should be easily translatable into English, and kept for a minimum period of 5 years.

The records you need to keep include:

• Dates and costs of buying the property: These will help work out any capital gain or loss when the property is disposed of – the date entered into the contact is the purchase date, not the settlement date.
• Any rent and rent-related income: This will be required to report tax return.
• Expenses associated with the property: These are important to claim deductions you may be entitled to. These records should include the name of the supplier, the amount of the expense, nature of the goods or services, the date the expense was incurred, date of the document
• Significant changes: These include repairs or improvements or partial or all sale of the property – the cost of repairs and improvements should be kept separate from depreciation costs so that deductions and capital gains and losses can be calculated correctly.
• Costs of selling or disposing of property: To be able to work out any capital gain or loss

The amounts you don’t need to include as income

Amounts which are not classified as income are split into 3 categories.

Exempt income

This is income that you do not pay tax on, although, some exempt income may be taken into account when determining:

• Tax losses of earlier income years that you can deduct
• Adjusted taxable income of dependants

Some examples include certain Government pensions, certain Government allowances, certain overseas pay, some scholarships, etc.

Non-assessable, non-exempt income

This is also income that you don’t pay tax on – it does not affect your tax losses.

Some examples include the tax-free component of an employment termination payment (ETP), genuine redundancy payments, super co-contributions, etc.

Other amounts

There are also other amounts that are not taxable.

Some examples include: Rewards or gifts received on special occasions, prizes won in ordinary lotteries, child support and spouse maintenance payments, etc.

Tax treatment of insurance payments for damaged or destroyed property after a disaster

The Australian weather can be unpredictable, resulting in intense weather conditions. Bushfires, severe storms or floods can cause personal properties and assets a lot of damage. In the case that this does occur, individuals need to determine the tax treatment of any insurance payouts or relief payments that they may receive.

Usually, individuals are unlikely to experience tax consequences for payments for personal property or assets. Personal property or assets include your home and household assets.

On the other hand, if an individual’s income-producing assets incur damage, then they will need to determine the proper tax treatment of the payouts or relief payments that they receive and the costs involved in repairing or replacing the assets.

If you have been working from home and using personal assets to produce income (such as a personal laptop you are repurposing) then determining which tax treatment applies could get complicated. You may have to talk to the ATO or an advisor to clarify the specificities of your situation.

Trustees and beneficiaries registering for tax in trusts

Trusts have their own tax file number (TFN) that should be used to complete tax returns. Trusts are also able to apply for an Australian business number (ABN) on the condition that the trust is carrying on an enterprise. If a trustee applies for a TFN or ABN, then this is in the capacity of a trustee and is separate from any other registration the trustee may require for other capacities.

Trustees

The trustee is responsible for managing the tax affairs associated with the trust. This includes registration of the trust in the tax system, lodgement of trust tax returns, as well as paying certain tax liabilities.

Beneficiaries

For beneficiaries, their share of the trust’s net income is included in their tax returns. Further, payments on the expected tax liability may need to be made, for which the pay as you go (PAYG) instalment system can be used.