Converting property into super

Individuals can minimise capital gains tax (CGT) when selling an investment property where proceeds are contributed to superannuation.

Those who sell their property can contribute up to $500,000 as a non-concessional contribution into their superannuation, which means that no tax will be payable. Non-concessional contributions, or after-tax super contributions, are super contributions for which an individual hasn’t claimed a tax deduction.

However, since selling an investment property is a type of capital gains tax event (unless it was acquired before 20 September 1985), sellers will need to calculate their capital costs to add to the purchase price to establish the property’s cost base. The sales price minus the cost base will form their taxable portion.

Individuals who have owned the property for more than 12 months will receive a 50 per cent discount on the taxable portion. For properties owned in joint names, the taxable portion may again be cut in half. The remaining taxable portion is added to each owner’s taxable income for the financial year in which they exchanged contract.

To further reduce CGT, individuals should consider their eligibility to contribute up to $35,000 as a concessional contribution to super, as this can help lower a person’s taxable income by $35,000 a year and reduce their potential capital gains tax liabilities.

Individuals should keep in mind that proposed changes to Australia’s superannuation rules may affect this strategy since concessional contributions may decrease to only $25,000 a year.

ATO crackdown on work-related expenses

The ATO is currently targeting work-related expenses by taking a closer look at unusual deductions and claims that are higher than expected.

The Tax Office will be looking for expense claims that are much higher than others who are in the same occupation and will be contacting employers to validate these claims.

When claiming work-related expense deductions, taxpayers must ensure that the expense is related to their job; they were not reimbursed for the money spent and have a record to prove it.

Here are some things to keep in mind when claiming deductions:

Car expenses
You can only claim a deduction if you use your own car in the course of performing your job as an employee. You cannot claim the cost of travel between home and work as it considered private.

The ATO is focusing on the transportation of bulky tools as carrying unnecessary equipment is not a legitimate claim if equipment is already supplied.

Self-education expenses
You may be able to claim a deduction if your study is work-related or if you receive a taxable bonded scholarship. A deduction cannot be claimed if a course does not have a sufficient connection to your current employment.

Internet and mobile phone expenses
If you use your own mobile phone or internet for work purposes, you may be able to claim a deduction. If you also use them for personal use, you will need to apportion the percentage that reasonably relates to work use.

ATO warns pre-retirees on SMSF tax schemes

The ATO has its sight set on individuals participating in an increasing number of aggressive tax avoidance and retirement planning schemes in self-managed superannuation funds (SMSF).

The Tax Office has launched Super Scheme Smart, an initiative designed to help inform individuals and advisers about illegal retirement planning schemes. The program is a result of an increase in schemes designed specifically to target those approaching retirement.

Individuals approaching retirement are most at risk, in particular, those aged 50 or over, looking to put significant amounts of money into retirement. SMSF trustees, self-funded retirees, small business owners, company directors and individuals involved in property investment are particularly at risk.

In addition to severe penalties, individuals caught using an illegal scheme may risk losing some of their retirement nest egg and their rights as a trustee to manage and operate a self-managed superannuation fund.

Transferring the seniors and pensioners tax offset

The Seniors and Pensioners Tax Offset (SAPTO) is a tax offset for retirees who are at the Service Pension age or the Age Pension age or older.

Those who have received SAPTO may be eligible to transfer unused portions of their offset to their spouse.

When transferring unused SAPTO, both the receiving individual and their spouse must be eligible to claim the offset and be an eligible couple either:

• living apart due to illness with a rebate amount of $2,040 each

• living together with a rebate amount of $1,602 each

If an individual receiving SAPTO has a spouse with a taxable income greater than $6,000, the ATO calculates their unused SAPTO amount with the formula:

The spouse’s rebate amount for the year – ((The spouse’s taxable income for the year – $6,000) x 0.15).

If an individual receiving SAPTO has a spouse who is a foreign resident and their taxable income is greater than zero, the ATO calculates the spouse’s unused SAPTO amount with the following formula:

The spouse’s rebate amount for the year – (The spouse’s taxable income for the year x marginal tax rate).

If a spouse is a foreign resident and has received an Australian government pension or allowance, the ATO calculates the spouse’s unused SAPTO amount as if they were a resident.

Work-related items that are exempt from FBT

There are a number of employee benefits that are exempt from fringe benefits tax (FBT). They include the following work-related items:
– portable electronic devices (mobile phones, laptops, tablets, portable printers and GPS   navigation receivers)
– computer software
– protective clothing
– briefcases
– tools of trade

The FBT exemption is limited to items that are primarily for use in the employee’s employment or one item per FBT year for items that have an identical function (unless the item is a replacement item).

From 1 April 2016, the exemption extends to all small businesses that give employees more than one work-related portable device in an FBT year, even if the devices have substantially identical functions.

To be eligible for the exemption, small businesses must be in operation for at least one income year that starts or ends in the relevant FBT year.

Reducing the risk of refund fraud

Refund fraud occurs where tax returns, activity statements and other documents are deliberately falsified in order to claim a tax refund a taxpayer is not entitled to.

Fraudulent claims can be lodged by individuals on their own account or third parties on behalf of others. Often, this can involve identity crime, where taxpayer identities are used by third parties to make fraudulent claims for personal gain.

Some examples of refund fraud are deliberately over-claiming deductions, offsets, or expenses by providing false or misleading information, understating income and/or providing fictitious payment summary details, providing false information in a business activity statement and making claims through fraudulent registrations or using false or stolen identities.

The ATO have a range of controls and systems in place to detect potential refund fraud, these include:

• analytical models that use behaviour and statistical algorithms to analyse information on income tax returns, business activity statements and other tax forms lodged

• sharing data and intelligence with their partner agencies

• obtaining information about suspected fraud from the community and other government agencies

Rental property owners on ATO radar

The Australian Tax Office has announced that it will be paying close attention to rental property owners during this tax season, especially in areas where excessive interest expenses are claimed and where there is an incorrect apportionment of rental income and expenses between rental property owners.

The ATO will also be focusing on those who make incorrect claims for newly purchased rental properties and those who own holiday homes that are genuinely not available for rent.

The Tax Office has advised rental property owners that they need to better understand their obligations to get their claims right.

Those who claim deductions for their rental property need to include all rental income and ensure that their property was genuinely available for rent when the expense was incurred. Owners must also make sure to apportion any deductions to take any private use into account and have records for the claims made.

Some examples of incorrect practices the ATO will be looking out for include:

• Occasionally advertising a new purchased rental property (that has not returned any rental income) on community notice boards and online. The ATO does not consider this a genuine way to actively seek tenants or genuinely advertise the property for rent.

• The higher earner of a couple who jointly own a rental property claiming the larger proportion of the property’s expenses. Expenses must reflect ownership interest.

• Reporting high rental interest claims that are not supported by evidence such as bank statements.

• Providing false receipts for property management fees.

• Inappropriately claiming a deduction for repairs to defects present in a newly purchased property. Capital works and borrowing expenses need to be spread over several years.

Taxation of employment termination payments (ETPs)

Redundancies, whether forced or elective, can become complex as there are many taxation issues to consider when receiving a payout.

The most common form of payment an employee will receive is an employment termination payment. Employment termination payments (ETPs) include payments for unused rostered days off or for unused sick leave; payments in lieu of notice; payments due to redundancy or early retirement that exceeds the tax-free amount, or payments due to invalidity.

Mistakes in employment termination payments (ETPs) are common as it is up to the employer to work out how much is owed to the employee and how much tax needs to be withheld from the various components that make up an ETP. Errors are generally made around how much leave is owed, whether the payment includes the correct tax-free amount and if the correct tax rate is used.

ETPs are made up of two components, the tax-free component and the taxable component. The tax treatment of the components will vary depending on the type of redundancy, whether it is an early retirement scheme; genuine redundancy; invalidity or compensation for personal injury, unfair dismissal, harassment and discrimination.

The ATO classifies a redundancy as “genuine” if the employer has made a decision that the job no longer exists and employment is to be terminated. A genuine redundancy has special tax treatment where an amount paid up to a limit is tax-free. To qualify for tax concessions the employee must be dismissed before the day they turn 65 and there must be no arrangement at the time of termination to re-employ the dismissed person.

Employees being offered a redundancy payment should check the right tax is applied to the right component. A genuine redundancy payment is tax-free up to a limit based on a formula which includes the base amount determined by the ATO. This is added to a service amount multiplied by the years of service. The base rate for 2015-16 is $9780 and the rate for each completed year of service is $4891. The formula depends on completed years.

Tax will be withheld by the employer where there is unused long service leave, rostered days off, pay in notice of lieu or golden handshakes. The tax withheld on long service leave would be either 17 per cent or 32 per cent (including Medicare) depending on the age of when redundancy occurred. For those over the preservation age (usually 55 and over) you will pay 15 per cent tax when you take redundancy and for those younger, 30 per cent tax will be payable, excluding Medicare.

Amounts that exceed the tax-free limit will be taxed based on your preservation age at the date of the redundancy and individual marginal tax rate. There is an ETP cap, which for the 2015-16 year is $195,000. When the cap is reached, the individual’s marginal tax rate is applied, plus the Medicare levy.

Employees receiving a redundancy payout need to ensure they understand how the calculations have been done and seek professional advice to confirm they are accurate.

Claiming mobile phone expenses

With tax time fast approaching, now is a good time to review those tax deductions that are often easily forgotten such as mobile phone expenses.

Mobile phone expenses can generally be claimed as a tax deduction provided they are used for work purposes, such as receiving or making work calls. When claiming expenses you will need to work out the percentage that reasonably relates to your work related use, not your entire phone bill.

The ATO requires you to substantiate these claims by keeping records for a 4-week representation period in each income year to claim a deduction of more than $50. Records may include diary entries, including electronic records and bills. The Tax Office also suggests including evidence that your employer expects you to work at home or make some work-related calls to demonstrate your entitlement to the deduction.

When apportioning the work use of your phone, you will need to use one of the following methods:

Incidental use
If you are not claiming a deduction of more than $50 in total and your work use is incidental, you may make a claim based on the following:

• $0.25 for work calls made from your landline

• $0.75 for works calls made from your mobile

• $0.10 for text messages sent from your mobile

Usage is itemised on your bills
For phone plans with an itemised bill, you need to determine your percentage of work use over a 4-week representative period which then can be applied to the full year. You can work out the percentage by the number of work calls made as a percentage of total calls, or the amount of time spent on work calls as a percentage of total calls, or the amount of data downloaded for work purposes as a percentage of your total downloads.

Usage is not itemised on your bills
If your plan is not itemised, you can determine your work use by keeping a record of all your calls over a 4-week representative period and then calculate your claim using a reasonable basis.

Bundled phone plans
Phone services are often bundled and can be used by other members in your household. If other members use the services, you need to take into account their use in your calculation. You will need to identify work use over a 4-week representative period which can be applied to the full year. A reasonable basis must be used to work out the work-related use such as:

• The number of work calls as a percentage of total calls

• The amount of time spent on work calls as a percentage of your total calls

• Any additional costs incurred as a result of your work-related use

ATO targets rental property owners

The Tax Office is focusing on rental property owners this tax time and is encouraging rental owners to understand their obligations and check their claims are right before lodging their tax returns.

The ATO will be paying close attention to excessive interest expense claims and incorrect apportionment of rental income and expenses between owners.

The Tax Office will also be targeting holiday homes that are not genuinely available for rent and incorrect claims for newly purchased rental properties.

To avoid incorrect property claims, rental property owners need to ensure all rental income is included when claiming deductions and that property was genuinely available for rent when the expense was incurred.

Rental owners must make sure they apportion any deductions to take any private use into account and keep records for the claims made. The ATO’s use of sophisticated technology and data matching has amplified the Tax Office’s ability to identify incorrect rental property claims.