CGT exemptions have been scrapped. What does that mean for you?

Are you an Australian living or working overseas with a family home in Australia? Or you know someone who is? If so, be sure to consider the impacts of the capital gains tax (CGT) on you from 30 June 2020.

Since 1985, the exemption of Australian expatriates from the CGT tax has been available for homes which have never been rented out for more than six years at a time. However, following the scrapping of the CGT exemption under the A$581m federal government plan, Australians working overseas will have to sell their property before the 30th of June 2020 to avoid CGT and still be eligible for CGT main residence exemption.

With the removal of CGT exemption past June 2020, Australian ex-pats who own property in Australia will be required to pay CGT dating all the way back to when they first bought the property. That is, if an ex-pat was to have bought their property in 1985, they would have to pay an accumulation of their tax owing in CGT from 1985 to 2020. The only way to avoid such hefty tax payments would be to sell your property on or before the 30th of June or to re-establish Australian residency before selling the property.

Understandably, the new change will impose a sizable cost on Australian ex-pats and has come as a result of the influx of speculative foreign investors as well.

As every situation is unique, taxation planning customised to every taxpayer’s specific circumstances are advised. In order to avoid the accumulated CGT payments, Australian expats need to be aware of their financial standings and be ready to make a quick decision regarding the selling or keeping of their Australian property.

Seeking out tax advice from knowledgeable tax specialists, employing organised bookkeeping services and detailed financial statements written up by accountants in preparation for making such an important decision regarding your Australian property is heavily recommended to ensure the new CGT laws don’t cause you financial problems.

What’s tax-deductible for home businesses?

Running your business from home can have great benefits, such as being able to spend more time with your family, not having to travel, and deciding your work hours. To make the most out of your home business experience, it is important to be aware of what tax deductions you can claim.

If your home is also your principal place of business and you have a designated room space for business activities, then you are considered to be running your business from home. However, if you only do some business activities from home, then you may be considered to be working from home and the following tax implications don’t apply to you.

You can claim deductions for your home business on expenses that you need to undertake work that produces income. Tax-deductible costs include:

• Utility expenses of the rooms you use for business. This can include electricity, water and gas bills that have been apportioned between business and private use.
• Work equipment such as computers and printers. For items costing up to $300, you can claim the full cost of the item. For equipment costing $300 or more, you can claim the decline in value.
• Cleaning and repairs for work equipment.
• Work-related phone calls. If you have a phone that you use for both business and private matters, you can claim a deduction just for the business calls.
• The depreciation of work equipment, where you must apportion the costs of business and private use.
• Occupancy expenses such as rent, insurance and mortgage interest, where you have apportioned the business and private spaces in the house. You can work out how much to claim by measuring the floor area of your business room as a proportion of the rest of your home.

Do you have to pay tax on super death benefits?

When someone dies, their superannuation usually gets transferred to their beneficiary as superannuation death benefits. Depending on who the beneficiary is, the benefits may be taxed in some circumstances.

If you are a beneficiary, the amount of tax you pay depends on factors such as:

• If the benefit is paid as a lump sum or pension.
• Your age and the age of the deceased at the time of their death (for income streams).
• Whether the benefit is paid from an untaxed superannuation scheme or a taxed scheme.
• Whether you’re a dependent for tax purposes.

Someone who is tax-dependant will:

• A spouse of the deceased.
• An underage child of the deceased.
• Someone who was financially dependent on the deceased at the time of their death.
• Someone who was in an interdependency relationship of the deceased at the time of their death.

Lump sum payments

Lump sum super benefits paid to tax-dependant beneficiaries are not taxed, whereas those who are not tax-dependent will need to pay more tax and will only be able to receive the benefit as a lump sum. Not all super death benefits paid to a non-tax dependant are subject to tax. There are tax-free components that are made up of contributions after-tax that the member made to their super.

The taxed element (where the member paid tax in their super) of the taxable component of the benefit is subject to a maximum tax rate of 15% plus the Medicare levy. The untaxed element (where the death benefit is being paid from an untaxed super fund or includes proceeds from a life insurance policy held by the fund) of the taxable component of the benefit is subject to a maximum tax rate of 15% plus the Medicare levy.

Income stream payments

If the death benefit is paid in the form of an income stream, the tax treatment of the payment is dependent on the age of the deceased and beneficiary at the time.

If the deceased or the beneficiary is aged 60 or over at the time of the benefactor’s death and the super is paid from a taxed super fund, then the payment will not be taxed. If the age of the deceased and the age of the beneficiary are both under 60, the taxable portion of income stream payments will be treated as assessable income but will be entitled to a tax offset equal to 15% of the amount.

Can you claim deductions for employee training?

Employees of a small business may need to develop their expertise or skills in a particular area to better perform their duties. While training courses like seminars and one-day intensives can be a worthwhile investment, there are still a few things employers should consider from a tax point of view.

Employers can generally claim deductions for the full costs incurred when providing education to employees, including aspects like course fees and travel costs. Paying for employee work-related course fees commonly constitutes a fringe benefit and is subject to FBT. However, FBT law allows a full or partial reduction of FBT payable provided that the ‘otherwise deductible’ rule is met. The ‘otherwise deductible rule’ implies that if the employee had paid the expense themselves, they could claim a deduction for the expense. The business could then provide the benefit to the employee without having to pay FBT on the amounts.

An education expense is considered to be hypothetically deductible to the employee depending on the type of course or education studied. The course must have a satisfactory connection to an employee’s current employment, maintain or improve the skills or knowledge required for the employee’s current role, or result in an increase in the employee’s income.

Tax implications of leasing commercial premises

Leasing commercial premises, such as an office building, hotels or stores have their own struggles compared to being a residential landlord. Making the correct tax payment and knowing what you can and can’t claim is key in being a successful commercial landlord.

When leasing out a commercial property, you must include the full amount of rent in you earn in your income tax return. You can claim deductions for expense related to renting out the property for the periods it is being rented or is available for rent, such as:

• Immediate deductions can generally be claimed for expenses relating to the management and maintenance of the property, including interest on loans.
• Expenses such as depreciation costs of assets and certain construction expenditure can be claimed over a number of years.

Tax deductions cannot be claimed on:

• Acquisition and disposal costs of the premise.
• Expenses that you do not pay for, such as water and electricity costs that your tenants pay for.
• Expenses that are not actually used for the commercial property.

As a commercial property landlord, you are liable for GST when your property is up for lease if you are registered, or required to be registered for GST. You can claim GST credits on your purchases that relate to renting out your property, such as managing agent’s fees subject to the normal GST credits rules.

Restoring damaged tax records after a natural disaster

In the event that your records have been damaged or destroyed in a natural disaster, such as bushfires, there are a number of ways you can reconstruct them. The ATO is able to help with reconstruction in the event tax records have been lost or damaged.

Where the tax records are lost or destroyed as a result of a natural disaster, the ATO will allow time for individuals to get their more pressing issues in order. They provide support by:

• Allowing lodgment deferrals of activity statements or tax returns without penalties.
• Allowing additional time to pay tax debts without incurring general interest charges.
• Making arrangements for tax payments to be done by instalments.
• Fast-tracking refunds.
• Arranging field visits to help with reconstructing tax records.

The ATO holds and can re-issue or supply copies of tax documents, such as income tax returns, activity statements and notices of assessment. If you have lost your TFN, you can still access your tax information by phoning the ATO.

If you are unable to substantiate claims made in your tax returns or activity statements because records have been damaged or destroyed, the ATO can accept the claim without substantiation, where it is not reasonably possible to obtain the original documents.

What are franking credits?

Franking credits are a kind of tax credit that allows Australian companies to pass on the tax paid at a company level to shareholders. Franking credits can reduce the income tax paid on dividends or potentially be received as a tax refund.

Where a company distributes fully franked dividends (and those dividends are included in the taxable income of the taxpayer) the taxpayer can claim a credit against their taxable income for the tax that has already been paid by the company from which the dividend was paid.

Since the 2016-17 income year, the standard formula for calculating the maximum franking credits is:

Franking credit = (dividend amount / (1-company tax rate)) – dividend amount

Franking credits are paid to investors in a 0-30% tax bracket, proportionally to the investor’s tax rate. If an individual’s top tax rate is less than the company’s tax rate, the ATO will refund the difference. Therefore, an investor with a 0% tax rate will receive the full tax payment paid by the company to the ATO as a tax credit. Franking credit payouts decrease proportionally as an investor’s tax rate increases. Investors with a tax rate above 30% do not receive franking credits with dividends and may even have had to pay additional tax.

There can be eligibility requirements that must be met before franking credits can be paid, such as that you must hold the shares ‘at risk’ for at least 45 days to receive a total franking credits entitlement of $5,000 or more. There are also rules that can apply to buying, holding and selling shares with franking credits attached.

Tax implications of buying a holiday home

Buying a holiday house can seem appealing, whether it’s to rent out for income, for your own holidays or both. However, it is important to be aware of the different tax implications for how you choose to use your holiday house.

If you own a holiday house and do not rent it out, you cannot claim any expenses relating to the property. If you decide to sell the property, you will need to calculate your capital gain or loss. Even though you don’t need to include anything in your tax return while you own the property, it is still important to keep all records to determine the capital gains tax implications for when you sell it.

If you own a holiday house and rent it out to others, you have to include the income you receive from rent as part of your income in your tax return. Deductions can be claimed on expenses incurred for the purpose of producing rental income, such as cleaning, advertising costs, pest control, insurance, maintenance and repairs. The cost of repairs and renovations cannot be claimed immediately, but are deductible over a number of years.

You are only able to claim deductions for the periods the property is rented out or genuinely available for rent. A holiday house may not be considered genuinely available when:

• It has none or limited advertising, e.g. when you only advertise by word of mouth or restricted social media pages.
• It is rented out free or discounted to family and friends.
• You use the property for yourself.
• There are unreasonable conditions for renting, e.g. restricting children and pets and only being available during off-peak holiday seasons.

If a holiday house is shared between two owners, then the deductions need to be split accordingly. For example, if the house is owned 50-50, then the owners can claim equal shares of the expenses. If one partner owns 20% of the property, they can only claim 20% of the expenses.

Removal of the main residence exemption for non-residents

The government has changed capital gains tax (CGT) rules for foreign residents under the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019, which was granted assent on 12 December 2019.

The law change no longer allows foreign residents to claim the CGT main residence exemption, which will impact people who are overseas or will be going overseas and want to sell residential property in Australia while they are a tax non-resident of Australia. However, this may not apply if you were a foreign resident for tax purposes for a period of six years or less during a CGT event occurrence on your Australian residential property, and a ‘life event’ occurred, including if:

• You, your spouse or your underaged child had a terminal medical condition.
• Your spouse or underaged child died.
• The CGT event involved the distribution of assets between you and your spouse because of divorce, separation or other maintenance agreements.

Individuals who will be impacted by the changes are non-tax residents who:

• Sell a property bought after 9 May 2017 and do not experience a ‘life event’.
• Sell property after six years of becoming a tax non-resident of Australia, regardless of a life event.

If you were not an Australian resident for tax purposes while living in your property, then it is unlikely that you will meet the requirements for the CGT main residence exemption.

Tax on gifts and donations

Individuals can claim tax deductions when giving gifts or donations to organisations that have the status of deductible gift recipients (DGR).

To be eligible to claim a tax deduction for a gift, the ATO stipulates that it must meet the following four conditions:

• The gift must “truly be a gift”; that is, a voluntary transfer of money or property where the giver receives no material benefit or advantage.
• The gift must be made to a deductible gift recipient (DGR).
• The gift must be money or property, this can include financial assets such as shares.
• The gift must comply with any relevant conditions. For some DGRs, the income tax law adds extra conditions affecting the types of deductible gifts they can receive.

What you can claim:
The amount an individual can claim for a gift or donation depends on the type of gift given. For gifts of money, individuals can claim the total amount of the gift, as long as it is $2 or more. Different rules exist for gifts of property, and the amount of the tax deduction depends on the value and type of property. There are special circumstances where donations to Heritage and Cultural programs can also be deductible and are based on the value of the donation.

What you can’t claim:
Individuals cannot claim a tax deduction for gifts or donation items that provide some personal benefit, such as:

• Raffle tickets.
• Membership fees.
• Payments to school building funds.
• Payments where there is an understanding with the giver and recipient that the payments will be used to provide a substantial benefit for the giver.