Paying tax on term deposits

The interest you earn from term deposits is subject to tax, just like your regular income. You have to declare investment income on your tax return, including interest in the year it was credited or received.

The amount of tax you need to pay depends on the amount of interest you earn on your term deposit as it is part of your overall taxable income and will, therefore, be taxed at the same marginal tax rate that applies to the rest of your income. The ATO’s marginal tax rates for the current financial year are:

• $0 for an income of $18,200
• 19c for each $1 over $18,200 for an income of $18,201 – $37,000
• $3,572 plus 32.5c for each $1 over $37,000 for an income of $37,001 – $90,000
• $20,797 plus 37c for each $1 over $90,000 for an income of $90,001 – $180,000
• $54,097 plus 45c for each $1 over $180,000 for an income of $180,001 and over

If you decide to roll over your interest earnings into a new term deposit, you will still need to declare the interest on your tax return if you choose to reinvest the money instead of accessing it.

Term deposits run under a joint account will have the ATO assuming each person has equal ownership to the funds in the account. This means that the interest earned is equally split between you and your account partner(s), where you will have to pay tax on your portion. If the funds in your account are not split equally, you can provide the ATO with documentation proving the amount you each earn and be taxed different amounts accordingly.

Making NRAS claims

The national rental affordability scheme (NRAS) started on 1 July 2008, encouraging large-scale investment in affordable housing. It offers tax and cash incentives to providers of new dwellings for 10 years, granted they are rented to low and moderate income households at 20% below market rates.

Though the NRAS is no longer taking new investments, property owners within the scheme will soon be receiving letters from the ATO to remind them of their claim requirements.

The two key elements of the NRAS are;

• An Australian Government contribution in the form of a refundable tax offset or direct payment to the value of $8,394.10 per dwelling per year in 2018-19. The Australian Government contribution is 75% of the total annual incentive.
• A state or territory contribution in the form of direct financial support or an in-kind contribution to the value of at least $2,798.03 per dwelling per year in 2018-19. The state or territory contribution is 25% of the total annual incentive.

Owners of NRAS rental property are eligible to claim a refundable tax offset if:

• The Approved Participant has provided them with advice of their entitlement based on the certificate received from the Housing Secretary, and;
• The claim is made in the year to which the certificate relates.

Deductions can be claimed for expenses incurred with a NRAS rental property, excluding the contribution amount received from the state or territory. The contribution amount is non-assessable, non-exempt (NANE) income for tax purposes.

Introducing ASFP

Plans are underway to carry out a system change during the December closure of the ATO, to introduce Activity statement financial processing (ASFP). This change will move the majority of taxpayer financial information into one accounting system that will have multiple accounts.

ASFP will shift activity statement and franking deficit tax accounts from the current ATO system into their primary accounting system, covering all the different taxes they administer. This change is intended to help improve ATO digital services by delivering simplified transaction descriptions and summary views of “statement of account transactions” with the ability to view full account transaction if required.

During the closure, a number of ATO online services will be unavailable. These include;

• SuperMatch: A service that enables APRA-regulated funds to consolidate member accounts.
• EmployerTICK: An online service employers can voluntarily use to validate employee details, prior to making the first contribution to a super fund.
• Fund Validation Service (FVS): A service that enables employers and funds to obtain APRA-regulated funds’ e-commerce details that support SuperStream transactions.
• Electronic portability form (EPF): An ATO-hosted form that can be used by fund members to transfer the whole balance of super accounts between APRA-regulated funds, or to member’s self-managed super fund.
• Member Account Attribution Service (MAAS): A service for super providers and life insurance companies to report the opening and closing of accounts, and changes to a member’s account phases and attributes when they occur (event-based reporting).
• Member Account Transaction Service (MATS): A service for super providers and life insurance companies to report member contributions or transactions more frequently and at a transactional level.
• Small business superannuation clearing house (SBSCH): The superannuation clearing house is a free online super payments service that can be used by employers with 19 or fewer employees or have an annual aggregated turnover of $10 million or less, to pay super contributions in one transaction to a single location.

Time limit on GST refunds

Small businesses entitled to refunds of GST may not be aware of the four-year time limit on claiming those refunds. Your entitlement to a GST credit ends four years from the due date of the earliest activity statement in which you could have claimed it.

GST refunds are claimed under the indirect tax concession scheme (ITCS), which also covers luxury car tax (LCT), wine equalization tax (WET) and excise. They are a form of “outstanding indirect tax refunds”, which are tax refunds that are entitled to the taxpayer but are yet to be claimed. “Outstanding indirect tax refunds” can be claimed in the following cases.

Refund of a net amount for a tax period:
This applies to those that have yet to lodge an activity statement for a tax period. Small businesses that have GST entitlements that amount to $2,000, (which exceeds the net GST, WET and LCT liabilities for that period $1,500), are able to claim an outstanding indirect tax refund of $500.

Refund of an overpayment of a net amount:
Due to a clerical error, a business owner reports and pays $4,600 net GST for a tax period instead of the actual amount of $4,060. The excess amount of $540 is an outstanding indirect tax refund which the business can claim.

Refund due to an underreported initial net refund entitlement:
A business claims a net GST refund of $3,000 for the tax period and receives the refund. Afterwards, however, it is realised that the actual refund entitlement was $3,200, the excess $200 represents an outstanding indirect tax refund that can be claimed.

Limiting tax deductions for holding vacant land

On the 28 October 2019, The Treasury Laws Amendment (2019 Tax Integrity and Other Measures No.1) Bill 2019 received royal assent. The new tax law creates limitations for deductions related to the expenses of holding vacant land from 1 July 2019. This is likely to affect those who acquire land for investment purposes and begin developing for rental investment purposes.

The amendments will only apply to holdings on ‘vacant land’, meaning that it will not apply to any land that has a substantial and permanent structure in use or ready for use, or is a residential premise that is lawfully able to be occupied. Land is considered vacant if both of these are not true.

The changes will not apply to vacant land held by ‘excluded entities,’ which are:

• Corporate tax entities.
• Managed investment trusts.
• Public unit trusts.
• Superannuation plans other than self-managed superannuation funds (SMSFs).
• Unit trusts or partnerships where all members are of the excluded entities listed above.

The law will also be inapplicable if:

• Structures affected by natural disasters or similarly exceptional situation.
• The land is in use or available for use in carrying on a business by the taxpayer or their affiliates, connected entities, spouse or child under 18.

The land is in use or available for use for business purposes under an arm’s length rental arrangement.

Amendment to Housing Affordability Measures introduced

The Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019 was re-introduced to parliament on 23 October 2019. This comes after it was first announced in the 2017-18 Federal Budget.

The amendment introduces a new system where the government will provide up to an additional 10% capital gains tax (CGT) discount for resident individuals who invest in qualifying affordable housing from 1 January 2018. This increases the maximum CGT discount to 60%.

For the discount to be received, housing investments must meet qualifications and provide proof of eligibility. Tenants must have low to moderate incomes and landowners must charge rent at a discounted rate below the private market rental rate.

A registered community housing provider (CHP) must manage the properties and the investment is to be held for at least three years before the discount applies. The discounts will go through managed investment trusts (MITs). CHPs determine the tenant eligibility criteria, including the rent charged, consistent with state and territory affordable housing policies.

Investors who already have invested in affordable housing with the National Rental Affordability Scheme (NRAS) will not receive the additional 10% discount as they already get a yearly financial incentive.

What are the tax implications for different business structures?

The structure of your business determines how you would pay tax and other business obligations you would need to consider. Whilst you are able to change your structure as your business develops, business owners must keep up with the changing tax responsibilities that may occur as a result. There are four major business structures in Australia that come with different tax implications.

Sole trader:
An individual running a business will declare revenue received from the business as part of their personal income tax return and will be taxed at the same rate as an individual. This means the more the income the business earns, the more tax the sole trader will have to pay. If their income is $18,200 or under for the 2018-19 financial year, then they are under the tax free threshold and do not have to pay tax. They can also receive a discount on Capital Gains Tax (CGT).

Partnership:
When more than one person runs a business and distributes income or losses between themselves, each partner must pay tax at the individual tax rate on their share of the business’ net income. They also need their own Australian Business Number (ABN) and Tax File Number (TFN) to use when lodging their annual business income tax return. An annual partnership return showing the income and deductions of the business must also be lodged.

Company:
A company is a separate legal entity with higher set-up and administration costs. They must apply for a company TFN and ABN if they are registered under the Corporations Act 2001. They must also be registered for GST if the annual GST turnover is $75,000 or more. There is no tax free threshold and no discount on CGT. Companies are responsible for paying income tax on their profits at the company tax rate, which is currently 30% under 2019-20 tax rates, or 27.5% for base rate entities.

Trust:
Businesses run through a trust must also have their own TFN and ABN, and register for GST if annual GST turnover is $75,000 or more. They are are not liable to pay tax because their beneficiaries who receive the trust net income are individually assessed for tax. If the trust generates net trust income and does not distribute it, they are assessed on this accumulated income at the highest individual tax rate. Each year, all the revenue earned by the trust and the income distributed to each beneficiary must be shown on their tax returns.

GST margin scheme

The margin scheme is a way of working out the GST you must pay when you sell property as part of your business. The amount of GST normally paid on a property sale is equal to one-eleventh of the total sale price. If the margin scheme is used, the GST is calculated on the difference between the sale price and your purchase price of the property or the property’s value. You can only apply the margin scheme if the sale of the property is taxable.

When purchasing a new residential property with the margin scheme being apart of the property transaction, withhold 7% of the contract price, including GST and the market value of non-monetary consideration. This amount will then be paid to the ATO at settlement. The margin scheme is not an automatic concession and the sale must be eligible for it to be applied.

The margin scheme can be applied to subsequent property sales depending on the original date of purchase and how GST was applied at that time. Property purchases prior to 1 July 2000 are eligible, as the property had not been subject to GST previously. For property purchases after 1 July 2000, the margin scheme may only apply to a subsequent sale when:

• The original seller of the property wasn’t registered for GST.
• The property was purchased as an existing residential premises.
• The original seller sold the property as a GST-free supply and was eligible to use the margin scheme, or;
• The seller sold the property and applied the margin scheme at that time.

There are limitations to the margin scheme in some situations such as; inheritances, the supplier being a member of a GST group or the property is GST-free (going concern or farmland). In these situations, if the supplier wasn’t eligible to use the margin scheme, the scheme cannot be used when selling the property.

Breaking down business industry codes

A business industry code (BIC) is a five-digit code you include on relevant tax returns and schedules that describes your main business activity. BICs come from the Australian and New Zealand Standard Industrial Classification (ANZSIC) codes and are added to by the Australian Tax Office (ATO) for tax return reporting purposes.

Employers must use the correct business industry code on their tax returns to ensure their return is lodged in the right category. Using the correct code for your business helps to reduce the risk of being incorrectly targeted for compliance activities, avoids processing delays and ensures employers receive services and information relevant to their business type.

The business industry code describes the main activity of the business. This can change over time if your business diversifies its products and services. The code is broken down into sections:

• ANZSIC system is first divided into 19 divisions, described by one letter (A to S).
• Divisions are broken down into subdivisions numbered with two digits. There are a total of 96 subdivisions.
• Subdivisions are broken down into groups. Each group is numbered with three digits, with the first two digits derived from the subdivision to which it belongs.
• Groups are broken down into classes. Each class is numbered with four digits, the first three digits derived from the group to which it belongs.
• The ATO adds a fifth digit to this system to provide further specifics.

Claiming travel expenses relating to rental properties

When making a claim in regards to your residential rental property, there are specific circumstances for when you can and cannot claim travel expenses. The law about claiming travel expenses for rental properties changed in July 2017. In the last year alone, the ATO received more than 70,000 incorrect claims for travel to and from residential rental properties.

A residential property is defined as land or a building that is either occupied as a residence or intended for and capable of being occupied as a residence. Owning one or several rental properties is not usually considered to be in the business of letting rental properties, with receiving income from letting property to a tenant being considered a form of investment rather than a business.

Entities that can claim travel expenses are:

• Corporate tax entity.
• Superannuation plan that is not a self-managed superannuation fund.
• Public unit trust.
• Managed investment trust.
• Unit trust or a partnership.

For those who are eligible to claim travel expenses, claims can be made on the following:

• Preparing the property for new tenants (except the first tenants).
• Inspecting the property during or at the end of the tenancy.
• Undertaking repairs, where those repairs are because of damage or wear and tear incurred while renting out the property.
• Maintaining the property, such as cleaning and gardening, while it is rented or available for rent.
• Collecting the rent.
• Visiting an agent to discuss the rental property.