Monthly Newsletter

October 2019

Deductions for a company or trust home-based business

The ATO has reminded taxpayers that, if they run their home-based business as a company or trust,their business should have a genuine, market-rate rental contract (or similar agreement) with the owner of the property.

The agreement will determine which expenses the business pays for and can claim as a deduction.

If there isn’t a genuine rental contract, there may be tax implications for the homeowner and the business for providing benefits to any individuals.

If an individual earns PSI,they may not be able to deduct some occupancy expenses.

If the business pays for or reimburses an employee of the business for some of the expenses of running the business from home, the employee can't claim a deduction for those expenses in their individual income tax return.

Also, the business may have to pay FBT if it pays or reimburses the individual for certain expenses as an employee (although exemptions and concessions may apply to reduce the FBT liability), and may need to keep additional records for FBT purposes.

Using the cents per kilometre method

The ‘cents per kilometre’ method broadly allows an individual taxpayer to claim up to a maximum of 5,000 business kilometres per car, per year without the need to keep any written evidence (e.g., receipts) of car expenses.

Importantly, taxpayers making a ‘cents per kilometre’ claim are required to demonstrate that they worked out the number of business kilometres they claimed on a reasonable basis.  

Taxpayers claiming under this method will generally fall into one of two categories, being either those who undertake a regular or irregular pattern of work-related travel.

If a taxpayer has a regular pattern of work-related travel (e.g., a 60 kilometre round trip to the warehouse to pick up supplies twice a week, 40 weeks in the year), then this type of explanation would generally be sufficient to justify the claim.

However, if the taxpayer has an irregular pattern of work-related travel, then they would need to make a note (e.g., in a diary) of each trip.

Also, remember that, for the 2019 income year, the rate that is applied (up to the 5,000 business kilometre maximum) is 68 cents (up from 66 cents in 2018) per business kilometre travelled.

Federal Court provides clarification on the PSI rules

The Federal Court recently handed down two decisions relating to the personal services income ('PSI')rules.

Income is classified as PSI when more than 50% of the income received under a contract is for a taxpayer’s labour, skills or expertise.

The PSI rules are integrity provisions which ensure individuals cannot reduce or defer their income tax by(for example) diverting income for their personal services through companies,partnerships or trusts.  If the rules apply, the individual is taxed on the income directly.

The rules do not apply if at least 75% of the individual’s PSI is for producing a result, where the individual supplies all the required 'tools of trade' and is liable for rectifying defects in the work (this is known as the 'results test').

In the first case, the Federal Court confirmed that the taxpayer did not meet the 'results test'.

The taxpayer argued that the 'results test' is still satisfied even if they do not get paid for achieving a result, provided they can show this is the custom or practice of independent contractors in their industry.

The Federal Court rejected this, agreeing with the ATO’s earlier determination to apply the PSI laws to tax the individual’s contract income as his own income, rather than income split through a partnership with his spouse (which also meant certain deductions were not allowable).

The Federal Court also affirmed the imposition of penalties for recklessness.

However, in the second case, the Federal Court allowed the taxpayer’s appeal from an earlier AAT decision, that he has failed the 'unrelated clients test' despite advertising his services on LinkedIn.

The Federal Court found the ATO and AAT had applied an exception for services provided through intermediaries (e.g., recruitment agencies) too broadly, and instead the Court preferred a narrow interpretation of the exception.

This matter has now been referred back to the AAT to be reconsidered, and the ATO has said it will consider this decision and whether an appeal is appropriate.

$30,000 instant asset write-off

The ATO is reminding businesses that are looking to expand or improve their business and thinking of buying new or second hand assets, that medium sized businesses with a turnover up to $50 million (but at least $10 million) are eligible for the instant asset write-off.

This now applies to assets that cost up to $30,000 and which were purchased and first used or installed ready for use from 7:30pm (AEDT) on 2 April 2019 to 30 June 2020.

Medium sized businesses may purchase and claim a deduction for each asset that costs less than the $30,000 threshold.

For assets over $30,000 the general depreciation rules apply (which may depend on the entity).

Steps to expand your property portfolio

Deciding to invest in property is one of the most significant decisions a person can make.

Once on the property ladder, it can be argued that it’s just as important to consider when, where and how to expand your property portfolio to avoid risk and broaden the opportunity for success.

If you’re considering this, below are some simple steps to be aware of.

Do your research on the property market  

Whether you’re looking to buy your first investment property or expand your portfolio, it’s important to do your research.

Consider economic factors and capital growth potential in up-and-coming areas with lower entry costs and forecasting high growth.

Look at Development Applications (DAs) to determine any roads and infrastructure projects including new schools, commercial developments, parks and any Council re-zoning submissions as these are likely to attract renters to the area. BMT Tax Depreciation’s online portal MyBMT has a handy ‘Research and insights’ tool allowing you to view planning applications in suburbs where you may want to invest.

It’s important to also consider locations with a range of public transport options, nearby employment opportunities for tenants and assess rental yields and vacancy rates. Awareness of these factors can help determine future property income potential to cover expenses involved in purchasing and holding the property.

Explore additional factors that may influence your buying decision including your budget, return on investment expectations, type of loan you qualify for and depreciation deductions you may be entitled to. Within MyBMT, take advantage of PropCalc which can help you calculate the cash flow of owning any property. In its projection of future potential cash flow, PropCalc will consider potential depreciation deductions once a property is income producing to help you make an informed decision.

Determine your acceptable risk

What level of risk are you willing to accept? All property investment comes with financial risk and knowing your limits can go a long way towards alleviating potential stress and ensuring you don’t

over-extend your financial obligations.

Consider potential changes in economic factors, including interest rates, or any repairs and maintenance that may be required on the property. This will ensure you aren’t leaving yourself without a buffer if unforeseen circumstances emerge.

Choose diverse locations and property options

If you’re an investor wanting to minimise risk, consider diversifying your property portfolio to expand your reach and spread the financial risks across a broader range of assets.

During FY 2018/19, BMT found 74 per cent of investors purchased an investment property within metropolitan areas/capital cities compared to 26 per cent who own regional investment properties.

BMT found most investors prefer to stay within their comfort zone, with 92 per cent of those living in metropolitan areas also purchasing an investment property locally, compared to 8 per cent who invested in regional areas.

In contrast, regional investors are more likely to invest further afield, with 64 per cent of those living in regional areas purchasing an investment property elsewhere, as 36 per cent then invested in metropolitan areas.

One way investors can diversify is by selecting properties in several locations. For example, you might already own a property in Perth where property values fell by -2.1 per cent in the three months to June 2019 according to CoreLogic.

If your only property was in Perth and you sold it during this time, you’re likely to have made a loss. However, by investing in other locations that are performing better and achieving capital growth, you can create a financial buffer and reduce your risk.

Alternatively, another way to diversify is to consider broadening the types of properties you invest in. Most property investors tend to focus on residential rental properties, however commercial properties are also worth considering as they offer a number of benefits, as explained in our article ‘Why you should invest in commercial property’.

Investors owning both residential and commercial properties minimise their risk of a single economic factor or downturn in one area of the property market affecting their entire portfolio.

However, some consider commercial properties to carry greater risk due to fluctuating economic factors and possible lengthy vacancy rates between tenancies.

Consult a specialist Quantity Surveyor when expanding your property portfolio

Once a purchase has been made and you’ve exchanged contracts on a second property, consult a specialist Quantity Surveyor to obtain a comprehensive tax depreciation schedule for the property.

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