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HOME OFFICE EXPENSES FOR A HOME-BASED BUSINESS
If you are a sole trader and your home is also your place of business you can claim tax deductions for a portion of the costs of owning, maintaining and using your home for this purpose. When you sell your home you may be liable for capital gains tax.
If you operate a business at or from your home, you may be able to claim a deduction for some of the expenses relating to the area you use for business purposes.
These expenses can be divided into two broad categories:
- occupancy expenses (such as mortgage interest or rent, council rates, land taxes, house insurance premiums)
- running expenses (such as gas and electricity, phone, decline in value of plant and equipment, decline in value and cost of repairs to furniture and furnishings, cleaning)
As for motor vehicles, if you are carrying on a home-based business you can claim the cost of trips between your home and other places if the travel is for business purposes.
Generally, you can ignore a capital gain or loss you make when you sell your home, unless you have used any part of it for business purposes.
BUSINESS TRAVEL EXPENSES
You can claim deductions you incur when travelling for business or paying for employee travel, for example:
- train fares
- bus fares
- taxi fares
However, there are special rules for claiming expenses incurred while travelling overnight on business.
OVERNIGHT BUSINESS TRAVEL EXPENSES
If you stay away from home for one or more nights on business travel you generally need to keep written evidence of all expenses to claim a deduction.
If you travel away from home for six or more consecutive nights, you need to use a travel diary or similar document to record the detail of each business activity before your travel ends, or as soon as possible afterwards. You must record:
- the nature of the activity
- the day and approximate time the business activity began
- how long the business activity lasted
- the name of the place where you engaged in the business activity.
If you operate your business as a company or trust, fringe benefits tax may apply if the employee travel includes private activities and it has been paid for by the employer.
If you are a sole trader and your travel is for both business and private purposes, you must exclude the private expenses from your claim.
Deductions for small business
You can claim a deduction for most costs you incur in running your business, for example staff wages, marketing, and business finance costs.
You can't claim private expenses and it is essential keep records to support your claims.
If you or your employees travel for business, you can claim:
- airfares, train, bus or taxi fares
- accommodation costs and meal expenses for overnight business travel – fringe benefits tax may apply for some employee travel expenses.
If you use the simplified depreciation rules, you claim a deduction:
- immediately – for the business portion of depreciating assets costing less than $20,000 each
- over time – for most other assets, combining costs into a small business pool and claiming a set percentage each year
- immediately – if the balance of your pool is less than $20,000 at the end of the income year
HOME BASED BUSINESS
If you run your business at your home, or your business is based from home, you can claim the business portion of some expenses, including mortgage interest and electricity.
If you sell your home, you may have to pay capital gains tax (CGT) on the business portion and declare it in your tax return.
SINGLE TOUCH PAYROLL REPORTING
The ATO’S introduction of the Single Touch Payroll Reporting (STPR) is set to streamline the way employers report some tax and superannuation information to the ATO.
While there will be some administrative benefits, with the introduction of STPR before the compulsory switch takes place from:
- July for businesses that employ more than 20 people
Some Of The Main Changes Include:
- Ordinary Time Earnings, salary or wages and PAYG withholding information will be reported and available to the Commissioner in ‘real time’ when payroll is periodically processed by the employer
- Employers will need to acquire SBR-enabled software to comply with their PAYG withholding obligations
- New employees will be able to prepare TFN declarations and Super Choice forms online
- The STPR reports for PAYG withholding will become the approved form for reporting PAYG withholding (currently this information is in the activity statements)
- Employers that have reported their PAYG withholding obligations via STPR will have their PAYG withholding prefilled by the ATO on their BAS
- Large withholders will no longer report PAYG withholding on their activity statement
- Employers will be provided with the option to pay their PAYG withholding at the same time they lodge their STP reports to further align the reporting and payment of PAYG withholding through the payroll system
- Employers will no longer be required to submit an annual PAYG summary report to the ATO
It is possible employers may no longer need to provide annual payment summaries to employees who will have access to their payroll information via their myGov account.
Action to Be Taken
Understanding the changes and how they apply to your organisation and beginning the planning process will help provide a smooth transition to this new reporting requirement.
Well before the compulsory start date for businesses that employ more than 20 people, your payroll system will need to be STPR enabled to comply with the new law. Additional costs may be incurred by employers, particularly those that do not currently use software based payroll systems or out-of-date payroll software systems. There are a range of payroll software providers now working with the ATO on product updates
to ensure STPR enablement.
Relevant employers should review their company’s SGC and PAYG payroll processes to ensure the treatment of all types of payments and remuneration are correct. Well before the two deadlines.
Three Crucial Steps to Get Things Started
- Consult with your accounting software provider to establish the current payroll processing arrangements will support the changes
- Conduct a detailed risk review of your current payroll procedures, including PAYG, superannuation, allowances, payroll deductions and the timeliness of payments
- Your HR processes should be reviewed and monitored to ensure employees are being treated fairly and paid correctly.
G.S.T TREATMENT OF DIGITAL CURRENCY
The treasury laws amendment bill was introduced into the House of Reps. This amends the G.S.T. Act to ensure
that supplies of digital currency receive equivalent GST treatment to supplies of money.
CORPORATE TAX CUT-PASSIVE INCOME EXCLUSION
In September the government released exposure draft legislation to clarify the corporate tax rate reduction will not be available for corporate tax entities with predominantly passive income.
BUYING AND SELLING YOUR HOME
Generally, you don't pay capital gains tax (CGT) if you sell the home you live in (under the main residence exemption). You also can't claim income tax deductions for costs associated with buying or selling your home.
But you should keep all the records relating to your home so that if things change – for example, you start to rent it out or otherwise use it to produce income (such as flipping the property) – you don't pay more tax than necessary.
A second property, such as a holiday house or hobby farm, is subject to CGT.
Similarly, you're not liable for goods and services tax (GST) when you sell your home and you can't claim GST credits on any costs associated with buying or selling it (except in some circumstances where you're in the business of building or renovating properties).
Some states charge stamp duty when you buy a property, including a home. Some states also levy land tax on land that exceeds a certain value, though the property you live in is usually exempt.
For information about stamp duty and land tax in your state or territory, visit:
- business.gov.au - stamp duty
- business.gov.au - land tax
PASSIVE INCOME –SMALL BUSINESS CORPORATE TAX RATE: EXPOSURE DRAFT LEGISLATION RELEASED
We have covered this matter in past tax updates and note that in September The Treasury released its exposure draft legislation regarding its proposal to limit the small business corporate tax rate to companies that do not exceed a passive income threshold of 80%.
Currently, a company that carries on business and does not exceed the aggregated turnover threshold (being $50 million) is eligible to apply the lower corporate tax rate of 27.5%.
In order to access the lower rate, it is required that a company's passive income must not be 80% or more of its assessable income in any financial year. Passive income includes rent, royalties, capital gains, interest (subject to certain exclusions) and trust or partnership income (to the extent that it consists of passive income).
The proposed amendment:
- Applies retrospectively and therefore may require amendment to tax returns lodged on the premise that pure passive investment companies
were eligible for the lower rate.
- A large capital gain could result in a company failing the 80% passive income test, resulting in the standard tax rate of 30% would apply to all
of the company’s assessable income for that year.
- Those seeking to direct passive income into a trading company must carefully consider insolvency risk and asset protection.
When small companies, on the 27.5% tax rate pay dividends the total tax paid by the company and shareholders will be greater than if the company remained at the 30% tax rate. In effect, the extra tax arises due to the trapped franking credits in the company which is a real tax cost for the shareholder.
This results because it increases the top-up tax payable by the shareholders, and the 2.5% franking credits left behind in the company are effectively wasted. This first became apparent in companies with less than $10m turnover that became entitled to the 27.5% tax rate. In the future this problem will be exacerbated when the 27.5% tax rate kicks in for companies with less than $25m turnover for this financial year
and $50m turnover for next financial year.
CONSULTATION ON THE DEFINITION OF ‘TAXI’ FOR FBT
The ATO is currently consulting on the:
Definition of ‘taxi’ contained in the Fringe Benefits Tax Assessment Act Exemption from fringe benefit tax travel taken to or from work due to illness.
Currently, taxi trips to and from work that are provided to an employee due to illness are exempt from fringe benefits. However trips taken with ride sourcing or hire car trips are not.
The ATO is inviting comment on extending this exemption by broadening the interpretation of ‘taxi’ to include:
- Vehicles licensed to provide taxi services, including rank and hail services
- Ride-sourcing vehicles
- Other vehicles for hire
Feedback on this consultation closed but we will keep you informed on developments.
INCOME PROTECTION AND TAX
Income protection insurance is a crucial form of financial protection for many Australians, providing an ongoing replacement income in the event of illness, injury of incapacity to work. That’s why there are tax incentives to take out cover.
Here’s which premiums are tax-deductible
Outside of super. Premiums paid for income protection insurance policies held outside of superannuation are tax deductible.
Inside of super. Payments for income protection insurance policies held inside superannuation are not tax-deductible when insurance premiums are deducted from your super contributions.
Outside of super. Payouts are generally taxed (at the marginal rate) if your benefits are to replace lost income and the premiums were deductible. You must disclose such payments in your tax return as income.
Inside of super. Trustees will usually apply a withholding PAYG from payouts for policies held inside super.
THE BUDGET ANNOUNCEMENTS AND THE HOUSING TAX INTEGRITY BILL
The budget announcements directed at housing affordability included two curious measures, one denying travel expenses to inspect a rental property and the other directed at subsequent owners of rental properties claiming depreciation deductions in excess of the value of assets acquired with the rental property. Treasury Laws Amendment (Housing Tax Integrity) Bill containing these measures was tabled on 7 September.
TRAVEL EXPENSES AND RESIDENTIAL PROPERTY
This was announced in the Federal Budget, a new s26-31 of the ITAA denies a deduction for to travel incurred in gaining assessable income from the use of residential premises as residential accommodation. Such expenditure cannot form part of the property’s cost base for capital gains tax purposes.
Exceptions include the expenditure incurred in carrying on a business or by a corporate tax entity. Also, if the premises are also used for other income-producing purposes then travel for those purposes remains deductible. Apportionment may be possible in the event of mixed travel purposes.
Deductions will remain available for a taxpayer conducting a boarding house or similar type arrangement that constitutes a business. Estate agents acting on behalf of a landlord client will also be entitled to a deduction. And, where the agent passes on the travel costs in their fees, the landlord will not to be denied a deduction.
The availability of travel expenses by a company (although not a corporate trustee) may allow some planning opportunities depending on a client’s circumstances.
Please note: Our Newsletters are not the place for the giving or receiving of financial advice concerning investment decisions or tax or legal advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Any ideas and strategies should never be used without first assessing your own personal needs and financial situation, or without consulting or engaging with us as your professional advisors.