Year End Update – Individual Tax Returns
Year End Tax Update
Here are a few tips and tricks to assist you prepare your 2014 individual tax returns
Good news for anyone who hates paper – we now have an app that you can put on your phone to keep track of any paperwork for deductions you wish to claim. Simply go to your app store and search handisoft. The rest is pretty straight forward, simply point and click; it will then come through to our tax return software!
Private Health Changes
If you recall back to 2013 year, the ATO changed the way you could claim the Private Health Offset and reduced the amount from 30% depending on your age & income. They have now changed it again to reduce the % claimed and taken the lifetime health cover loading out of the amount that is rebatable. Just to confuse everyone they have changed it from 1/4/14 so we will now have 2 items on your tax return rather than 1. The good news on this is that the rebate is available regardless of who pays the fees.
Medical Tax Offset
This rebate is a refund of excess net medical expenses incurred over a threshold based on your income. In the 2014 year it is only available if you claimed it in 2013 and 2015 is the last year you can claim it but you must have claimed it in 2015. If you have a disability or your medical expenses are for aged care then special rules apply so check with us to find out how it effects you.
Living Away from Home Allowances (LAHFA)
True Living away from Home allowances are treated as a fringe benefit and should not appear on your PAYG Summary. There are no deductions claimable against LAHFA. If you have a LAHFA on your PAYG summary then you need to go back to your employer to get more information on what this payment was for as it may have been a travel allowance.
The ATO are focusing on Travel Allowances and the amounts claimed against these allowances. In order to claim a deduction for a Travel Allowance you need to be travelling overnight on work. Note that the receipt of an allowance does not automatically authorise a claim – the travel allowances must actually be incurred. While the ATO have an amount it says is reasonable for travel expenses which is based on your income and where you go, you must be able to substantiate that these expenses are reasonable. Some of the ways they suggest you substantiate this is some record of where you went to eat and the type of meals and general price range. This seems crazy as it is a set amount but the ATO wants to know that you actually did eat out! (take for example a truck driver who receives an allowance but takes his own food but then claims the allowance – they want to know you actually went to the Truck Stop, what you were likely to eat and how much it is likely to cost!!) We suggest you either take photos of menus or use the handisoft app to track your actual expenses.
Note that if you are away for 6 or more nights in a way you need to have a travel diary.
Home Loan Reduction Schemes
The bottom line is any scheme that puts all your income into a home loan whilst capitalising seemingly deductible interest on investment loans is not going to work. It is ok to have a home loan with an offset account where you pay the majority of your investment income to keep the interest down on your home loan, provided you pay the interest on the investment loan and it isn’t capitalised. There are many variations and suggestions on this matter so please seek advice from your accountant as well as your financial planner.
Excess Super Contributions
If you put excess concessional (deductible) contributions into your super fund this year then it will be added to your taxable income and taxed at your marginal tax rate. The good news is that you get a rebate in your own name for the 15% tax the super fund will pay on this contribution. The bad news is that the ATO will also levy you with interest on this amount from 1/7/14 to the date of the amended assessment to add the super as it cannot do this until it gets the information from your super fund. This interest is non-deductible and not remittable by the ATO.
You can also request 85% of the excess contributed back from the fund if you wish. While generally we suggest you don’t go over your contribution cap, there may be benefits in over-contributing. A discussion with your accountant and financial planner will be able to help. Also keep in mind that excess contributions are still deductible to your employer.
What is super splitting you ask? If your spouse is under 65 or over 55 and not retired, super splitting allows you to split 85% of your contributions to your spouse. The split contributions are not included in your spouse’s contribution limit cap as it is included in yours. This is a good way to boost superannuation for a spouse that is nearing retirement and getting extra contributions across to their superannuation balance. Again this is something that is best discussed with your financial planner.
Share Trading vs. Share Investor
The ATO have had a lot of activity in this area, especially as many people have tried to classify themselves as traders to use the losses of the GFC to offset their other income. This has always been a grey area as the ATO’s rules are:
- Whether the taxpayer has a profit making intention (who doesn’t)
- The repetition, regularity, volume and turnover of share transactions
- Whether the taxpayer undertakes their activities in a business-like manner
It all comes down to repetition, regularity, volume & turnover. Recent decisions have pointed to the relevance of working in another full-time occupation and have shown that if you have another full-time occupation you are unlikely to be in the business of share trading. The bottom line is if you are in doubt; consult your accountant ASAP as it can effect the deductions available to you.
Taxation of Overseas Income
If you are a resident for tax purposes then ALL income you receive overseas is taxable in Australia. This includes any income earned whilst temporarily out of the country such as a “Gap Year”. In order to prove that you are a non-resident and any income received overseas is not taxable in Australia you need to be able to prove that you have moved overseas permanently. Things that the ATO look at here are whether you have established a permanent abode overseas, the continuity of association with your family in Australia and your outgoing immigration passenger cards. There are lots of ‘grey’ areas in this so it is an issue that if you thinking about classing yourself as a non-resident, please discuss this with your accountant.
Audit Hot Spots
- Claims for remuneration of spouse, gifts, advertising & referral expenses. You really need to be able to show increased ability to earn due to these expenses. Another big ‘grey’ area that needs discussion with your accountant
- Claiming motor vehicle expenses for “Work Horse Vehicles” that are not cars. These are usually some types of utilities. You are not able to claim the klm method or 1/3 of cost method for these vehicles as they are not cars. You need to be able to determine a reasonable % to claim so in reality you need to have a logbook to prove business travel.
- Home to work Travel – Generally travel from home to work is non-deductible, regardless of the vehicle used. There may be some tax savings for employees to salary sacrifice such a vehicle through their employment arrangement.
- Log books – need to be no more than 5 years old and need to be completed for 13 consecutive weeks. Each journey must be logged with details to show where and where you went and why.
- Home Offices may trigger Capital Gains Tax! If you have a business and you use a designated office or an employee who isn’t proved with an office, then it means that there may be CGT when you sell your house. The rule is that if you are eligible to claim an interest deduction it will trigger CGT whether you do claim it or not. So the bottom line is that you may as well claim it. Note here that if your spouse owns the property 100% and is not involved in the business then there is no CGT. Also the small business concessions will be available as the office is an active asset.
- Fly-In/Fly-Out or Drive-In/Drive-Out workers – Transport and accommodation to get to work is non-deductible regardless of what you carrying.
- Personal Services Contractors (Employees contracting labour) – all travel is non-deductible.
Last but not least, the ATO have come into the digital era and are using data matching. Not only are they talking to centrelink but also the credit card providers, health funds and businesses. Businesses in the building & construction industry are now required to report all payments to contractors for labour which means the ATO know what you have earned. Also businesses such as car yards and Harvey Norman report asset purchases which means the ATO can work backwards to determine what you earn. Now, more than ever it is essential that you declare ALL income you earn.