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What is the Best Business Structure?

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At the start of each year, business owners typically review their affairs, including at times their trading structure. Others may be going into business and choosing their initial structure.  Choosing the right one for your business is an important decision as it can impact decisions initially, and further down the line. We provided a brief introduction to these structures for business owners, new or existing looking for a bit of clarity of the subject. Here are the main characteristics of the various business structures. 

There are four main business structures – partnership, trust, company and sole trader (or a combination of these).

Partnership

A partnership is a group or association of people who carry on a business and distribute income or losses between themselves (between two and up to 20 people). The partners themselves are liable for tax on the income from the partnership commensurate with their share of the partnership, however this is again subject to the PSI rules – see earlier. The losses and control of the business are also personally shared. Partnerships are governed by a partnership agreement which should be in writing and deal with all aspects of how the partnership operates. Some of the advantages of operating a partnership is that they are easy to understand, reasonably inexpensive to set up and maintain, and other individuals can easily be admitted. On the other hand, there is no real asset protection, in that each partners ‘jointly and severally’ liable for the partnership’s debts (that is, each partner is liable for their share of the partnership debts as well as being liable for all the debts). Each partner is also an agent of the partnership and is liable for actions by other partners.

Trust

This is quite a common business structure whereby the trustee holds your business on trust for the benefit of the beneficiaries (usually the business owners, but can include other parties such as family members, companies etc). The trustee can be a person or a company and is responsible for the operation of the trust including compliance with its deed. In practical terms, the beneficiaries pay tax on the trust income that they receive from the trust at their own tax rate. Note however that trust income may be caught by the PSI rules, see earlier.

The advantages of a trust include asset protection (even more so when there’s a corporate trustee), potential legal tax minimisation, and for family trusts compliance is relatively straightforward. On the downside, trusts can be complex, costly to establish, and on the tax front losses are trapped inside the structure and can only be used to offset future income. Trusts are also a strong focus of the ATO.

Company

Here, the directors (and mainly in the case of small businesses, shareholders) run the business. The company itself pays tax on the income at a reasonably low company tax rate of 25%, though directors can be personally liable for tax if they are caught by the personal services income (PSI) rules. These rules can come in to play where the business income is a result of your personal effort, expertise or skills. Subject to any personal guarantees or any director penalty notices being issued, companies provide asset protection for the owners, potential legal tax minimisation, they easily allow the admission of new business partners, and they can trade anywhere in Australia. On the downside, companies are not eligible for the 50% CGT discount, are highly scrutinised and regulated, and are reasonably expensive to establish, maintain and wind up.

Sole trader

This is how many businesses commence. Under this structure, an individual operates the business and is liable for all aspects of the business including income, debts and losses. These can’t be shared with any other individual. Advantages of this structure include simplicity, and minimal set up or ongoing costs. Disadvantages include personal liability, and also an inability to take on a business partner, noting however that as a sole trader you can still employ workers.

What you need to know

Aside from tax, there are many factors to consider when determining the best structure for your business, including ease of understanding, set up and compliance costs, the ability to admit new owners, asset protection etc. You can change your business structure at any time, however there may be costs involved such as capital gains tax and stamp duty. Talk to a professional if you are considering changing your structure or if you are going into business and choosing your initial structure.

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This is a de Kretser Client Information Newsletter keeping you on top of the issues, news and changes you need to
know. Should you require further information on any of the topics covered, please contact us via the details below.
T: +61 3 9550 6900 E:admin@dekretser.com.au

De Kretser’s Measure for Success in 2022

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Success is a term that can be perceived in many different ways simply because one’s success isn’t synonymous with another’s. This topic has always spiked interesting conversations amongst our team members. We believe that if we are responsible for our own happiness then we must surely be responsible for our own success.

As a team, we managed to put forth the unique elements that contribute to de Kretser’s success. As we head towards a new year, and with a clear vision in mind, we thought we would share with you just what that means. We wouldn’t be in this line of work if we didn’t understand numbers. That is why when it comes down to measuring de Kretser’s success, we use Key Performance Indicators such as client and performance based metrics to evaluate the impact on our overall company productivity.

Success can be measured by cumulating the wins

Whether big or small, individual or organisational, all wins impact on the productivity and success. It’s not always about celebrating the Big Wins like on-boarding new clients but the importance of celebrating the small wins along the way. It’s been crucial for our team to highlight daily successes, especially during tax season. Our team has often managed to tick off even the most arduous tasks on a To-Do list. Although this may not be considered an actual win, for our team completing these tasks meant that we were able to help more clients with issues involving taxes and compliance.

With this said, we definitely achieve more as a group. We strongly believe in teamwork and have been a lot more productive because of it. We must admit, being able to work collaboratively is an attribute that we look for in potential employees. Many people think that Accountants are introverts and would assume that we work best alone but this couldn’t be further from the truth. Our natural ability to collaborate and work in unison has given us an advantage over the competition.

Celebrating employees and creating engagement

There are many imaginative ways to celebrate success. Most recently, Kirsty, our Senior Accountant, celebrated her 10-year work anniversary. Kirsty’s work anniversary was a great way to underline her strengths but also our way of showing appreciation. Kirsty’s milestone work anniversary was not something that we took lightly.

Our team decided to hold a Cork and Canvas to celebrate Kirsty’s loyalty and dedication to the de Kretser team. The group activity and workshop had wonderful outcomes. It increased employee engagement, allowed for team bonding opportunities and helped communicate and translate our brand values to our newest team members.

We found that the more we highlight success the more our employees feel valued and have a sense of belonging. It also helps in communicating the brand, which can eventually lead to boosting company productivity. We have a high employee retention rate and this contributes to our success.

Success is determined by the strength of our relationships

We build and create strong relationships with other team members and clients alike. It must be said that we have a loyal client base and some have been with the company for over 40 years. Through the years, the relationships built have helped establish de Kretser as a brand. Today we are honoured to consider so many clients part of our family. In our many years of practice, we are certain that there is nothing more valuable than building positive client relationships, which have directly translated to our success.

From individual achievements and work anniversaries to 40-year client relationships- small or big wins, the way we measure our success is always through specific goals, setting targets and KPIs, which we’ve met and exceeded year after year. As we approach 2022, we look forward to kicking more goals and celebrating with you.

And to whatever your success may look like for you in 2022 and beyond, we will support you along the way…

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How to Obtain your Director ID

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The director identification number(director ID) regime is now in place with Australia’s newest company directors having to comply first. Director IDs are a unique 15-digit identifier that a director will apply for once and will keep forever, similar to a tax file number (TFN). A director can only have one director ID and they must use it for all relevant entities.

Background

In the 2020 federal budget, as part of its Digital Business Plan, the government announced the full implementation of the Modernising Business Registers (MBR) Program. This program unifies the Australian Business Register and 31 business registers administered by ASIC into a single platform and introduces the director ID initiative. Director IDs are intended to prevent false or fraudulent registration of directors, to enable regulators to better trace directors’ relationships with companies, so as to facilitate accountability and traceability. Director IDs will also assist the reduction in phoenixing activities where by a company is deliberately placed into liquidation, wound up or abandoned to avoid paying its debts (such as superannuation owed to employees, tax owed to the ATO, or debts owed to suppliers/contractors). Under phoenixing, a new company is then started to continue the same business activities, but without the debts.

Who Needs to Apply?

The table on the following page outlines who is and is not required to apply for a director ID. As can be seen, it applies not only to company directors, but to non-business people as well. The time by which a director ID application must be made depends on the date of appointment as follows:

Date of AppointmentDate for Director Application
On or before 31 October 2021By 30 November 2022
Between 1 November 2021 and 4 April 2022Within 28 days of appointment
From 5 April 2022Before appointment

Therefore, there is some urgency if you are a newly-appointed director from 1 November 2021. You may need to apply for a director ID within 28 days of your appointment.

How do you Apply?

Directors will need to apply for a director ID themselves in order to verify their identity. This means that advisers and accountants/tax agents are unable to apply for a director ID on behalf of their director clients. Directors will need to visit the ABRS website (abrs.gov.au)and click on “Director identification number” near the top of the homepage. Otherwise, directors can scroll down and click on “Apply for your director ID”. Directors can then follow the three-step process set out on the website:

  • Step 1 – Set-up a myGovID (not the same as myGov)
  • Step 2 – Gather documents required for identification
  • Step 3 – Complete your application
Must ApplyNo Need to Apply
Directors appointed under the Corporations ActCompany secretaries who are not directors
Company directors appointed under the Corporations Aboriginal and
Torres Strait Islander Act		Directors of a registered charity with an organisation type that is not registered with ASIC to operate throughout Australia
Member of an SMSF for which there is a corporate trusteeIndividuals who are sole traders or partners in a partnership
Directors of a family trustAn officer of an unincorporated association, cooperative or incorporated association established under state or territory legislation, unless the organisation is also a registered Australian body
Directors acting in the capacity of an alternative director (even if
appointed for a specified period or on a temporary basis)

The application process should take less than five minutes and, once complete, the director will instantly receive their director ID. Applicants must provide their TFN, their address as recorded by the ATO, and two basic identification documents. If preferred, directors can also apply for their director ID by telephone or by using paper.

Penalties

The harsh penalties that can be imposed, offer a great incentive to obtain a director ID on time and comply with the ongoing rules. Civil and criminal penalties of up to 60 points ($13,320), or a criminal penalty of up to one year imprisonment can apply where an individual:

  • Fails to apply for a director ID when required to do so(see earlier timeframes)
  • Intentionally applies for more than one director ID
  • Provides a false director ID, or is actively contravening one of the above offences.Directors of an SMSF corporate trustee who fail to obtain a director ID may be forced to step down as a trustee and potentially leave the fund.

Take-home messages

  • All directors should apply for their director ID well before the relevant deadline.
  • Directors should also take care when applying for their director ID. They must only apply via theabrs.gov.au website as it is a secure site that will keep your information safe

To stay informed and connected, follow us on LinkedIn

This is a de Kretser Client Information Newsletter keeping you on top of the issues, news and changes you need to
know. Should you require further information on any of the topics covered, please contact us via the details below.
T: +61 3 9550 6900 E:admin@dekretser.com.au

de Kretser Chartered Accountants support animal charities

de Kretser Celebrates Milestone Birthday by Giving Back:

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At de Kretser Chartered Accountants, we love to celebrate achievements and accomplishments; we love to celebrate people.

For many years, Suzie de Kretser, the matriarch of the family has continuously given back to the community. She is recognised in the community for her charitable work and her generous contributions to various charities such as German Shepherd Rescue Victoria (GSRV), The Prahran Mission and Pets of The Homeless.

A very charitable birthday

Donate to Pets of The Homeless

I believe this is the opportune time to underline that Suzie will be turning 70 this month of June. With great modesty, she has declined any formal type of celebrations and this includes gifts of any kind. For her milestone birthday, instead, Suzie has requested that we give back to ones who deserve it the most. For her 70th birthday, Suzie has decided to support Pets of The Homeless (POTH).

POTH is a charity that offers essential services such as nutritious meals and emergency veterinary care to pets that live amongst the homeless. Since 2015, POTH has distributed more than 400, 000 nutritious pet meals to the community.

Throughout the month of June, de Kretser Chartered Accountants will be supporting Pets of the Homeless through mycause.

Suzie decided to accentuate support for POTH due to increasing numbers and issues related to homelessness across the CBD of Melbourne and outer suburbs.

“Homelessness is real issue. These are difficult times for businesses and many individuals are struggling to get back on their feet, as it’s been a rough year. Pets are loyal to their masters and will stick by them through thick and thin. Sadly, pets can also find themselves homeless without proper care, food or shelter” said Suzie.

While we are currently in lockdown, there is a greater need to create awareness for pets that are struggling to survive. Your funds will be allocated to our less fortunate pets and will help to provide essentials such as food, veterinary visits and general overall care.

Click on the link to support Pets of The Homeless

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SMSF trustees or directors: What is Required from the ATO?

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All members of a self-managed super fund (SMSF) must be individual trustees or directors of the fund’s corporate trustee. Anyone 18 years old or over can be a trustee or director of a super fund as long as they’re not under a legal disability (such as mental incapacity) or a disqualified person.

The Responsibilities

Whether you’re a trustee or director of a corporate trustee, you are responsible for running the fund and making decisions that affect the retirement interests of each fund member, including yourself. As a trustee or director, you must:

  • Act honestly in all matters concerning the fund
  • Act in the best interests of all fund members when you make decisions
  • Manage the fund separately from your own superannuation affairs
  • Know, understand and meet your responsibilities and obligations
  • Ensure that the SMSF complies with the laws that apply to it

All trustees and directors are equally responsible for managing the fund and making decisions. You are responsible for decisions made by other trustees, even if you’re not actively involved in making the decision. You can appoint other people to help you or provide services to your fund (for example, an accountant, administrator, tax agent or financial planner). However, the ultimate responsibility and accountability for the SMSF’s actions lie with you, as trustee or director. As an individual trustee or director of a corporate trustee, you may be personally liable to pay an administrative penalty if certain laws relating to SMSFs are not followed.

Other members of the fund can take action against you if you don’t follow the terms of the trust deed. Any fund member who suffers loss or damage because of a breach of any trustee duties may sue any person involved in the breach.

Other eligibility factors should not be overlooked. To knowingly act as a trustee, a trustee director or an office holder of a corporate trustee (such as secretary), while being a disqualified person, is an offence. To be sure you are not a disqualified person you need to be able to answer “no” to all of the following questions.

 
1. Have you ever been convicted of a dishonest offence, in any state, territory or a foreign country?

Offences of a dishonest conduct are things such as fraud, theft, illegal activity or dealings. These convictions are for offences that occurred at any time, including convictions that have been “spent” and those that the court has not recorded, due to age or being a first offender.

2. Have you ever been issued with a civil penalty order?

Civil penalty orders are imposed when an individual contravenes a civil penalty provision (this can be an order to pay a fine or serve jail time).

3. Are you currently bankrupt or insolvent under administration?

You cannot be a trustee of an SMSF while you are an undischarged bankrupt, and you cannot remain a trustee if you become bankrupt or insolvent after you are appointed.

4. Have you been previously disqualified by the ATO or APRA?

The Commissioner of Taxation, as the SMSF regulator, can disqualify a trustee, which is permanent and is not just specific to the SMSF you were a trustee of at the time. The Federal Court can make an order to disqualify a trustee of an APRA fund. This is permanent and this disqualification does not allow you to operate an SMSF

To stay informed and connected, please follow us on LinkedIn

This is a de Kretser Client Information Newsletter keeping you on top of the issues, news and changes you need to
know. Should you require further information on any of the topics covered, please contact us via the details below.
T: +61 3 9550 6900 E:admin@dekretser.com.au

Must Love Pets: A True de Kretser Story

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Many people outside of the accounting field may find it difficult to imagine an accountant without a computer, a calculator or even a tax file report. Popular opinion may even focus on an accountant’s introverted qualities. But if you’re willing to take a few moments, you might discover that there is more to an accountant than meets the eye.

The truth is that behind every accountant is a relatable and humanitarian side and our team at de Kretser Chartered Accountants would like to share a little more about ourselves.

 

“There’s simply more to being a good accountant”

Accounting services and business advice is part of any Chartered Accountants position description but what our team actually accomplishes in one day may astonish you. In addition to our regular performed tasks, our professionals and Chartered Accountants will offer your canine companion complimentary services such as petting, rewarding and we even give them treats. Let’s just say that a large doggie-biscuit-filled jar does come in handy but definitely doesn’t last long. We do extend our love and appreciation to all pets, especially the ones that don’t have shelter, loving homes or access to proper veterinary care. We simply take these matters to heart.

Our team has a love and respect for animals, one that can be traced back to over 50 years ago when Suzie de Kretser, the matriarch of the family and the Administrative Assistant of the practice, cared for the sheep at her family farm in the Western District. This care and nurture of animals has been passed from one generation to the next and has now become contagious. The gentle Djamacia, the loyal office German Shepherd has recently been awarded the title of the “accountant’s best friend”.

 

“The de Kretser Chartered Accountants, give a dog a bone”

It is only natural that when Suzie came across Pets of The Homeless (POTH), that she would offer her support in any way she could think of. Since the beginning of 2020, Suzie has personally donated more than $1000 to the charity. She also encourages our team and clients to do the same. These funds have help POTH offer essential services such as nutritious meals and emergency veterinary care to pets that haven’t been so lucky in life.

“True animal lovers nurture and provide care to the most vulnerable pets”

Recently, we received great news from POTH notifying us that Tiger (cat) and George (dog), two beloved pets that once belonged to homeless individuals had been permanently transferred to palliative care due to their old age. Emergency care and health services were made available to these majestic creatures. Defenceless animals may not have a voice but as an accounting practice with philanthropic and humanitarian values, we make it our duty of care to show high levels of social responsibility.

Donations, fundraisers and volunteering do make a difference in the community. For more information on POTH or to find out more on how you can get involved, please visit https://petsofthehomeless.org.au/

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Federal Budget 2021-2022: Relief for many taxpayers and businesses

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Rather, the Government has decided to put its foot on the accelerator with the hope that the growth in the economy over a long period of time will help to pay down the debt that has been central to theGovernment’s response to COVID-19. On personal taxation, in an expected announcement, the Government confirmed that it will extend the low and middle income tax offset (LMITO) beyond 2020-21 so that taxpayers will continue to receive the tax offset (between $255 and $1,080) in the 2021-22 income year.




In summary, the major tax-related measures announced in the Budget included:

■ LMITO retained for 2021-22 – the Government will retain the low and middle income tax offset for the 2021-22 income year. The LMITO provides a reduction in tax of up to $1,080.

■ Loss carry-back extended – the loss years in respect of which an eligible company (aggregated annual turnover of up to $5 billion) can currently carry back a tax loss (2019-20, 2020-21 and 2021-22) will be extended to include the 2022-23 income year.

■ ATO debt recovery – the AAT will be given the power to pause or modify ATO debt recovery action in relation to disputed debts of small businesses.

■ Employee share schemes – the Government will remove the cessation of employment as a taxing point for the tax-deferred employee share schemes.

■Loss carry-back extended – the loss years in respect of which an eligible company (aggregated annual turnover of up to $5 billion) can currently carry back a tax loss (2019-20, 2020-21 and 2021-22) will be extended to include the 2022-23 income year.

■ Personal tax rates – no changes were made to personal tax rates, the Government having already brought forward the Stage 2 tax rates to 1 July 2020. The Stage 3 personal income tax cuts remain unchanged and will commence in 2024-25 as already legislated.

■ Temporary full expensing extended – the Government will extend the 2020-21 temporary full expensing measures for 12 months until 30 June 2023. This will allow eligible businesses with aggregated annual turnover or total income of less than $5 billion to deduct the full cost of eligible depreciable assets of any value, acquired from 7:30pm AEDT on 6 October 2020 and first used or installed ready for use by 30 June 2023.

■ Employee share schemes – the Government will remove the cessation of employment as a taxing point for the tax-deferred employee share schemes.

■ Individual residency test reformed – the Government will replace the existing tests for the tax residency of individuals with a primary «bright line» test under which a person who is physically present in Australia for 183 days or more in any income year will be an Australian tax resident.



SUPERANNUATION AND RELATED MEASURES

The key superannuation and related measures announced in the Budget include:

■ Super Guarantee $450 per month threshold – to be removed from 1 July 2022.

■ Downsizer contributions – eligibility age to be lowered from 65 to 60.

■ First Home Super Scheme – to be extended for withdrawals up to $50,000, plus some technical changes for tax and administration errors in applications.

■ Victims of domestic violence – the Government will not proceed with its previous proposal to extend the early release of super to victims of family and domestic violence.

■ Pension Loans Scheme – will be expanded to allow
access up to two lump sums in any 12-month period
(up to a total of 50% of the maximum annual Age
Pension); together with a Government guarantee that
“no negative equity” will apply

■ Superannuation contributions work test – to be repealed from 1 July 2022 for voluntary non con-cessional and salary sacrificed contributions for those under age 75. However, the work test will still apply for personal deductible contributions by those aged 67-74.

■ SMSF residency rules – to be relaxed by extending the central management and control test safe harbour from two to five years, and removing the active member test for both SMSFs and small APRA funds.

■ Conversions of legacy income streams – individuals will be permitted to exit certain legacy retirement income stream products (excluding flexipensions or lifetime products in APRA-funds or public sector schemes), together with any associate reserves, for a two-year period. Any commuted reserves will not be counted towards an individual’s concessional contribution cap. Instead, they will be taxed as an assessable contribution for the fund.

Temporary full expensing: extended to 30 June 2023

The Government will extend the temporary full expensing measure until 30 June 2023. It was otherwise due to finish on 30 June 2022.

Other than the extended date, all other elements of temporary full expensing will remain unchanged. The measure allows eligible businesses to deduct the full cost of eligible depreciating assets, as well as the full amount of the second element of cost.

A business qualifies for temporary full expensing if it is a small business (annual aggregated turnover under $10 million) or has an annual aggregated turnover under $5 billion.

Loss carry-back extended by one year

Annual aggregated turnover is generally worked out on the same basis as for small businesses, except the threshold is $5 billion instead of $10 million. Assets must be acquired from 7:30pm AEDT on 6 October 2020 and first used or installed ready for use by 30 June 2023.

Under the temporary, COVID driven, restoration of the loss carry back provisions announced in the 2020- 21 Budget, an eligible company (aggregated annual turnover of up to $5 billion) could carry back a tax loss for the 2019-20, 2020-21 or 2021-22 income years to offset tax paid in the 2018-19 or later income years.

The Government will extend the eligible tax loss years to include the 2022-23 income year. Tax refunds resulting from loss carry back will be available to companies when they lodge their 2020-21, 2021-22 and now 2022-23 tax returns.

This will help increase cash flow for businesses in future years and support companies that were profitable and paying tax but find themselves in a loss position as a result of the COVID-19 pandemic. Temporary loss carry-back also complements the temporary full expensing measure by allowing more companies to take advantage of expensing, while it is available.

Intangible assets depreciation: option to self-assess effective life

The Budget confirmed that the income tax law will be amended to allow taxpayers to self-assess the effective
life of certain intangible assets (such as intellectual property and in-house software), rather than being required to use the effective life currently prescribed. This amendment will apply to patents, registered designs, copyrights and in-house software for tax purposes

Taxpayers will be able to bring deductions forward if they self-assess the assets as having a shorter effective life to the statutory life. The self-assessment of effective lives will apply to eligible assets acquired following the completion of temporary full expensing (introduced in the 2020-21 Budget — ie to assets acquired from 1 July 2023).

The amendments, as they affect companies incorporated offshore, will have effect from the first income year after the date the enabling legislation receives assent, but taxpayers will have the option of applying the new law from 15 March 2017 (the date on which the ATO withdrew an earlier ruling).It not known whether the same arrangements will apply for the start date for trusts and corporate limited partnerships should they be brought under the new rules.

Extended consultation on corporate tax residency rules

In the 2020-21 Budget, the Government announced that it would amend the law to provide that a company that is incorporated offshore will be treated as an Australian tax resident if it has a “significant economic connection to Australia”. This test will be satisfied w here both the company’s core commercial activities are undertaken in Australia and its central management and control is in Australia.

The Government has now announced that it will consult on broadening this amendment to trusts and corporate limited partnerships. The Government will seek industry’s views as part of the consultation on the original corporate residency amendment.

Small businesses to be able to pause disputed ATO debt recovery

The Government will introduce legislation to allow small businesses to pause or modify ATO debt recovery action where the debt is being disputed in the AAT. Specifically, the changes will allow the Small Business Taxation Division of the AAT to pause or modify any ATO debt recovery actions – such as garnishee notices and the recovery of GIC or related penalties – until the underlying dispute is resolved by the AAT.

This measure is intended to provide an “avenue” for small businesses to ensure they are not required to start paying a disputed debt until the matter has been determined by the AAT.

Small business entities (including individuals carrying on a business) with an aggregated turnover of less than $10 million per year will be eligible to use the option. The AAT will be required to “have regard to the integrity of the tax system” in deciding whether to pause or modify the ATO’s debt recovery actions.

To stay informed and connected, please follow us on LinkedIn


This is a de Kretser Client Information Newsletter keeping you on top of the issues, news and changes you need to
know. Should you require further information on any of the topics covered, please contact us via the details below.
T: +61 3 9550 6900 E: admin@dekretser.com.au

Tax tips for a smooth EOFY

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The financial year is almost over, but there are still effective strategies you may be able to put in place. The aim is to make sure you pay no more tax than you have to for the 2020-21 year and maximise any refunds you may be entitled to. This is still the case, if not more so, in the on-going COVID-19 environment.

While the best strategies are adopted as early as possible in a financial year and not at the end, it’s worth remembering proper tax planning is more than just sourcing bigger and better deductions. The best tips involve assessing your current circumstances and planning your associated income and deductions from income year to income year. Not all of the following tips will suit everyone’s specific circumstances, but they should provide a list of possibilities that may get you thinking along the right track for your tax planning.

Pre-Pay Investment Loan Interest

If you have some spare cash, then see if you can negotiate with your finance provider to pay interest on borrowings upfront for the investment property or margin loan on shares (or other loan types) and make that deduction available this year. Most taxpayers can claim a deduction for up to 12 months ahead. But make sure your lender has allocated funds secured against your property correctly, as a tax deduction is generally only allowed against the finance costs incurred for the purpose of earning assessable income from investments. Be aware that a deduction may not be available on funds you redraw from a loan of this type that is put o other purposes. Also, a component of the National Rental Affordability Scheme payment is not assessable income and therefore the deduction on these properties may need to be apportioned.

Investment Property

Expenses stemming from your rental property can be claimed in full or in part, so, if possible, it can be helpful to bring forward any expenses that can be undertaken before June 30 and claim them in the current financial year. If you know that your investment property needs some repairs, some gutter clean up or some tree lopping, for example, see if you can bring the maintenance and (deductible) payments into the 2020-21 year. It should also be noted that deductible rental property expenses remain deductible even if the property is not rented as long as it is genuinely available for rent (which is relevant in the current COVID-19 environment).

Temporary Full Expensing

The temporary full expensing regime is now operable for depreciating assets acquired after 6 October 2020 and before 30 June 2022. The full cost of acquiring depreciating assets is deductible in the year of income in which the asset is first held, provided the item is first used, or installed ready for use, by 30 June 2022.

The cost of improvements made to a depreciating asset is also deductible in the year of income the improvements are made (no later than 30 June 2022). In contrast to the instant asset write-off rules, there is no upper limit on the amount that can be fully deducted in respect of any asset. This may enable some effective tax planning between the 2021 and 2022 tax years where there are assets you have been looking to acquire or improve

The ATO’s Clarification

In October 2020, the ATO updated its website clarifying the objective andsupportable evidence needed to support real property valuations. The ATO listed the following examples of various items it considered may be useful:

  • Independent appraisals from real estate agents (ie, kerb side valuations)
  • Sales contract (provided the purchase is recent and no events have occurred to the property that could materially impact its value since the purchase, such as perhaps a global pandemic or natural disaster)
  • Recent sales of comparable property in the area
  • Rates notices — provided they are consistent with other evidence on valuation
  • Net income yield of commercial properties. (The ATO notes, however, that this on its own is not sufficient and is only appropriate where tenants are unrelated.)

Use the CGT Rule to your Advantage

If you have made and crystallised any capital gain from your investments this financial year (which will be added to your assessable income), think about selling any investments on which you have made a loss before 30 June. Doing so means the gains you made on your successful investments can be offset against the losses from the less successful ones, reducing your overall taxable income.

And while there may be many opportunities to realise capital losses in the current circumstances, you should be aware that the deliberate realisation of capital losses for the purpose of reducing capital gains in some circumstances may trigger a response from the ATO. Keep in mind that for CGT purposes a capital gain generally occurs on the date you sign a contract, not when you settle on a property purchase or share transaction. When you are making a large capital gain toward the end of an income year, knowing which financial year the gain will be attributed to can be a handy tax planning advantage. Of course, tread carefully and don’t let mere tax drive your investment decisions – but check to determine whether this strategy will suit your circumstances, and whether you risk attracting the attention of the ATO in any way.

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This is a de Kretser Client Information Newsletter keeping you on top of the issues, news and changes you need to know. Should you require further information on any of the topics covered, please contact us via the details below.
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