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The thing that every property investor should know about is that if you are holding an investment property eventually you will likely have to pay Capital Gains Tax (CGT)

 

In this post, we will find out:

  1. WHAT IS THE CAPITAL GAINS TAX?
  2. HOW MUCH IS IS THE CAPITAL GAINS TAX?
  3. HOW TO CALCULATE YOUR CAPITAL GAIN?

 

What is Capital Gains Tax?

Capital Gains Tax was introduced in Australia in 1985 and applies to any asset you’ve acquired since that time unless specifically exempted.

 

According to the Australian Tax Office, a capital gain or capital loss on an asset is the difference (the gain) between what the property was the cost to you (we call this Cost Base) and what you receive when you dispose of it (we call this sale to proceed).

 

Tax is levied on again made as a result of the sale proceed, which forms part of your income tax and is NOT considered a separate tax – though it’s referred to as CGT.

 

In most of the cases if an asset is held for 12 months or more, then any gain is first discounted by 50% for individual taxpayers and most Trusts or by 33.3%for superannuation funds.

 

Capital loss from one asset can be offset against capital gains from other assets,  and net capital losses in a tax year may be carried forward indefinitely.

 

However, if there is a capital loss, then it will be either used to offset other capital gains in the financial year or carried to later financial years forever until it is offset up.

 

According to the ATO, most personal assets are exempt from CGT, including your home (main resident property), car, and most personal use assets such as furniture. CGT also doesn’t apply to depreciate assets used solely for taxable purposes, such as business equipment or fittings in a rental property.  

 

Foreign residents only pay capital gain tax if a gain is made on an asset that is ‘taxable Australian property’.

 

If you’re an Australian resident for tax purposes, CGT applies to your assets no matter which country it is located.

 

When you sell off an asset it’s called a CGT event, which is the moment when you make a capital gain or capital loss. Therefore the timing of a CGT event is important because it tells you in which income year to report your capital gain or capital loss, and may affect how you calculate your tax liability.

 

In the case of real estate, for example, the CGT event generally occurs when you enter into the contract (contract signed and exchange) – that is, the date on the contract, not when you settle.

 

How much is Capital Gains Tax?

The vast majority of people pay Capital Gains Tax on a rental property when they sell, or dispose, of it, so it’s important to understand how CGT is calculated.

 

CGT can be a little tricky to calculate, that’s why it’s so important to have a good accountant on your side – BOA & Co. is CGT specialist to safeguard your investment return.

 

Remember CGT is only payable in the financial year in which you sell or dispose of your rental property.

 

For most CGT events, your capital gain is the difference between your capital proceeds and the cost base of your CGT asset – that is, where you receive more for an asset than it cost you.

 

According to the ATO, the cost base of a CGT asset is largely what you paid for it, together with some other costs associated with acquiring, holding and disposing of it.

 

If the rental property or asset was acquired before 1985, then no CGT is payable, however,  major improvements to a property since that time may be subject to CGT.

 

There are two main measures to calculate your CGT

The two different calculations are:

  • CGT discount method

 

For assets held for 12 months or more before the relevant CGT event. Allows you to reduce your capital gain by:

  • 50 per cent for individuals (including partners in partnerships) and trusts
  • 33.33 per cent for a complying Self-managed Super Fund.

 

This is generally not available to companies.

  • Indexation method

 

For assets acquired before 11.45 am (by legal time in the ACT) on 21 September 1999 (and held for 12 months or more before the relevant CGT event).

  • Allows you to increase the cost base by applying an indexation factor based on the consumer price index (CPI) up to September 1999.

 

An example of using the CGT discount method is:

Justin purchased a rental property on 1 June 2016 for $300,000 and sold it for $350,000 on 15 July 2018.

 

As she owned the asset for more than 12 months she is entitled to the 50 per cent CGT discount.

 

She would need to also subtract the cost base from the capital proceeds, deduct any capital losses, then reduce by the relevant discount percentage.

 

There is a Capital Gains Tax calculators available on our website so you can work out how much CGT you might have to pay if you sell a rental property.

 

It’s important, of course, to speak to our taxation accountant when it comes time to decide on selling off or before lodging your income tax return so ensure you did it right. 

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What’s New for 2020FY Home Office Tax Claims due to COVID-19

With an increased number of employees working from home due to the Covid-19 pandemic, home office expense claims have become more common deduction items for the 2020 tax year. Anyone who has worked from home, they may be able to claim a tax deduction for expenses they necessarily incur related to performing their work duties.

 

Traditionally expenses that can be claimed as a tax deduction by employees required to work from home includes two categories:

  1. Home office running expenses, and 
  2. Occupancy expenses.

 

Home office running expenses

In most cases, claiming tax deductions for these items will require some substantive evidence which should be understood to demonstrate how the deduction has been calculated. 

The ATO allows the following methods for calculating running expenses:

 

Fixed-rate

A fixed-rate of 52 cents per hour can be claimed for each hour worked from home and represents running expenses. This method is simple and more commonly used as it does not require full substantiation of actual expenses. Employees will need to keep a record of actual hours worked at home or a diary showing the usual pattern of working from home over a four week period (applied across the remainder of the year).

 

For instance, if an employee spent 10 hours per week for the whole year (48 weeks estimated after excluding public holidays and annual leave), the claim under this method will be 10 hours per week x $0.52 per hour x 48 weeks = $249.60.

 

This method covers heating, cooling, lighting, cleaning and the decline in value of the furniture.

 

If using this method, the following can be claimed in addition as per usage:

  • Phone and internet expenses
  • computer consumables and stationery, and
  • a decline in value on the computer or other equipment

Employees claiming are required to separately work out their eligible claim for these items (as explained below).

 

Actual running expenses

To calculate the claim for running costs, as an alternative to the fixed rate method employees can use the actual running expenses method. This method is more complex requiring more detailed records but may result in a larger claim.

 

To use this method, they will need to work out how much of their household running expenses ‘reasonably’ relate to performing work in the dedicated office. As an example, a reasonable method of apportionment could include working out what floor area relates to the dedicated home office as a percentage of the total floor area of the home. This percentage is applied to actual running costs incurred during the period including electricity etc. Employees will need receipts of expenses and records to prove the claim.

 

Some common examples of working from home expenses an employee can claim a tax deduction for include:

  • lighting, heating and cooling;
  • costs of cleaning the home working area;
  • the decline in value (or, depreciation) of equipment, furniture and fittings in the area used for work. Small capital items costing $300 or less may be claimed in full by individuals i.e. does not need to be depreciated;
  • the cost of repairs to this equipment, furniture and furnishings; and
  • other running expenses, including computer consumables (such as a printer, paper, ink etc.) and stationery.

 

Phone and internet expenses

If employees use the phone or internet for work, they can claim a deduction for the work-related percentage of these expenses if they paid for these costs and have records to support their claims. As above, they will need to formulate a reasonable method of apportioning their work percentage of claims, ordinarily done in the form of a logbook demonstrating a usual pattern of work use.

 

As an alternative, a tax deduction of up to $50 with limited documents can be claimed based on a set rate for work-related use of:

  • 25 cents for calls made from a landline
  • 75 cents for calls made from a mobile
  • 10 cents for text messages sent from a mobile.

 

The shortcut method

Since the beginning of 2020 Covid-19 made people working from home more intensively, the ATO has amplified the claim using the working from home shortcut method,

 

The shortcut method to claim tax deductions at a flat rate of 80c per hour.

 

This method is only available for hours worked from home from 1 March 2020 and unless extended, will apply to 30 June 2020. Claims before 1 March 2020 will need to be calculated using the above-mentioned methods.

 

This method covers all running costs (including depreciation, phone and internet costs), and there is no requirement to operate in a dedicated work area to claim a tax deduction under this method during the eligible time period.

 

 All that is required is a record of the hours worked from home. Further, multiple people in the same household working from home can each make a claim under this method.

 

 If a person worked from home prior to 1 March 2020, then they will need to use one of the other methods to calculate the claim for this period.

 

Home office occupancy expenses

Generally, an employee cannot claim a deduction for occupancy expenses, such as rent, mortgage interest, property insurance, land taxes and rates, unless their home office is a regular place of business. In the event that a home is a place of work, these expenses could be claimed, however, beware that claiming such expenses may have adverse tax consequences such as impacting the main residence CGT exemption.

 

Occupancy expenses can include:

  • Rent
  • Mortgage interest
  • Rates
  • House insurance

 

‘In order to claim occupancy expenses, you must be able to pass what the ATO refers to as the ‘interest deductibility test’

 

Frankly speaking, if you intend to claim a deduction on the interest you pay on your mortgage or rent paid to your landlord, the area you declare as your home office/place of business must have the ‘character’ of a place of business. It should meet the criteria, outlined by the ATO:

  • clearly identifiable as a place of business, for example, you have a sign identifying your business at the front of your house
  • not readily suitable or adaptable for private or domestic purposes
  • used exclusively or almost exclusively for carrying on your business
  • used regularly for visits by your clients.

 

How can BOA & Co. help?

If you need any assistance understanding the above, please contact us on  02 9904 7886 so we can help address your personal circumstances.

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How to make tax-deductible super contributions

What are tax-deductible super contributions?

Tax-deductible super contributions are made from your after-tax income. This income may be from a variety of sources such as your take-home pay, savings, an inheritance or from the sale of assets.

Whatever the source, you can make a payment to your super fund from your bank account either as a one-off payment or a periodic direct debit.

 

Who can make tax-deductible contributions?

There was a time when the only people who could claim a tax deduction for super contributions were self-employed (defined in super legislation as earning less than 10% of their income from salary or wages).

But thanks to changes in super legislation on 1 July 2017, more Australians are now able to make voluntarily tax-deductible, concessional super contributions.

If you are self-employed you can still do this, but now you’re also eligible if you:

  • Earn salary or wages as an employee
  • Earn investment income
  • Receive a government pension or allowance
  • Receive a partnership or trust distribution
  • Earn income from foreign sources
  • Earn superannuation income.

To be eligible to claim a tax deduction for your super contributions you must also:

  • Be aged under 75
  • Meet the work test if you’re aged between 65 and 74
  • Not use the contribution to help fund an existing super income stream or pension
  • Not be splitting the contribution with your spouse (married or de facto)
  • Not make the contribution to an untaxed super fund or a Commonwealth public sector defined benefit fund.

 

What do I need to do to claim a tax deduction on a super contribution?

If you’d like to benefit from a tax deduction on your personal after-tax super contributions, you’ll need to:

Make an after-tax contribution to your super

The amount you choose to contribute is up to you, but remember you cannot contribute more than $25,000 per year under the concessional contributions cap – or penalties will apply. If you’re an AMP super customer, you can set up notifications in My AMP to let you know when you’re nearing your limit.

Lodge a form with your super fund

You’ll need to lodge a notice of intent form with your super fund, which your super fund will acknowledge in writing.

Also note, you shouldn’t make any withdrawals or start drawing a pension from your super before your notice of intent form has been lodged with your super fund.

Are there other things that I should keep in mind?

 

How much can I claim tax-deductible Super Contribution?

If you’re claiming a tax deduction for an after-tax super contribution, the contribution will count towards your concessional contributions cap ($25,000 per year). If you exceed this, penalties will apply. 

From 1 July 2019, your concessional contribution cap may be higher than $25,000 if you’re eligible to use unused concessional contribution cap amounts that you have carried forward from previous years.

Unused concessional cap carry forward

 

Description 2017–18 2018–19 2019–20 2020–21 2021–22
General contributions cap $25,000 $25,000 $25,000 $25,000 $25,000
Total unused available cap accrued Not applicable $0 $22,000 $44,000 $69,000
Maximum cap available $25,000 $25,000 $47,000 $25,000 $94,000
Superannuation balance 30 June prior year Not applicable $480,000 $490,000 $505,000 $490,000
Concessional contributions nil $3,000 $3,000 nil nil
Unused concessional cap amount accrued in the relevant financial year $0 $22,000 $22,000 $25,000 $25,000

It’s also important to note that personal tax-deductible contributions are not the only contributions that count toward this cap. Other contributions include:

  1. Compulsory contributions paid by your employer under the Superannuation Guarantee
  2. Contributions from any other jobs you may have held in the same financial year
  3. Salary sacrifice contributions
  4. Notional taxed contributions if you’re a member of a defined benefit fund.
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