Depreciation changes and how to maximise your deductions now

Anyone with investment property in Australia is probably feeling a little edgy with all the recent media attention on deductions, affordable housing, and negative gearing. We take a look at some of the key tax issues for investors pre and post 30 June:

No more deductions for travelling to and from your investment property

The days of writing-off the costs of travel to and from your residential investment property are about to end. From 1 July 2017, the Government intends to abolish deductions for travel expenses related to inspecting, maintaining, or collecting rent for a residential rental property. Investors who purchase residential rental property from Budget night (9 May 2017, 7:30pm) may not be able to claim the same tax deductions as investors who purchased property prior to this date. In the recent Federal Budget, the Government announced its intention to limit the depreciation deductions available.

Depreciation changes and how to maximise your deductions now

Investors who directly purchase plant and equipment - such as ovens, air conditioning units, swimming pools, carpets etc., for their residential investment property after 9 May 2017 will be able to claim depreciation deductions

over the effective life of the asset. However, subsequent owners of a property will be unable to claim deductions for plant and equipment purchased by a previous owner of that property. If you are not the original purchaser of the item, you will not be able to use the depreciation rules to your advantage. This is very different to how the rules work now with successive owners being able to claim depreciation deductions.

Investors will still be able to claim capital works deductions including any additional capital works carried out by a previous owner.

This is based on the original cost of the construction work rather than what a subsequent owner paid to purchase the property.

There are very limited details about how this Budget announcement will work but we will bring you more as soon as we know.

Business as usual for pre 9 May investment property owners

If you bought an investment property recently, are about to renovate, or have not had a depreciation schedule completed previously, you should consider having one completed.

As a property gets older the building and items within it wear out. Property owners of income producing buildings are able to claim a deduction for this wear and tear. Depreciation schedules are completed by quantity surveyors and itemise the depreciation deductions you can claim.

Welcome to the 2016/17 Winter Edition of InFocusIn this edition an article discusses how you can maximise your deductions for your rental property.

Further restrictions were announced in December 2016 around the ability to claim the wine equalisation tax (WET) rebate. We look at the proposed changes being introduced in the next 12 months.

Do you have bank accounts held in joint names? Who is taxed on the interest income? The ATO has provided guidance around the taxation of interest income when accounts are held in joint names or accounts that are operated on behalf of children.

CMS Financial Planning have given an insight to latest super reforms and potential strategies. Whilst the changes have upset many, it is certainly important that you know how these changes will affect you.

Have you upgraded your website this year? We look at the different tax treatment of developing and maintaining your commercial website. We also take a look at why big businesses don’t pay small businesses on time!

We hope you enjoy the Winter 2016/2017 issue of CMS InFocus. We would like to take this opportunity to wish you a happy end of financial year!

InFocusWinter 2017

Investment Property: Pre & Post 30 June

Higher immediate deductions for co-owners

It’s not uncommon to have multiple owners of an investment property. Co-ownership can, in some circumstances, quicken the rate depreciation deductions can be claimed for the same asset. This is because depreciation is claimed on each owner’s interest. If an owner’s interest in an asset is less than $300, they can claim an immediate deduction. In a situation where there are two owners split 50:50, both owners could potentially claim the immediate deduction, bringing the total immediate deduction available up to $600 for a single asset.

The same method can be used when applying low-value pooling. Where an owner’s interest in an asset is less than $1,000, these items will qualify to be placed in a low-value pool.

This means they can be claimed at an increased rate of 18.75% in the first year regardless of the number of days owned and 37.5% from the second year onwards.

In a situation where ownership is split 50:50, by calculating an owner’s interest in each asset first, the owners will qualify to pool assets which cost less than $2,000 in total to the low-value pool.

The value of renovations

It’s best to get a depreciation schedule completed before you start renovations so the scrap value of any items you remove can be recognised and written-off as a 100% tax deduction in the year of removal. This is available for both plant and equipment depreciation and capital works deductions. When new work is completed as part of the renovations (i.e., a new roof, walls, or ceiling), this can also be depreciated going forward.

In some circumstances, there may be depreciation deductions available for renovations completed by a previous owner.

Deductions for older properties

Investors in older properties may still be able to claim depreciation costs. This is because a lot of the items in the house will not be the same age as the house or apartment. Hot water systems, ovens, carpets, curtains etc., have probably all been replaced over time. Additional works, extensions or internal refurbishments may also be deductible.

The ATO has become more focussed on the tax treatment of rental properties in popular holiday destinations. It suspects that some taxpayers are claiming deductions that they are not actually entitled to and has released a guide dealing specifically with holiday homes. The guide explains how the ATO expects claims to be apportioned to take into account periods when the property is genuinely used as a rental property, when it is used privately and when it is made available to family and friends at less than a market value rent.

One of the main issues considered is whether the property is genuinely available for rent during periods when it is not being occupied. The following factors may indicate that a property is not genuinely available for rent:

• It is advertised in ways that limit its exposure to potential tenants (e.g. only advertised at the taxpayer’s workplace, by word of mouth or outside of annual holiday periods);

• The location of, condition of, or accessibility to the property, mean that it is unlikely people will seek to rent it;

• The owner imposes unreasonable conditions on renting out the property such as setting a rent above the rate of comparable properties in the area

• The owner refuses to rent out the property to interested people without reasons.

The ATO’s guide also includes a number of examples explaining the approach that should be taken when completing tax returns for clients who own holiday homes. More information can be found here: https://www.ato.gov.au/General/Property/In-detail/Holiday-homes/

Tax treatment of holiday homesIn December 2016 the Government announced that it would be placing further restrictions on the ability of taxpayers to claim the wine equalisation tax (WET) rebate. This was to address concerns that the rebate had encouraged artificial business restructuring and distortions in the wine market.

Treasury has released draft legislation relating to the proposed changes from 1 July 2018. These proposed changes include:

• producers will have to own at least 85% of the grapes used to make the wine throughout the winemaking process in order to access the rebate.

• The rebate will only be available in relation to wine that is branded with a registered trademark and packaged in a container that does not exceed 5 litres for domestic retail sale.

• The rebate cap will be reduced from $500,000 to $350,000.

Tightening of the WET rebate rules

A question that clients occasionally ask is whether they are taxed on their children’s bank account interest. Through a tax ruling TD 2017/11, the ATO has provided updated guidance on the taxation of interest income where funds are held in joint names and also where accounts are operated on behalf of children. The ruling confirms that the person who beneficially owns the money in the account should be taxed on the interest.

For joint accounts the interest is to be split in proportion to the beneficial ownership of the funds in the account and it is assumed that joint account holders have an equal share of the money in the account. In some cases it may be possible for the parties involved to prove that the funds are not beneficially owned in equal shares or that a trust arrangement exists.

If a parent operates an account on behalf of a child interest thereon can be shown in the child’s tax return as long as the Commissioner is satisfied that the child beneficially owns the money in the account.

Who is taxed on interest income?

Investment Property: Pre & Post 30 June (Continued)

Upcoming legislative reforms to superannuation are complex and may affect people in different ways. Here’s a description of some of the changes and potential strategies to boost your superannuation.

The Australian Government will make a number of changes to our superannuation system from 1 July 2017. Before these changes kick in, it’s a good idea to look at what they are and how they may affect you. As these changes are complex, consulting a financial adviser is a great step to gaining clarity and confidence about the future of your super how to take control of your retirement.

So, what are the changes?

The aim of the upcoming reforms is to make the superannuation system more sustainable as our population ages.

One change is a new cap on the amount of super savings you can transfer to a superannuation retirement account. If your super income streams are valued at more than $1.6 million on 30 June 2017, then you may need to transfer the excess to an accumulation account or take a lump sum.

The Government will also reduce the cap on annual pre-tax contributions to super, such as via employer contributions, salary sacrifice, the Superannuation Guarantee and personal deductible super contributions. The new cap will be $25,000 for everybody.

When it comes to after-tax super contributions, you’ll only be able to add up to $100,000 each year – or up to $300,000 if you’re eligible to use the bring-forward provisions. However, you won’t be able to make non-concessional contributions if your total superannuation balance(s) exceeds $1.6 million (indexed) by the end of the previous financial year.

The Government has also reduced the Division 293 income threshold, over which high income earners pay an additional 15% on concessional contributions. The new threshold will be $250,000, reduced from $300,000.

In good news, more individuals are eligible to claim tax deductions on personal contributions to eligible super funds. Now, anyone who is less than 65 years old – or between 65 and 74 and who meets certain requirements – is eligible to claim.

The Treasury estimates that this will benefit approximately 800,000 Australians. And, if you’re contributing super for a spouse who earns up to $40,000, you may be eligible for a spouse contribution tax offset of up to $540.

This is only a glimpse of the reforms about to come into effect, and there’s still the 2017 May Budget to keep in mind, which may introduce other changes. It is important to discuss the new legislation in more detail with an expert and learn how it may impact your unique situation.

Strategies to boost your super

Many individuals approaching retirement may feel troubled by significant superannuation reforms. However, there are many strategies available

that may help protect your super, ensure it continues to grow, or make it better suit your lifestyle.

For example, if you’re not looking to reduce your work hours any time soon but are at preservation age, you may be able to boost your super via a transition to retirement (TTR) pension.

You may be able to increase your pre-tax contributions through salary sacrifice, for example, and substitute some of your take-home pay with income from a TTR pension. Due to the reforms, you may even be eligible for a tax deduction on your personal contributions.

If you are planning to reduce your work hours, you may be concerned about how you’ll maintain your lifestyle on the reduced pay, and how this may affect your super. However, if you’ve reached preservation age, you may be able to use the income from a TTR pension to supplement your reduced take home pay.

This means you may be able to maintain the same lifestyle even though you’re working fewer hours. But keep in mind that from 1 July 2017, earnings from assets that support TTR income streams will be taxed at a maximum of 15%. A financial adviser can explain how this may affect your retirement plans.

Seek advice

While you can’t control legislation changes, you can seek advice from a financial adviser on how you can gain from the changes and protect your nest egg. From enhancing your lifestyle as you approach retirement to boosting your personal super contributions – there are many paths to the retirement you want.

The views expressed in this publication are solely those of the author; they are not reflective or indicative of licensee’s position, and are not to be attributed to the licensee. They cannot be reproduced in any form without the express written consent of the author. *John Flanagan is an Authorised Representative of RI Advice Group Pty Limited ABN 23 001 774 125, AFSL 238429. This editorial does not consider your personal circumstances and is general advice only. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser. From time to time we may send you informative updates and details of the range of services we can provide. If you no longer want to receive this information please contact our office to opt out. The views expressed in this publication are solely those of the author; they are not reflective or indicative of Licensee’s position, and are not to be attributed to the Licensee. They cannot be reproduced in any form without the express written consent of the author.

The latest super reforms: how will they affect you?

The ATO has finalised its ruling dealing with the treatment of website expenditure (TR 2016/3). The previous ruling on this issue was withdrawn in 2009.

A website is considered to be an intangible asset, consisting of software and content, to the extent it has no separate identity or value. The ruling considers whether expenses are of a capital or revenue nature. Expenditure in developing a website is capital, while expenditure in maintaining a website is of a revenue nature. Costs of modifying a website can be either capital or revenue in nature. If a modification relates to an improvement in the profit yielding structure of the business, it is more likely that the cost will be capital in nature.

Capital expenditure incurred in relation to the creation or modification of a website can be deducted under the depreciation rules, if it is classified as in-house software. In-house software is software, or the right to use software, that is mainly for the taxpayer to use in performing the functions for which the software was developed. The cost incurred in the development of in-house software may be deducted over 5 years from the time it is used or installed ready for use.

Alternatively, the expenditure may be allocated to a software development pool or in the case of a small business, dealt with under the small business simplified depreciation rules (including the instant asset write-off provisions).

The ruling sets out a number of examples as well as a flowchart to assist in characterising commercial website expenditure.

Expenditure on a commercial website

DISCLAIMER. It is important to note that all information and advice submitted in this issue of inFocus is only for the general information of clients and is not to be taken as a substitute for specific advice. If you would like further information please contact us on (08) 8407 1300. Liability limited by a scheme

approved under Professional Standards Legislation.

P (08) 8407 1300 F (08) 8407 1301 www.cmsca.com.auLevel 4, 190 Flinders Street, Adelaide SA 5000 AustraliaABN: 38 116 091 555

The previously announced increase in SBE turnover threshold and company tax cuts have finally passed through Parliament. The changes had been announced in the May 2016 Federal Budget. Under the changes, from 1 July 2016, businesses with an aggregated turnover of less than $10m can access most of the SBE concessions discussed below, with the exceptions being the small business tax offset ($5m threshold applies) and the small business CGT concessions ($2m threshold continues to apply).

The small business tax offset has been increased to 8% for the 2017 financial year (was 5%) and is to remain in place until 2025. The offset is capped at $1,000 however, and a business must have turnover less than $5m to be eligible for it.

As mentioned in our article “Small business $20,000 instant asset write-off extended” businesses with turnover of up to $10m can access the instant asset write-off concession.

A company that carries on business will

enjoy a reduced tax rate of 27.5% as long as its turnover is below $10m in

2017, $25m in 2018 and $50m in 2019.

Going hand in hand with the reduced company tax rate however, is a reduced level of franking credit rate. From 1 July 2016, the maximum franking percentage is based on the company’s corporate tax rate for the year. If the company’s

rate is 27.5%, dividends can only be franked to this level. This is a potential

issue for companies if they have paid dividends earlier in the current year

and applied the standard 30% rate. These companies should

inform their shareholders of the correct level of franking

credit as soon as possible by reissuing dividend statements or otherwise advising them in writing.

Increase in Small Business Entity (SBE) turnover threshold

As announced in the May Federal Budget, the $20,000 instant asset write-off for small business will be extended by a further 12 months to 30 June 2018. The measure is available for businesses with annual turnover of less than $10 million, following passage of the company tax changes, which extended the definition of a small business.

With some exceptions (including horticultural plants and in-house software), assets costing less than $20,000 first used or installed for use by 30 June 2018 may be immediately deducted. Assets costing more than $20,000, which therefore cannot be immediately deducted, can be placed into the small business simplified depreciation pool and depreciated at 15% in the year of acquisition and 30% in following years.

Small business $20,000 instant asset write-off extended

The ATO has advised that they will be reducing the information needed for the Business Activity Statement to simplify GST reporting. From 1 July 2017, “Simpler BAS” will be the default reporting method for small business with a GST turnover of less than $10 million.

The only GST-related items that will need to be reported on the BAS are:

• Total sales• GST on sales• GST on purchases

The transition to Simpler BAS will be automatic for eligible businesses and the reporting cycle will remain unchanged (quarterly, monthly or annually).

Source: ATO wesbite

Simplified BAS Reporting