For taxation purposes, there are three major types of expenditure property investors should be aware of, all of which are subject to different taxation treatments.

• Expenses that cannot be claimed (e.g. utilities charges, and acquisition and disposal costs).
• Expenses for which immediate deductions can be claimed (e.g. rates, insurance, legal expenses and repairs).
• Expenses for which deduction claims can be made over a number of income years (e.g. borrowing expenses such as stamp duty, title search fees and capital works).

When considering the deductibility of renovations, such as replacing a bathroom, the effective life of the existing structure must also be factored in. Houses are generally depreciated over a period of 40 years (at 2.5% per year), but the residual value of the existing structure is also taken into account.

Example

Tony owns a rental property built 20 years ago, and needs to replace the now obsolete bathroom at a cost of $20,000. The original value of the bathroom was assumed to be $8,000, with the result being depreciation of $4,000 (being 2.5% times 20 years times $8,000), and a residual value of $4,000. As a result, Tony will be able to claim a tax deduction for the $4,000 residual value, plus 2.5% of the renovation cost ($375), for a total deduction of $4,375 this income year.

Timely and quality maintenance of investment properties can provide significant benefits through the improvement of rental yields. However, for taxation purposes, the treatment of these expenses can vary, so it is worth discussing with your accountant or adviser before you commit to expenses.

For more information, contact us at Leenane Tempelton on 02 4926 2300 or email success@leenanetempleton.com.au

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Every year, the ATO announces a number of compliance targets that will be subject to additional scrutiny.

It always pays to be aware of these focuses, as non-compliance is, more often than not, the result of an honest mistake as opposed to willful deception. Unfortunately, an honest mistake can still cost you dearly in penalties and/or interest on late payments to the ATO. In the 2014/15 financial year, the ATO will be focusing on:

Personal technology

Deductions claimed for personal technology items such as smartphones, tablets and laptops. Taxpayers who are claiming deductions on such items should ensure that they have adequate documentation to prove the breakdown of personal/work use (for example diary entries). You are only able to claim a tax deduction equivalent to the portion of the use that is professional.

Cash economy

The ATO will be aiming to identify businesses that operate off the books by failing to accurately record their cash transactions. This may involve paying employees in cash (and therefore avoiding minimum wage requirements and the super guarantee) and/or underreporting the business’s profits, thereby reducing the overall tax liability.

GST compliance

The GST compliance program involves ensuring that all businesses that are required to register for GST have done so (that is all businesses with an annual turnover in excess of $75 000). The accuracy of BAS reporting is also under scrutiny.

Travel costs

Taxpayers claiming large deductions in the form of work-related travel costs will be subject to additional examination from the ATO this year. In particular, the tax office has warned that it will be focusing on the validity of deductions claimed for the transportation of bulky tools and equipment.

Call (02) 4926 2300 or email us. 

To speak with one of our expert accountants about upcoming ATO compliance targets please do not hesitate to contact us here at Leenane Templeton. 

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The ATO is preparing to enter into the second phase of its dividend washing compliance program.

Over 3000 individuals and entities have now received written correspondence requesting that they amend their returns to rectify dividend washing benefits.

Taxpayers who have gained a tax benefit from dividend washing transactions are being asked to self amend their tax-returns for the 2011, 2012, 2013 and 2014 financial years. There will be no penalties for taxpayers who comply with this direction.

Dividend washing occurs when a shareholder sells and then immediately repurchases an identical bundle of shares, and in the process claims two sets of franking credits when in substance they have only held one set of shares.

When the shares are first sold the holder retains the franking credit. This is known as selling shares ex-dividend. The investor then repurchases an identical set of shares cum-dividend (with the franking credits), thereby receiving two sets of franking credits.

Dividend washing transactions occur on the ASX trading market, where shares can be sold without dividends. Taxpayers who have engaged in dividend washing are unable to claim the tax offset gained from the second set of shares. The ATO will continue to monitor dividend transactions and apply the divided integrity rule to prevent future divided washing.

Call (02) 4926 2300 or email us.

To discuss dividend washing further or if you have any questions, please do not hesitate to contact our expert team here at Leenane Templeton.

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The ATO has indicated that it intends to undertake an extensive examination of share transactions – dating all the way back to 1985!

The objective of the data matching activity is to identify taxpayers with capital gains that have not been included in their taxable income. It is also likely that the investigation will reveal any inconsistencies in reporting of Employee Share Schemes (ESS).

In order to undertake this investigation, the ATO will be accessing the details of entities’ share records dating back over twenty years. It is estimated that in the process over 95 million records will be obtained, including the records of 1.2 million individual taxpayers.

By matching sale and purchase details, the tax office hopes to identify taxpayers that have failed to report capital gains made from share transactions.
Individual taxpayers who have failed to report a capital gain from shares (or disclose shares from an ESS) may care to contact the tax office to have the relevant tax return amended.

Our accountants are at hand to help you with any question you may have in relation to share transactions and the ATO.

Call (02) 4926 2300 or email us.

If the team at Leenane Templeton can help you with your share transactions or your tax in general, please do not hesitate to contact us.

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This includes breaches that may be inadvertent. This new legislation received Royal Assent on 18 March 2014 and will make new penalties available to the ATO for breaches that occur on or after 1 July 2014.

The legislation will also apply to contraventions that were made prior to 1 July 2014.

Examples of breaches of law include:
• loan to a member of the fund
• failure to prepare accounts in a year of income
• failure to keep minutes

The new penalties are designed to make it easier for the ATO to impose a monetary penalty on trustees who breach the law. The penalties will range from $850 to $10,200 depending on the type of breach that has occurred.

This monetary penalty will apply to the trustees personally and cannot be paid using the super fund’s assets.

The ATO has stated that if trustees are making progress in resolving the contravention by 1 July 2014 it will consider these circumstances in any request to remit any imposed administrative penalties.

These new penalties represent a significant change for SMSF trustees. The ATO’s ability to issue monetary penalties in the past has been restricted due to the severity of penalties available to them.

It is expected that the ATO will adopt a practice of imposing administrative penalties and require trustees to demonstrate that the penalty was unwarranted.

These changes have increased the risk that trustees will be exposed to financial penalties if a breach of the law occurs, so it is important that trustees ensure that they are vigilant in meeting all compliance requirements.

If you would like to discuss these chanes with our SMSF team then please do not hesitate to contact this office.

Disclaimer

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Failing to meet superannuation obligations will generate significant penalties for employers. In addition to interest and administrative penalties, employers lose the tax deduction that would normally be available for superannuation payments made on time.

The total cost to businesses found to have underpaid their super or paid it late can be substantial. The ATO has no discretion to waive or reduce these penalties.

Recent changes to superannuation legislation also means that company Directors may be held personally liable for any unpaid superannuation contributions and the associated interest and administration charges.

The ATO has regularly undertaken reviews of superannuation in the past.

Penalties have greatly contributed to revenue for the ATO and with the increased resources now to be provided to the ATO by the Government it is likely the number of these reviews will be increased.

Considering the potential financial penalties and increased scrutiny, it is essential that employers take the opportunity to review their internal systems and ensure that superannuation payments are being made correctly, consistently and in a timely manner.

If you are a business owner and are unsure about your Superannuation responsibilities, contact our office today!

Disclaimer

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According to Andrew Frith of the Self-Managed Super Specialists, headquartered in Newcastle NSW, it was refreshing to hear the Commissioner of Taxation, Michael D'Ascenzo, in his speech to the SMSF Professionals Association of Australia (SPAA) in February 2011, say that the ATO's "consistent message both to our people and to the community is to take care of family, friends, community and property first.  We can sort out tax and super issues later."

This was said following the devastating floods in Queensland, Victoria and Western Australia.  We have recently added the Illawarra and South Coast of NSW to this list.

One of the specific ways the Commissioner indicated assistance to self-managed super funds is where the fund may have acquired what are now flood or cyclone damaged buildings, in which case the ATO, in determining what is a repair or an improvement, whilst not having "a discretion to treat what is an improvement to be repaired, or a repair to be an improvement", they "will not be seeking to make fine distinctions having regard to what is available to repair what has been damaged".

The Commissioner went on to say "In financing repairs or incurring other costs, SMSF trustees may need to borrow funds and if SMSF trustees contravene the limited recourse borrowing provisions due to the natural disasters experienced Australia-wide, we would be favourably inclined to exercise the Commissioner's Discretion under section 42A(5) of the Superannuation Industry (Supervision) Act 1993 (SISA) to continue to treat the super fund as complying. 

Mr D'Ascenzo added "We are currently reviewing this matter with APRA and Treasury to ensure no unintended consequences arise."

Andrew Frith commented further how important it is for the taxpayer to know that there is human thought and a caring attitude behind the enormous bureaucracy that is the ATO.

Andrew Frith is the Chief Executive Officer of Leenane Templeton The Self Managed Super Specialists Pty Ltd.  Located in Newcastle, NSW, Australia.   Visit  Self Managed Super Funds web site for further information or visit our Newcastle Financial Planning Self Managed Super Fund Page.

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