End of Financial Year 2018

With 30 June 2018 not far away, thoughts turn towards what needs to be done by the end of the financial year.

The information contained in this article is of a general nature and does not take into account personal circumstances. Before making any decisions based on the factual information contained in this document please consult with your financial adviser.

Below are some ideas and tips that might assist with your end of financial year housekeeping.

Travel Expenses

As announced in the 2017 Federal Budget, travel expenses incurred by a taxpayer from 1 July 2017 is no longer deductible where it is incurred in gaining or producing the taxpayer’s assessable income from the use of residential premises as residential accommodation.

ATO Compliance focus on Holiday Homes

The ATO has released a fact sheet titled “Focus on holiday homes” explaining their position on the ability to claim deductions against income, where family and friends use the accommodation.

The fact sheet, explains the ATO position as:

• Taxpayers can only claim deductions for a holiday home with respect to periods it is genuinely available for rent.
• Taxpayers cannot place unreasonable conditions on prospective tenants/renters, set rental rates above market value, or fail to advertise a holiday home in a manner that targets people who would be interested in it and still claim that the property was genuinely available for rent.
• Where a property is rented to friends or relatives at “mates rates”, they can only claim deductions for expenses up to the amount of the income received.
• Property owners whose claims are disproportionate to the income received can exceed greater scrutiny from the ATO.

GST Withholding Measures

From 1 July 2018, purchasers of new residential premises and new residential subdivisions will generally be required to withhold the GST on the purchase price at settlement and pay it directly to the ATO.

Property developers will also need to give written notification to purchasers regarding whether or not they need to withhold.

Contracts entered into before 1 July 2018 will not be affected by this change as long as the transaction settles before 1 July 2020.

Some property transactions are excluded from withholding at settlement including:

• sales of commercial property (for example, factory or shop) and commercial residential developments (for example, hotel or motel)
• new residential premises created by substantial renovations
• fully taxable supplies of vacant land between GST registered businesses where the purchaser is entitled to an input tax credit (GST refund) on the purchase.

Depreciation Deductions

From 1 July 2017, unless you are carrying on a business of property investing or are an excluded entity you cannot claim for depreciation of second-hand plant and equipment in rental premises used for residential accommodation.

These changes apply to second-hand plant and equipment you acquired at or after 7:30 pm (AEST) on 9 May 2017 unless you acquired them under a contract entered into before this time. Additionally, you cannot claim for plant and equipment installed on or after 1 July 2017 if you have ever used it for a private purpose.

Investors who purchase plant and equipment for their residential investment property after 9 May 2017 will be able to claim a deduction 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 buy a newly built property, or buy a property that has been substantially renovated, you will be entitled to claim depreciation deductions for decline in value of the new depreciating assets if:

• no one previously claimed any depreciation deductions on the asset, and;

• • • either no one lived in the property when you acquired it, or;
    • if anyone lived in the property after it was built or renovated, you acquired it within six months (of the property being built or renovated).Capital Expenditure Write off

The $20,000 instant asset write-off for small business will be extended by 12 months to 30 June 2019, for businesses with an aggregated annual turnover of less than $10m.

Small businesses will be able to immediately deduct purchases of eligible depreciating assets costing less than $20,000 provided they are first used, or installed ready for use, by 30 June 2019. Only a few assets are ineligible (such as horticultural plants and in-house software).

Depreciating assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed into the general small business pool (the pool) and depreciated at 15% in the first income year, and 30% for each income year thereafter. The pool can also be immediately deducted if the balance is less than $20,000 over this period (including existing pools).

Company Tax Rate

For FY18, the company tax rate for a small business entity is 27.5%.

The definition of small business entity for this tax cut, is a business with an aggregated turnover of less than $25million.

With the reduction in the company tax rate to 27.5%, a corresponding change in the level of imputation credits will also reduce to 27.5%. This reduction in imputation credits only applies to dividends paid from a Small Business Entity (SBE).

Other companies will still pay tax at 30% and payout franked dividends at 30% for FY18. Corporate beneficiaries and investment companies fall into this category.

“Top up” tax will apply in some instances when corporate beneficiaries receive dividend income from a SBE or a Trust that received a dividend from a SBE.

Based on the new position, consideration needs to be given to which company in a family group will pay dividends to individual family members. Groups that have a SBE and a corporate beneficiary may find it more cashflow effective to pay the dividends from the corporate beneficiary before paying any dividends from the SBE company.

Superannuation Issues

End of financial year would not be the same without superannuation being mentioned.

Below is a table highlighting how much superannuation can be contributed for FY18.

Regardless of the Super Fund type, for contributions to be claimable as a tax deduction in the FY18 year, the money must be deposited into the Fund’s bank account by 30 June 2018.

The contributions tax of 15% applies to all deductible contributions made to superannuation this financial year.

If you are over 65yrs and wish to make contributions to superannuation, you must make sure you pass the work test for FY18.

Transitional rules apply for “the bring forward” rule, for those members with account balances of $1.4m or higher.

Please note, that if you have a superannuation balance in excess of $1.6m you are no longer able to make non-concessional super contributions.

From 1 July 2017, individuals with income greater than $250,000 have tax payable on their concessional contributions increased from 15% to 30% (excluding the Medicare levy).

From the 2018 Federal Budget

Land deductions

From 1 July 2019, expenses associated with holding vacant land will no longer be tax deductible. This measure is to ensure no deductions are claimed for vacant land that is not genuinely held for the purposes of earning assessable income.

Deductions that are denied will not be able to be carried forward for use in later income years. Expenses for denied deductions that would ordinarily be a cost base element (such as borrowing expenses and council rates) may be included in the cost base of the asset for capital gains tax (CGT) purposes when sold. However, deductions denied for expenses that would not ordinarily be a cost base element would not be able to be included in the CGT cost base.

The measure will not apply to expenses associated with holding land that are incurred after:

• A property has been constructed on the land, it has received approval to be occupied and is available for rent, or
• The land is being used by the owner to carry on a business, including a business of primary production.

Taxable Payments Reporting System (TRPS)

The taxable payments reporting system (TRPS) will be expanded to the following industries from 1 July 2019:

• Security providers and investigation services
• Road freight transport, and
• Computer system design and related services.

The TPRS requires businesses to report to the ATO any payments made to contractors during an income year. This additional reporting to the ATO is in the form of an annual report, for which the first annual report will be required in August 2020.

Please remember that the reporting requirements for cleaning and courier industries commence 1 July 2018.

GST Administration

Offshore sellers of hotel accommodation in Australia will be required to calculate their GST turnover in the same way as local sellers from 1 July 2019. Currently, unlike GST-registered businesses in Australia, offshore sellers of Australian hotel accommodation are exempt from including sales of hotel accommodation in their GST turnover. This means that they are often not required to register for and charge GST on their mark-up over the wholesale price of the accommodation.

This article was contributes by Ian Walker – Director, Archer Gowland Chartered Accountants.