Top small business $20k tax deduction Q&As

In a recent speech, Small Business Minister Bruce Bilson stated that a lot of his time talking about the $20,000 immediate deduction for small business was convincing people it was not a hand out.
“I have spent a lot of my time explaining that asset write-off mechanisms aren’t grants, they are not gifts, they are not cash backs. They are a way of expensing a purchase in an asset that can contribute to a functioning business. Now, if you are not making any income there is not a huge benefit in you being able to write-off additional expenses at a faster rate.”
Here are some of the common questions we are asked to help clear confusion.
If I spend $20,000 how much will I get back? The instant asset write off is a tax deduction that reduces the amount of tax your business has to pay. It enables small business entities (businesses with annual aggregated turnover below $2 million) to claim a deduction for depreciating assets of less than $20,000 in the year the asset was purchased and used (or installed ready to use). For example, if your business is in a company structure the most you will ‘get back’ (reduce your tax by) is 30% (in 2014-15) or 28.5% (in 2015-16) of the cost of the asset. If the business made a $19,000 purchase in June 2015, the most the business would reduce its tax bill by is $5,400. It’s a much better deal than the previous $1,000 immediate deduction limit but there are still cash flow issues for the business that need to be considered. Remember also that the business would have been able to deduct the purchase anyway, just over a longer period of time.
If I signed a contract before Budget night but didn’t pay for the asset or receive it until after the Budget, can I still claim the deduction? To be able to claim the immediate deduction, you had to “acquire” the asset on or after 7.30 pm AEST on Budget night (12 May 2015) and use it (or install it ready for use) before 30 June 2017. Contracts are often tricky because the date you acquired the asset really depends on what the contract says and how it’s structured. Generally, if you signed the contract before Budget night and the contract made you the owner of the asset, then the asset would not qualify for the $20k immediate deduction.
We’ve invested in new equipment for just under $18,000. How soon can we claim the immediate deduction? ‘Immediate deduction’ is a bit of a misnomer. Immediate in this context means that your business can claim a tax deduction for the asset in the same income year that the asset was purchased and used (or installed ready for use). The deduction is claimed on the business’s tax return.
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Requiring the asset to be used or installed ready to use is an interesting catch. It means that businesses cannot stockpile assets and claim the immediate deduction for those assets. For example, if a restaurant business bought three ovens in June 2015, those ovens would need to be in use or installed ready to be used before the tax deduction could be claimed. If only one oven was used or installed before the end of the financial year, then the business could only claim the immediate deduction for one oven in their tax return. Assuming the other ovens are used before 30 July 2017, the immediate deduction could be claimed in the year they were first used or installed ready for use on the business’s tax return.
Can I buy multiple items and claim the immediate deduction even though the total being claimed is more than $20,000? Yes. As long as you acquired the asset on or after 7.30 pm AEST on Budget night (12 May 2015) and use it (or install it ready for use) before 30 June 2017, then an immediate deduction should be available if each individual item costs less than $20,000.
Don’t forget about the cash flow implications. Depending on when you purchase the assets it might be another year before you can claim the deduction.
What sorts of assets can I claim an immediate deduction for? To be able to claim the $20,000 immediate deduction, the asset needs to be a depreciating asset. A depreciating asset is an asset whose value you expect to decline over time. Examples include computers, furniture, and motor vehicles. So, no investment assets.
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We’ve had some very interesting questions from people wanting to know what they can and can’t claim the immediate deduction for. Take artwork being advertised by a local art gallery. The gallery tells you that your business can buy anything up to $20,000 and claim an immediate deduction for it. Is this correct? The answer is, it depends.
There has to be a connection between the artwork and your business for it to be a depreciating asset. For example, the artwork could be displayed in your office reception or waiting area.
The Tax Office says that the life of an artwork for tax purposes is 100 years. So, deducting the artwork immediately is a big tax bonus.
The same principle applies to items that relate to an existing asset, like machinery. If what you are purchasing qualifies as a depreciating asset in it’s own right, then you can claim it.
Whatever the asset is, the same principles apply. Your business needs to qualify as a small business entity, the asset needs to be purchased and used (or installed) after Budget night and before 30 June 2017, the asset must cost less than $20,000, and the asset must be a depreciating asset. Not everything will qualify.
It’s not easy being a foreigner If you are not an Australian resident for tax purposes, you are excluded from many of the tax breaks available to residents and an increasing target of the Australian Taxation Office. We explore the widening gap between residents and nonresidents. Scrutiny of Australian investments With residential property prices soaring, foreign investment and ownership is in the spotlight.
However, foreign residents and temporary visa holders cannot buy established residential property – they can only invest in property where that investment adds to the housing stock (including) vacant land for development. And, only foreign companies with a sizeable interest in Australia can buy residential real estate for Australian based staff. Temporary residents can buy one established property to live in (with approval) which they have to sell when they are no longer living in the property.
Investment in agricultural land Foreign ownership of agricultural land has come under scrutiny lately resulting in a number of changes. From 1 July 2015, all new foreign interests in agricultural land must be registered with the Australian Tax Office (ATO) and all existing interests registered by 31 December 2015. In addition, the threshold at which foreign investors must get approval for an investment in agricultural land dramatically reduced from $252 million to $15 million in March this year. Tax rates and tax benefits Tax rates Unlike Australian resident taxpayers, non-resident taxpayers pay tax on every dollar of taxable income earned in Australia starting at 32.5%. There is no tax-free threshold.
Tax on investments The 50% general discount on capital gains tax that applies to Australian residents is no longer available to non-residents; meaning that non-residents pay the full amount of CGT on any gains made. Impending new laws also seek to apply a 10% withholding tax on the sale of real property by foreign residents where the property is valued at $2.5 million or more.
Superannuation SMSFs have strict residency rules and must meet three separate tests to continue to be a complying fund and access the tax concessions that come with complying status:

– The fund must be established in Australia or have an asset located in Australia;  The management and control of the fund must ordinarily be in Australia – generally this means that trusteeship should be in Australia; and Contributions to the SMSF should only be made by members residing in Australia. If overseas members want to contribute to the fund then at least half the fund’s assets need to be held by members who reside in Australia and also make contributions.
This is not an exhaustive list and residency can be a very complex issue. If you are concerned about your residency status, please give us a call.
The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.

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Landlords Beware: Key issues for property investors

Are you relying on negative gearing?

There has been a lot of negative conversation about negative gearing lately. But, if you are currently negative
gearing your investment property, should you be concerned?
Negative gearing is when you claim more in deductions than you earn for an income producing asset that you have
purchased using debt. It is not limited to property, you can for example negatively gear shares, but property is the
dominant negatively geared asset claimed by Australians.
The latest Taxation Statistics show that we claimed $22.5 bn in rental interest deductions in 2012-13 against gross
rental income of $36.6 bn. While these statistics are not as bad as previous years because of the low cost of
borrowing ($1.6 bn less than 2011-12), it’s more than the total Defense budget in 2013-14 at $22.1 bn.
The use of these property deductions does not vary widely across income ranges – that is, it’s not just those on the
highest income bracket using negative gearing. The highest proportional losses were experienced by those with
incomes (net of the rental loss) between $55,001 and $80,000, where deductions exceeded rental income by more
than 28%. Negative gearing makes owning an investment property accessible to those who potentially would not
invest for the long term gain in property value alone.
The Reserve Bank has stated that the ‘hot’ property market, particularly in Sydney, is because “Investor demand
continues to drive housing and mortgage markets, with low interest rates and strong competition among lenders
translating into robust growth in investor lending.” In NSW, lending to investors now accounts for almost half of the
value of all housing loan approvals. Demand drives price.
The tax policy experts we canvassed generally held the view that negative gearing distorts the market and – in
combination with the CGT discount – provides considerable and unnecessary tax advantages to those who least need
them. To quote one, “[Negative gearing] is a uniquely Australian phenomenon (no other country is so generous) and
I would abolish it (and the CGT discount) immediately (and not be so generous as to grandfather existing owners).
The suggestion that its (temporary) abolition in the early 1990s led to an increase in rent was based on spurious and
incomplete evidence. More relevant research has subsequently debunked the suggestion that the spike that
happened in Sydney house prices had little to do with the abolition and a lot more to do with other, unrelated
market forces.”
At present, the Government and property investors want to keep negative gearing. It’s a lonely policy position.
The Government Tax White Paper is due out later this year and may provide a better indication of any potential risk
for investment property owners. But, negative gearing is not something to bank on as a long term strategy. It’s just
a question of which Government will have the support to remove it.
Friends, family and holiday homes
If you have a rental property in a known holiday location, chances are the ATO is looking closely at what you are
claiming. If you rent out your holiday home, you can only claim expenses for the property based on the time the
property was rented out or genuinely available for rent.
If you, your relatives or friends use the property for free or at a reduced rent, it is unlikely to be genuinely available
for rent and as a result, this may reduce the deductions available. It’s a tricky balance particularly when you are only
allowing friends or relatives to use the property in the down time when renting it out is unlikely.
A property is more likely to be considered unavailable if it is not advertised widely, is located somewhere
unappealing or difficult to access, and the rental conditions – price, no children clause, references for short terms
stays, etc., – make it unappealing and noncompetitive.
Repairs or maintenance?
Deductions claimed for repairs and maintenance is an area that the Tax Office is looking very closely at so it’s
important to understand the rules. An area of major confusion is the difference between repairs and maintenance,
and capital works. While repairs and maintenance can be claimed immediately, the deduction for capital works is
generally spread over a number of years.
Repairs must relate directly to the wear and tear resulting from the property being rented out. This generally
involves a replacement or renewal of a worn out or broken part – for example, replacing damaged palings of a fence
or fixing a broken toilet. The following expenses will not qualify as deductible repairs, but are capital:
– Replacement of an entire structure (for example, a complete fence, a new hot water system, oven, etc.)
– Improvements and extensions
Also remember that any repairs and maintenance undertaken to fix problems that existed at the time the property
was purchased are not deductible.
Travel expenses to see your property
If you fly to inspect your rental property, stay overnight, and return home the following day, all of the airfares and
accommodation expenses would generally be allowed as a deduction. Where travel is combined with a holiday, your
travel expenses need to be apportioned. If the main purpose of the trip is to have a holiday and the inspection is
incidental, a deduction for travel is not allowed. In these circumstances you can only claim a deduction for the direct
costs involved in inspecting the property such as the cost of taking a taxi to see the property and a proportion of
your accommodation expenses.
If you drive a car to and from your rental property to collect rent or for inspections, you can claim your car expenses.
Just keep in mind that you need to be able to prove that you needed to visit the property.
Redrawing on your loan
The interest component of your investment property loan is generally deductible. Take care if you have made
redraws on your investment loan for personal purposes. A portion of the loan may be non-deductible.
Borrowing costs
You are able to claim a deduction for borrowing costs over 5 years such as application fees, mortgage registration
and filing, mortgage broker fees, stamp duty on mortgage, title search fee, valuation fee, mortgage insurance and
legals on the loan. Life insurance to pay the loan on death is not deductible even if taking out the insurance was a
requirement to get finance. If the loan is repaid early or refinanced, the whole amount including mortgage discharge
expenses and penalty interest become deductible.
Tax scams catching out the unwary
Every tax time is an opportunity for scammers to target the unwary.
This time around, the scammers are phoning and claiming to be from the prosecutions department of the ATO. They
then state that they believe you have committed fraud and the Sheriff’s Office has been called. You can of course
make this all go away by transferring cash using the details they provide or by giving your details to them. All of it is
There are a number of variations to this fake arrest warrant scam. In some cases a message is left on an answering
machine obliging the person to call back.
Understandably for those with outstanding tax debt, these calls can cause concern.
If you receive a call like this, you should feel free to hang up. We can contact the ATO on your behalf to verify there
are no known issues.
If you are contacted by email by the ATO or a group purporting to represent the ATO, you can forward these emails
directly to the ATO
Quote of the month
“He who is not courageous enough to take risks will accomplish nothing in life.” Muhammad Ali

small business accounting expert – Babu