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Welcome to the June newsletter.
Maximise deductions before 30 June
With another new financial year almost upon us, it is timely to mention a few strategies you can easily implement to reduce your 2007 tax burden:
• Depreciating assets costing $100 or less can be deducted in full so acquisition of such items can help with your 2007 tax bill.
• Repairs to business premises, plant, vehicles, etc should be incurred before 30 June.
• Consumables that are not resold are deductible in full so these items should be acquired before 30 June.
• Bad debts (for an accruals basis taxpayer) must be evidenced as written off before 30 June to be deductible in that year. A minute of a meeting of directors is good evidence that the debt was written off in the year ended 30 June.
• Non business taxpayers can look at prepaying interest and similar costs.
Unlike other expenditure superannuation is only deductible when paid rather than the usual rule of being deductible when incurred so you should ensure that all superannuation has been paid in full before 30 June each year. Any SGC obligations must be met before 28 July to ensure a deduction (albeit in the 2008 financial year).
The limit on deductions is linked to each employee’s age and for 2007 the limits are:
Under 35 $ 15,260
35 to 49 $ 42,385
50 and over $ 105,113
What to do with Super
Many clients have taken advantage of the opportunity to contribute a substantial sum to superannuation prior to 30 June 2007 ahead of the substantial changes in super law at that date. The next challenge is where to invest those funds. Please speak to us about how to invest any superannuation balances you may have or how to develop a strategy that will allow these balances to grow.
Will Rents Rise?
Some media report a rental crisis. Whilst “crisis” makes for a good headline there are some questions when it comes to the severity of the situation or suggesting a solution.
As at the end of last year the monthly average value of loans for investment properties had fallen to $5.4 billion. The capital city rental vacancy rate was down to 1.1 per cent with the rent increases over 2006 as high as 9.8 per cent.
CommSec’s chief equities economist Craig James noted vacancy rates had been driven down to 18 year lows and rents were rising at the fastest pace in 15 years. Figures bandied about at a recent Parliamentary committee hearing suggested Perth rents for a three-bedroom house had jumped 18.2 per cent in the preceding 12 months while climbing 16.3 per cent in Brisbane.
BIS Shrapnel say that a comparison of Sydney rents shows tha in inflation adjusted terms rents were actually 6 per cent lower in June 2006 than they were in June 2000. The firm says Sydney apartment rents could experience an average annual rise of 7.3 per cent for the next five years.
According to CommSec “Higher rents will put upward pressure on inflation; raise the risk of more (interest) rate hikes, keep investors on the sidelines and in turn lead to tighter rental markets.”
Possible Outcome
The rental yield is the rate of return on a property investment. $10,000 in rent per year on a $200,000 property is a yield at 5%. One way or another yields must return to a fair reward for the investment cost. This can happen by either rents increasing or property prices falling. The Reserve Bank has indicated that in its view it is more likely that the yield adjustment will occur through an increase in rents rather than a fall in prices.
As with any investment, Professional advice has the benefit of objectivity so contact us if you would like to discuss this topic.
Tax Office Email Scam
Click here to link to the Australian Taxation Office’s “Tax Office email scam warning” page.
Changes to stamp duty (hire of goods/hire arrangements duty) 1 July 2007 in NSW, ACT, NT and SA.
On 1 July 2007. the stamp duty (hire of goods/hire arrangements duty) charged on new and existing instalments for lease and hire purchase contracts will be abolished in New South Wales, Australian Capital Territory and the Northern Territory.
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Are you eligible for the STS?
Certain businesses can elect to participate in the Simplified Tax System (“STS”). Generally businesses with a gross turnover under $2 million (from 1 July 2007) will qualify. Some advantages of being in the STS are:
• Full deduction for prepayments (all other business taxpayers must claim only the part of prepaid expenses relating to services received prior to 30 June);
• Debtors not being assessable until received (although creditors are not deductible until paid);
• Increased depreciation allowances; and
• Reduced tax on disposal of plant and equipment.
Elections to enter the STS regime can be made in your 2007 tax return for the full year so please discuss this with us if it is of interest.
Main residence Exemption Did Not Apply
In a recent case the applicants, a husband and wife, purchased a vacant block of land in 2002 on which they built a house. It was sold on 30 June 2004. The Commissioner assessed the applicants on a net capital gain from the sale of the property and imposed an administrative penalty (that ultimately represented 25% of the shortfall amount).
The applicants claimed that they were exempt from paying CGT because that once built the house was their main residence for more than three months prior to the settlement date of the sale as required under subsection 118-150(3) of the Income Tax Assessment Act 1997.
The Tribunal took into account factors in Taxation Determination TD 51 in determining whether the property was the taxpayers' main residence. For instance the applicants had only moved the "bare necessities" into the premises pending the sale by their daughter of her property. The level of electricity consumption for the time was dramatically below what would be expected and there was no evidence of a change of residential address in official records (eg driver's licence, vehicle registration, address with Centrelink, electoral roll, insurance and banking institutions). The timing of the purchase of the family's present residence also complicated the situation.
The Tribunal was not satisfied that the applicants had discharged the burden of proving that the property was their main residence for the period so that the Commissioner's decision to assess the net capital gain was affirmed.
It is clear from this case that taxpayers must have adequate (if not substantial) objective evidence that a property is a main residence.
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