Your Business is Our Business
To prepare your annual tax return, it is a good start to ensure you have the following information:
PAYG payment summaries.
Interest and dividend income statements.
Record of use of your motor vehicle for work purposes - be it a diary or log book
Details about bus, train or taxi travel for work purposes.
Details about costs incurred to stay away from home overnight for work purposes.
Details of any costs incurred to attend training courses.
Details of costs of any protective clothing or compulsory uniform expenses including footwear, glasses and sunscreen.
Costs of any subscriptions, telephone costs, low cost tools, reference materials, computer costs etc, that relate to your job.
Costs of any education tex refund expenses like new computers educational software, stationery etc for the kids' education.
Our of pocket medical expenses including dental (non cosmetic), optical, chiropractor, physiotherapist, specialists and and pharmaceutical scripts.
Private health insurance annual statement (if you have private health insurance).
Income protection insurance costs for the year.
It is quite common these days to have a rental property, so it is important to know what expenses incurred in owning that property you can claim as a tax deduction.
Insurance - both buildings and landlords.
Interest on your loan to purchase that property.
Bank fees on that loan.
Agent's fees to manage the property
Genuine repairs - Repairs are those costs incurred to put the property back to it's original condition after general wear and tear from the tenants or if they have damaged some aspect of the property. Cost incurred to improve the property are generally not deductible.
Depreciation- This is a cost of wear and tear of plant and equipment within the rental property that occurs as a result of tenants using those items; For example, an air conditioner costing $2,000 might decrease in value due to general wear and tear each year to the value of $500. This decrease in value is called depreciation and it is deductible within a set of more complex rules. Other rental pro;erty items that are depreciable if purchased during the year are: hot water service, oven, hot plates, carpet (being new carpet to an area not previously carpeted), dishwasher.
Negative gearing, put simply, is investing in something whereby the income produced by that investment will be exceeded by the costs incurred in holding that asset. Thus a rental property can be negatively geared where the rent you receive is less than the rental expenses. Similarly, investments in shares can be negatively geared if you borrow money to but the shares and the interest on that loan exceeds the income (dividends) produced by those shares.
Negative gearing is a popular way of increasing your tax refund at the end of each tax year as your taxable income will be reduced by the loss created by the negatively geared investment. However, make sure your investment is a sound one. You don't want to invest in something just for the tax deduction!
If you make a taxable capital gain on an asset in a tax year, you will need to pay tax on that gain. This is called Capital Gains Tax. However, it is not actually a separate tax from your normal tax, but extra tax that is added to your annual tax bill. It is payable at whatever marginal tax bracket the gain from the sale of the Capital asset puts you in.
So, if your normal income is $20,000 per annum, your normal tax bracket for the 2010 tax year would be 15%. However, if you sold your rental property in the 2010 tax year and made a taxable capital gain of $40,000, then this would make your taxable income $60,000 and put you in th 30% tax bracket. Thus most of your capital gain would be taxed at 30%.
Capital gains are made when you sell a taxable capital asset for a profit. Conversely, capital losses are made when you sell a taxable capital asset for a loss. Capital losses can only be offset against capital gains, not any other assessable income.
So what are capital assets? Capital assets are those assets invested in by you, which you purchased because you hoped that over time they would increase in value and you could then sell them and make a profit. They include, but are not limited to, the following:
Units in a trust or managed fund.
Assets for personal use (eg. furniture or boats over a certain value).
Real Estate (eg. land, investment and holiday properties)
Other assets (eg. forfeited rights).
Sometimes you may make a taxable capital gain without meaning to, for example, if you purchased a block of land to build a house on and then decided to sell the land without going ahead with the building. This would be a capital disposal and thus subject to capital gains. You may also receive a capital gain distribution from a managed fund that you have invested n. This will appear on your annual managed fund tax statement for the year.
A capital gain will only occur if you make a profit upon disposing of an asset. So, the mere fact that your shares, for example, have increased in value, does not mean that you have made a taxable capital gain. This will only occur if you dispose your shares after they have increased in value.
A disposal can occur a number of ways. Obviously if you sell the assets, that is a disposal, but also if you transfer the asset to someone else, perhaps a child or partner, or transfer an asset to your superannuation fund. These would all be considered a disposal of the asset by the ATO and they would treat the disposal as is it occurred at market value. Disposals can also occur if a compulsory acquisition occurs or an item is written off by an insurance company.
The ATO allows significant tax advantages with regards to the treatment of capital gains, such as discounts for assets held for more than one year and concessions for small business owners.
If in doubt it is always advisable to seek advice as this is quite a complex area of the tax law.
Claimable Motor Vehicle Expenses
There are a number of different ways whereby you can claim for the use of your Motor Vehicle in your tax preparation.
Set rate per kilometer (SRPK)
Under the SRPK method, you can claim up to 5,000km at a set rate (the top rate for 2010 is 75c per km for a 3L engine or greater) which if you claimed the entire 5,000km would be a tax deduction of $3,750.
However, in order to be able to claim these kilometers, you need to be able to justify why you are claiming that number of kilometers so it is best to either have a diary record or a log book of the kilometers you are planning to claim.
12% of cost method
Under this method, usually used by business operators, you can claim a tax deduction for 12% of the original cost of the vehicle. This is used where you would have traveled more than 5,000km and do not want to use the SRPK.
One third of costs method
This method allows you to claim 1/3 of each of the costs for the year. Thus, you can claim 1/3 of the cost of your fuel, insurance, registration, repairs, depreciation and interest on finance for your motor vehicle without a log book. Again this should only be used if you have not prepared a log book and you have more than 5,000 km to claim in travel. You will need to keep receipts for all your expenses.
Log Book Method
This method requires you to have completed a 12 consecutive week log book of all business/work related travel in your car and this log then determines what percentage of all your vehicle costs you can claim. So, if your 12 week log book shows that you have used your vehicle for 80% business use, you will be able to claim 80% of all your fuel, insurance, registration, repairs, depreciation and interest on finance of your motor vehicle. You will need to keep receipts for all these expenses.