work-from-home

What You Can (And Can’t) Claim On Tax If You’re Working From Home

by Advice

Restrictions imposed due to Covid-19 has seen more employees working from home.  On the back of this retailers are seeing increased expenditure on such things as desks, computer screens and cleaning products, as people try to bring makeshift office spaces up to scratch.

Employees who have worked from home during the COVID-19 pandemic are entitled to claim a deduction this tax time for the extra expenses they have incurred – provided they are not reimbursed by their employer.

There are three potential methods to calculate the value of their claim.

The first – and by far the simplest – is a new “shortcut method” which applies for the period between March 1 and June 30 in the 2019-20 income year. It will continue on from July 1 to September 30 for the 2020-21 income year. All you need is a timesheet, or other proof of your working hours, to claim a flat deduction of 80 cents for every hour worked from home. For an employee who worked 40 hours from home each week during the period, it amounts to a deduction of just over $500.  This shortcut method covers all additional running costs including electricity, internet and depreciation.

However, workers who have incurred particularly high costs in working from home may be better off calculating their claim via one of two older methods.

The “52 cents” method is where you claim 52 cents for every hour worked at home to cover the costs of electricity, gas and home office furniture, and then add in separately the costs you have incurred for phone calls, internet, stationery and the decline in value of equipment such as laptops and phones. Purchases under $300 can be claimed in full in the first year, while purchases over $300 must be spread over multiple years.

The “actual expenses” method is the most intricate, requiring you to individually calculate the work-related portion of all costs you have incurred working from home.

Home expenses you can’t claim

  • Snacks
  • Toilet paper
  • Coffee, tea and milk
  • Luxury stationery
  • Childcare or home schooling costs
  • Items your employer has already reimbursed you for

Do you need a dedicated work area to make a working from home claim?

For the short-cut method, you don’t need a dedicated work area. For the fixed-rate method – so 52 cents per hour plus some other things – you do need a dedicated work area. For the actual costs method, if you’re not claiming for household running costs such as cleaning, heating, cooling, electricity then you don’t need a dedicated work area. But if you’re going to try to claim for those sorts of things, then you do need a dedicated work area.

Can you claim expenses like your mortgage, rent and council rates?

These costs are really limited to where your home is a formal place of business. So, it’s more likely to apply to a small business person who is actually running their business from home, and they might have business signage and a place where clients visit and those types of things. Most employees are not going to meet those requirements. And what is important also is that if they do, then there will be capital gains tax consequences.  You will not get the full main residence exemption when you sell your home.

In summary

The ATO is expecting a large increase in people claiming working-from-home expenses and that’s part of why they developed the “80 cents per hour” shortcut method, because they also know that it’s an area where people do make a lot of mistakes.

Still, it will be an area that the ATO will be paying attention to and I would say to people who have unusual things that they’re wanting to claim: only claim what you’re entitled to. Don’t try and push the boundaries too far because it can result in a) slowing your return down or b) it can result in a bill later on.

These claims can be a bit of a minefield so don’t hesitate to contact Activ8 Business Advisors if you have any questions.

rental-property

What Are The Tax Consequences of Rental Properties ?

by Advice

If you own a rental property or are thinking of buying one, it’s a great idea for you to understand the tax consequences. Here is a summary of how rental properties’ income and expenses can affect your tax return, including what deductions you can claim and the records you need to maintain.

Rental Income

The income received during a Financial Year must be included on your tax return.  Rental income and expenses are attributed to each co-owner according to their legal interest in the property.

If your property is rented to family members or friends at below market rate, you can only claim deductions up to the amount of rent charged.  The property cannot be negatively geared.

If you use a Property Manager, they usually provide you with an Annual Summary showing the amount of rent earned during the year and any expenses they have paid on your behalf such as any repairs and maintenance, letting fees, advertising and property management fees.

Rental Expenses

There are three categories of rental expenses:

  • Expenses that are not deductible
  • Expenses that you can claim an immediate deduction in the income year you incur the expense
  • Expenses that can be claimed over several income years.

Non-Deductible Expenses

These include:

  • acquisition and disposal costs of the property. These are added to the cost base of the property
  • expenses not actually incurred by you, such as water or electricity usage charges paid by your tenants
  • expenses associated with periods where your property (including your holiday home) was not genuinely available for rent
  • expenses that are not related to the rental of a property
  • travel expenses

Deductible Expenses

To claim deductions against your rental income, your property must be genuinely available for rent. This means that the property is advertised giving it broad exposure to potential tenants and those tenants are reasonably likely to rent it.  Word of mouth, limiting the time the property can be rented or you place unreasonable restrictions on the property would indicate the property is not genuinely available for rent.

You will need to apportion your expenses if any of the following apply to you:

  • your property is genuinely available for rent for only part of the year
  • your property is used for private purposes for part of the year
  • only part of your property is used to earn rent
  • you rent your property at non-commercial rates

Interest

Interest is the biggest deduction.  Interest paid on the loan used to purchase the property is deductible, provided that all the money borrowed was used to purchase the property.

For line of credit accounts that are used privately as well, the interest claim must be apportioned for the private portion.

Repairs and Maintenance

Repairs made to the property during the period it is rented are deductible.

Repairs must relate directly to wear and tear or other damage that occurred as a result of your renting out the property.  Repairs generally involve a replacement or renewal of a worn out or broken part, for example, replacing worn or damaged curtains, blinds or carpets between tenants.

Maintenance generally involves keeping the property in a tenantable condition, for example repainting faded or damaged interior walls.

Initial repairs are not deductible. Initial repairs include repairing defects, damage or deterioration that existed at the date you acquired the property. These can be used to reduce a capital gain on disposal.

Improvements

Improvements you make to the property are not deductible in full. They need to be depreciated and claimed over their effective life.  Examples of improvements include:

  • Landscaping
  • Insulation
  • Adding on another room
  • Extensions
  • Replacement of an entire structure such as a complete fence, stove, kitchen cupboards or fridge

Other deductible expenses can include:

  • advertising for tenants
  • bank charges
  • body corporate fees
  • cleaning
  • council rates
  • electricity and gas
  • gardening and lawn mowing
  • insurance
  • land tax
  • legal expenses re leases agreements.
  • lease costs
  • pest control
  • property agent’s fees
  • letting fees
  • quantity surveyor’s fees
  • security
  • stationery
  • postage
  • telephone
  • internet
  • water rates

Expenses deductible over several years:

  • Borrowing expenses – these are written off over the term of the loan or 5 years whichever is less
  • Depreciation for capital assets
  • Capital works deductions

Capital Works Deductions

If the building is under 25 years old you will be entitled to claim a deduction of 2.5% per year of the original cost of construction of the building for up to 40 years from the original date of construction.

If you do not know the building cost you can contract a quantity surveyor to determine the building costs and prepare the depreciation schedules for the property and determine what can be claimed.  The fee is tax deductible.

If the previous owner was allowed capital works deductions, earned assessable income from the property and the capital works started after 26 February 1992, they are required to give you, as the new owner, information that will enable you to calculate those deductions going forward.

Records you need to maintain

You should keep records of your rental income and expenses for five years from 31 October or, if you lodge later, for five years from the date you lodge your tax return.  If at the end of this period you are in a dispute with the ATO that relates to your rental property, you should keep the relevant records until the dispute is resolved.

Records of expenses must include the name of the supplier, amount, nature of the expense, and the date.

salary sacrificing

The Benefits of Salary Sacrificing

by Advice

There are still opportunities for tax-effective salary packaging – especially if you are in the not-for-profit sector.

Salary sacrificing is where your employer pays you the same salary, but you pay for selected expenses before the tax is taken out, rather than after. This could reduce your taxable income and give you more money to spend on the things you want.

The key to a tax-effective salary sacrifice is for the employee to take some of their salary in the form of concessionally taxed benefits or even exempt benefits instead of taking it all as taxable salary.

For the employer, salary packaging has some advantages such as the ability to attract employees. The administration costs of salary packages also need to be considered. Some employers may only offer limited forms of packaging to reduce their costs.

The most common salary packaging items are:

  • Car fringe benefits (i.e. Novated Lease)
  • Expense payment fringe benefits (especially otherwise deductible expenses)
  • Portable digital devices – laptops, mobile phones etc
  • Car parking fringe benefits
  • Superannuation.

The advantages of salary sacrifice are that you are buying the benefit in pre-tax dollars, saving money you would otherwise pay in tax.

Contact us today to discuss options for your situation.

 

Get A Grip On Your Finances

Get A Grip On Your Finances

by Advice

Even If You’re Financially Secure, It’s Time To Live On A Budget!

As we start to see the loosening of the restrictions imposed due to the COVID-19 pandemic, there is still another big unknown in our lives right now: What is going to happen with the economy? Some would argue that the sharp economic recession brought on by this crisis is near the bottom of the trough and we are close to a recovery stage.  I believe we are virtually guaranteed of an ongoing recession over the next 12 to 24 months.  Particularly after the governments subsidies and stimulus packages come to an end.  What will that mean for our jobs and livelihoods—and what should we be doing financially to prepare?

Some of us are already having to rethink our spending habits to make ends meet. Others may feel more financially secure thanks to high salaries, six-month emergency funds or the ability to work remotely. But when recessions come, they tend to come for everybody—so it is time for all of us to re-evaluate our budgets and, potentially, start saving as much as we can.

Here are three pieces of advice to get you started:

Treat your income like it’s temporary

This is a good mindset to have at any time but particularly now: whatever income you are earning right now is temporary. If you are happy with your current income, don’t take it for granted—and don’t assume there will always be more money coming in.

This mindset becomes even more important during a recession. When jobs are harder to come by it’s important to treat your current income as if it might need to stretch for as long as possible. This doesn’t mean you need to cut back on all discretionary spending, but you might want to consider trimming some of your expenses so that you can put more money into savings or an emergency fund.

Saving money now is worth more than spending money later

In the face of so many unknowns, it is important to err on the side of cash.  In recessions, cash is king.  A lot of retailers have started offering significant sales and discounts to entice shoppers to start spending again—but buying something at a bargain may not be the smartest financial move.

Unfortunately, this advice will not help get the economy ticking over again, but in times of uncertainty, money in your pocket now is worth more than any saving you might make.

In other words: If you spot a great deal, remind yourself that having cash on hand is often more valuable than getting a price cut on a purchase that isn’t absolutely necessary. Saving $50 might still mean spending $100 after all—and you might really need that $100 in the not too distant future.

Make a plan and act

If you’re worried about how long your money might last during a potential recession—or if you’re simply unsure about what you should be doing with your money right now— try budgeting for 30 days, then re-evaluate.

No matter the current condition of your financial safety net. Create a budget, cut your expenses and save every dollar you can for the next 30 days, then evaluate: Did you actually trim as much as you could’ve? Did you make any purchases you regret? Were there any purchases you should have made but didn’t? How did your budget affect your overall quality of life?

Once you know the answers to these questions, you can reconsider and refresh your budget for the next 30 days. Continue to budget, reflect and repeat while saving as much money as possible—because whether you feel financially secure or financially anxious, right now it’s essential to start preparing for an uncertain future.

Don’t cut out all the things that make life bearable in these stressful times.  If you can keep something that just makes you happy, keep it.  For me, it’s chocolate and red wine.  So, if you can afford that nice bottle of red you ordered, go ahead and drink up!

Don’t hesitate to contact us if you’d like some assistance with your personal budgeting.  ASIC’s Moneysmart website also has an excellent budget planner (under Tools & Resources) as well as other useful advice.  Check out: https://moneysmart.gov.au/