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Tax FAQs

Property Investments

Q:  I’m moving overseas but I am not selling my home or investments here. How will they be taxed for Australian taxation purposes?

A: If your intention is to move overseas permanently and your family is moving with you, then you will be considered a “non-resident” to Australia for taxation purposes.  It is advisable to obtain market values of all your assets when becoming a non-resident as the taxation laws will apply differently to non-residents, for example the 50% discount on capital gains on assets held for more than 12 months does not apply to non-residents.   Also, the income from these assets will be taxed at non-resident tax rates which are higher than the resident tax rates.  Any interest or dividends paid from your Australian investments will be subject to withholding tax.

Q:  I am selling my house but I rented it out for 5 years before I lived in it for 10 years.  Do I have to pay tax on the gain I made on the sale?

A:  Yes, the house will be subject to capital gains tax because it was rented out first. Let’s say the property was sold for $500,000 and the original purchase was $400,000.  Thus the total gain is $100,000.  This gain is then proportioned based on the time it was rented over the period held i.e. 5/15 x $100,000 = $33,333.  This taxable proportion is then reduced by 50% as the property was held for more than 12 months thus the taxable capital gain amount is $16,667.

Q:What is the tax consequences of letting a property to relatives/children for under market value rent?

A: The decision will ultimately be dependent on the facts of each case but as a general rule, the deduction for outgoings incurred in connection with the property may be allowed only up to the amount of rent received.

Q:  We currently have a mortgage free home. We wish to purchase a new property to live in and will need to borrow around 40% of the value of the new home. If we rented out our current home, is it possible to put the new loan towards the rental property to offset the interest against the rental income?

A: The deductibility of interest on the loan is determined by the purpose of the borrowed funds. By borrowing to buy a new home to live in instead of renting it out, the purpose is of a private nature. Hence, the interest on the loan cannot be offset against the rental income.

Q: I’m moving overseas indefinitely and I’ll be renting out my property during this time. Do I need to lodge a tax return even when I’m not an Australian resident for tax purposes?

A: As a non-resident you will still need to lodge a tax return in Australia. This is because non-residents are taxed on Australian sourced income. Your rental property being taxable Australian property will generate Australian sourced income which will need to be reported on a tax return. The same would apply to unfranked dividends and interest generated on an Australian bank account (However, there is no need to lodge a tax return solely on that income if the company paying the unfranked dividend and/or the bank paying the interest withholds the correct amount of withholding tax.).

Investing in Shares

Q: I have sold some of my shares that I purchased last year.  What is the tax effect on that?

A:  If you purchased the shares for investment and held them for less than 12 months then any capital gain you make on the shares is a taxable capital gain and the full gain is included in your tax return as assessable.  If you held the shares for more than 12 months then any capital gain you make on the shares is discounted by 50% such that only 50% is included in your tax return as assessable.  If you made a loss on the sale of the shares it is carried forward indefinitely and can only be used to offset against future capital gains.

If you buy and sell shares as a ‘business’ and therefore are considered a ‘trader’ of shares then the income is assessable and  the loss is deductible as it is considered normal business income or loss.

Tax Deductibles

Q: Can my business borrow money to pay the income tax that it owes and claim the interest deductions?

A: If you carry on a business for the purpose of producing an assessable income, then it is considered that the interest incurred on those borrowings is a normal incident of conducting business and the interest expense will qualify as a deduction.

Q: Can I claim entertainment expenses as business deductions?

A: Entertainment expenses are generally not deductible. This includes the cost of business lunches, and attendance at sporting events, gala or social nights, concerts or other similar types of functions or events.  This is the case even if the entertainment is provided specifically for business reasons, such as business lunches and entertaining clients, or in connection with the performance of employment-related duties.  However there are a few exceptions to this rule such when:

  • The cost of a person’s meals while travelling (overnight travel) in the course of employment.
  • The cost of food and drink you provide to employees in an in-house dining facility or recreation facility
  • The cost of food and drink that is reasonably incidental to an employee’s attendance at a seminar.
  • The cost of providing an overtime meal to an employee under an industrial award or agreement

The cost of entertaining clients and suppliers (that is, not employees or associates of employees) remains non-deductible.

Q:  Can I claim laundry expenses of my work clothes as a tax deduction?

A: You can claim the cost of laundering and dry-cleaning of:

  • work uniform that is distinctive (such as one that has your employer’s logo permanently attached to it).
  • occupation-specific clothing which allows people to easily recognise that occupation (such as the checked pants a chef wears when working) and which are not for everyday use.
  • protective clothing and footwear to protect you from the risk of illness or injury, or to prevent damage to your ordinary clothes, caused by your work or work environment.

You cannot claim the cost of purchasing or cleaning plain uniforms or clothes, such as black trousers, white shirts, suits or stockings, even if your employer requires you to wear them.

If you’re interested in any of the issues above, please don’t hesitate to contact us.

Advice provided by Peter Vickers and Associates Pty Ltd Chartered Accountants Liability Limited by a Scheme under the Professional Standards Legislation ABN 60003466813. Authorised representative of Peter Vickers Insurance Brokers Pty Ltd trading as Peter Vickers Investment Services Australian Credit Licence and Australian Financial Services Licence Number 229302

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