Fortunately with the help of business tax advisers, you can get over the hump at the end of the year with a minimum of fuss. For eleven months and 30 days, though, the records that go into that tax return are your responsibility. Today we look at the top tips for Sydney tax agents on meeting your obligations and maximising your return.

Keep it together

Keep all business expense and income records together in a cash book. This is usually done with software, though the manual method is still acceptable in some circumstances. Popular applications include MYOB and Quickbooks, and many Sydney tax agents will be able to train their clients in the functions they will specifically need.

Employee records

When it comes to tax time, the records that your business tax agent will need include payment summaries, eligible termination payments (to employees that left the company with benefits owing), and reportable fringe benefits. Your payment summaries will be automatically generated by all good bookkeeping software programs; if you need additional advice on calculating them (for example, if you keep manual records), Sydney tax advice agents can usually help out.

The five year itch

You need to store your tax records for a period of five years, while they are still subject to a possible audit by the Tax Office. In most cases, you will not have turned over every single record to your business tax agent, you will simply have given them a report detailing total expenses. Keeping the tax invoices and bank statements relating to your expenses needs to be done in house, for five years at least.

Keeping records for every pay period

There are plenty of records and payments that you can’t leave until the end of the year, but which must be paid either every pay period or every month. These obligations fall under three main categories:

• PAYG withholding (the tax that is owed per payment to yourself and your employees)
• GST recording obligations
• Superannuation

You may have gone to your Sydney tax agent for advice when you first started up your business about these issues – or you may have muddled through until now! We always recommend that you check in with your business tax accountant at least yearly about the state of your day-to-day record-keeping.

They may be able to point out deficiencies that would otherwise only be found when a Tax Office auditor was going through your records. They will also be able to advise you on state legislation regarding recording keeping for SMEs, which vary widely across Australia.

Technorati Tags: medium enterprises, tax tips

Congratulations! After years of planning and wishful thinking you have finally decided to start your own business. If you are obtaining income from your business and it’s not a hobby, then you need to declare your taxable income. You can also claim deductions for certain expenses that you incur when running your business. Here’s a quick rundown on the small business tax issues that you need to consider when starting your own business.

Structure of your business

You need to decide on the legal structure of your business. There are four main business structures commonly used by small businesses in Australia:

• sole trader
• partnership
• trust
• company.

Sole traders, partnerships, companies and trusts have different legal obligations and are taxed differently. For instance, sole traders can use their individual tax file number while partnerships, trusts and companies need to apply for a separate tax file number called a business tax file number. A company will also have to apply for an Australian Company Number (ACN) before applying for an Australian Business Number (ABN).

You are not locked into a structure and as your business grows, you can change the structure of your company.

Australian Business Number (ABN)

Under Australian law, you are not required to have an ABN but having an ABN will make it easier to register for GST and other business tax registrations such as pay as you go (PAYG) withholding and avoid having amounts withheld from payments to you. Businesses must withhold 46.5% of any payments they make to you unless you quote an ABN.

An ABN is free and you can apply for an ABN by visiting the Australian Business Register.

Goods and services tax (GST)

You only have to register for the GST if any of the following apply:

• your annual turnover is $75,000 or more or $150,000 or more if you are a non-profit organisation.
• you provide taxi travel and/or
• you wish to claim fuel tax credits.

You need to monitor your taxable earnings. If they fall over $75,000 or more, you have 21 days to register for the GST or you will be penalised.

Fuel tax credits

You may be able to claim fuel tax credits for taxable fuel you used in your business. The only exceptions are aviation fuels, alternative fuels and fuels used in light vehicles (of 4.5 tonne GVM or less) travelling on a public road. You can claim around $19 in fuel tax credits for every 100 litres of fuel you use in your business, even if you use it in machinery, plant or equipment such as cement mixers, compressors or bulldozers. Consult the Australian Tax Office for a full listing. To be eligible for fuel credits, you will need to register for fuel tax credits and you must be registered for GST.

Pay as you go withholding (PAYG)
As a sole trader, you pay the same tax as individual taxpayers, at personal income tax rates. You may have to register for PAYG withholding if you make payments of a salary, wages, commissions or allowances to an individual or an employee and you may also make payments to yourself as the director of the company or make payments to contractors.

You don’t have to register with the ATO for super purposes but you must offer your employees a choice of a super fund and pay contributions into that fund.

Other business tax registrations

There may be tax registrations specific to your business that you can apply for such as:

• fringe benefits tax, if you provide fringe benefits to employees
• wine equalisation tax, if you are a wine manufacturer, wholesaler or importer
• luxury car tax, if you are a retailer, wholesaler or manufacturer of luxury cars

Record keeping

You must keep any account books, records or documents related to preparing your income tax return for at least five years after they are prepared, obtained or the transaction is completed, whichever occurs last. Some records need to be kept for more than five years like capital gains tax for example. You also need to keep records like:

• bank records
• asset purchases
• contracts and agreements
• year-end records, and
• minor deductible expenses such as claiming for certain work, car and business travel expenses.

You may also need to keep additional records if you have applied for the GST, have employees or contractor records, fuel tax records, motor vehicle records, stocktaking records and no ABN withholdings.

Consult your accountant or the Australian Tax Office in regards to your tax obligations and what specific deductions you can claim for your business.

People often search for “Tax Accountant Sydney” on the web because it can be very hard to find a reputable accountant for your Sydney based business, or for self employment. With so many accountants out there, all claiming to be the best, how can you be sure they can do any better than you?

The first thing to realize is the actual need for an outside tax accountant. Sydney is a thriving and competitive city for all types of businesses, although many simply fail at the accounting level. If you are spending too much time managing accounts, going through financial records or researching what deductions you can make, instead of focusing on other aspects of the business that actually bring in profit, then that is a sign that you should be searching for a tax accountant in Sydney. Although you’ll have to pay them for their work, they could actually save you on taxable income, and you’ll have more time to focus on the business and make more money anyway.

Whereas you might do the bare minimum to get by and file your tax return, a Sydney tax accountant will make it their job to keep every single piece of financial information in check, and to save you the most amount of money possible through the effective use of accounting techniques and deductions. You will no longer have to worry about any calculations, keeping your records in order or learning complicated accounting software, because your accountant will do it all for you.

When finding a tax accountant in Sydney you have to do your research. Not every accountant is qualified or will fir your own personal needs. First you’ll need to look at their experience. Not just how many years they’ve been offering their services, but what types of businesses they’ve been representing. Finding one that has served clients in your field is an important decision making factor. Price is also obviously an important factor. You need to weigh up experience versus price, because the more years in the game usually mean higher fees. Their staff is also something to consider. They may be a well respect and experienced firm, but does that mean anything if they just delegate your accounts to a junior?

Easy Tax is a leading tax accountant in Sydney that has over twenty years of experience in accounting. They have helped clients with small businesses, IT contractors and consultants, various Tradesmen and builders, Medical practices and professionals, Property investors and even International clients.

Running your own business can be very stressful and extremely time consuming. In fact sometimes you feel like you’re spending more time bookkeeping and updating accounts for your tax than you are running the actual business itself.

Despite this leaving your tax responsibilities as an after thought can not only get you in trouble if you do not keep adequate records or pay what is owed, but you may also end up paying far more than you should be. The following tax tips should help you stay in control of your business and keep hold of those much needed profits.

• Stay Consistent: We all know you can deduct legitimate work related expenses (aka things that cost money and are directly related to your work; such as travel) but after a while you might become lazy at doing the sums. Oh it was just a quick drive up the road, who cares? Oh I forgot to keep the receipt when I bought my client lunch, it doesn’t really matter. In this frame of mind you’ll eventually lose out. Stay consistent and deduct everything, so you get the income you deserve!
• Get Savvy: Lodging the tax return, keeping your accounts in order and doing the sums can be very daunting, but in today’s age it doesn’t have to be. There are tonnes of pre-made spreadsheets, software and websites that can do the hard work for you, as long as you key in the right data you’ll be set. Filing your tax return is easy by using E-tax at www.ato.gov.au.
• Donate to charity: What give away money? This is not strictly true, if you do the math and find out that you’ve only just fallen in to a higher tax bracket, it may work out cheaper if you make a donation to charity and end up back in the cheaper bracket, thus saving more money on tax than the cost of the donation.
• Depreciate: This old accounting trick bewilders many new business start-ups because A) it involves maths and B) the concept seems illegal. Well the math is easy and it isn’t illegal; just do it. When you buy something for your business like a laptop, it has value (the value you bought it), but after a while it becomes outdated, slow and less efficient costing you money because a much quicker machine would process your work faster. It will eventually conk out. Depreciation is simply working out the monetary value of its deterioration. This is done by estimating how long the asset will last (3 years is a good estimate for a brand new laptop. It may become outdated but it will still usually work fine) and then dividing the initial cost by that figure. E.G. You bought a $3,000 laptop, so its annual depreciation would be $1,000. That figure is tax deductible.
• Utilize Your Refund: This sounds silly, but utilizing your tax refunds can save you money if done smartly. Many get the money and spend it, put it in the bank or invest it, but you should pay of any debt first. A lot of people are happy to constantly let their credit card balance roll over, but you are paying interest on this. Loans and credit cards have interest of around 16% to 18%, so if you put your refund in the bank you’d only be making about 6% to 8%. In other words you could be paying more interest than you’re making without realising.

There are lots of other ways to get the best out of your tax. Just remember to keep it legitimate, because if they don’t get you now they may still get you later and paying a huge lump sum ten years from now isn’t fun.

How can the Investment Allowance benefit you? If you purchase new equipment costing $1000 or more between 13th December 2008 and 31st December in 2009 and install it before the end of 2010 then you are entitled to 50% of the total value of an asset as a deduction, plus you can also depreciate the asset at the normal rates.

In effect the government is giving you your cake and you can eat it too! Magic!!

Here’s an example:

Elvis Pelvis owns a small business selling musical instruments. He requires a vehicle which he wishes to use to carry and deliver pianos, guitars and other musical instruments. For advertising purposes Elvis is going to add a big golden guitar on top of the vehicle. The new vehicle costs $50,000 including the cost of the construction of this golden guitar. He can now claim 50% of the purchase price of the vehicle in his tax return in the year that he has purchased the vehicle and has it ready to use.

This has an immediate result of reducing his income tax. Receiving the investment allowance does not stop Elvis from receiving the full amount of depreciation. He gets both.

Elvis also plans to use the vehicle for private purposes but this too does not stop him receiving the full 50% investment allowance.

The investment allowance eligibility criteria:

• The asset must be intended to be used for business in Australia.
• It must be a tangible asset. It can’t be software, licenses, patents or websites. It does not include land, buildings or trading stock.
• The asset must be new.
• For a small business the asset must be worth more than $1,000. For a business which is larger and does not meet the small business criteria the asset must be worth more than $10,000.
• The contract to buy or construct the asset or make additional investment in the asset must be entered into between 13 December 2008 and 31 December 2009 and installed before 31 December 2010.
• The asset must be “held” meaning available to be used. Hire purchase assets are eligible but novated lease assets are not eligible unless they are luxury cars which can be claimed only up to the cap on the luxury cars.
• Leased assets depend on ownership rights. Usually they rest with the leasing company. If you are about to lease equipment or a vehicle point out to the salesman that the terms should be better for you as the leasing company is going to get the investment allowance.
• You are not locked into only one asset you can do it again with multiple assets.
• If you are employed and also have a small business on the side and you use this small business to purchase your equipment then the turnover of your small business must exceed $20,000 in order to be entitled to claim the costs of the investment allowance against other income.
• If it is a motor vehicle you are claiming for make sure you do over 5000 business kms or you won’t get your investment allowance.
• The claim for the investment allowance is available in the year that the asset is installed and ready to be used.

People with rental properties may be disappointed because rental is not considered a business but rather a passive activity so landlords with only a few rental properties would not be eligible for the investment allowance.

The gift of the Investment Allowance is a really amazing opportunity for small business to reduce their tax burden during the economic downturn and invest in new assets for future growth. It is also important to be aware that the ATO will be alert to any schemes to claim the investment allowance where there is not a genuine intention to use the asset for business purposes or where the asset is purchased and quickly resold with the intention merely of making a claim to reduce tax.

Even a new business that has never operated before is entitled to claim the Investment Allowance if it has a genuine intention to operate and use the asset in a business.

If you have been dreaming of equipment that could help your business don’t wait, make haste and buy now. You’ve got the perfect excuse for shopping- you’re doing it for Australia and you will get a tax deduction for it!

Tax benefits for ex patriots can include Living Away From Home Allowances (LAFHA) and a significant change in the Australian tax law that has removed taxation on earnings that you may still accrue outside of Australia.

There are some very specific things that can save expats thousands of dollars, and too often they are not being advised of them.

If you are coming to Australia on a 457 visa you will have to lodge an income tax return.  In fact anybody in Australia who earns more than $A6,000 dollars is required to lodge a tax return.

This applies even though your employer has deducted income tax from your salary.  Most Australian employees receive a small refund but if you have Australian investment income this could mean that you need to pay extra tax to cover this additional income.

The Australian tax year starts on July 1 and ends on June 30.   In July your employer will issue you with a PAYG (Pay As You Go) statement which shows how much income you have earned and what tax has been remitted to the tax office on your behalf.

Armed with your PAYG statements you can go on-line and visit the Australian Taxation Office website (www.ato.gov.au ) to complete a tax return.

Alternatively, you can use the services of a good tax agent. However, unless you are registered with a tax agent you are expected have your tax return lodged by October 31 for the previous period of July 1 to June 30.

What is LAFHA and how can it benefit you?

The best opportunity for an expat is the benefit available to expats who come to Australia on a 457 Visa to obtain “a living away from home allowance” or “LAFHA” from their employers in Australia.

Living away from home allowance is intended to compensate people who have moved from their permanent residence to work and live in another environment.

The Australian Taxation Office allows $206 for food per adult per week.  While this might not seem much the Australian tax system also allows a “reasonable” allowance for rent for those who have relocated.

The question is – what is reasonable?

The Australian Taxation Office does not stipulate what is reasonable but it is an allowance which would provide an equivalent standard to the accommodation the expat would have in his home country.

Provided the employer takes off $42 for the food per week and gives the employee $164 instead of $206 for food, and provides a rental allowance that is “reasonable”, the living away from home allowance is not taxed when given to the employee and importantly costs the employer nothing extra.

This is a real plus if you are coming to Australia.   You get the money weekly in your pay packet but it is not taxed.  Unless the amount for rent is “unreasonable” there would be no tax to pay by an employer.  It is a win/win situation.

Many employers are not aware of the benefits which they can legally provide to an employee who has been re-located. If you are an expat on your way to our sunny shores make sure that it is in your contract before you take up employment in Australia.

The Australian Self Assessment tax system and computer monitoring
The Australian Taxation system works under what is called “self assessment”.  Self assessment means you are personally responsible for correctly reporting all your income and any expenses directly related to you earning that income.   That means you have to get it right!

To assist them to trap those not contributing their fair share of income tax the Australian Taxation Office has invested heavily in computer systems which do data checking and cross matching to catch tax cheats who are deliberately manipulating the system for their own ends.

As an example the ATO computers are able to identify taxpayers who understate the interest they have earned in Australia.

Like everybody else, Australians take a keen interest in whatever impacts their income or whatever can help them to legally reduce their tax  and receive a refund.

Among the many things which can cause you to be faced with paying more tax is interest income, dividends received from shares and selling an asset and making a capital gain.

Deductions and a change in the tax law for expats

Deductions, or costs you have paid, which would reduce your tax and help you get a refund, are anything that you pay for that directly assists you to earn your income.

This could include depreciation on your computer, payment for the internet or stationary but they can only be claimed if these costs are directly related to helping you with your work.

This is an area of expertise for Easy Tax.  We are specialists in helping expats understand their tax obligations in Australia.

From July 1 2006 the Australian Government no longer taxes those who are not permanent residents of Australia on investment income earned outside of Australia.

This is wonderful for those expats who leave behind their home and rent it out while they are on a visa working in Australia.  Although they may be taxable in their home country, they don’t have the onerous task of including their non Australian investments in their Australian tax returns.

This is an area few Australian accountants are aware of and Easy Tax can help you here.

If you find yourself in a position where you would like to benefit from LAFHA, and your potential Australian employer does not understand how it can benefit you and also cost him and yourself no extra tax, we can help guide you and your employer.

Whether you are a resident or not is a big issue especially if you are going overseas to make your fortune and you think it could be severely diminished by your income being taxed in two jurisdictions. Read what happens for Australians who go overseas and are classified as residents and those who go overseas and are classified as non residents.

If you are classified as a resident of Australia while you are overseas you have to pay tax on all income earned no matter where it comes from even if this income has been taxed by another country. The ATO expects you to lodge your tax return annually just like anybody else living in Australia. If you have paid tax in another country you are entitled to a credit for income tax that you have paid in other jurisdictions with which Australia has a double taxation agreement. Check out countries with double tax agreements.

What happens to your Australian investments while you are away?
If they earn income then you have to declare the income along with any other income you make from investments anywhere.

This raises the question of a capital gain. The same taxation rules apply whether you sell a property that you own in Timbuktu and make a capital gain or if you make a capital gain on a property you’ve sold in Bondi. So make sure you keep all the details of all income, all losses and of course all expenses incurred when you sell anything and make a capital gain.

Of course you need to know the conversion rate into Australian dollars. If the money has gone through your credit card or been transferred to an Australia bank that is the rate applicable for your tax return. If however you don’t know the rate to apply, the ATO has rates available on their web site.

Tax Management of Living Away From Home Allowances
Australian expats who are transferred by companies to another country are entitled to a “living away from home allowance”. A foreign company can also pay this wonderful “LAFHA” to Australians they transfer overseas.

What is LAFHA? How much is LAFHA?  And what can it do for you?

LAFHA is an allowance intended to bring you up to the standard of living you would have had at home,

Here’s how it works.  Currently the Australian Taxation Office allows $206 for food for an adult.    While this might not seem much, the tax system also allows a ‘reasonable’ allowance for rent for those who have relocated.

The question is – what is reasonable?

The Australian Taxation Office does not stipulate what is reasonable but it is an allowance which would provide an equivalent standard to the accommodation the expat would have at home.

Provided the employer takes off $42 from the food allowance per week and gives the employee $164 instead of $206 for food, and provides a rental allowance that is ‘reasonable’, the living away from home allowance is not taxed when given to the employee and, importantly, costs your employer nothing extra.

In other words no fringe benefits tax for the employer.

This is a real plus.  You get the money weekly from LAFHA in your pay packet without it being taxed.  So unless the amount for rent is ‘unreasonable’ there would be no tax to pay by an employer if the employer is Australian.

This makes LAFHA a win/win both for the employer and the employee.   If you are going overseas and remaining an Australian resident why wouldn’t you ask your employer to go that route and give you LAFHA?

If you need assistance with LAFHA or your employer does not understand how to implement LAFHA contact support@easytax.com.au and we will be delighted to help.

Am I a resident for tax purposes?
The big question for Australians going overseas is “Am I a resident for tax purposes?” Expats often say “I’m not there any more. I don’t cost the country any money now so why should I pay tax?” So if you are one of those people who are leaving Australia “permanently” or “semi permanently” and who are then considered non residents there is no tax to pay on you overseas earnings outside of Australia in any Australian Tax return.

I can understand why people who go to live elsewhere in such places as Hong Kong, where income tax has dropped to 15% might prefer to pay Hong Kong tax and become non residents of Australia.

Legislation brought in on 12th December, 2006 means you have to watch out about one thing, going overseas permanently and declaring yourself a non resident will crystallize a capital gain on Australian shares but very fortunately the act of becoming an ex-patriot does not trigger a capital gain on your real estate.

I should say this again because it is so important. Becoming a non resident for income tax purposes does not trigger a capital gain on your home or other property (real estate) held in Australia. If you sell an investment property of course it triggers a capital gain but here we are only talking about changing your residency status. If you’re confused about this and worried about your home being taxed and subject to capital gains contact us and we can explain it better for you.

For the non resident, interest earned on money left in Australia is taxed at source at 10% and dividends are taxed also at source at 15%. As you probably know company tax is 30% so that means that tax on dividends for non residents is half.

I have often been asked if Australian ex-patriots who are non residents need to lodge a tax return and the answer is “yes” if you earn income from any source in Australia other than interest and shares you need to lodge a tax return.

Ex-patriots who are classed as non residents need to declare income earned from any business or investment activity in Australia. Naturally this includes real estate. If you own real estate which you rent out in Australia you have to continue to lodge an annual tax return.

Make sure you let your bank know that you are going overseas so they take off 10% for tax on interest earned. That is certainly better than being taxed at the top marginal rate of tax if you don’t provide your tax file number! Same with dividends – I would suggest you provide the company who pays you dividends with your overseas address so that you are only taxed at 15% and not 30%.

Even though the ATO has set out how a person is classified as a resident or non resident for income tax purposes it is still a contentious issue and subject to much litigation.

Whether you are a resident for Australian Taxation purposes or not at Easy Tax we can help you do your Australian taxation returns.

With the end of the 2007 financial year just passed, its time to get everything in order for your tax return…here are just a few tax tips for you to be thinking about…contact us today for more, and start planning for this year.

1. Sunglasses

Sunglasses are a deductible expense provided you have to work outside and didn’t buy them as simply a fashion accessory. So don’t throw away the receipt for those sunnies.  It could help get you a bigger refund. You can also claim for sunscreen if you are exposed to the sun when you work.

2. Fines

You can’t get a deduction in your tax return for fines.  Even though you may have been working when you copped a parking fine it’s absolutely not deductible.

3. Mobile Phone

Get your employer to provide you with your mobile phone. Provided it’s for work related purposes it’s not subject to fringe benefits tax and it’s deductible for him and not taxable for you.

4. Tools

Tools used for work are deductible for all trades people. If you are an employee you can claim them outright if they cost under $300 but if they cost you more than $300 they have to be depreciated. To depreciate means to claim them over a number of years as they reduce in value. If they wear out and you can’t use them any more then you can claim for the balance that has not yet been depreciated. That is great for increasing your tax refund.

5. Simplified Tax System

If you are a tradie in business for yourself and in STS (the Simplified Tax System) you can “write off” tools up to the value of $1,000 in the year you purchase a tool. If you have tools which are being depreciated you need to keep your tax return from a previous year for your accountant so they know what tools and equipment were on your list of depreciable items from last year so you can continue to claim the depreciation.

6. Protective Clothing

If you are required to purchase boots or a hard hat for work the ATO considers them “Protective Clothing” and essential for you to earn your living so like tools they are deductible.

7. Travel

Have you got a mate who raves about how he went to Europe and claimed the travel in his tax? Well, if you actually go and visit sites where you exchange information with people in your industry in other countries and you actually learn something to help in your work then, the part of the travel that directly relates to you learning or doing business, is deductible in you tax return. Make sure you keep diary notes of the travel details that relate to work.

8. Health Insurance

Have you gone to get your tax return done and found out you have to pay the tax office? Shudder!! Perhaps you did not have health insurance. If your income is above $50,000 and you do not have health insurance you could be faced with payment of a Medicare Surcharge if you do not have health insurance. It makes medical as well as financial sense to get health insurance so you are not lumped with paying the surcharge of 1% on your income.

9. Transport

If you have to transport bulky tools when traveling to work you can claim travel to work and returning home.

10. Receipts

If you make claims in your tax return make sure you have the invoices and receipts to back them up. Missing your receipts but you paid for them with your credit card? The ATO now accepts your credit card statement as proof of payment.

Variation of income tax

If you have a negatively geared rental property, you can apply to have your weekly or monthly PAYG income tax reduced. This can help you to repay your loans faster as you can apply the reduced tax directly to your loan.

It takes a number of weeks for the ATO to approve the variation in your tax and get it in place even if you have already had an application approved in the last financial year. If you wish to do it yourself, go to www.ato.gov.au. Or you can contact Easy Tax, and we can assist you with this for a fee.

Here is the information Easy Tax needs to assist you:

1. Your expected rentals next over the coming12 months
2. Your expected property expenses over the next 12 months
3. Your interest payments to bank for the next 12 months
4. Your weekly, fortnightly, or monthly salary and the current tax paid on this.
5. Your budgeted depreciation.

Repairs

You should consider getting those repairs for your rental property done and paid for before the 30th of June. This helps reduce your rental income to give you a possible refund. Repairs which are considered maintenance or relate to wear and tear are deductible, but the costs of improving, adding to, or altering a rental property are of capital nature. These are not immediately deductible. Instead, these capital costs may be depreciated. Make sure you keep the receipts to help you determine the exact amount claimable.

Deductions

You can also prepay expenses over $1,000 up to twelve months in advance (including the cost of interest for your mortgage). That would help you with an immediate reduction in your tax and will probably help you get a hefty refund!

Put big dollars into your Super before the 30th June.

This month there is a one-off opportunity to put up to a million dollars into super. Fantastic if you have just won lotto or if you have inherited a cool million! One client who is nearing retirement and wants to downsize to a smaller property has sold his large family home to drop money into super. That is a smart move as the sale of your home is capital gains free. But, before you start thinking of selling rental properties or shares to dump money into super, it is wise to check carefully so you don’t end up being caught by the capital gains tax.

Records to keep

You have to keep records of everything that affects your tax for at least two years if you have a simple tax return. But with an investment property you need to keep your records for at least five years. For purchase of property or capital additions to your property, you need those old stuffy records until you dispose of them. Those old records may help you reduce tax that is the result of a capital gain. So go carefully when you are cleaning out your papers.

Above we’ve talked about getting the Max from your Tax for yourself. How about giving the Max to get more Tax?

Donations

Now is also the time to make sure others benefit. Make your tax-deductible donations now so you can claim your donation in your 2007 tax return. To be tax deductible, tax deductions must be to eligible gift recipients. This means your donation must truly be a gift (i.e, you can’t receive something for it), and the donation must be to a registered organization.

If you made a New Year’s resolution for 2009 to keep good records for your rental property, it is one New Year’s Resolution you should keep! One of the ATO’s biggest concerns is that investors and business owners keep good records.

If you faced an audit, it would be no use to throw up your hands and smile at the ATO auditor while saying: “I’ve lost my records” or “I didn’t keep those papers.” A taxpayer who makes no attempt to keep records or who deliberately destroys records could face penalties.

Taxpayers who have simple tax returns without investments or business activities are expected to keep their tax records for only two years. But if you own property or have business interests, you have to keep all those taxation records for five years.

So what documents do you need to store? The answer is all supporting documents that prove the claims in your tax return. If your investment is in real estate, this documentation would include your bank statements, mortgage statements, estate agent’s statements of rental income and expenditure, leases, and copies of all your receipts for costs such as council rates, insurance, repairs, and new equipment. You would even keep a receipt for work done on the garden. In other words, all receipts. In short, if you claim it, you must keep it.

Legal documents are equally important to keep. Fortunately, very few people discard heavy legal documents. Legal documents evidencing ownership such as documents of title are essential when you need to prove ownership, or you need to show when you commenced or ceased to be an owner. For tax purposes, you need to keep both the contract for sale as well as documents of settlement.

Most people think it is the date of settlement when the property is transferred that represents the sale of the property. For tax purposes, though, it is not the date of settlement, but the contract date which is used to calculate capital gains. So you need to keep the contract as well as documents showing the settlement which provide evidence of the amount paid and a break down of the transfers and costs.

Naturally, all these documents need to be kept in a safe place. Storing information is not easy and the papers mount up. The more investments you own, the higher the pile of documentation grows, and filing and orderliness become important. It is also necessary to be able to find the relevant papers when you need them.

With space at a premium, many people, including myself, would like to reduce the mountains of paper by scanning all documentation and keeping everything neatly stored and filed on computer. This may solve the space problem but could create another difficulty if you have a computer crash or a virus. I would suggest that storage on computers would be great insurance should you lose your hard copies, but it is still necessary to store the original documentation.

Keeping accurate proof is increasingly important especially as the Tax Office is improving its capability of comparing rental property information within tax returns. They are using this to make comparisons between income from property and costs of rentals between different taxpayers with similar investments.

The ATO are also checking on property sales. They are doing this through significantly expanding data matching and comparing figures with Land Titles Offices, State Revenue Departments, Valuation Offices, and even commercial service providers enabling them to obtain information about property sales which may not have been disclosed by a taxpayer.

The Tax Office is keen to educate the public to keep records and to that end provide books showing how to record data. Practice statement 2005/2 outlines the tax officers’ practices when reviewing taxpayers’ records, and Section 228-25 of the Taxation Administration Act imposes a penalty of $2,200 if a taxpayer fails to keep records in the appropriate manner required by law.

So, for the smart property investor, it is wise to retain all relevant documents in the interest of being able to support all your property investment taxation claims and to give you added peace of mind.

Rosemarie Chad is a CPA, a registered tax agent and holds qualifications in accounting and business administration. She graduated from the University Of Technology Sydney (UTS) in with a Bachelor of Business majoring in accounting. She became a member of the Australian Institute of Export in 1983.

Since commencing Easy Tax, Rose has been providing accounting services for small and medium businesses across a range of industries including medical practitioners, builders, IT consultants, educational institutions, hotels and more. Rose also has developed specific experience and expertise in offering tax advice for property investors.

For more information contact:

Rose Chad
Principal
Easy Tax Accountants
Suite 8
73 Albert Avenue
Chatswood NSW 2067

P: +61 2 9419 5322
F: +61 2 9412 2237
E: contact@ easytax.com.au

W: www.easytax.com.au

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