December 2012 Newsletter

Welcome to the December 2012 newsletter.

In this newsletter we will discuss:

• Assisting women to grow their super fund balances
• Claiming deductions from working from home
• Claiming legal expenses
• Making improvements to your business property
• Proposed new anti-avoidance tax measures
• Revisiting Christmas parties and FBT

Assisting women to grow their super fund balances

It has been well reported that women generally have a smaller super fund balances than their spouse. The good news is that there is a simple way to equalise the balance with the spouse. The simple way to rectify this is that your spouse can transfer some of their yearly super contribution to you to equalise your balance.

Your spouse can transfer up to 85% of their concessional contribution to you after the end of the financial year. Concessional contributions are either employer contributions or contributions that are made personally if you are self-employed. For example in the 2012 financial year your spouse’s employer contributed $10,000 into your family’s SMSF. Your spouse can transfer up to 85% of the amount contributed ($8,500) to your name on 1 July 2012, this can be particularly useful if you are on maternity leave.

Another useful idea is that if you plan to go back to work part-time for a few years then your spouse can continue to transfer up to 85% of their concessional contributions to you so that your super balance is not affected while you work part-time. Your spouse can also salary sacrifice more into super to reduce his personal tax bill and transfer a portion of his super contribution to you to ensure that your super fund balance is not affected while you are working part-time.

The other benefit in your spouse transferring a portion of his super contributions to you is that when you and your spouse begin to withdraw money from your SMSF in the future then both you and your spouse have more flexibility in how much to withdraw and also reduce your personal tax liabilities when the money is withdrawn. If your spouse has a significantly larger super balance then you then he may have more tax to pay when the money is withdrawn, by transferring a portion of his concessional contributions to you then he will minimise his future tax liabilities and this means more spending money to both of you.

The only time when doing this may not work is if your spouse is significantly older than you because your spouse can start drawing down an SMSF Pension sooner than you.

When you have a SMSF it is simple to organise for your spouse to transfer a portion of their super contribution to you as this just requires simple paperwork to be signed by both you, there is no need for any cash to be transferred in order for your super balance to increase in your SMSF.

Claiming deductions from working from home

If you operate your business from home you may be entitled to reduce your tax bill in relation to the property expenses. You should also be aware that if you work from home as a matter of convenience because you already have another office that you operate from then your abilities to claim a deduction are reduced.

Place of business

In order to maximise your deduction claim for your property you must show that the property is used as a place of business. When this can be shown then you can claim a portion of rent, interest, repairs, home and contents insurance, rates and land tax.

The ATO considers some factors, none of which is conclusive on its own which will indicate whether an area has been set aside as a place of business:

• The area is clearly identifiable as a place of business;
• The area is not readily suitable or adaptable for use for private or domestic purposes in association with the home generally;
• The area is used exclusively or almost exclusively for carrying on a business; or
• The area is used regularly for visits of clients or customers.
• It is a requirement inherent in the nature of your business that you need a place of business;
• Your circumstances are such that there is no alternative place of business and it was necessary to work from home

Examples of where it is possible to claim a portion of the property to be a place of business are:

• A doctor or dentist who has a surgery, consulting or waiting rooms at home
• An employee architect who conducted a small private practice from home
• A tradesperson who has a workshop at home
• A self-employed scriptwriter who conducted her writing activities from a room in her flat

Claiming expenses

1. When you can show that you operate a business from home then to apportion the expenses relating to interest, rent, home insurance, rates and land tax the apportionment is based upon:

floor area of business
total floor area of property × property expense
 

If you work from home as a matter of convenience such as bringing work home rather than working back late in the office then you cannot claim interest, rent, home insurance, rates and land tax.

Repairs can be claimed to the part of the home that is a place of business.

The expenses below apply if you operate your business from home or work from home as a matter of convenience:

2. Heating and lighting expenses-small and reasonable estimates can be made for this if you are running a business from the property or just doing extra work at home.

3. Telephone and internet-claim the percentage used for your business or for working from home.

4. Office equipment-Claim based upon usage for the business or to assist you to do extra work from home while away from the office.

Capital Gains Tax

There may be Capital Gains Tax on the sale of the property when you sell it but if you are able to access the small business concessions then this problem should be eliminated.

Land Tax

Land tax may be payable if you own the property and you conduct your business from a room in your property. Land tax is not payable if you work from home as a matter of convenience.

Claiming legal expenses

If you run a business you may have to use a lawyer for various business purposes. If you are a property investor you will also have to use a lawyer for various purposes. The information below will help you understand the tax implications when you pay various legal expenses so you know how it affects you from a tax perspective.

Legal expenses that is deductible

The examples below help you understand when the legal expenses are tax deductible and help you reduce your personal or your business’s tax bill:

• Drawing up a lease or reviewing a lease agreement, registration or stamping of a lease, or assigning or surrendering of a lease. The deduction is available to the lessee or lessor.
• Chasing bad debts
• Defending against unauthorised use a of a trademark
• Defending against patent infringement
• Defending against a misrepresentation suit in relation to sale of your business’s goods

• Defending against an employee’s personal injury claim
• Defending against libel action

Legal expenses that reduce capital gains

The examples below help you understand when legal expenses reduce any capital gain, this means that when an asset is sold it will reduce the tax liability on the sale of the asset and it is not a tax deduction in the year that it is paid.

• Purchase and sale of a property
• Purchase and sale of a business
• Purchase and sale of shares in a company or units in a unit trust
• Defending against an action brought by the purchaser in relation to the sale of an asset

Deductible over 5 years

There are certain business expenses that are tax deductible over 5 years and they are:

• Establishing a company or a trust
• Liquidating a company
• Business restructuring advice

As you can see not all legal fees are automatically tax deductible. This is important for you to know so that if you do have to pay for a large legal fee then you know the tax outcome for you and your business.

Making improvements to your business property

If you are planning to make improvements to your business property in the New Year to attract new clients it is important that you are aware of all the tax issues in relation to making improvements.

Improvements can be claimed for tax purposes as either Plant or capital works. Plant items are depreciated over their useful life for tax purposes, for example audio visual equipment and coffee machines are depreciated over 5 years. If you are a small business the depreciation rates for Plant are better because you can automatically deduct Plant that is less than $6,500. Items over $6,500 are depreciated at 15% in the first year and 30% in subsequent years. Capital works items are depreciated at 2.5% per year, an explanation of capital works and Plant items are discussed below.

Capital works

Works relating to buildings or structural improvements and to extensions, alterations or improvements to those buildings or its structural improvements are generally referred to as capital works.

Whether a fit-out is considered to be capital works depends on whether it “has formed part of the premises”. The following factors are relevant matters to consider in determining whether an item of fit-out forms part of the premises:

• Whether the item appears visually to retain a separate identity from the rest of the premises
• The degree of permanence with which it has been attached to the premises
• The incompleteness of the structure without it

None of the above factors are necessarily conclusive and the importance of each will vary depending on the nature of the item.

So therefore, broadly speaking, items which are “fixed” to the structure and form part of the structure of the premises would generally be capital works and deducted at 2.5% per year.

Plant items

A Plant item is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used; examples are computer equipment, software, cars, restaurant equipment.

In determining whether an item is plant, you will need to consider its function. Where its function is primarily to provide a setting or environment from which assessable income earning activities are conducted, the item would not generally qualify as plant. For example, a building is generally the “setting” for the income earning activities.

Where an item is used to create a particular atmosphere or ambience for premises used in a cafe, restaurant, licensed club, hotel, motel or retail shopping business performs a function that is so related to that business to warrant the item being held to come within the ordinary meaning of plant for that business then the item can be depreciated as a Plant item and not as capital works. Even if the items are fixed, the items can still be depreciated as a Plant item if the purpose of the item is to attract clients and add to the ambience of the place.

Proposed new anti-avoidance tax measures

The Government has announced changes to the anti-avoidance tax measures. The new measures have not been legislated but they are proposed to make it difficult in entering transactions for certain tax benefits. The main aim of the proposed new rules state that a taxpayer cannot successfully argue that they did not receive a “tax benefit” from a scheme by showing that they would have entered into another scheme or by not doing anything at all and the anti-avoidance measures will also apply to commercial arrangements implemented in a particular way to avoid tax.

The new proposed legislation is more stringent than the current legislation because the proposed legislation applies if a person participated in a scheme with a sole or dominant purpose of securing a particular tax benefit for the taxpayer in connection with the scheme. We will of course keep you updated on any legislative changes.

Revisiting Christmas parties and FBT

Christmas Party

A Christmas Party may be treated as an exempt minor benefit for FBT purposes if expenditure per employee together with their associate (if any) is below $300. This exemption cannot be used if the 50/50 election for FBT meal entertainment is chosen.

If treated as a minor exempt benefit then you cannot claim the tax deduction or the GST credit.

If treated as a fringe benefit to staff and subject to FBT then you can claim both the tax deduction and the GST credit.

Christmas Gifts

Christmas gifts may be treated as an exempt minor benefit for FBT purposes if expenditure per employee is below $300. The ATO have relaxed their view on associated benefits that are added together before the $300 test is applied and they will not generally add together the Christmas party and the Christmas gifts.

If treated as a minor exempt benefit then you can still claim both the tax deduction and the GST credit.

We hope you have enjoyed the article and please contact us if you need any further assistance. We wish you a happy and successful new year.

Disclaimer – The material contained in this newsletter does not constitute advice. DPL & Co Pty Ltd is not responsible for any action taken in reliance on any information contained in this newsletter. Anyone reading the newsletter should not act upon material contained in this newsletter without appropriate consultation.