A lot of our clients have received an unexpected additional tax refund as a result of the ATO amending tax returns of eligible Youth Allowance recipients to include a deduction for study expenses. This came about thanks to the High Court decision in  Commissioner of Taxation v. Anstis.

In the same way that the ATO did this for Youth Allowance recipients, they are now amending the tax returns of eligible Austudy and Abstudy clients. Tax assessments for the 2007, 2008, 2009 and 2010 income tax years will be amended to include a tax deduction of $550 for study expenses for each year of eligibility.

Deductions can be claimed for the 2011 year for study expenses incurred by Austudy, ABSTUDY and Youth allowance recipients.

Keep in mind that this is likely to be the last time you can claim a deduction against an assistance payment. The government announced its intention in the recent Budget to change the law to prevent deductions being claimed against all government assistance payments from 1 July 2011.

I was met with a mix of both scepticism and delight this week as I contact taxpayers who have received an unexpected, addition tax refund as a result of the Anstis case. (Let’s face it, it’s not often I call people to say “Hey, the Tax Office have sent us money for you although you weren’t expecting it”).

The case received a fair amount of coverage at the time. Essentially, the High Court decided that the taxpayer was permitted to claim education expenses against their Youth Allowance income. As a result, the ATO have been amending eligible taxpayers assessments with a standard additional $550 deduction for each of the 2007 – 2010 years they were eligible.   

This has been a positive for many of our client base who’s refund payments are starting to flow through now

Don’t get used to it, though. According to budget papers, the Government will amend the tax law to prevent deductions being claimed against all government assistance payments, with effect from 1 July 2011, in response to the 2010 High Court decision in Commissioner of Taxation v Anstis.

Commencing the measure from 1 July 2011 will allow individuals who receive Youth Allowance (Student) to claim a deduction for expenses incurred in gaining their payment for the 2010/11 income year. This is to ensure individuals who have maintained records of their expenditure following the High Court decision are not precluded from claiming a deduction.

The ATO is reminding small businesses that the first use and installation deadline for the business tax break is fast approaching.

Small businesses who committed to investing in an eligible asset as part of the business tax break initiative need to ensure that the assets are first used or installed ready for use by 31 December 2010 in order to be eligible to claim the 50% deduction.

The 31 December 2010 first use or installation deadline also applies to other businesses (turnover $2 million or more) that want to claim the 10% business tax break deduction.

Small businesses will be able to access the tax break for assets costing $1,000 or more. For all other businesses, the asset threshold is $10,000.

The tax break provides an additional tax deduction for assets acquired from 13 December 2008 to 30 June 2009, where the asset is also installed before 30 June 2010. The deduction will be equal to 30 per cent of the asset’s cost.

For assets acquired between 1 July 2009 and 31 December 2009 and where they are installed ready for use before 31 December 2010, the deduction is 10 per cent of the asset’s cost.

Who will be assisted?

• Taxpayers that carry on a business will be able to claim the tax break in the form of a bonus tax deduction.

When and how can it be claimed?

• The core provisions of the uniform capital allowance in Subdivision 40-B of the Income Tax Assessment Act 1997 (ITAA97) will provide the framework for determining which assets are eligible and who is entitled to claim the bonus deduction. This approach will reduce complexity and compliance costs for businesses.
• The allowance will take the form of a tax deduction on top of the usual capital allowance deduction able to be claimed for the asset as part of the taxpayer’s income tax return.

What kinds of assets will qualify?

• Assets that are eligible will be tangible depreciating assets used in carrying on a business, for which a deduction is available under Division 40 of the ITAA97.
• Further, the tax break will be available for new expenditure on existing assets as well as for new assets. The assets must be used in Australia.
• A minimum expenditure threshold of $10,000 will also apply, except for small business entities which only have to meet a minimum threshold of $1,000.
• Draft legislation to implement the investment allowance will be released for public consultation later this month.

The Tax Office today announced a practical approach to ensure those donating to help the victims of the Victorian bushfires and Northern Queensland floods can do so with minimum fuss.

People who give to ‘bucket donations’ can claim a tax deduction equal to their contribution up to $10 in their 2008-09 tax return without the usual need to keep a receipt. This also will apply to donations collected through third parties such as banks and retail outlets.

I hope we can all give generously to help victims of the recent fires/floods, but I feel it’s also worth mentioning that if you want to claim a tax deduction for your donation, the organisation must be endorsed by the ATO as a ‘deductible gift recipient’. If you’re not sure whether the organisation you’re donating to is endorsed the Tax Office lists them as ‘deductible gift recipients’ on its website at www.ato.gov.au.

Be generous but be smart….it’s sad but at times like these there are always scammers out to take advantage of your giving nature and profit for themselves.

Rental income and expenses has been a strong focus for a few years, because of the large number of new entrants and the wide range of common mistakes being made in claims.

Figures recently released indicate that over 1.5 million people claimed more than $24 billion in rental deductions in their tax returns last year. Almost 170,000 of these people claimed for the first time.

So far this year the Tax Office have completed over 6,800 reviews and audits of rental property claims. As of the middle of May they had identified $8.6 million in total revenue owing, with $5.6 million collected.

Some of the most common mistakes were:

• claiming deductions for rental properties not genuinely available for rent
• not apportioning expense claims where the property is only available for rent part of the year, such as a holiday home
• overstating interest claims on loans taken out to purchase, renovate or maintain a rental property, and
• claiming the full cost of a visit to inspect a property when it is combined with a private purpose, like a holiday.

The ATO has stated that they will soon be writing to last years new entrants with information on the dos and don’ts and to let them know where to get more information. They will also be writing to some people who have been in the investment property market longer. They have been selected because they have some of the following characteristics:

• unusually high claims for rental deductions
• low rental income in relation to rental deductions
• high claims for interest expenses, and
• high claims for borrowing expenses.

If you receive a letter from the ATO in relation to rental property deductions, check carefully all the information you provide in your tax return as you can be assured the tax office will be carefully checking it too!

Click below to hear what Assistant Tax Commissioner Megan Yong says about claiming rental property deductions in your 2007-08 tax return.

Work-related expenses will continue to be a focus area for the Tax Office in 2007/08.  Around 7.1 million individuals claimed $12.5 billion in 2005–06 income tax returns - an increase of 9.3% over the previous year.

The Tax Office plans to conduct 15,000 reviews or audits of at-risk cases. Based on an analysis of claim patterns for the previous year, the ATO have said they are paying special attention in 2007–08 to claims from:

• tourism workers, travel consultants and guides
• fitness and sporting industry employees
• construction industry employees
• guards and security employees, and
• mining site employees.

• you must have incurred the expense in the year you are claiming,
• the expense must be work-related and not private,
• if your employer has reimbursed you the expense cannot be claimed again,
• if deducting more than $300 in total, you’ll need written evidence to support your claim.

Wanting to capitalise on the rental property that you own? A lot of people hold rental properties for a two-fold reason: to negative-gear (reduce their current taxable income) and to obtain capital growth from the property in future years.

To maximise negative gearing it is advisable to obtain a quantity surveyor’s report to utilise the maximum depreciation possible. The surveyor will look at all fixtures and fittings on the property and assign a value to each from which depreciation can be calculated.

If the building was constructed after 17 July 1985 (for residential properties) the quantity surveyor can estimate the cost of building the premises and a capital works deduction of 2.5% can be claimed on that.

This may not seem like much but you may be surprised at how much it can increase your deductions. If you consider a building that cost $110,000 to build at a rate of 2.5%, that will be $2,750 in deductions claimable. Now add to that items such as carpets, curtains, blinds, hot water systems, ovens, stoves, dishwashers, light fittings, security systems, air conditioners/heaters etc, the claimable depreciation amount could rise to around $6,000.

When you consider that kind of deduction with an income of $80,000 it will give you a tax saving of $2490… each year! Even on a lower income between $30,000 to $75,000 you would still receive a tax benefit of $1,890 per year.

A quality surveyor will provide a report on the property giving a breakdown of the fixtures and fittings as well as the capital works amount in depreciation schedules tailoring to prime cost, diminishing value and low-value pools. Armed with this, you can give it to your tax agent when you do your next tax return.

You can find quality surveyors in the phone book and their prices usually range from $600 to $800 which can be written off over a period of five years. All-in-all it’s not a bad investment.

The ATO has stated it will continue to closely scrutinise rental property expense claims for the 2007 income year.

Some of the areas of concern identified by the ATO in recent compliance activities include:

- Claiming deductions during a period where the property is not genuinely available for rent;

- Claiming full deductions when the property was available for rent only part of the year.

- Claiming initial repair and or renovation costs as repair and maintenance costs (these should be attributed to the base cost of the property under the CGT rules);

- Incorrectly allocating deductions related to private borrowings or travel; and

- Incorrectly claiming deductions for legal expenses for things such as costs associated with buying and selling a property or defending title.

I’ll be detailing some of these issues in more detail in future posts.

SOURCE: National Tax and Accountants’ Association Tax Schools Seminar 2007

June is a great time to maximise your tax deductions. If you pay your annual premium now as a lump sum, you can then claim a tax deduction for the full amount in this years tax return.

Do you work outdoors?

If the nature of your work causes you to work all or part of the day in the sun, you can claim a tax deduction for your sun protection expenses.

Sun protection includes sunhats, sunglasses and sunscreen lotion.

This ruling is most likely to apply to buiders, labourers, tradespeople, plant operators and others in the building or construction industry.

A common misconception I hear people say regarding certain expenses or giving is, “it’s okay, I’ll get it all back at tax time.” Well, that’s not exactly true and, strictly speaking you do not “get it back” at all. So what does a deduction do…How do deductions work?

A tax deduction reduces the amount of income you have to pay tax on. The Tax Office does not reimburse you for your expenses nor can you deduct these from your tax amount. Tax deductions are taken off your total income to get your ‘taxable income’ – the amount your tax is calculated on.

Income – Deductions = Taxable Income

Example:

Sally has income of $25,000. The tax payable on this amount is $2,850. Now suppose that Sally also has $400 in deductions. This reduces her taxable income to just $24,600. Tax payable on $24,600 is $2,790.

In this example, deductions of $400 have saved Sally $60 in tax (Sally is taxed at the 15% tax rate).

Please note this is a simplistic example given as a guide to understand how the deductions work and does not take into account other factors such as offsets previous losses, the Medicare levy, etc.

How much of a saving?

The individual tax saving as a result of deductions will vary depending upon what tax bracket a person is in. If your taxable income is less than $6,000 you would not receive any benefit from a deduction as your income is below a taxable level.

As the average Australian is in the 30% tax bracket, the best most of us can hope to recoop of our allowable deductions is just 30 cents in the dollar; better than nothing but a long way from “getting it all back at tax time.”

Okay, so most of us know what we can claim on our tax returns (or at least what we usually claim) but there are still a lot of deductions that go neglected by people year after year.

Did you know?

Most taxpayers are aware they can claim a deduction of their accountant’s fee for preparing their return. We call that a “cost of managing tax affairs.”

What a lot of people fail to factor in is the cost of travel to and from the accountant. Yep, you can claim that too.