Tax Planning 101 - Accounting Fees

Ok, so this one might be a little cheeky. But hey, can't hurt to mention it anyway as it really does benefit you, dear reader.

The key concept with prepaying expenses is to bring forward things that you know that you'll have to buy sooner or later anyway. Get them inside of this financial year and you get to claim the tax benefit back almost straight away instead of waiting until over a year later. We discussed this recently in reference to prepaying interest; it's a good system, hey?

The same principle can apply with accounting fees. You know that it's gonna happen soon enough, so by taking us up on this offer... you get a tax benefit, and you give me a tax problem! ;-)

Existing clients will also get the existing rates, instead of the slightly-increasing rates that will come into play from July onwards, which makes for a discount on offer, as well. I know that you all love a discount.

So! With just a slight hint of mischievousness, we'll leave you with that one to think about. And if you're interested, feel free to drop either myself or Dannielle a line and we'll get something hooked up for you.


Tax Planning 101 - Depreciation (part two)

Most of you would know that it's not just new stuff that you can depreciate in your investment properties. A good quantity surveyor can find heaps of extra deductions for you as well.

So we have been busy doing some negotiating with our good friends at BMT and Depreciator to get you guys a special rate on depreciation schedules, especially for our clients and readers here. If you’ve recently purchased a new property or done a renovation and you need a quantity surveyor report, it’s a good idea to get that written up before tax time so you can claim the highest possible deduction for the decline in your assets. And if you get that happening before the end of June then you can claim their fees in your 2010 tax returns as well.

If you’re interested please email me and I’d be more than happy to send you an application form to fill out. Or just mention our name when you call them and I'm sure they'll look after you well.


Tax Planning 101 - Depreciation

Buying new stuff between now and the end of June is often helpful come tax time, for obvious reasons. But, you may need to keep the depreciation rules in mind as not all purchases will be complete deductions for you. When talking about investment properties, a brief guide for depreciation looks something like this:

  • Assets under $300 = write off in full
  • Assets between $300 and $1,000 = low value pool
  • Assets over $1,000 = written over their effective life

Those thresholds are for each owner, bye the way, so a property held between you and your spouse could have fixtures of double those amounts before jumping to the next level.

In working out how much you can claim; things in the low value pool depreciate at 18.75% in the first year and 37.5% every year thereafter on the reducing balance. There's no apportionment for holding the asset for only a month or so, which makes the rate quite attractive.

The effective life for more expensive assets can be anything between about four and forty years, depending on the item. Most, we find, tend to be about ten to twenty years or so (giving about 10-20% of the value each year) but these do require apportionment - so buying something over $1,000 now won't give much benefit for the current financial year.

You'll also need to be careful with assets vs repairs vs improvements. Genuine repairs can be written off in full when incurred, but, you'll need to be able to show that these are simply restoring the property to its condition at the time of purchase. So, most investors are unlikely to have repairs in the first year of ownership. Improvements are costs which, well, improve the property beyond that original standard, and may need to be depreciated at a flat 2.5% per year. Yes, there's a decimal point in there. Not ideal but sometimes hard to avoid.

So, whilst many expenses can be claimed outright and spending cash on this side of June is generally helpful, you do need to be sure how it will be categorised to ensure that you get the best tax bang for your buck.


Tax Planning 101 - Beware Wash Sales

Let's start with an example to make things a little clearer:

An investor (on a 45% tax bracket) has managed a profit of $20,000 for the year buying and selling shares. At this stage (ignoring any discount method claims), the investor owes $9,000 in tax from the $20,000 profit.

Let’s say that the investor is also holding 3 shares with an unrealised loss of $5,000 between them.  In order to save tax, the investor sells off these shares and crystalises the loss. Assuming $29.95 brokerage per sale, the investor’s new profit is $14,910.15. The tax liability on this new profit is $6,709.57, which is a saving of $2,290.43 worth of tax.

Now if that investor were to buy back their stocks (assuming at sale price for this example) they would be liable to another $89.85 in brokerage. This takes the net benefit to $2110.73. This method is known as a wash sale, and strictly from a tax point of view, would appear to be a favourable option as you've saved tax and kept your assets. Unfortunately the ATO are all too aware of wash sales and consider them illegal. For more info, visit the ATO website.

If you have undertaken what you think is a wash sale it is better to treat it as if you never sold the asset. There is no problem, however, to selling a share for a loss at market value, provided the dominant purpose is not for a tax benefit. Note that you shouldn’t base a sale purely on the tax benefits anyway as you should have your investment strategy in place for a reason. But if you were thinking about offloading some underperforming assets to reinvest into something with more potential, then it may work out better to do so on this side of the EOFY.


Tax Planning 101 - Medical Expenses

Here’s a hint for those of you who might be spending a fair bit on medical expenses.

What we do at tax time is take the full amount you’ve spent on medical expenses throughout the year for your family, less the rebates you were paid, and claim the remainder (your out-of-pocket amount). However, you’ll only get that offset if you’ve spent more than $1500. Then, 20% of all amounts above that figure are used to reduce your taxable income.

In case you’re wondering, some medical expenses that qualify for a rebate are payments to:

  • Dentists (except for purely cosmetic work)
  • Optometrists (including the costs of prescription glasses, etc)
  • Pharmacists (for prescription medicines only)
  • Laser eye surgeons
  • Guide dog service providers.

As well as the various other costs listed here - and also note the expenses which aren't included, too.

Anyway, this presents a neat tax planning opportunity for you. If you’ve already spent a fair bit on meds this year, or you’re expecting to soon, or both; it’s certainly in your best interests from a tax point of view to try fitting all those purchases in before July.

Look at it this way; If you spend $1500 in the 09/10 FY, and then $1500 in the 10/11 FY, you’re looking at medical offsets of $0 in both years. Disappointing. However, if you can find a way to gather that cash a little earlier and buy all your meds in the one year, that $1500 (that you were going to spend anyway) can now get you a $300 offset. A very basic example, but it gets the message across.

Stay tuned for more tax-planning tips to come next week!


Tax Planning 101 - Prepaying Interest

Ok, so we thought that between now and the end of the year (and damn, that's creeping up awfully fast now!) we might go through a handful of clever tax planning strategies that you can use to improve the bottom line. Not all of these will apply to everyone, but hopefully will at least get you thinking about what you can do over the next few weeks to make tax time that little bit more fun than it usually is.

So first up, prepaying interest. This is one that pops up from time to time on the various investment forums in which we like to contribute and so seemed like a good place to start this series.

The idea is to use either cash, or funds in a line of credit (ie, equity) to pay the interest on your investment loans up to twelve months in advance. The bank will essentially fix the interest rate for that period at an agreed level (and usually at a slight discount) and take the cash out of your bank account or line of credit to fund the expense up front.

The are a few main benefits here; you increase your available deductions substantially, as you've now got up to two years worth of interest to claim all at once. And, your cashflow for the next twelve months is also improved, as you receive the rental income without the usual interest expenses. And, the bank will often offer a discount for paying in advance. Nice!

An important drawback to consider though is that if you do it once, you'll really want to consider doing it again next time. Otherwise, there won't be any interest expenses paid in the following year which means less tax benefits for you then. So, it can be something of a trap like that, but should be easily managed if you keep on top of things and prepay every year until you sell or no longer need the tax benefits of negative gearing.

You'll also need to move quickly; the banks can take a little time to get themselves organised for this sort of thing so don't wait until the last week of June to start talking to your broker. Using your available funds to prepay expenses will also reduce your available funds for buying property, so be sure to weigh that up in your calculations as well. And of course, drop us a line if you'd like to talk more about how this idea can work for you.


2010/11 Budget Review

In Danny's post earlier this week, we laid a few bets on what we expected to see happening in last night's budget. There really weren't too many surprises, but a few changes that are could affect you might include:

  • The effective tax-free threshold will be raised to $16,000 from 2010-2011 with an increase in the low-income offset.
  • There will also be lower tax on savings, with 50% discount on tax on interest income up to $1,000. This could save you up to about $230 if you're on the top tax bracket and have more than about $17k or more in savings.
  • There will be a standard deduction for individuals with simple tax returns, meaning that it won’t be necessary to lodge a tax return if you simply get income from wages, interest and dividends. This deduction will be $500 from 2012 and $1000 from the 2013. Most of you, of course, have slightly more complex affairs so we won't be out of a job just yet!
  • The government plans to eventually increase the super guarantee from your employers to 12%, from 9%.
  • From July 1st 2012, the government will contribute up to $500 to offset contributions tax for workers on incomes up to $37000.
  • From 1st July 2012, allow catch up contributions by older workers with super balances less than $500,000 of up to $50,000 a year.
  • The company tax rate will be cut to 29% from 2013-2014, and to 28% from 2014-2015.
  • Companies purchasing assets under $5000 will be able to claim an instant write-off for those assets from 1st July 2012.

So, small business has received some good benefits, but the increased super guarantee may affect employment rates as it gets closer. Nothing much changes for property investors and that tax break on interest income will yield a maximum of about $232 for high income earners with substantial savings.

Other items of potential interest include:

  • The forecast budget for the 2010-2011 is $40.8 billion, which is $16.3 billion less than expected one year ago. The budget is expected to return to surplus in 3 years.
  • Childcare benefits are being capped, at a reduced rate of $7,500 and this won't change for at least four years even if childcare costs increase.
  • The first home buyer saving accounts are now a little more attractive, as funds can be withdrawn early to pay down a mortgage if you manage to buy a home sooner than expected.
  • The super profits tax on mining companies, flagged in the Henry Review, was included and is a large part of the reason for such a strong turnaround in the budget figures. We're still not convinced that it's a good idea though and the sharemarket seems to agree.

For more information please don’t hesitate to call us, or visit www.budget.gov.au.


Our budget night predictions

So, it’s that time of year again already! The federal budget is going to be announced tomorrow night, and economists, investors and general citizens alike are making predictions left, right and centre.

Here’s a few things we’re expecting:

  • A tax cut on bank interest, equivalent to a 40% discount on the tax payable.
  • Tax cuts for small businesses, by either increased offsets and/or lower company tax rates.
  • Added superannuation benefits for low-income earners, through a government contribution to cover some (or all) of your fund's taxes.
  • The usual small income tax cuts for individuals are already scheduled and unlikely to be adjusted.
  • Rental income and negative gearing to remain unchanged.
  • For those individuals with simple tax affairs (which, incidentally, is not most of you), filing a tax return should become a much more simplified affair with one-click processing to become the standard with the tax office already able to see your occupation, wages, tax withheld, interest and dividends earned. It's almost a little scary...

We'll find out all the details tomorrow night, of course, but that's a brief summary of what we think will affect you most. There will be the usual election-year sweeteners, we're sure, but by all accounts from the media and those supposedly in the know... there's won't be anything overly exciting.

And of course, check back here on Wednesday for the full wrap of what's announced overnight. We'll have it all here to explain just what it means for you as investors.


Tax returns deadline extended

Hiya Guys,

Ok so we have some good news for whoever hasn’t lodged their 2009 individual and trust income tax returns. The Commissioner has approved rescheduling the due date out until to 22nd May 2010 so if you've been slack, you now have an extra week. You don’t need to apply for the new deadline, as you will be automatically approved for the new lodgement date.

So! If you haven’t got all of your documents organised we suggest you to get a move on, and send them to us ASAP. We're ready when you are.


Henry Review: what it means for Property Investors

In short: Sweet FA.

In a little more detail; the review flagged a number of potential changes, most of which the government has chosen to disregard. The cynic in me suggests that this is largely because of the upcoming election, but for whatever reason, the government has chosen just a handful of these (four, from a total of 138) to include in the budget (due in just a couple of weeks now).

For investors, there is not a lot of direct influence. The additional taxes on large mining companies may affect property in WA, but that remains to be seen.

Amongst the ignored recommendations from Henry were ideas such as seeing net income (positive or negative) on rental properties carry a 40% differential, encouraging loans to be paid down and removing part of the negative gearing benefit. Capital gains tax for long term assets would increase (by adjusting the 50% discount) and land tax would become a flat 1% regardless of the location and would include the family home.

However, these are all things to be vaguely aware of as future possibilities and don't yet form the basis of any likely change. We'll see what happens come November, I guess.

So, the four key changes that the government does want to implement, include;

  • eventually reducing company tax rates to 28%  (by 2014/15)
  • eventually super contributions rising from 9% to 12% (by 2020)
  • eventually increasing taxes on highly profitable mining companies of up to 40% (by 2012)
  • low income earners may get an additional $500 in super from the government

In addition, small businesses will get the reduced company tax rate a little earlier, and the depreciation thresholds for small businesses are also increasing to encourage business spending. For most property investors, though, there is not a lot to think about here.

That said, there is also speculation of further announcements, particularly in the federal budget and then again as election policies. So, watch this space...