What Income Is Considered Exempt In Your Income Tax Return?

Are you looking at the approaching 31 October deadline for individual income tax returns with plenty of questions? Don’t worry – your trusted tax professionals are here to help.

One of the more common questions we encounter around this time of the year involves declaring income – or, sometimes, when you do not need to declare income.

Exempt income is income you don’t pay tax on (that is, it’s tax-free). However, you may still need to report these in your tax return as the ATO use certain exempt income amounts to work out other calculations such as:

  • tax losses of earlier income years that you can deduct
  • adjusted taxable income of your dependants.

Exempt income includes:

  • certain Australian Government pensions, such as the
    • disability support pension paid by Centrelink to a person who is under age-pension age
    • invalidity service pension paid under the Veterans’ Entitlements Act 1986 where the veteran is under age-pension age
  • certain Australian Government allowances and payments, such as the
    • carer allowance
    • child care subsidy
  • certain overseas pay and allowances for Australian Defence Force and Federal Police personnel
  • Australian Government education payments, such as
    • allowances for students under 16 years old
    • Commonwealth secondary education assistance
  • some scholarships, bursaries, grants and awards
  • a lump sum payment you received on surrender of an insurance policy where you are the original beneficial owner of the policy – generally you do not earn, expect, rely on or regularly receive these payments – examples include
    • mortgage protection
    • terminal illness
    • a permanent injury occurring at work.

Lodging your tax return can be time-consuming – why not consult with one of our tax advisers for help? Start the conversation with us today.

Taking Away The Cryptic from Cryptocurrency

The popularity of the digital currency known as crypto often leads to many questions when it comes to tax time. However, it’s encouraged that you speak with your accountant about your obligations as soon as possible to be prepared for what you are expected to do.

The ATO classifies cryptocurrencies as property, specifically as a capital gains asset. This means that it is taxed under Capital Gains Tax provisions, where a taxpayer gains capital from the disposal of cryptocurrency if the proceeds/profit exceeds what the cryptocurrency initially cost the taxpayer. It must be reported in their assessable income.

If the taxpayer does not make a profit and instead receives a loss for the sale, they will need to report that instead in their assessable income.

There is a commonly held belief that the gains from cryptocurrency if the costs for acquiring the asset were less than $10,000 are tax-free. This is not the case.

In very limited circumstances, a cryptocurrency gain that is less than $10,000 may be classified as a personal-use asset rather than as a capital gains asset. This exemption is usually determined by the Australian Taxation Office’s private rulings according to strict criteria.

Any income derived from the sale or purchase of Bitcoin as an exchange service must be included in the assessable income reported in the tax return lodged at the end of the financial year. The best way to be sure that all of the potential assessable income resulting from cryptocurrency is recorded in next year’s tax return is to maintain immaculate records. You will need to ensure that a record is kept of:

  • The date of each transaction
  • The amount in Australian dollars at the time of the transaction (which can be taken from a reputable online exchange)
  • Details of the transaction,
  • Any associated expenses, like fees and commissions, and
  • Details of the other party (the Bitcoin public address is enough).

If you have been involved in the acquisition or selling of bitcoin and want to be sure that you’re prepared for your next tax return, start a conversation with us about your obligations and potential tax liabilities sooner rather than later. If the circumstances around your tax liability change, it will put us in a better position to assist you.

Thirty-Five Items Can’t Be Claimed On Your Returns – Here Are The Most Common

Special provisions in tax law provide that certain items will never be tax-deductible.

Even if you have incurred this expense in earning your income, they will still not be tax-deductible. In total, there are 35 different items explicitly mentioned in this area of tax law as not being tax-deductible, with some of the more common items being:

  • Penalties: You cannot claim any fines or penalties imposed under any laws (e.g. if you receive a parking fine when parking in the city for work-related purposes).
  • Payments to reduce your HECS or student debt.
  • Travel expenses of a relative when you travel for work-related purposes (unless they are also travelling for their work-related purposes).
  • Wages paid to an associate that is more than reasonable for the work they do (e.g. your spouse cannot simply be paid $30,000/year to perform 1 hour of admin work a week for you).
  • Payments to maintain your family (this usually applies to farmers, who feed their workers who may also be their family).
  • Expenses to obtain or maintain membership of a recreational club.
  • Expenses relating to a recreational boat more than the income earned from that boat. There is no negative gearing (‘running at a loss’) into a boat unless it is for a real and genuine business.
  • Bribes to public officials both here and abroad (even if they had to be paid to get something approved).
  • Expenditure relating to illegal activities.
  • Superannuation guarantee charge- if you are late in paying your employee’s superannuation, you don’t get a tax deduction when you do eventually pay it.
  • Interest on borrowings to make non-concessional superannuation contributions.
  • Travel expenses related to a residential rental property.
  • Expenses associated with holding vacant land
  • Where you are required to withhold taxes from certain payments such as interest, royalties or wages and then fail to withhold the required taxes, tax deductions cannot be claimed on these payments.

Some of these expenses are avoidable (such as the superannuation guarantee charge or the failure to withhold taxes from payments). It is essential to consult with us to ensure you are not wasting money on expenses that will not provide you with a valid tax deduction.

How Connected Are You In The World Of Tax?

In the realm of tax law, a critical concept revolves around understanding the notion of “entities connected with you.”

This concept serves as a linchpin in several aspects of taxation, from determining one’s status as a Small Business Entity to ascertaining the value of assets when seeking eligibility for Small Business Capital Gains Tax (CGT) Concessions. Furthermore, it holds significance when an individual has sold an asset and claimed it was used by an ‘entity connected with them.’

In various tax scenarios, having an entity connected to you can either prove beneficial or burdensome. A prime example of the former is when you sell a factory unit, and a company affiliated with you operates a mechanics business within that unit. In this case, you become eligible to claim the Small Business CGT Concessions on the sale of the factory unit, potentially leading to substantial tax benefits.

Conversely, connected entities can have adverse consequences, particularly in specific asset tests. When evaluating certain asset-related criteria, the value of assets connected entities hold is aggregated with your own. Consequently, having entities connected with you in such situations may not be advantageous.

Consider a scenario involving a family trust and a distribution made to the adult daughter. In this instance, her assets may need to be added to the overall asset pool when determining your eligibility for tax concessions. A key threshold for determining connection to a trust is if an individual has received 40% of the income or capital of that trust in the preceding four years.

Entities controlled by the same person or entity are also considered connected with each other. For instance, if you oversee two trusts, those trusts are not only connected to you but also to each other. This interconnectedness has implications for tax planning and assessment.

In the eyes of tax law, spouses are not automatically deemed connected to each other. This is not the default assumption; spouses are typically not considered connected entities. For instance, if you are in control of a company, and your spouse independently manages their own separate company, they would generally not be considered connected to each other. The implications of this can vary depending on the specific tax scenario.

While the concept of entities connected with you may seem intricate, it is a dynamic factor that necessitates ongoing attention and evaluation. Circumstances surrounding the connections can change over time. Returning to the example of the factory unit, the nature of its disposal could alter the connection dynamics. For instance, you may have retained ownership of the factory unit while transferring ownership of the company to your son five years ago. In this case, the company is no longer connected with you, potentially affecting your eligibility for specific tax concessions.

Understanding and managing the relationships between entities and their connections is pivotal in navigating the complexities of tax law. It is not a static concept, but one that requires ongoing consideration, as changes in these connections can have significant implications for an individual’s tax obligations and eligibility for various concessions.

Therefore, individuals and businesses should remain vigilant and seek professional advice when dealing with entities connected with them in the realm of taxation. Keeping us apprised of your future plans for your assets and of changes that could impact your connections means that we can ensure that you do not inadvertently miss out on any of the tax concessions available.

What Do I Need To Know About My Trust Tax Return?

Like how individuals and businesses must complete tax returns when it’s tax season, so too do trusts.

Trusts have their own tax file number (TFN) which should be used to complete tax returns. Trusts can also apply for an Australian business number (ABN) if the trust carries on an enterprise. If a trustee applies for a TFN or ABN, then this is in the capacity of a trustee and is separate from any other registration that the trustee may require for other capacities.

Trustees

The trustee is responsible for managing the tax affairs associated with the trust. This includes registration of the trust in the tax system, lodgement of trust tax returns, as well as paying certain tax liabilities

Beneficiaries

For beneficiaries, their share of the trust’s net income is included in their tax returns. Further, payments on the expected tax liability may need to be made, for which the pay-as-you-go (PAYG) instalment system can be used.

Looking at trusts from a tax perspective, one of the primary advantages of using them is that any income generated from business activities and investments (including capital gains) can be distributed to the beneficiaries in lower tax brackets. These may often be the spouses or children of the holder of the trust.

This means that, as the trustees of the trust have the discretion to distribute income and capital as they see fit and no beneficiary has a fixed entitlement to receive anything, the trustees can stream income in a tax-effective way on a year-to-year basis. However, as they don’t distribute the trust’s income, the trustees themselves may be liable to tax on the undistributed income (and at a rate of tax that is usually higher than what the beneficiaries would then have to pay).

Regarding trusts, you need to be aware of the potential tax consequences that can arise if they are misused. Trusts are perceived as a means of hiding income, concealing the ownership of assets and facilitating the transfer of funds (tax-free) between family and business groups. That’s why the ATO often keeps a close eye on trusts.

You will want to ensure that your trust deeds (or other constitutional documents) achieve a tax planning benefit and that any changes to them reflect this credibly (and are not credibly explainable for any other reason).

You will also need to ensure that the trusts and the beneficiaries are filling out their returns and lodging all income (including the distributions of the income from the trust).

The ATO keeps a particularly close eye on non-compliance regarding trusts.

If you want to be confident that you are doing the right thing as a holder of a trust, a trustee or a beneficiary when it comes to tax, it’s critical to speak with a professional tax expert such as us.

Amending A Past Return If You’ve Made A Mistake Can Be Done – Here’s How

It’s not the end of the world if you make a mistake on your tax return, particularly if it has already been submitted to the ATO.

If you make a mistake on your tax return, you generally have a couple of years to correct it, which can be done online

You may need to amend your tax return if you have:

  • made an error when answering a question
  • forgotten to include some income or a capital gain
    • Please remember to report all your income – it is common for individuals to forget to report cash income, foreign income and cryptocurrency gains.
  • forgotten to claim an offset or deduction
  • had something change after you lodged your tax return, such as
    • receiving a revised payment summary or another payment summary
    • your employer finalising or updating your income statement
    • repaying an amount of income you were overpaid.

You can lodge an amendment through your myGov account, through ATO’s online services, and then selecting “manage tax returns”. You should wait until your original tax return and amendments have been processed before you submit a consecutive amendment to the return.

This online amendment may take up to 20 business days to be processed once lodged. An amendment made in writing will take up to 10 weeks to process.

You can also speak with your registered tax agent, who can amend your tax returns on your behalf.

The myGov website will provide you with updates for both the tax returns and amendments, which should alert you of the progress being made. By the end of this process, it should show you how much money will be issued for your claim.

If your amendment reduces the tax you owe, you’ll receive a tax refund (unless you have other tax debts). If it increases the tax you owe, the ATO treats the amendment as a voluntary disclosure. Your voluntary disclosure needs to be in an approved form. For an amendment to your tax return the approved form is either:

  • an online amendment in ATO online services through myGov
  • the paper form ‘Request for amendment of income tax return for individuals’
  • a letter.

If you have questions about this process or want assistance, please contact your registered tax agent as soon as possible.

The Last Thing On Our Minds After The Death Of A Loved One Is Tax – But The Final Return Is Important

At the worst time of your life, the last thing you want to think about is tax.

However, when a loved one dies, their affairs must be dealt with at some stage. This includes their tax obligations.

You must lodge a date of death tax return if any of the following apply to the deceased person in the income year in which they died:

  • they had tax withheld from their income, including from interest or dividends
  • their taxable income was above the tax-free threshold
  • they lodged tax returns in the income years before their death or had outstanding tax returns.

To deal with a deceased loved one’s affairs, the help of a solicitor is highly recommended. Someone will be granted the role of executor or administrator of the deceased person’s estate (usually stipulated in a will).

From a tax perspective, there are a few things that the executor or administrator has to do.

The Australian Taxation Office (ATO) must be contacted and informed that your loved one has died. When you notify them of the death, they can tell you if the person had any outstanding tax returns for prior income years.

All their financial documents must be compiled, and you must lodge a date of death (or final) tax return. This will only need to be lodged if your loved one had tax withheld from their income or had earned more than the tax-free threshold.

This final tax return differs from a standard tax return as it doesn’t cover the full financial year – it only covers up to the day that the person died. The date of death tax return covers the period from 1 July of the income year in which the person died up to the date of death. All income and tax deductions until that day are inputted into the final tax return. This differs from a trust tax return for the deceased estate, which is for the period after the person dies.

Tax obligations can still occur after that day, such as income earned from investments or the sale of assets that may or may not be subject to capital gains tax.

In these circumstances, the executor or administrator of the estate will need to apply for a separate and new tax file number for the estate. The estate is treated as a separate taxpayer and will pay tax as if it were an adult individual resident taxpayer.

This special treatment of the estate is received for up to three tax returns after the date of death (in fact, it is for two years from the date of death).

This time is very stressful, even without these additional obligations. The support of a tax professional during this process can ease the burden, as this is a role we are accustomed to taking.

Contact us to find out how we can aid you, even if we weren’t the accountants for your loved one. We’re here to help.

Watch Out For Incorrect Claims! Property-Related Deductions Are On The Watchlist

Ensure you are doing the right thing with your property-related claims this tax return season.

The tax office is paying close attention to rental property owners, especially those who own a holiday home, who incorrectly claim for initial repairs to recently acquired rental properties.

One key concern is people claiming expenses when the property is not genuinely available for rent. For example, if the property is only available for a set period of time and unavailable for other months of the year, claims can only be made for the period of time that the property was available for rent or rented out.

You may need to be prepared to answer questions such as:

  • How many days was it rented out, and was the rent in line with market values?
  • Where do you advertise for rent, and were any restrictions placed on tenants?
  • Have you, your family or friends used the property?

Answering questions like these can give us more information that assists us in determining if this is a valid deduction to claim.

With the ATO taking a broader approach in monitoring rental deductions, now may be the perfect opportunity for holiday home investors to review the rules surrounding holiday home tax deductions to ensure that they can address any risks or issues in a timely manner.

Areas where rental property owners are incorrectly claiming deductions include:

  • Claiming excessive deductions
  • Partners splitting income and deductions
  • Repairs or maintenance claims
  • Claiming for interest deductions.

Homeowners should be aware that it is not just holiday homes that are under focus by the ATO. The office will also address rental property owners who incorrectly claim deductions.

A common mistake that has risen among rental property owners is claiming deductions for initial repairs to rectify damage, defects or deterioration that existed at the time of purchasing the property.

Taxpayers are not entitled to claim a deduction for any repairs made to their rental property for issues that existed when they purchased it, even if the repairs were carried out to make the property suitable for rent.

Instead, the cost of these repairs is used to work out any profit or capital gain when the property is sold.

Make claiming property-related expenses a hassle-free situation this tax season by consulting with your trusted tax agent. We’re here to help.

Tax Avoidance Schemes On The ATO’s Radar

Tax avoidance schemes are just one of the many red flags the Australian Taxation Office will be keeping its eye on this tax season.

In the right hands and for the proper purpose, holding companies can be set up to buy and hold all the shares and assets in one or more of their subsidiary companies. They are often advantageous for asset protection, business diversification & structuring reasons.

However, some individuals are misusing them for tax avoidance purposes.

Any arrangements that use interposed holding companies to avoid tax will be subject to additional scrutiny from the Australian Taxation Office and potentially severe penalties.

These may be arrangements where individuals seek to access private company profits without any additional individual tax liability by arranging for the profits to be passed to them via an interposed company.

These arrangements may involve:

  • A private company (first company) has retained profits on which it may have paid tax at the corporate rate. Shares in the first company are held by an individual who may also be a director of the first company.
  • The individual disposes of their shares in the first company to a private company (interposed company), receiving shares in the interposed company in return.
  • The shares in the interposed company are issued at a paid-up amount being the same as, or similar to, the net assets of the first company, which includes the retained profits of the first company.

Any involvement in tax-related schemes highlighted by the ATO throughout their current warnings and notices could involve severe penalties for taxpayers and agents promoting them.

Improper business structuring can lead to significant tax consequences, so let us help you avoid issues. Start a conversation with us today.

Earning Income Via The Sharing Economy? Don’t Make A Critical Tax Mistake…

In Australia, any income earned by a job may be considered taxable income. Those who receive their income via the sharing economy are no exception to the rule.

In fact, further complications can result from incorrect understandings of how the income tax and goods & services tax may apply to those individuals. ‘

The sharing economy is a socio-economic system built around sharing resources, often through a digital platform like a website or an app that others can purchase the right to use for a fee.

Popular sharing economy services and activities that could be subject to income tax include

  • Being a Driver for popular ride-sharing/ride-sourcing services and obtaining fares for those services
  • Renting out a room, whole house or a unit on a short-term basis
  • Sharing assets (such as cars, parking spaces, storage space or personal belongings) through platforms such as Camplify, Car Next Door, Spacer, Toolmates or Quipmo.
  • Creative or professional services provided by individuals through online platforms to fill a need of others (also known as the gig economy)

You need to remember some things about the income and goods & services tax for these popular sharing economy services, including:

Ride-Sourcing/Ride-Sharing

If you’ve ever caught an Uber or gotten a Lyft, you’ve been on the passenger side of ride-sourcing. The income received from ride-sourcing is subject to goods and services tax (GST) and income tax is applied to it. All drivers on ride-sourcing platforms in Australia must have an Australian business number and be registered for GST.

GST requires:

  • An ABN
  • GST is to be registered from the day you start, regardless of how much you earn.
  • GST is to be paid on the total fare.
  • Business activity statements (BAS) to be lodged monthly or quarterly.
  • To know how to issue a tax invoice (any fares over 82.50 must be provided if asked).

Income tax needs to:

  • Include the income you earn in your income tax return
  • Only claim deductions related to transporting passengers for a fare, including apportioning expenses limited to the time you are providing a ride-sourcing service
  • Keep records of all your expenses and income.

Renting out all or part of your home

Renting out all or part of your residential house or unit through a digital platform can be an easy way to supplement your income, especially if you aren’t using the property at that time. If you do this, you:

  • Need to keep records of all income earned and declare it in your income tax return
  • Need to keep records of expenses you can claim as deductions
  • Do not need to pay GST on the amount of residential rent you earn.

Sharing Assets (Excluding Accommodation)

Assets that can be shared through a platform include personal assets (e.g. bikes, caravans), storage or business spaces (e.g. car parking spaces) or personal belongings like tools, equipment and clothes.

When renting out or hiring these (share) assets that you own or lease through a digital platform, you:

  • Need to declare all income you receive in your income tax return
  • Are entitled to claim certain expenses as income tax deductions
  • Need to keep records of the income you earn and of the costs you can claim as deductions

Providing Services

Providing time, labour or skills (services) through a digital platform for a fee requires you to report income in your tax return. Deductions for expenses directly related to earning this income can be claimed, and records must be kept to support these claims.

The following services that can be provided are considered to incur assessable income that needs to be reported in your tax return:

  • Delivering goods
  • Performing tasks and activities
  • Providing professional services

Those who fail to declare their income from their sharing economy side hustle may incur penalties in the form of interest on their tax bills or potential criminal charges.

You must ensure your tax return is correctly lodged and all income is declared if you are a gig economy worker. If navigating your tax return feels daunting, consider contacting us for assistance.