Capital Gains Tax on Inherited Properties

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When a property is inherited, the recipient is considered to have acquired the property at market value at the time of the inheritance. If the recipient decides to sell the property in the future, they may be subject to capital gains tax.

Capital gains tax is calculated by subtracting the cost base of the inherited property from the sale price. The cost base includes the market value of the property at the time of inheritance, as well as any additional costs such as renovations, repairs, or improvements.

If the inherited property was rented out, there are additional factors to consider. If the property was generating rental income, the recipient may be subject to income tax on that rental income. Additionally, the rental income may affect the cost base of the property, as any expenses related to the rental property can be used to offset capital gains tax.

For example, let’s say John inherited a rental property from his father in 2010. At the time of inheritance, the property was valued at $500,000. John decided to rent out the property and has been receiving rental income of $20,000 per year.

In 2021, John decides to sell the property for $800,000. His cost base includes the market value of the property at the time of inheritance ($500,000), as well as any additional costs such as renovations ($50,000). His total cost base is $550,000.

The capital gain on the property is therefore $250,000 ($800,000 – $550,000). John will be subject to capital gains tax on this amount. He may also be subject to income tax on the rental income he received over the years.

It’s important to keep thorough records of any expenses related to the inherited property, as these can be used to offset capital gains tax. If you inherited a property and would like more assistance on this matter, please contact our office at 03 9973 5905.

Dividends and Franking Credits

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Dividends paid by companies to their shareholders can be either franked or unfranked, and they can also be accompanied by franking credits.

Franked dividends are those that have already had tax paid on the underlying profits of the company. This means that the shareholder receiving the dividend is entitled to a franking credit, which represents the tax already paid by the company on those profits. The franking credit can be used to offset the shareholder’s own tax liability. For example, if a shareholder receives a franked dividend of $1,000 with a franking credit of $429, they will only be taxed on $571 of the dividend (i.e., $1,000 – $429), as the franking credit is used to offset the tax liability on the remaining amount.

On the other hand, unfranked dividends are those that have not had any  tax paid on the underlying profits of the company. As such, no franking credit is available to the shareholder. The shareholder is taxed on the entire amount of the dividend received. For example, if a shareholder receives an unfranked dividend of $1,000, they will be taxed on the full $1,000 amount.

Understanding the difference between these types of dividends and their associated franking credits is crucial for anyone receiving income from shares.

If you receive dividends and require more assistance on this matter, please contact our office at 03 9973 5905.

Types of Trusts

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Trusts are a popular structure for managing assets and income. A trust is a legal arrangement where a trustee holds assets on behalf of beneficiaries. There are different types of trusts, and each type has different taxation implications.

  1. Discretionary Trusts: Discretionary trusts are a popular type of trust. In a discretionary trust, the trustee has the discretion to distribute income and capital to the beneficiaries. This type of trust is often used for estate planning, asset protection, and tax planning purposes. Income distributed to beneficiaries is taxed at their marginal tax rate, which can be beneficial if beneficiaries have a lower tax rate than the trustee.
  2. Unit Trusts: A unit trust is a trust where the beneficiaries hold units, similar to shares in a company. The trustee manages the trust and distributes income to the unit holders according to the number of units they hold. Unit trusts are commonly used for property and investment trusts. Income distributed to unit holders is taxed at their marginal tax rate.
  3. Hybrid Trusts: Hybrid trusts combine the features of both discretionary and unit trusts. The trustee has the discretion to distribute income and capital to the beneficiaries, and beneficiaries also hold units in the trust. This type of trust is often used for investment purposes.
  4. Testamentary Trusts: A testamentary trust is created through a will and comes into effect after the testator’s death. This type of trust is often used for estate planning purposes and can provide asset protection and tax benefits for beneficiaries. Income distributed to beneficiaries is taxed at their marginal tax rate.

The taxation implications of trusts can be complex, and it’s important to ensure that trusts are set up correctly and comply with tax laws and regulations. If you need to set up a trust, please contract our office at 03 9973 5905.

Main Residence Exemption

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The sale of a property may be subject to capital gains tax (CGT) depending on a few factors, including whether the property is the seller’s main residence. The main residence exemption is a valuable tool for reducing or avoiding CGT on the sale of a property that is the seller’s main residence.

To be eligible for the main residence exemption, the property must have been used as the seller’s main residence for the entire period of ownership. This means that any periods where the property was rented out or used for business purposes may affect the exemption. However, there are a few exceptions to this rule, such as where the property is used as a place of business and the owner lives on the premises.

The main residence exemption also has a six-year rule, which allows a seller to treat a property as their main residence for up to six years after they have moved out if the property is not used to produce income during that time. This can be beneficial for sellers who choose to rent out their property for a period before selling. The property must also be on land of 2 hectares or less.

It’s important to note that the main residence exemption can only apply to one property at a time, and that there are additional rules and restrictions for foreign residents and trusts.

In summary, the main residence exemption is an important consideration for anyone selling a property in Australia. By carefully considering the eligibility criteria and any periods of rental or business use, sellers can potentially reduce or avoid CGT on the sale of their main residence. If you require more assistance on this matter, please contact our office at 03 9973 5905.

Types of Insurance a Business Owner should Consider

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As a business owner, having the right insurance coverage can be crucial to protecting yourself and your business from financial risks. However, it’s important to also consider the potential taxation implications of your insurance policies. Here are some of the different types of insurance that a business should have and their taxation implications:

  1. Public liability insurance: Premiums for public liability insurance are generally tax-deductible for businesses, meaning they can be claimed as an expense on the business’s tax return. However, any pay outs received from a claim may be subject to income tax.
  2. Professional indemnity insurance: Premiums for professional indemnity insurance are also tax-deductible for businesses. Any pay outs received from a claim may also be subject to income tax.
  3. Workers’ compensation insurance: Premiums for workers’ compensation insurance are tax-deductible, and any pay outs made to injured employees are generally exempt from income tax.
  4. Property insurance: Premiums for property insurance are typically tax-deductible for businesses. However, any pay outs received may be subject to income tax if they are deemed to be revenue rather than capital in nature.
  5. Cyber insurance: Premiums for cyber insurance are generally tax-deductible for businesses. Any pay outs received from a claim may also be subject to income tax.
  6. Business interruption insurance: Premiums for business interruption insurance are generally tax-deductible for businesses. However, any pay outs received may be subject to income tax if they are deemed to be revenue rather than capital in nature.

It’s important to note that the taxation implications of insurance policies can be complex and may vary depending on the specific circumstances of the business. If you need more assistance on this matter, please contact our office at 03 9973 5905.

Gifts to Employees and Clients

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Gifts to employees and clients are a common practice for businesses. However, it’s important to understand the taxation implications of such gifts.

According to the ATO, gifts provided to employees are considered a form of remuneration and are subject to fringe benefits tax (FBT) if the value of the gift is more than $300. If the gift is under $300, it is generally exempt from FBT. Gifts that are considered ‘minor and infrequent’ are also exempt from FBT, provided they are not given as a reward for services performed by the employee.

Gifts provided to clients, on the other hand, are advertising or promotional expenses and are generally tax deductible.

It’s important to keep proper records of gifts provided to staff and customers, including the date, recipient, nature of the gift, and the cost. Failure to maintain proper records may result in penalties or fines.

In conclusion, while providing gifts to staff and customers is a common practice, it’s important to understand the taxation implications and comply with the guidelines set by the ATO. By doing so, businesses can avoid penalties and fines and maintain good relationships with their staff and customers. If you require more assistance on this matter, please contact our office at 03 9973 5905.

Holiday Homes

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If you own a holiday home, you may be eligible to claim certain deductions on your tax return. However, the ATO has specific rules and regulations regarding claiming deductions on holiday homes.

To claim deductions on your holiday home, it must be rented out to tenants for at least part of the year. The amount of deductions you can claim will depend on the amount of time the property is rented out and the expenses associated with maintaining the property.

Expenses that can be claimed as deductions include:

  • Interest on the mortgage
  • Council rates and land tax
  • Insurance premiums
  • Repairs and maintenance
  • Cleaning fees
  • Advertising costs to find tenants
  • Property management fees

However, if you use the holiday home for personal use, such as a family vacation, you cannot claim any deductions for that period. In addition, if the property is not available for rent for a significant period, such as being blocked out for personal use, the deductions may be limited or disallowed.

It’s important to keep accurate records of all income and expenses related to your holiday home, as well as evidence that it was available for rent during the times you are claiming deductions for.

Here’s an example of how claiming deductions on a holiday home might work:

Emily owns a holiday home in a popular tourist destination. She rents out the property for 6 months of the year and uses it for personal use for the remaining 6 months. During the rental period, she earns a total of $20,000 in rental income. She also incurs expenses for the property totalling $15,000, including interest on the mortgage, council rates, insurance premiums, repairs and maintenance, cleaning fees, advertising costs, and property management fees.

Emily can claim deductions for the $15,000 in expenses, which will reduce her taxable rental income to $5,000. She cannot claim any deductions for the 6 months she used the property for personal use.

If you own a holiday home and need tax advice, please contact our office at 03 9973 5905.

Which Business Structure is for you: Company, Trust or Sole Trader?

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When starting a business, there are three common structures to consider: a company, a trust, or a sole trader. Each structure has its own benefits and disadvantages, and it’s important to choose the right one for your specific needs. Here’s a closer look at the benefits of each, along with some examples.

A company is a separate legal entity that is owned by shareholders. One of the main benefits of a company is limited liability, meaning that the personal assets of shareholders are generally protected if the company runs into financial difficulties. A company may also be able to access more favourable tax rates compared to an individual. However, running a company can be complex and requires a higher level of administration.

For example, John wants to start a construction business with his friend Mark. They decide to form a company, ABC Constructions Pty Ltd. As shareholders, they can limit their personal liability in the event of any legal issues that may arise from the business.

A trust is a legal entity that holds assets for the benefit of a specified group of people or organisations. One of the main benefits of a trust is that it provides greater flexibility in the distribution of income and capital gains, as well as potential tax savings. However, setting up a trust can be complex and requires the help of a professional.

For example, Sarah wants to start a property investment business. She decides to form a trust, ABC Property Trust, with herself as the trustee and her family as the beneficiaries. This allows her to distribute the income from her investments to her family members, potentially reducing her overall tax liability.

A sole trader is a simple business structure where an individual operates their business as themselves. One of the main benefits of a sole trader is that it’s easy and inexpensive to set up and maintain. However, a sole trader is personally liable for any debts or legal issues that may arise from the business.

For example, David wants to start a small online store selling handmade crafts. He decides to operate as a sole trader, trading under the name ABC Crafts. This allows him to start his business quickly and easily without the need for complex legal structures or ongoing administration.

In conclusion, each business structure has its own benefits and disadvantages, and it’s important to carefully consider your specific needs. If you need more clarity on which business structure suits your needs, please contact our office at 03 9973 5905.

Victorian Business Support Fund 3

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The Victorian Government has announced a third round of one-off grants for businesses in specific industry sectors hit hardest by Covid-19 shutdown restrictions.

 

Grants are for businesses with payrolls up to $10 million. The size of the grant depends on the business’ payroll:

 

Payroll per annum

Grant
Under $650,000

$10,000
Between $650,000 up to $3 million

$15,000
Between $3 million up to $10 million

$20,000

 

In general, to be eligible a business must:

 

  • Operate in Victoria,
  • Be registered as operating in an industry sector that has industry restriction levels of restricted, heavily restricted or closed. A list of this industries can be found here. A business’ industry sector is defined by the industry classification code linked to its ABN,
  • Be a participant in the JobKeeper Program,
  • Be an employing business registered with WorkSafe Victoria,
  • Have an annual payroll for the 2019/20 year of up to $10 million,
  • Be registered for GST as of 13th September 2020,
  • Hold and ABN as of 13th September 2020, and
  • Be registered with the responsible federal of state regulator (eg ASIC)

 

The grants must be used to meet business expenses, seeking support for, or developing the business. Applications and use of the grant funds may be subject to audit. Applications close on 23rd November 2020.

 

For more information on the Victorian Business Support Fund 3 or assistance with applications contact the team at Private Wealth Accountants on info@privatewealthaccountants.com.au or 03 9973 5905.

How COVID-19 will affect your 2020 tax return

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Tax Return

The last year has been a year like no other, with COVID-19 changing the way we have gone about our lives. When it comes to your tax return it is important to keep in mind these changes and how they will impact your return.

 

Working from home

Where you undertake work from a home office, the ATO allows a deduction for the costs of using that area. In addition to specific home office costs such as phone, internet and office equipment, the ATO allows a claim for running the home office. This is generally done by either claiming a fixed rate per hour worked from the home office, or a percentage of actual home gas and electricity costs incurred.

 

For the 2019/20 financial year, the ATO has temporarily introduced the ‘shortcut method’. This method is only available for the period 1 March 2020 to 30 June 2020, so you will need to keep records for this period separate to those for the first 8 months of the year.

 

The shortcut method is claimed as a deduction of 80 cents per hour worked from home. This method is intended to simplify your claims and therefore covers ALL home office expenses, so you will not be able to claim other office costs such as utilities, phone, internet, computer or office equipment separately. Unlike the other methods, the shortcut method is available to use whether or not you have a dedicated area set aside as a home office.

 

Protective equipment

Where your work has required you to be in physical contact or close proximity to customers the ATO will allow a deduction for protective items such as gloves, masks, sanitizer and antibacterial sprays. This may be especially relevant for employees in the retail, hospitality and healthcare sectors.

 

Car expenses

If you are usually required to use your own car to travel for work, but this travel either reduced or stopped completely you will likely need to adjust how you claim car expenses. Where you make a claim using the logbook method, it may be appropriate to only claim your car for part of the year up until you ceased work related travel, or adjust you claim based on a lower work use percentage taking into account how your travel requirements were affected.

 

Despite many employees still having to attend the office on occasions, travel from home to your regular work location is still not deductible.

 

Laundry expenses

If your work from home increased, then it is likely that you have worn your uniform less than usual. Therefore, if you are using the common method of calculating laundry deductions based on the number of times the uniform was washed your may have to adjust your claim appropriately.

 

JobKeeper payments

JobKeeper payments are a subsidy paid to employers who have been impacted during COVID-19. Although the wages you receive may have changed due to your employer receiving the subsidy, you do not need to include any JobKeeper payments separately in your tax return as this is already included in what is reported as wages on your income statement. However, if you operate a business as a sole and have received JobKeeper then you will need to be include these payments as part of your business’ income.

 

JobSeeker payments

JobSeeker payments are made to those of working age with minimal income or out of work. The Government increased the amount and accessibility of the payment during COVID-19. JobSeeker payments are taxable income and will therefore need to be included in your tax return.

 

COVID-19 early access to super

The Government allowed early access to super to those whose incomes had been sufficiently affected by COVID-19. The good news is that if you did access your super under this measure, the payment received is tax free and is not required to be included in your tax return.

 

For more information on the above topics contact one of our friendly consultants at Private Wealth Accountants on info@privatewealthaccountants.com.au or 03 9973 5905.