The following tax planning measures should be borne in respect of your own individual circumstances.
Salary sacrifice arrangements
If employed you may wish to review your remuneration arrangements with your employer and forego future gross salary in return for receiving exempt or concessionally taxed fringe benefits and/or making additional superannuation contributions under a valid salary sacrifice arrangement. However, in entering into a salary sacrifice arrangement it is important to make sure that any additional employer superannuation contributions do not result in the total of compulsory superannuation contributions and salary sacrificed contributions exceeding the prevailing concessional contributions cap which is $25,000 for the 2018 year. Alternatively, an employee can now claim a deduction for personal superannuation contributions provided certain eligibility conditions are met including the requirement to provide a notice of your intention to claim such a contribution with your complying superannuation fund. You should consult our licensed financial planner to consider the merits of exploring these options.
Capital gains tax planning
Careful planning should be undertaken in planning the timing of any CGT event in respect of the disposal of appreciating assets which may trigger a capital gain. In this context, it is important to recognise that CGT is triggered when you enter into a contract for the sale of a CGT asset rather than on its settlement which is particularly important where the entry and settlement of the contract straddle year-end. In these circumstances, it may be preferable for a cash flow perspective to defer the sale of the CGT asset to the subsequent year where other relief may be available such as a capital loss sold on another asset. However, it is important to note that Taxation Ruling TR 2008/1 provides that an asset sold under a ‘wash sale’ to a related entity to generate a capital or revenue loss to reduce a capital gain will result in the loss being cancelled under the general anti-avoidance provisions of Part IVA of the Income Tax Assessment Act (1936) where there has been no significant change in the taxpayer’s economic exposure to the asset. Care should also be taken to ensure that an eligible asset is retained for the 12-month holding period required under the CGT discount, and to recognise that the CGT discount is not available to the extent that any capital gain accrued after 8 May 2012 and you were a foreign resident or temporary resident at any time after that date.
You should ensure that any unreimbursed claims for work-related expenses, car expenses and travel expenses are correctly allowable on the basis that such expenses were incurred in gaining or producing salary and wages income or other payments subject to the PAYG withholding regime (including any work-related claims below $300). Where items are used both for work or business purposes and for private purposes (e.g. use of a mobile phone or home computer) it is also necessary to apportion deductions so that a deduction is only claim for the business portion of the expense. In addition, all claims for work-related expenses and business travel expenses must be substantiated by way of evidence such as invoices, receipts and credit card statements. Where car expenses are claimed as deductible using the logbook method it is also necessary to retain all appropriate invoices and receipts as well as maintain a compliant logbook. Alternatively, where car expense deductions are claimed using the cents per kilometre method it is necessary that any estimate of business kilometres travelled be based on reasonable estimates which should be appropriately documented. Care should be taken in claiming such deductions as the Australian Taxation Office (ATO) is continuing to scrutinise excessive work-related expense claims and is using data analytics to detect deductions which are unusual or abnormally high relative to other persons in the taxpayer’s occupation or profession.
RECENT TAX AND SUPERANNUATION REFORMS IMPACTING PROPERTY OWNERSHIP
Over the past year the Federal Government has announced a range of measures impacting the buying and selling of property and the amount of deductions potentially available to residential rental property owners. The most important of these changes for resident taxpayers are as follows.
Denial of rental travel deductions
From 1 July 2017, the income tax law has been amended to deny a deduction for travel costs incurred in inspecting or maintaining residential rental properties by individuals, discretionary trusts, small unit trusts and self-managed superannuation funds. For these purposes travel expenditure includes motor vehicle expenses, taxi or hire car costs, airfares, public transport costs and any meals or accommodation related to such travel. Moreover, such expenses cannot be included in the cost base or reduced cost base of the residential rental premises or deducted as blackhole expenditure. Accordingly, it is important to recognise that there is no tax relief for travel costs incurred in either inspecting or maintaining property or collecting rents from the 2018 year onwards.
Limiting deductions for second hand depreciating assets
From 1 July 2017 individuals, discretionary trusts, small unit trusts and self-managed superannuation funds are also denied a deduction for the decline in value of a depreciating asset (e.g. furniture and fittings) to the extent that the asset is used or installed ready for use in residential rental premises, and that asset was previously used by the taxpayer for a non-taxable purpose or was previously used by another entity. However, any decline in the value of such second-hand depreciating assets may result in a capital loss (or in certain circumstances a capital gain) on any subsequent disposal of an asset on the basis that the asset has been used for a non-taxable purpose. Broadly, these amendments apply to income years starting on or after 1 July 2017 to depreciating assets acquired from the time the measure was publicly announced on 9 May 2017.
Increase to foreign resident CGT withholding rate
The rate of foreign resident CGT withholding tax that must be retained by a purchaser at settlement from the purchase price of a property was increased from 10% to 12.5% effective from 1 July 2017. However, such tax does not need to be retained from the purchase price of the property if the vendor obtains a clearance certificate from the ATO prior to settlement or if an exemption or variation otherwise applies. It should be noted that the foreign resident CGT withholding obligation does not arise in relation to a CGT asset if the market value of that asset is less than $750,000, and the CGT asset is either taxable Australian real property or certain indirect taxable Australian real property interests.
Additional superannuation contributions on downsizing a main residence
Following recent amendments individuals aged 65 or over are eligible to make additional non-concessional contributions of up to $300,000 per individual from the capital proceeds on the sale of the ownership interest in a CGT exempt main residence held by that individual (or their spouse or former spouse) from 1 July 2018. Essentially, this measure allows an eligible individual an additional downsizing contribution cap of $300,000 which will be excluded from the broader non-concessional contributions cap and the restrictions on non-concessional contributions for individuals with a total superannuation balance above $1.6 million. Furthermore, the maximum downsizer contribution of $300,000 can be claimed by both the taxpayer and the spouse even where only one of those parties is on the title to the property. However, various conditions must be satisfied including the requirement that the ownership interest in the main residence having been held for at least 10 years prior to the date of disposal, and that the contribution made to a complying superannuation fund must come from the capital proceeds received on the sale the property. In addition, there is no requirement that the individual acquire a replacement main residence or satisfy the work test in order to be eligible for the downsizing contribution which can only be utilised once by each taxpayer.
First home super saver (FHSS) scheme
This recently enacted scheme essentially allows an individual to make additional voluntary superannuation contributions to a complying superannuation fund from 1 July 2017 up to a maximum amount of up to $30,000 which can be withdrawn to help finance a first home deposit starting from 1 July 2018. Compulsory superannuation employer contributions and contributions in respect of defined benefit funds are not eligible for the FHSS scheme. Various other eligibility conditions must be satisfied including a requirement that the relevant individual has never owned real property in Australia. Broadly, where the buyer’s partner also has never owned real property, the couple can effectively withdraw an amount of up to $60,000 to jointly fund a home deposit. The FHSS scheme is a tax initiative primarily aimed at low to middle income earners and provides that 85% of concessional contributions can be withdrawn together with any associated earnings as a FHSS released amount which is then in aggregate included in the individual’s assessable income and subject to a 30% non-refundable tax offset.
Proposed removal of the CGT main residence exemption for foreign residents
The Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No.2) Bill 2018 proposes that the CGT main residence exemption would be removed for foreign residents who would otherwise have been entitled to the exemption effective from 9 May 2017. The residency tests that generally apply for income tax purposes will be applied to determine whether an individual is a foreign resident at the time at which they enter into a contract for the sale of their main residence. Accordingly, where a person is a foreign resident at that time he or she will have to recognise any capital gain or loss arising on a disposal of that main residence where the contract for sale is entered into on or after 9 May 2017. However, under transitional provisions the proposed amendments do not apply to dwellings held by such individuals before 9 May 2017 provided the sale of the ownership interest in the dwelling happens on or before 30 June 2019.