December 2004
In this issue:
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ATO’s Compliance Program
Focus on record keeping
Work related expenses update
Rental property hit list
Car expenses
Boosting your superannuation
Superannuation choice
CAPITAL GAINS TAX ALERT
The ATO has capital gains tax in its
sites in the 2005 tax year - 765,000
individual taxpayers declared about
$6.2 billion in net capital gains from
property sales and shares in their
2002-03 tax returns and these
figures are increasing.
COMPLIANCE CHECK-UP
Have you ever wondered just how important
you are to Australia’s tax system?
According to the ATO’s Compliance Program
2004-05 if you are one of the 10.2 million
individual taxpayers (most of them salary and
wage earners), you collectively contribute
around 45% of tax revenue.
It’s no wonder then that the ATO wants to
make sure you are complying correctly with the
tax laws, lodging your tax returns on time and
paying any tax liabilities.
30 June 2005 may seem light years away.
However, there’s no time like the present to
come to grips with the types of issues that the
ATO is likely to look at in your 2005 personal
tax returns:
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declaring all your interest, dividend and
employment income
ensuring that all rental income is declared
and only legitimate deductions are claimed
claiming legitimate work-related expenses
making sure any capital gains’ obligations
are correctly disclosed
If you think you may have problems in any of
these areas before 30 June 2005, it’s best to
get advice now so that any difficulties can be
cleared up before year’s end.
So the ATO will be on the look out to make
sure you have correctly disclosed any capital
gains from:
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rental properties
holiday homes and units
vacant land
residential units purchased off the plan
shares
distributions of capital gains from managed
funds
ON THE RECORD
Whilst the move to self assessment has made
tax time more convenient for many people, it
has also increased your responsibility for
‘getting it right’.
Now the Tax Office, with its stepped up audit
activity, is keen to ensure that you are keeping
proper books and records. Should the ATO
ask, you need to be able to show how you
arrived at the figures you disclose in your tax
return. In some cases, the ATO may also ask
you to provide written evidence.
DID YOU KNOW?
The Commissioner has the power
to impose a separate administrative
penalty (up to a maximum of
$2,200) if you have not kept or
retained records in a manner
required by a tax law. Although the
Commissioner is only likely to use
this penalty as a last resort, it’s best
not to give him an excuse to use it.
What records should you keep?
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As an individual taxpayer you should be
keeping tax records in at least the following
main categories:
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payments you have received (e.g.,
salary and wages, overtime, pensions,
annuities interest, dividends, managed
fund income and rental properties)
expenses related to the payments you
have received (e.g., the most common
expenses include: work related car and
travel expenses; clothing, uniform, dry
cleaning and laundry; sun protection for
outdoor occupations; self education
expenses, union fees and subscriptions)
tax deductible gifts or donations
medical expenses (e.g., payment to
hospitals, doctors, dentists, opticians and
chemist expenses relating to an illness or
an operation)
information about any assets you have
acquired or disposed of during the year
(e.g., purchase/sale contracts)
If you are not sure whether or not to keep a
record, it’s best to err on the side of safety and
keep it.
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RENTAL PROPERTY DEDUCTIONS
Are you one of the 1.3 million taxpayers who
have declared rental income and deductions in
your tax return?
Here is a list of frequently occurring mistakes
identified by the ATO that you can avoid in
2005:
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WORK-RELATED EXPENSES
According to the ATO, around 6.5 million
taxpayers claim work-related expenses worth
almost $10 billion (and increasing year by
year).
Here is a list of common mistakes identified by
the ATO that you can avoid when you are
making a claim for a work-related expense in
your 2005 return:
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Clothing being claimed where qualifying
conditions are not met (e.g., special rules
govern deductibility of uniforms; the cost of
protective clothing is usually deductible;
otherwise expenditure on clothing is
usually not deductible unless the clothing
can be readily distinguished from everyday
clothing and is specifically related to your
job)
Self education claims made where there
is no work connection at the time the
expense is incurred (e.g., expenses
incurred before employment commences
or to obtain a new type of employment are
generally not deductible)
Not apportioning deduction claims
between business and private use (be
particularly careful in this regard if you are
claiming deductions for your home
computer, internet usage and mobile
phone claims)
Claims made for home office expenses
based on occupancy costs (e.g., mortgage
interest) where the home is not considered
to be a place of business
Claims made for meal expenses where no
overtime meal allowance has been
declared
Motor vehicle claims made using the ‘log
book’ method where there is no valid log
book
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Claiming the cost of carrying out initial
repairs
(e.g.,
claiming
immediate
deductions for rectifying damage, defects
or deterioration that existed at the time of
purchasing the property – these costs are
capital expenditure)
Claiming renovation costs as deductions
for repairs (e.g., remodelling bathrooms
and kitchens and adding a deck or pergola
are capital improvements and not repairs –
in this case you need to make a claim for
capital works deductions instead)
Claiming deductions for a property that is
not genuinely available for rent or is
rented for only part of the year
Including the cost of the land in capital
works deductions (i.e. as part of the
construction cost of the rental property)
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Claiming construction costs as decline in
value deductions (previously known as
depreciation)
Overstating interest deductions by
including amounts related to private
borrowings (e.g., interest on a loan taken
out for both income-producing and private
purposes, such as the purchase of a rental
property and a private motor vehicle,
needs to be apportioned into deductible
and non-deductible parts, according to the
amounts borrowed for the rental property
and for the private purpose)
Not apportioning travel expenses where
the visit to the rental property is combined
with another purpose, such as a holiday
Claiming deductions for items incorrectly
classified as depreciating assets
DEPRECIATION TIP
If you own a rental property and
have purchased any depreciating
assets since 1 July 2004, you
should be aware that the ATO has
published a revised list of effective
lives that apply from 1 July 2004.
There are over 120 items that have
had their effective lives revised or
an effective life calculated for the
first time.
CLAIMING CAR EXPENSES
Have you used you car for work related travel?
You may be able to claim a deduction, using
one of 4 different calculation methods
summarised below, for work-related car
expenses for using your car (whether you own
your car, lease it or are acquiring it on hirepurchase).
The types of expenses you can claim include:
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interest on any loan to purchase your car
decline in value of your car (depreciation)
registration and insurance
repairs and maintenance
petrol and oil
WHAT TYPE OF CAR?
We’re talking about a motor car, station wagon,
panel van, utility truck or similar vehicle of less
than 1 tonne or fewer than 9 passengers.
MAXIMISE YOUR CLAIM!
It’s best to get advice regularly
about the how to calculate you car
expenses. Not only can you choose
the calculation method that gives
you the largest deduction for your
car expenses (provided you have
the
evidence
required
to
substantiate your claim under that
method), you can also change
calculation methods each year.
Method 1 – Cents/kilometre
You can use this method to claim a maximum
of 5,000 business kilometres even if you have
travelled more business kilometres than this in
a tax year.
Your claim is based on a set rate set for each
tax year (linked to the engine size of your car)
for each business kilometre travelled
Example
Sonia is a travelling salesperson and travels
5,450 kms in her car on work-related business
during the tax year. If Sonia decides to
calculate her car expenses claim using the
cents/kilometre method, she can only claim for
5,000 kms and can’t claim for the additional
450 kms.
Method 2 – 12% of original value
If your car travels more than 5,000 business
kilometres in a tax year, you can base your
claim on 12% of the original value of your car
when you acquired it.
However, the original value of your car is
limited to the luxury car limit.
What’s the luxury car limit?
The luxury car limit (LCR) sets a cap on the
maximum value you can use to depreciate
your car or claim your car expenses under the
12% method. The LCR is indexed each year
and for the 2004-05 year is $57,009.
Example
Peter drives a 4-wheel drive. When he comes
to prepare his 2005 tax return, he works out
that he travelled 6,500 business kilometres
during a tax year. Peter bought his car in the
2004-05 year at an original cost of $67,500.
Using the 12% of original value method, his
claim will be limited to 12% of $57,009
($6,841) rather than 12% of $67,500 ($8,100).
Method 3 – 1/3rd of actual expenses
If your car travels more than 5,000 business
kilometres in a tax year, an alternative method
is to claim 1/3rd of each actual car expense.
Method 4 – log book
Your claim is based on the business use
percentage of each car expense. You use your
log book to calculate the business use
percentage.
What’s a log book?
It’s a book in which you record details for each
of your business journeys.
If 2004-05 is the first year you are using this
method, you must have kept a log book during
2004-05.
The log book must cover at least 12
continuous weeks and will remain valid for 5
years - the 2004-05 year and the following 4
years (i.e., up to an including 2008-09).
will be less than $1,500 (it’s adjusted based on
your income and how much you personally
contribute).
If you earn $58,000 or more a year, you don’t
qualify the Super Co-contribution.
Am I eligible?
You will be eligible for the Super Cocontribution in a year of income if you meet a
number of qualifying conditions, including:
 you make personal superannuation contributions to a complying superannuation
fund or a retirement savings account
 your total income is less than $58,000
 10% of more of your total income is from
eligible employment
 you are less than 71 years old at the end
of year of income
 you lodge a tax return for the year of
income
WHAT DO I HAVE TO DO?
A WORD TO WISE…
The ATO is very particular about how you keep
a log book. If you need to keep a log book, you
should make sure it complies with the
requirements for a valid log book.
Where you keep a log book for 2004-05 year,
your log book must contain the following
information:
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when the log book period begins and ends
(e.g., the 12 week period)
the car's odometer readings at the start
and end of this period
the total number of kilometres that the car
travelled during this period
the number of kilometres travelled for work
activities based on journeys recorded in
the log book
the business use percentage for this
period
BOOSTING YOUR SUPER
If you earn $28,000 or less a year, make
personal superannuation contributions and
meet
some
eligibility
conditions,
the
Government will now put in $1.50 for every $1
you put into your superannuation (up to a
maximum contribution of $1,500).
When your income is more than $28,000 but
less than $58,000, your Super Co-contribution
You don’t have to apply for the
Super Co-contribution. The Tax
Office will use the information on
your income tax return and
contribution information from your
superannuation fund or retirement
savings account to work out
whether you are eligible. If you are,
the ATO will automatically calculate
the Super Co-contribution amount
and deposit it into your super
account.
SUPER CHOICE FOR EMPLOYEES
From 1 July 2005 as an employee you will be
able to choose which superannuation fund that
your contributions are paid into. From this date,
your employer will have to give you this choice
unless you are already covered by a State
award or some other agreement (like an
Australian
Workplace
Agreement)
that
specifies your superannuation fund.
Disclaimer
Taxwise® News is distributed quarterly by
professional tax practitioners to provide
information of general interest to their clients.
The content of this newsletter does not
constitute specific advice. Readers are
encouraged to consult their tax adviser for
advice on specific matters.