Trusts acquiring property in Victoria & New South Wales

If you have bought or are planning to buy residential property via a discretionary trust, you could be liable to pay more duty.  It all depends on what is in the trust deed.

Changes came into place on 1 March 2020 for trust structures acquiring residential property in Victoria or New South Wales.  These trusts will need to check the existing trust deeds which may need amending to exclude any potential foreign beneficiaries.

The changes occurred as the Victorian and New South Wales Offices of State Revenue (SRO and OSR) announced it was changing its stance on the application of duty surcharge to property owned or acquired by family trusts.  This could result in paying more tax.

So what does all that mean? 

Well most family or discretionary trusts do not specifically exclude potential foreign beneficiaries.  This can mean your trust will be a foreign trust for duty purposes resulting in an additional duty of 7% being applied to a property purchase.  This can mean extra tax of tens of thousands.

What to do?

Call us before purchasing property in Victoria or New South Wales if you are thinking about purchasing the property in your trust structure.  We can work with you to ensure your trust structure is the most appropriate structure to use and whether your deed should be amended.

ATO eye on ‘standard’ deductions

The ATO have recently issued warnings of increased audit activity such as motor vehicle claim for 5,000kms, work-related expenses up to $300 and laundry expenses of $150. These items are claims you can make where you do not have to have kept actual receipts for every expense, however the ATO is stressing that this does not make them “standard deductions” that everyone can claim automatically.

The ATO are not saying that you cannot claim these in any circumstances, but they are saying that they can only be claimed where you have actually incurred the expense and have made a reasonable calculation of the amount you are claiming.

Motor vehicle expenses

For motor vehicle expenses you need to be able to show how you calculated the number of kilometres you travel for work and have you remembered that you cannot claim travel between home and work unless you need to carry bulky tools.

Laundry

For laundry expenses the ATO allow up to $150 claim without substantiation. However, you need to be able to show that you need to wash your registered uniform or protective clothing using the ATO’s estimate of $1.00 per full load and $0.50 per part load. So to claim the full $150, you will need to be able to justify that you wash your uniform 150 times per year.

Work-related expenses

For work-related expenses you need to be able to explain what sort of expenses they were and how they add up to the amount you are claiming. If you are claiming for a home office as part of your work-related expenses, you need to have a dedicated office space and a reasonable estimate of the number of hours that you work from home.

The ATO are concerned that a large number of taxpayers are using Motor Vehicle, Work-related expenses and Laundry as “standard” deductions when they do not actually need to incur the cost for their work.

If you have these type of deductions we will contact you prior to finalising your return to make sure you are comfortable that you could provide further information if your tax return is reviewed by the ATO.

The ATO have sent out many media releases about this in the past few weeks, so you may have already been alerted to their increased audit activity from items in the news. Here is a link to one of ATO’s media releases about the dangers of claiming unsubstantiated deductions.

There is a more comprehensive summary of the ATO’s crackdown here.

Is it Goodbye to Rental Property Travel Expenses?

From 1 July 2017, an individual’s travel expenses relating to a residential investment property are not deductible, so you will not need to calculate kilometres and expenses when sending in your 2018 tax information.

Those who have commercial or industrial rental properties, or running a business of property investing will still be eligible to claim travel expenses as will companies that own residential property.

Proper record keeping for tax deductions

If you have ever lodged a tax return, you would know the pain in keeping records to substantiate your tax deductions. While it may be possible that some receipts are lost, perhaps it is a fuel receipt that is lost in the glovebox (or beneath the car seat!), or simply faded over time, it is important that you keep all the receipts as evidence that you have made the purchase as the receipt will include detailed line items of what was purchased.

There is a recent case where the Administrative Appeals Tribunal (AAT) knocked back a taxpayer’s claim for deductions. One of the reasons was that the claims were based on his bank statement transactions rather than on actual receipts/invoices.

PSJF and Commissioner of Taxation (Taxation) [2018] AATA 678 (20 March 2018)

In PSJF and Commissioner of Taxation (Taxation) [2018] AATA 678 (20 March 2018), the taxpayer was employed as a photographer. He claimed some travel expenses as tax deductions in his tax return. The AAT found that some of his deductions are disallowed.

During the Discussion, there were a few issues that were raised. However we would like to bring to your attention on the matters about the tax deductibility of expenses:

  • For an expense to constitute an allowable deduction in the production of salary or wages income, a two-pronged test must be satisfied: first, that expense must come within the definition of a deduction pursuant to s 81 of the ITAA97. Secondly, such claimed deduction must be substantiated with written or receipt-based evidence. There is no other way for any claimed expense to be allowed as a deduction against assessable income.
  • Put another way, element (1) above must, to quote the requirements of s 81 of the ITAA97, “be incurred in gaining or producing [the Applicant’s] assessable income” and cannot be an “outgoing of a domestic or private nature”. Element (2) above requires that the claimed expense must be substantiated by written evidence – most usually in the form of a tax invoice and accompanying receipt – from “a supplier”. That paperwork must identify the supplier and “the nature of the goods or services” provided by the supplier in order to meet the requirements of s 900-115 of the ITAA97.

To put it simply, for an expense to be tax deductible, it needs to satisfy the following:

  • have a link between the expense and the income that was earned, and
  • have sufficient evidence to prove the purchase – and the evidence they require is a tax invoice and receipt.

This means that merely having a bank statement showing the transactions is not a valid form of evidence to claim them as your tax deduction.

There are various ways to keep record of your work or business-related receipts. If you would like to hear about our options in keeping proper records of your receipt without having a shoebox, feel free to have a quick chat to us and we can work with you to find you a best solution.

If you are interested, or are unable to sleep at night, check out the full document here.

Subdividing your property and Tax

If you live on a large sized block you may have at some stage thought about subdividing.

You might want to subdivide to make some profit, to generate regular rental income or to reduce your backyard maintenance.  You will need to think about what happens when you sell….

Generally, your main residence is not subject to capital gains tax when you sell it, but subdividing your land will create two (or more) separate titles which are now separate assets.  These subdivided properties will have tax implications when you sell them.

A few things to consider are:

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