Want to buy a holiday home and claim it on tax?
It’s not as simple as it sounds…
Find out what the ATO requirements are before you start.
Australia has had its fair share of disasters over the last few years – drought, bushfires and floods – that have ramped up the volume of insurance claims. Most people would assume that if and when they need to claim on their insurance, the insurance payout covers the damage and is not income assessed for tax purposes – but this is not always the case.
Insurance payouts for damaged or destroyed personal items are generally not taxed. For example, any insurance payout you receive for your family home won’t necessarily be taxed. But, the rules are different if you have used your home to produce an income, for example, you have used part of your home as a home business or you have rented out part of your home.
The rules are also different if the item is a personal asset costing more than $10,000 or if the asset is a collectible that cost more than $500.
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.
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.
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.
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.
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.
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.
