Tag: TAx Compliance

2019 November/December – Page 14

Page 14
background image

SMSF INVESTMENT STRATEGY REVIEW

As we come towards the end of the year, it’s traditionally a time when 

investors review their portfolios with a view to making changes where 

appropriate. Those of you who have an SMSF have an obligation 

under the law to formulate and regularly review your fund’s 

investment strategy. In basic terms, investment strategies are plans 

for making, holding and realising assets of your SMSF. A failure to 

regularly review your strategy may result in Trustee fines of up to 

$17,000. The obligation to review applies irrespective of whether you 

invest directly or indirectly through advisors/investment managers. 
Under SIS Regulation 4.09(2) your investment strategy must address 

the following issues:
•  The risk involved in making, holding and realising, and the likely 

return from, the SMSF’s investments having regard to its objec-

tives and its expected cashflow requirements

•  The composition of the SMSF’s investments and the extent to 

which the investments are diverse or involve the SMSF being 

exposed to risks from inadequate diversification

•  The liquidity of the SMSF’s investments having regard to its 

cashflow requirements

•  The ability of the SMSF to discharge its existing and prospective 

liabilities. 

Whilst, under the law, there is no actual requirement to document 

your strategy, it is strongly recommended that you do so, as this will 

enable you to demonstrate (to the ATO if any questions are asked by 

them) that the strategy is being adhered to when making investment 

decisions. 

HAVE YOU CANCELLED YOUR GST REGISTRATION?

When a business cancels its GST registration, often overlooked is the 

potential GST adjustment that may be necessary on existing business 

assets.  The GST Act provides that an increasing adjustment be made 

for anything that forms part of the assets of an entity immediately 

before the cancellation of the GST registration.  The rationale for the 

adjustment is that, on cancellation of registration, the assets of an 

entity are assumed to go into private use.  The increasing adjustment 

recovers amounts claimed as input tax credits on acquisitions, as the 

asset no longer qualifies as a creditable acquisition.  The amount of 

GST payable is calculated by reference to the GST inclusive market 

value of the asset, where the market value is less than the initial 

consideration provided in acquiring the asset.  
Take, for example, a business that has ceased operation and has a 

motor vehicle on hand with a market value of  $11 000.  GST credits 

had been claimed on the acquisition and running costs of the vehicle. 

The increasing adjustment would result in GST payable of $1,000 

(1/11th of $11,000).

MY TAX SAVERS

November/December 2019

13

www.mytaxsavers.au

2019 November/December – Page 4

Page 4
background image

MY TAX SAVERS

November/December 2019

3

www.mytaxsavers.au

NOVEMBER 2019

11 NOVEMBER

July-September quarterly Activity Statements – due 

for lodgement and payment (if lodging electronically)

21 NOVEMBER

October monthly Activity Statements – due for 

lodgement and payment

28 NOVEMBER

Superannuation Guarantee Charge (SGC) Statement 

– due for lodgement and payment if insufficient 

contributions or late contributions were made for 

the July-September quarter

DECEMBER 2019

1 DECEMBER

Due date for income tax payment for companies 

that were required to lodge by 31 October

21 DECEMBER

November monthly Activity Statements – due for 

lodgement and payment 

Many key dates are looming for business 
including those relating to Activity Statements, 
superannuation, and more. 

KEY DATES

2019 November/December – Page 15

Page 15
background image

Estate Planning 

- Part 2  

Testamentary Trusts

 

In this second instalment of our Estate Planning 
series, we examine the benefits of Testamentary 
Trusts. Establishing a Testamentary Trust in your 
Will can have many advantages including asset 
protection and tax minimisation. 

BACKGROUND     

A “Testamentary Trust” is a trust established 

by the terms of a person’s Will (as opposed to 

a Family Trust which is established to operate 

during a person’s life). Testamentary Trusts 

come into existence on the Will-maker’s 

death. These trusts can be fixed (such as a 

simple life estate), discretionary, or a hybrid 

(a combination of both fixed and discretionary 

entitlements). Most typically though, 

Testamentary Trusts will be discretionary in 

nature. It is possible to establish more than 

one Testamentary Trust in your Will, for 

example, one for each child. 
The principal benefits of Testamentary 

Trusts are their ability to reduce tax paid 

by beneficiaries on income earned from the 

inheritance as well as their ability to protect 

assets that you leave behind at death.  

ASSET PROTECTION

When we pass away, most of us would like 

to think that our assets and wealth will be 

left to the benefit of our loved ones for many 

years subsequent. Under a normal Will, if an 

inheritance is left directly with a beneficiary 

(e.g. child) it may be lost to that person if 

they are wasteful, they get into financial 

trouble, or they experience a relationship 

breakdown such as a divorce. By establishing 

a Testamentary Trust in your Will, this risk is 

mitigated. 
WASTEFULNESS / INABILITY TO 

MANAGE MONEY
If you are concerned that some of your 

beneficiaries are financially wasteful or 

because of their inherent characteristics they 

have an incapacity to manage money (for 

example, they may be a minor or may be 

mentally impaired) you may wish to strongly 

consider the establishment of a Testamentary 

Trust. Although your inheritance is passed to 

the Testamentary Trust for the benefit of your 

nominated beneficiaries, the Trustee of the 

Trust is vested with the sole power to control 

any distributions. Thus, the income and 

capital from the inheritance can be gradually 

bled out to the beneficiaries at the absolute 

discretion of the Trustee; and therefore sustain 

those beneficiaries for hopefully many years 

into the future – rather than being potentially 

squandered if passed directly to them at death. 
RELATIONSHIP BREAKDOWN
If a beneficiary is in a volatile relationship, 

has a history of relationship breakdowns 

or you just wish to guard against this in the 

future, Testamentary Trusts may assist in 

ensuring their inheritance is not depleted or 

lost to their partner. Assets held inside the 

Trust do not form part of the pool of assets 

that can be the subject of division (either by 

court order or formal agreement) in the event 

of a relationship breakdown. It is however 

acknowledged that due to the nuances of 

family and bankruptcy law, in some cases the 

protection offered by a Testamentary Trust 

may not in all cases be absolute. 

14

www.mytaxsavers.com.au

My Tax Savers

2019 November/December – Page 5

Page 5
background image

t'is the season 

to be jolly

Christmas is traditionally a time of giving – including 
employers showing gratitude towards staff for a 
job well done throughout the year. However, gifts 
and Christmas Parties can attract the attention of 
the Taxman. With the Fringe Benefits Tax (FBT) rate 
sitting at 47%, avoiding or minimising this impost is 
important.  This article looks at a range of common 
Festive Season scenarios, how FBT applies, and how 
it may be minimised.

4

www.mytaxsavers.com.au

My Tax Savers

PARTIES AT RESTAURANTS

In certain circumstances, an employer can 

hold a Christmas party for staff and it be 

exempt from FBT. 
Take for example an employer holding a 

Christmas party at a restaurant for employees 

and their partners and it is the only social 

function they provide for employees each 

year.  Where this is the case, it is very likely 

to be exempt from FBT provided the per-head 

cost (dinner and drinks) is kept to under 

$300 per person. To enjoy this exemption 

you must use the Actual Method for valuing 

FBT meal entertainment. The Actual Method 

is the default method for valuing meal 

entertainment FBT and no election is required 

to use this method. Under this method, an 

employer pays FBT (in the absence of an 

exemption) on all taxable meal entertainment 

provided to employees and their associates i.e. 

their partners (but not to other parties such as 

clients, contractors, or suppliers). However, an 

FBT exemption may apply for such a party in 

particular circumstances. 

If the meal entertainment meets the 

requirements of the minor benefit exemption, 

the party is exempt from FBT. Broadly 

speaking, under this exemption a benefit will 

be exempt from FBT where its value or cost 

is less than $300 and, if similar or identical 

benefits are provided during the year, they are 

only provided on an infrequent or irregular 

basis. The less frequent and regular, the 

more likely each single similar or identical 

benefit will be exempt from FBT. The ATO 

has not specified an exact number of times a 

benefit can be provided before it is considered 

frequent (and therefore less likely to satisfy 

the minor benefit exemption). However, the 

ATO has confirmed that a once-per-year 

benefit (such as a Christmas gift or gym 

membership) will not be considered frequent. 

The downside of using the minor benefit 

exemption is that the meal entertainment is 

not tax deductible, and nor can you claim a 

GST credit. 

This minor benefit exemption is 

not available if you elect to value 

your meal entertainment under 

the alternative 50/50 method. 

Under this method, you pay 

FBT on only 50% of all taxable 

meal entertainment provided 

to employees, associates 

AND clients, contractors, 

customers etc. regardless of 

the cost. Likewise, you can 

only claim a 50% income 

tax deduction and 50% 

GST credits on such meal 

entertainment.  

2019 November/December – Page 16

Page 16
background image

EXAMPLE
Brad tragically dies and leaves behind his two rental 

properties to his children, Jake and Cameron in equal shares. 

The children decide to rent out the houses for ten years. 

After this time and having now become adults, they decide 

to take ownership of one house each with a view to making 

each their family homes. 
If the houses are bequeathed to them directly, then CGT and 

stamp duty will be triggered on the transfer of 50% of each 

house when they are adults. This is because each person is 

transferring a half interest in each house to the other sibling 

in order to become sole owners 
By contrast, if both houses pass into a Testamentary Trust, 

each child will generally be able to take ownership of a 

single house each without triggering CGT or stamp duty. 

This can save thousands of dollars in tax. 

OTHER CONSIDERATIONS

As illustrated, Testamentary Trusts are a useful estate planning 

tool. In consultation with your advisor, carefully consider whether a 

Testamentary Trust is right for you. Factors to be considered include:
•  The characteristics of beneficiaries (are any of them minor or in-

capacitated)? And are any of the above-listed factors at play, such 

as wastefulness, the potential for relationship breakdown, expo-

sure to creditors etc. which could see an inheritance depleted.

•  Whether you have sufficient assets, and whether sufficient 

income is going to be generated from those assets, to justify the 

establishment of a Testamentary Trust in the first place. 

•  Testamentary Trusts will incur ongoing costs such as accoun-

tancy fees for the preparation of tax returns, as well as initial 

establishment costs. 

If having consulted your advisors, you do decide to establish a 

Testamentary Trust, careful thought should be given to who to 

appoint as the Trustee. Anybody can be appointed, including your 

spouse, the Executor of your Will etc. As the Trustee exercises 

effective control of the Trust, it is essential to appoint a party that will 

act in a way that is broadly reflective of your intentions and in the best 

interests of the beneficiaries going forward.  

CREDITORS    
If a beneficiary, by virtue of their personal dealings, is exposed 

to financial risk (e.g.. they may operate their own business), 

Testamentary Trusts can offer protection from creditors. 
Under a normal Will, where an inheritance is passed directly to a 

beneficiary who is experiencing solvency difficulties or is already 

bankrupt at the time of the deceased’s death, that inheritance is likely 

to end up in the hands of creditors. However, where a Testamentary 

Trust is used, the beneficiary has no actual entitlement to a 

distribution until the Trustee so determines. Accordingly, assets are 

generally not exposed to creditors but rather remain the property of 

the Trust.  

TAXATION

Testamentary Trusts offer a range of tax benefits:
INCOME SPLITTING 
Where a beneficiary receives their inheritance as an individual, they 

will pay tax on any earnings (such as interest) at their own personal 

tax rate. By establishing a Testamentary Trust, income from the 

assets and cash from the Estate can be distributed to tax-advantaged 

beneficiaries (such as non-working spouses of your children). This can 

in turn minimise the overall tax payable. 
INCOME STREAMING 
In simple terms, income streaming is the ability to allocate 

different styles of income to particular beneficiaries. Establishing a 

Testamentary Trust allows you to stream fully franked dividends to 

tax-advantaged beneficiaries (such as resident beneficiaries – non-

resident beneficiaries can not utilise franking credits) and likewise 

stream capital gains to tax-advantaged beneficiaries (such as those 

who have a current year or prior year unused capital loss, which can 

then reduce the capital gain). This is as opposed to assets just sitting 

with beneficiaries themselves; which will give you no flexibility as to 

who pays tax on any earnings. 
CGT RELIEF
When you pass away and bequeath a CGT asset directly to a 

beneficiary, where they subsequently transfer the asset to another 

person, CGT and stamp duty may apply on that subsequent transfer. 

Testamentary Trusts can provide relief in this regard. 

MY TAX SAVERS

November/December 2019

15

www.mytaxsavers.au

2019 November/December – Page 6

Page 6
background image

EXAMPLE – COMMON SCENARIO

Smith Pty Ltd uses the Actual Method to calculate its meal 

entertainment and is contemplating having a $220 per head 

(including GST) Christmas party in December 2019 for 

its 9 employees plus their spouses ($3 960 in total). This is 

the only meal entertainment provided for staff during the 

year. The Directors wonder about the FBT, income tax, and 

GST consequences of the two methods for valuing meal 

entertainment. 
ACTUAL METHOD
The following tax treatment applies for both employees and 

their spouses:
•  FBT – Zero is payable as the benefit is an exempt minor 

benefit

•  Income Tax Deduction – Cannot be claimed as the benefit 

is an exempt Minor Benefit and meal entertainment

•  GST – Cannot be claimed as the benefit is an exempt  

minor benefit

.

Therefore, the employer’s out-of-pocket expense is simply the 

cost of the Christmas Party ($3,960). 

Under the 50/50 Method, FBT will be payable in respect of 50% of 

the total meal and accommodation expenditure, with a 50% GST 

credit and a 50% income tax claimed accordingly. Again though, with 

the FBT rate at 47%, the 50% tax deduction and 50% GST credits 

available under the 50/50 Method is unlikely to provide a better after-

tax result for the employer. 
WHY?
Given the significantly better results that can be achieved with the 

Actual Method for valuing meal entertainment (by utilising the Minor 

Benefits exemption) it is reasonable to ask why an employer would 

choose to value their meal entertainment under the 50/50 Method? 

The answer is typically that where an employer provides meal 

entertainment to their employees on a reasonably frequent basis, the 

minor benefit exemption may not apply (remember, for the exemption 

to apply the meal entertainment must be less than $300 and be 

infrequent/irregular). Where this was the case, then the 50/50 Method 

would provide a better outcome than the Actual Method, given the 

50% GST and income tax reduction.

CASH/LEAVE BONUS

With the FBT rate sitting at 47%, you may instead opt to provide 

employees with a cash bonus rather than a non-cash benefit this 

Christmas. This transfers the tax liability to the employee (to be 

assessed at their marginal tax rate) and, ensures the benefit does not 

attract FBT, and allows you to claim an income tax deduction for the 

full value. 
Alternatively, if your business is shutting down over the Christmas 

break and your employees are required to take annual leave (over and 

above the public holidays such as Christmas Day and Boxing Day) 

then you may wish to consider providing them with a leave bonus. 

This is where the compulsory annual leave days where your business 

is closed down (e.g. 28 December) are not deducted from employee 

leave balances but instead is granted to them as a bonus by the 

business. Such a bonus does not attract income tax or FBT for either 

party, and has no immediate cash or other impact on your business.

GIFTS 

If a gift is given at Christmas time and less than $300, the minor 

benefits exemption may be available to exempt from FBT all sorts of 

common Christmas gifts to employees.
Non-entertainment gifts to staff (such as Christmas hampers, bottles 

of alcohol, gift vouchers, pen sets etc.), are tax deductible and you can 

claim GST credits, irrespective of cost. Note however that you can 

generally avoid paying FBT if you keep the gift under $300. If this 

threshold is exceeded, FBT will apply. Therefore, be conscious of this 

threshold when providing such gifts to staff this Christmas.  
On the other hand, entertainment gifts to staff (such as tickets to 

movies/theatre/amusement park/sporting events, holiday airline 

tickets etc.) which are under $300 will not attract FBT, are not income 

tax deductible, and you can not claim GST credits. If over $300, 

FBT will apply, but a tax deduction and GST credits can be claimed. 

With FBT rate at 47%, the tax deduction and GST credits available 

is unlikely to provide a better tax outcome than avoiding FBT by 

keeping the gift under $300. 

WEEKENDS AWAY

An employer may also consider rewarding their staff at Christmas 

time with a weekend away, which typically may involve an evening 

meal at a restaurant and an overnight stay at a nearby hotel. Under the 

Actual Method, FBT will be payable in respect of the accommodation 

which will be deemed to be meal entertainment as it is provided in 

connection with the function. FBT will also be payable in respect 

of the dinner/drinks. FBT will apply to both employees and their 

partners. However, each of the benefits will be eligible for the 

$300 minor benefits exemption – with each receiving its own $300 

threshold (i.e. $300 threshold for employee accommodation; $300 

threshold for partner accommodation; $300 threshold for employee 

dinner/drinks; $300 threshold for partner dinner/drinks). 

FBT 50/50 METHOD
The following tax treatment applies for both employees and 

spouses:
•  FBT – The taxable value of the meal entertainment would 

be $1 980 ($3 960 x 50%). The fringe benefits taxable 

amount would be $4 118 ($1 980 x 2.0802 gross up rate). 

The FBT payable would be $1 935 ($4 118 x 47% FBT rate). 

•  Deduction – $ 1800 (50% of the $3 600 GST-exclusive cost 

of the party) would be deductible. At a 27.5% tax rate, this 

would reduce the cost of the party by $495

•  GST – $180 (50% of $360) could be claimed back as a GST 

credit. 

Thus, the after-tax cost of the party would be $5 220 ($3960 + 

$1 935 - $495 - $180). 
CONCLUSION
In this common scenario, by using the Actual Method (rather 

than the 50/50 Method) and keeping the party under $300 per-

head, the employer has saved $1 260 after-tax. This example 

illustrates the sting in the tail of FBT; payable as it is at 47%. 

Although the company enjoyed a tax deduction and GST credits 

under the 50/50% Method, the FBT cost far outweighed this. 

MY TAX SAVERS

November/December 2019

5

www.mytaxsavers.au

2019 November/December – Page 17

Page 17
background image

THE EXEMPTION

Section 118-110 of the Income Tax Act sets out the basic conditions for 

the Main Residence exemption from CGT as follows:
•  The taxpayer is an individual (the exception being where a main 

residence is owned by a special disability trust – see later)

•  The dwelling was the Main Residence of the individual through-

out the period of ownership

•  The individual did not acquire the ownership interest either as a 

beneficiary or trustee of a deceased estate.

INDIVIDUAL
The individual requirement means where a Company or Trust owns 

the dwelling, the Main Residence exemption is not available. This is 

certainly food for thought if for asset protection reasons, for example, 

you are contemplating holding the family home in such a structure.  
The one exception to the requirement that the taxpayer must be 

an individual is where the Main Residence is owned by a Special 

Disability Trust provided the principal beneficiary under such a Trust 

uses the dwelling as their Main Residence.  
Note that from 9 May 2017, the CGT main residence exemption is not 

available to foreign and temporary tax residents. Properties held prior 

to this date were grandfathered until 30 June 2019.
MAIN RESIDENCE
This term is not defined. However Tax Determination TD 51 lists the 

factors to be considered in determining whether a residence qualifies 

as your Main Residence:

•  The length of time you have lived in the dwelling (note however 

there is no minimum time requirement, for example two weeks is 

long enough)

•  Whether you have moved your personal belongings into the 

dwelling

•  The address to which you have your mail delivered
•  Your address on the electoral role
•  The connection of services such as telephone, electricity and gas
•  Your intention in occupying the dwelling. 
A specific choice or election is not required for you to claim the 

exemption. Rather the way in which you complete your tax return 

(e.g. excluding a capital gain when you have sold your Main 

Residence) is evidence of your choice to claim the Exemption. 
DWELLING
This can include a yacht, caravan, mobile home or house-boat (and 

any land under them) provided they have the level of facilities to make 

them habitable (e.g. toilet, shower, kitchen etc.). Land and structures 

adjacent to your dwelling can also qualify for the Exemption, 

provided that the land does not exceed two hectares and is used for 

private purposes in association with your dwelling. Adjacent land 

needs only to be close to the dwelling, not necessarily attached to it. 

For instance, land across the road from your dwelling can qualify for 

the exemption. 

MAIN 

RESIDENCE

With Australia having one of the highest 
home ownership levels in the world, this 
article is dedicated to the many issues 
surrounding the main residence exemption 
from Capital Gains Tax.  

Tips and Traps

16

www.mytaxsavers.com.au

My Tax Savers

2019 November/December – Page 7

Page 7
background image

SHARES VERSUS 

PROPERTY

 

VERSUS CASH

INTRODUCTION

The end of the year is traditionally a time 

when investors review their portfolios, and 

specifically the mix of their investments 

between shares, property and cash. While 

factors such as liquidity, ongoing expenses, 

income streams and entry and exit costs, play 

a role in your choice between these three 

investment types, so does taxation. 

SHARES

While most people will hold shares in their 

own name, thought should be given to other 

investment vehicles. By investing through 

a trust for instance, under the current trust 

streaming laws you can distribute franked 

dividends and capital gains on shares to the 

most tax-advantaged beneficiaries (which will 

typically be those on the lowest tax rate). It’s 

also worth considering having your SMSF 

as the shareholder. With dividends taxed at 

just 15% and capital gains at 10% (provided 

the shares have been held for more than 12 

months), the tax advantages of SMSF share 

ownership are significant. What’s more, if the 

SMSF account is in pension mode, then any 

dividends or capital gains are tax-free. On 

the downside, the dividends are locked away 

inside superannuation – unable to be accessed 

by members of the fund – until you meet a 

condition of release, such as turning 65.  

All share owners also need to be aware of 

two important holding period timeframes. In 

terms of minimising capital gains tax upon 

sale, where you hold shares for 12 months or 

more you, your trust, or your superannuation 

fund are entitled to a 50% discount on any 

capital gain (companies however are not 

eligible, while for superannuation funds the 

discount is 33%). If you are contemplating 

selling, but are nearing the 12-month mark, 

then you may wish to consider delaying the 

sale until this ownership period is satisfied.  
The other holding period that large 

shareholders and share traders need to be 

aware of is the ’45-day rule’. By way of 

background, where you are paid a dividend, 

that amount will generally be assessable. 

However, where the dividend is franked (i.e. 

tax has already been paid by the company on 

the dividend before it was distributed to you) 

you will be entitled to a franking credit of 

at least 27.5% (the current tax rate for most 

companies) which will reduce your overall 

tax liability. However, you are only entitled 

to the franking credit if you have held the 

shares for 45-days or more. It’s important 

to note however that small shareholders (i.e. 

those whose total franking credits for the 

income year are less than $5 000 which is 

the equivalent of receiving a fully franked 

dividend of $11 666) are exempt from this 

holding rule.

WARNING 
The advent of online trading has opened 

up the ability to acquire foreign shares. 

However, with the exception of New 

Zealand shares, any tax paid by foreign 

companies who distribute a dividend to 

you will not be taken into consideration 

by the ATO (unlike franked Australian 

shares). The upshot is that from a 

taxation standpoint, it pays to invest 

in Australian companies that have a 

history of paying franked (as opposed to 

unfranked) dividends.

Negative gearing is also an attractive aspect 

of share ownership. While most people think 

of negative gearing as applying solely to 

property, it applies equally to shares. Simply 

put, negative gearing refers to the practice 

of accepting a short-term loss from an 

investment with a view to trading that loss off 

at a later date against a greater capital gain. 

The losses you incur – created from expenses 

associated with holding and purchasing the 

shares, such as interest on a loan – are used to 

reduce your tax payable on other income such 

as salary and wages. Shares are negatively 

geared if after taking into consideration the 

expenses associated with holding the shares, 

these exceed the income from the shares (i.e. 

dividends paid).

This article looks at the tax treatment and strategies around the 
three major investment classes – property, shares and cash. 

6

www.mytaxsavers.com.au

My Tax Savers

2019 November/December – Page 18

Page 18
background image

EXAMPLE
Kevin bought the family home in 1990 for $450,000 in inner-

Brisbane. With his children having grown up and moved out, 

in 2017 he decided to downsize to a unit and proceeded to 

rent out the property until it was sold in 2019 for $1.1 million. 

At the time the property was rented out it had a market value 

of $1 million. 
The cost base of Kevin’s property will be $1 million being 

the market value of the property at the time it was first rented 

out. Therefore, although the residence has more than doubled 

in value since purchase, the vast bulk of the capital growth is 

not subject to CGT under previously-discussed rule.  

EXAMPLE
Bert made a gross capital gain of $90,000 on his Main 

Residence that he had occupied for the entire 10 years of his 

ownership. However, for two years he had been renting two 

of his rooms out to relatives who attend University where he 

lives. They have been paying rent at market rates. The two 

rooms represent 10% of the floor area of the house. 
On sale, Bert will be entitled to a Main Residence Exemption 

but not for the part of the house that he was renting out for 

the 2 years. The gain will be calculated as follows:
Capital gain  x  
% of floor area not used as Main Residence x 
percentage of period of ownership that the home was not a 

Main Residence
($70 000   x   10%)   x  20%  = $1 400

Where you rent out only part of your home (quite common with 

Airbnb arrangements, for example) the proportion of the capital gain 

or capital loss that is taxable is an amount that is reasonable having 

regard to the extent to which you would have been able to deduct the 

interest on money borrowed to acquire the home. In most cases, this is 

the proportion of the floor area of the home that is set aside to produce 

income and the period you use the home to produce income. This 

includes if the dwelling is available (for example, advertised) for rent.

TAX TIP
Where you only qualify for a partial Main Residence Exemption 

from CGT, the CGT discount is still nonetheless available to 

reduce any partial capital gain provided the dwelling has been 

owned for at least 12 months. In the above example therefore, 

Bert’s capital gain would be reduced to $700. 

EXTENSION

There are a number of rules which allow taxpayers to avail 

themselves of the Main Residence exemption despite not living in the 

dwelling. 
CHANGING MAIN RESIDENCES
If you acquire a new home before you dispose of your old one, both 

dwellings are treated as your Main Residence for up to six months if:
•  You lived in your old home and it was your Main Residence for 

a continuous period of at least three months in the 12 months 

before you disposed of it

•  You did not use it to produce assessable income (such as rent) in 

any part of that 12-months when it was not your main residence, 

and

•  The new dwelling becomes your Main Residence.
Therefore, if you sell your old home within six months of acquiring 

the new one, both dwellings are exempt for the whole period between 

when you acquire the new one and dispose of the old one. 
ABSENCES
Once a dwelling has qualified as your Main Residence, you can 

continue to treat it as such during a subsequent period of absence 

for an unlimited timeframe provided you are not using it to produce 

income, and provided you are not treating another residence as 

your Main Residence for tax purposes during this period. You are 

not required to re-occupy the dwelling before sale to enjoy this 

exemption. It’s also worth noting that the absence can be for any 

reason. 

RENTING OUT YOUR MAIN RESIDENCE

Particularly with the advent of Airbnb, it’s quite common for 

individuals to rent out a property (or part of a property) that has been 

previously used as a main residence. Although in this situation CGT 

will generally be payable on at least some portion of the property 

when it comes time to sell, the capital gain will often not be as much 

as anticipated. 
If you start using all or part of your Main Residence to produce 

income for the first time after 20 August 1996, you are taken to have 

acquired the property at its market value at the time you first used it to 

produce income if all of the following apply:
•  You acquired the property on or after 20 September 1985 

(where you acquired it before this date, it will be CGT exempt 

on sale)

•  You first used the property to produce income after 20 

August 1996

•  When a CGT event (i.e. a sale) happens in relation to the property 

you would only get a partial Main Residence Exemption because 

you used the property to produce assessable income during the 

period you owned it, and 

•  You would have been entitled to a full Main Residence Exemp-

tion if the sale happened to the property before you used it to 

produce income. 

As illustrated in the following example, this rule can produce quite 

favourable tax outcomes given the buoyant nature of the property 

market in the 2000s and the way the market has flattened out in very 

recent years:

TAX TIP
Where the land exceeds two hectares, you should select the 

most valuable 2 hectares as your Main Residence and have that 

portion valued.

MY TAX SAVERS

November/December 2019

17

www.mytaxsavers.au

2019 November/December – Page 8

Page 8
background image

Other advantages of property ownership 

include a potential for higher returns than 

shares and cash, and a regular income stream 

(via rent).
On the downside however there are a range 

of disadvantages in property investment 

including:
•  High entry and exit costs – even where 

you borrow to buy, the costs of buying 

average about 6% of the purchase price. 

Selling costs can be as much as 2% of the 

price of the property. 

•  Illiquidity – In a barren market, if you 

have trouble selling your property it 

can mean that your money is tied up for 

long periods. Even where the market 

is buoyant, it can be months between 

needing the cash from the sale, to actually 

making the sale. 

•  Long investment timeframe – Property 

ownership requires a long-term commit-

ment. Particularly if you are negatively 

gearing, it can take 20 to 30 years to 

service your debt, and eventually make a 

profit from your investment. Even if you 

are not negatively gearing, you need to 

hold onto your property long enough for it 

to appreciate in value. 

•  Rising interest rates – Perhaps the 

greatest risk facing an investor is the 

risk of rising interest rates, particularly 

where the property is highly geared with 

borrowed funds. Indeed, with interest 

rates currently at historic lows, a prudent 

investor needs to factor rising rates into 

any purchase decision.

TAKE HOME MESSAGE 

While nobody can confidently predict the 

future performance of shares versus cash 

versus property, ultimately your investment 

choice should be informed by a range of 

factors, remembering that prudent investors 

will diversify. Having made your choice, by 

then canvassing some of the above taxation 

strategies, you can maximise the value of your 

investment. 

TIP
If your property is negatively geared it 

may pay to have the ownership in the 

name of a high-income earner in your 

family (e.g. your spouse). This way the 

revenue losses made on the property can 

be maximised. 

TIP
Aside from interest, one of the main 

deductions available is for capital works 

(building depreciation). All properties 

constructed in the last 40 years should 

be eligible for this big-ticket deduction, 

regardless of whether you are not the 

original owner. 

The tax system is heavily geared towards 

property ownership. For instance, the six-

year rule, combined with the main residence 

exemption can be used to great tax effect. 

That is if you:
•  Acquire a property
•  Move in as soon as practicable
•  Then move out while renting out the 

property for a period of less than six-

years…

…you can then sell the property CGT-free at 

a future. (provided you do not treat another 

property as your main residence during the 

six-year period)…all the while enjoying the 

benefits of negative gearing during the period 

of rental.

Whilst all taxpayers can negatively gear 

a share investment, it is typically more 

appealing to taxpayers with higher marginal 

rates of income tax. This is because the ATO 

allows an offset of the loss from the holding 

of a negatively geared investment against 

other income. Therefore, the higher your 

marginal tax rate, the greater the benefit from 

a gearing strategy.

CASH 

Investing your cash in interest-bearing 

bank accounts, including term deposits, is 

a largely risk-free option as your capital is 

protected. While investing in shares and 

property can see the value of your investment 

fall below your outlay, your original cash 

sum is protected even where only minimal 

interest is earned. The flip side of this low-risk 

environment is that cash investments such as 

term deposits do not have the same potential 

for high growth which property does when 

the market is booming, or shares do when 

a company “takes off” or when the ASX is 

performing well. Indeed, in the current low 

interest rate environment, returns on cash 

investments are not particularly fruitful.     
By its very nature cash is a liquid investment 

that you can instantly draw upon should you 

need to. This is in stark contrast to property 

and to a lesser extent shares which must first 

be sold before you can access the cash. In a 

flat property market, your investment can 

prove very illiquid with your cash effectively 

tied up until you find a suitable buyer, at 

a suitable price. That said, if you wish to 

make higher returns on your cash investment 

by investing in a term deposit (the longer 

the term, the higher the rate of interest), 

significant penalties can apply if you draw 

your money out before the term expires. This 

effectively renders your investment illiquid 

if you don’t wish to incur this penalty. Term 

deposits are therefore very much for serious 

investors and not for those who experience 

cash flow problems. 
From a tax planning perspective, there is 

generally less opportunity to minimise 

tax than there is with share and property 

investments. However, the following 

strategies should be considered:

1. ACCOUNT HOLDER

Interest income from your investment will be 

added to the rest of your income and taxed at 

your marginal rate. Interest income will be 

assessed to the account holder (i.e. the person 

whose name the account is in). Therefore, it 

pays to have your interest bearing account or 

term deposit investment in the name of a low 

income earner (e.g. non-working spouse) or at 

least in joint names. 

2. DEFERRAL 

Interest income is assessed in the year it is 

received. For this reason, some investors like 

to defer the maturity of their term deposit to 

the following financial year, if they anticipate 

that their other income is going to be lower in 

that subsequent year.   

PROPERTY  

One of the principal advantages of property 

ownership is negative gearing. Negatively 

gearing property can be more tax effective 

than shares, as there are usually higher 

costs involved in owning a property. Where 

the costs of owning your rental property 

(advertising, agent’s commission, interest 

on loans, electricity and gas, insurance, land 

tax, legal expenses, maintenance such as 

gardening and pest control, repairs, servicing 

expenses, tax advice etc.), exceed the rental 

income, the loss effectively reduces the 

tax payable on your other income such as 

salary and wages. The property has to be at 

least available for rent or being rented for 

deductions to be claimed. Be aware though 

that negative gearing by definition involves 

making losses. Before you adopt a heavy 

negative gearing strategy, you need to ensure 

that you can sustain those losses, and that they 

don’t adversely impact your cash flow or your 

lifestyle. 

MY TAX SAVERS

November/December 2019

7

www.mytaxsavers.au