tax deductions – Thomson Hall, Campbelltown Accountants

ATO renews focus on car deductions

Chris Jordan, Australian Tax Commissioner

The tax office has restated its examination of people who claim more than they are entitled to around a car travel deductions as part of a broader compliance crackdown.

The ATO noted that over 3.75 million people made a work-related car expense claim in 2016-17, totalling around $8.8 billion, of which around 870,000 claimed the maximum amount under the cents-per-kilometre method.

The announcement follows comments from tax commissioner Chris Jordan that some tax practitioners were “deliberately scamming or cheating the system”, which then received the backing of Tax Practitioners Board chair Ian Taylor, describing the ATO’s focus on clothing and laundry expenses as “fair”.

In addition, ATO made a commitment earlier this year to focus on ‘other’ work-related expenses, after $7.9 billion in claims were recorded last year between about 6.7 million Australian taxpayers.

ATO assistant commissioner Kath Anderson said that the ATO’s ability to identify claims that are unusual has improved due to enhancements in technology and data analytics.

“We compare taxpayers to others in similar occupations earning similar incomes. Our models are especially useful in identifying people claiming things like home to work travel or trips not required as part of your job,” Ms Anderson said.

“Unless you have a work-related need to travel while performing your job, you won’t be able to claim a deduction. For example, travelling from home to work is not deductible for most people.”

Ms Anderson said that while the rules can be a bit tricky for some, and that most people want to do the right thing, the ATO is seeing a lot of mistakes.

“We are particularly concerned about taxpayers claiming for things they are not entitled to, like private trips, trips they didn’t make, and car expenses that their employer paid for or reimbursed,” she said.

Last year, the ATO issued a similar warning, with Ms Anderson noting a “significant proportion” of claims were at the limit of the 5,000 kilometres mark that did not require detailed records.

She said the cents-per-kilometre method of calculating deductions for expenses is to simplify record-keeping, not to provide a free ride.

“It’s true that claims of up to 5,000 kilometres using the cents per km method don’t require a log book,” Ms Anderson said.

“However, you still need to have done the kilometres as part of your job and be able to show how you calculated your claim, for example by keeping a diary of places you have had to drive to for work, and how often.”

Depreciation changes for investment property

This article has been provided by BMT Quantity Surveyors

This month, the government released draft legislation regarding the proposed changes to plant and equipment depreciation as announced in the May federal budget.

The draft outlined further details around a property investor’s eligibility to claim depreciation and provided a range of scenarios to be aware of should this legislation pass.

In a positive move, the government has provided the public with an opportunity to have their say on the new measures, with public consultation open until the 10^th of August 2017.

While these measures are yet to be legislated, we have taken a proactive approach in reviewing how these intended changes could impact investors. Following is an in-depth look at the possible outcomes.

Limiting depreciation on second-hand assets

Section two of Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 advises that the Bill intends to amend the Income Tax Assessment Act 1997 (ITAA 1997) to limit deductions for plant and equipment in residential premises.

In essence, the proposed new law reduces the amount an investor can deduct for a previously used depreciating asset for the purpose of gaining or producing assessable income.

Should the proposed legislation be passed, this means that residential property investors won’t be able to claim depreciation for plant and equipment assets found in second-hand properties in which contracts exchanged after 7:30pm on the 9^th of May 2017.

Investors can learn more about the proposed changes, who is affected and what they mean by visiting our blog post, ‘What do the proposed changes to depreciation mean for you?’

Capital gains tax changes and implications

The draft legislation outlines some detail around a reduced Capital Gains Tax (CGT) liability for property investors.

Any property investor who is unable to claim depreciation on previously used plant and equipment due to these amendments will be able to claim a capital loss for the decline in value of the plant and equipment assets. This capital loss will only be able to offset a capital gain and if needed can be carried forward to offset future capital gains.

A value that relates to the previously used depreciation assets will need to be established at the time of purchase. A decline in value will then need to be calculated for the assets so that a termination value can be determined at the time the property is sold. The difference between the value at the time of purchase and the termination value will be the capital loss which will reduce the owner’s CGT liability.

How will the changes affect an investor’s cash return?

The following scenario compares the cash return an investor will receive for a three year old house purchased for $600,000 both before and after the proposed new measures.

In the example, the owner receives a rental income of $560 per week or a total income of $29,120. Expenses for the property, such as interest, council rates, property management fees, insurance and repairs and maintenance total $41,028.

In scenario one, the owner is able to claim a total depreciation claim of $12,397 for both capital works deductions and plant and equipment depreciation.

Using depreciation, this investor will experience a weekly cost of $56 per week to hold the property.

In the second scenario, as the owner exchanged contracts on the property after 7:30pm on the 9^th of May 2017, they are only able to claim $6,126 in capital works deductions and will be unable to claim $6,271 in plant and equipment deductions.

This reduced claim would result in the investors weekly cost of holding the investment property increasing from $56 to $101, a difference of $45 per week or $2,340 in the first full financial year.

As you can see, the proposed changes will limit the depreciation deductions available to property investors, which will lead to a cash flow reduction each year.

While we believe that generally the integrity measure has merit, the proposed changes go much further than what is necessary to deliver on the Government’s intention of stopping subsequent owners from claiming deductions in excess of an assets value. The approach proposed in the draft legislation treats residential property investors differently by extinguishing a property investor’s ability to claim a deductions based upon a transaction.

We believe this is caused by gaps in current legislation around establishing a depreciable value for second-hand plant and equipment.

BMT Tax Depreciation will be making a submission detailing this concern along with suggestions of alternative methods which will better resolve this integrity issue.

To view the draft legislation and make a submission click here.

ATO on work-related clothing and laundry expenses

The ATO has recently expressed concerns about the increase in claims by taxpayers for certain work related expenses, including clothing and laundry expenses, and has advised that it is an area where it will be “increasing attention, scrutiny and education”.
It has also reminded taxpayers that to be eligible for a deduction, clothing needs to be occupation-specific, protective, or a uniform that is unique to the organisation for whom the taxpayer works.
It is not correct that taxpayers can claim a standard deduction of $150 without spending money on appropriate clothing or laundry. While record-keeping requirements for laundry expenses are “relaxed” for claims up to the $150 threshold, taxpayers do need to be able to show how they calculated their deduction.