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2017 Tax Year End – Last Minute Planning

June is here and so as usual we are touching base with all our Clients to ensure 30 June doesn’t pass by without the necessary preparations.

Firstly, for all of you with a Discretionary Trust … as you know your annual Trust Income Distribution must be implemented before midnight on 30 June. And remember, once 30 June has passed it is too late to make a change!

This week we are scheduling meetings with those Clients who regularly take advantage of the chance to meet up and fully prepare for year end, so if you too would like to ensure you have minimised your tax and prepared for 2018, please do get in touch ASAP!

Year End Tax Planning for Business Owners –

The Company Tax Rate continues to fall (for some)

This year, for Companies that qualify as Small Businesses, the tax rate is 27.5% (down from 28.5% last year and down from 30% prior to that). And the number of Companies that qualify as Small Businesses has substantially increased. Last year turnover had to be under $2 million. This year the threshold has increased to $10 million.

Next year, the threshold increases all the way to $25 million! So even more companies will qualify for the lower rate of 27.5%.

If your Company’s business turnover is expected to be close to the $25 million threshold next year, there could be an argument for bringing forward some revenue into this year, to ensure qualification for the lower rate next year.

Non-Companies also continue to get a Tax Saving

The still relatively new Tax Discount for Non-Company Small Businesses continues this year and next both at 8% (with a cap of $1,000). Your turnover needs to be under $5 million to qualify, so if you are close, consider deferring income to ensure qualification.

Company Tax Changes Could However Catch You Out

With the reduction in the company tax rate changes have also been made to the way dividends are franked. In short, there are less tax credits attached to your dividends then there used to be if you qualify for the lower tax rates. So keep this in mind if you have been budgeting on receiving credits at the old rate.

$20,000 Instant Asset Write-Off

In this year’s Federal Budget it was announced that the instant deduction for eligible assets costing less than $20,000 would be extended to 30 June 2018, but as things stand this isn’t yet law. So there is a chance 30 June this year could be the last opportunity to take advantage of this very valuable opportunity.

Having said that, PLEASE, don’t just buy assets you don’t really need in order to obtain the tax saving! For every dollar spent at best you will save 49 cents in tax, so you are still out of pocket and accordingly the item you acquire best be needed.

This particularly applies to motor vehicles. Don’t just buy one you don’t need to save tax, you will still lose!

Having said that, if you know you will need to purchase assets in coming months anyway, including motor vehicles, that will cost less than $20,000 then there is a strong argument to bringing the purchase forward (there are exceptions to what assets qualify, so if in doubt please get in touch).

And remember …

If your business is registered for GST, the $20,000 test applies to the GST exclusive price. So generally that will mean the purchase can cost as much as $21,999 including GST (so long as the GST is a full 1/11th, just remember to check, especially in the case of motor vehicles).

Super Contributions – Watch those Contribution Caps

You all know we feel super is the most tax effective place to accumulate long term passive wealth, and this remains the case despite all the negative press over the past year related to law changes. So if you pass the 10% Employment Income Test, or you operate via a business structure, give serious consideration to topping up your contributions for this year before 30 June.

Just ensure …

Your fund MUST receive (so not just you must have paid) the contribution before 30 June (this is a strict deadline, though if you don’t have a Self-Managed Super Fund be weary of your corporate funds business rules and earlier cut off dates).

And …

You do not want to go over your Contribution Caps. $30,000 for individuals under 49, $35,000 for those 49 and over!

Employee Superannuation Contributions

Remember superannuation contributions made on behalf of your employees are only tax deductible when paid (UNLESS they are paid late, which means they are not tax deductible at all so don’t be late)! Your June quarter contributions are due 28 July, so why not bring them forward 28 days and get them paid before 30 June, providing that extra tax deduction this year?

Loans from your Company

Have you borrowed money from your Company (ie. that hasn’t been paid to you as a Salary, Wage or Dividend)? Then you need to make sure you have a Division 7A Loan Agreement in place! Similarly, if you had a loan from your Company last year it will need to be (at least partly) repaid this year which will almost certainly add to your tax bill, so let’s plan for this now.

Dividends from your Company

If Dividends are to be paid from your Company this year (ie. perhaps in relation to your Division 7A Loan above) you need to ensure your Company has enough Franking Credits before 30 June so that your Dividends can be Fully Franked. This may entail prepaying your June Pay As You Go Instalment.

Personal Services Income

If you derive Personal Services Income and you have not yet meet the 80/20 test, is there a way to do so before 30 June?

Utilise Your Tax Losses

If you have entities in your group that have current or prior year losses, you need a strategy in order to get income into them to soak up those losses and reduce tax to be paid elsewhere. Don’t get caught with a tax bill when you have unused losses going to waste.

Planning on Salary Sacrificing Next Year?

You must have a formal salary sacrifice agreement in place with your business BEFORE the sacrifice can take place, so get it done ready for 1 July. Note: this includes for those who intend to make extra super contributions for themselves from their business.

Trust (Income) Distribution Minutes

Mentioned above, but a reminder, you have to decide how your Trust income will be distributed BEFORE 30 June, and you can’t change your mind later. So make sure you know how much the Trust has earned and how much it’s Beneficiaries have earned, so you can get your income splitting strategy right now.

Is It Time to Consider Restructuring Your Business

Some substantial tax benefits can potentially be accessed via a restructure. In particular significantly reducing the capital gains tax you will pay in the future in the event of the sale of your business and/or related assets. If you are serious about wanting to pay the absolute minimum amount of tax possible, talk to us about investigating the benefits of a reorganisation of your affairs.

Avoid a Hit to your Credit Rating

Less a tax planning matter, more a warning regarding maintaining your Business’ good credit rating. As of 1 July, the ATO will commence reporting poor tax compliance to credit reporting agencies. Owing tax has always been stressful, now it could seriously impact your business’ ability to receive loans and other funding in the future as it will now impact your credit rating.

Year End Tax Planning for All –

For both business owners and employees alike, the basics still apply –
This year will see the last of the Budget Deficit Repair Levy being the extra 2% tax those earning more than $180,000 pay. So next year those individuals will have a tax cut of 2% creating even more incentive to get this year’s income down at the expense of an increase to next year’s income. So as usual …Look to defer income till next year,
Look to bring forward expenses. If you lodge on a Cash Basis (rather than Accruals) or are an employee, you must have physically paid the bill before 30 June for it to be deductible (that includes Accounting Fees by the way). Further, if you are an employee or currently a Small Business (under this year’s $10 million turnover threshold) you can claim prepaid expenses so long as the prepayment is for a period of not more than 12 months of services.

Planning on buying new plant & equipment related to business or work soon? Consider making the purchases before 30 June (even if you don’t qualify for the $20,000 Instant Asset Write-Off above),
Planning on doing some repairs & maintenance soon? Again consider bringing it forward to before 30 June (even if you just pay for it in advance),
If you have a Motor Vehicle make sure you have a log book capturing all your business/work related travel,
Own an investment property? Make sure you have a Property Depreciation Report. Also …Consider prepaying interest on your related investment loan,
Looking to sell, while the strategy could come with risks, if you will be selling at a profit consider holding off on accepting any offers until after 30 June.

On that note, consider delaying the sale of any assets that would have a capital gain until after year end, while considering bringing forward the sale of assets that will have a capital loss. Particularly if you already have a capital gain, selling under-performing assets at a loss could help offset the tax payable on your gains (though be careful of wash sales).
Considering making an investment in a Start-Up Company? Without rushing your decision, it could be well worthwhile doing so before 30 June. Investments in Early Stage Investment Companies (ESIC) can provide a 20% tax offset (capped at $200,000). Non-sophisticated investors may also benefit but they may only invest a maximum of $50,000. (Note: Capital Gains may also be disregarded if the shares are disposed after 12 months but before 10 years though this won’t help with this year’s tax.) Various criteria apply to ensure the company is an ESIC so do get in touch if you are thinking of going down this wealth building path.
Do you have Private Health Insurance? If you are over the threshold but don’t have the cover in place before 30 June, next year you could be hit with the Medicare Levy Surcharge the cost of which is often similar to the cost of the cover itself. Also, make sure you review your entitlement to the Private Health Insurance Rebate, if you continue to pay your premiums on the basis of qualifying, but then when you lodge your tax it turns out you don’t, you will get a nasty surprise bill requiring you to repay it!
Consider your Pay As You Go Instalments. Your last one for 2017 will be due in July. If you can estimate your tax position for this year now, perhaps you can vary your July Instalment down to ensure you haven’t over paid.

How To Save Tax

Use these 5 simple strategies to pay less tax
1. Capture All Your Deductions
There are certain tax deductions that are permitted for most employees in Australia. More information of these deductions can be found on the ATO website.
We recommend that you are familiar with these deductions and ensure that you and your tax agent are claiming these as part of your tax return. The hardest thing about this is keeping track of your receipts and deductions. For this reason we recommend using a household budget system that can track your spending and record your allowable tax deductions in real time and capture all your relevant data required to complete tax returns at the end of the financial year (JAS Wealth provides this type of facility to our clients).

2. Utilise Superannuation Where Appropriate
Superannuation is the best tax structure available in Australia, with a maximum tax rate of 15%.
Therefore where appropriate you should take advantage of the superannuation environment to build long term wealth. This comes with a proviso if you are 30 years of age, you will have to wait 30 years until you can access the funds in this structure.
On the other hand if you are 55 years of age, you should be looking to take full advantage of the superannuation environment and investigating the implementation of a transition to retirement strategy.
The key is that superannuation is by far the most tax effective structure for building wealth, therefore you should look to take full advantage of it.

3. Don’t Invest in Your Personal Name
It is quite common to see people making large investments in their personal names. This is rarely a sensible strategy particularly if you are already generating income, such as a salary, from another source. Australia uses a marginal tax rate system, which means the more you earn the more tax you pay.
Of the available structures that can be used for investment, companies will only ever pay a maximum of 27.5% in tax. If you are a high income earner it will usually be far more tax effective to utilise a trust structure that can advantage of the corporate tax rate.

4. Invest Tax Effectively
It goes without saying that the easiest way to pay less tax is to invest tax effectively.
What exactly is a tax effective investment?
Arguably the most tax effective source of income in Australia are from fully franked dividends. A fully franked dividend is a distribution from a company that has already paid 27.5% tax, therefore providing you with a tax credit. If your marginal tax rate if above 27.5%, you will pay top up tax for the difference, if however you tax rate is 27.5% or below, you will either pay no additional tax or your will receive a tax credit. Self funded retirees are well aware of the tax benefits of fully franked dividends.
The other big factor is to avoid investments that will realise significant capital gains. If you are actively trading investment assets and capital gains you realise that have been held for less than 12 months are taxed at your marginal tax rate. If however you are a longer term investor and hold your investments for over 12 months you will receive a 50% capital gains tax discount and this can save you a significant amount of tax in the long run.
Be aware that there are very few investment options in Australia that we would consider tax effective.

5. Use Good Debt not Bad Debt
The tax system in Australia is geared towards using debt to generate assessable income.
What does this mean?
Put simply you get a tax deduction for any costs that are incurred in order to generate an income. The clearest example of this is that the interest costs on a mortgage over an investment property are tax deductible, while the interest costs on your home mortgage are not.
Investment loans are classed as good debt, because they are tax deductible, while loans for personal assets such as homes, cars and personal expenses (credit cards) are not.

Effective Tax Structures

For established and growing small business you are likely to outgrow a sole proprietor business/tax structure and be looking at a more sophisticated structure that can be established for both asset protection and taxation purposes. We will discuss the advantages and disadvantages of the following three business/tax structures:
• a partnership of family trusts
• a unit trust, and
• a private company

Partnership of Family Trusts
For more than one partner a Partnership of Family Trusts is a sophisticated and well balanced structure. In this structure two family trusts, for the two practicing partners, are empowered to operate by two trustee companies respectively. It’s important to have brand new trusts and companies for this structure for asset protection purposes. This is a Partnership so it will be administered under Partnership Law meaning there is joint liability for the trusts running the business. If the business fails, for whatever reason, and interested parties start chasing monies or claims outstanding to them, they are allowed to look at the assets in each trust to recover their claim. As a result we recommend these trusts deal with the business only and no private investment assets should be bought in these trusts.
For operational simplicity a Company Manager will often run the business on behalf of the Partnership of trusts. So there is a fair bit of setup cost and complexity for who identify that complicating your business life with trusts means being better protected and minimising your tax.
A Partnership of Trusts has one major advantage over it’s competitor structures, and that is it will likely yield the easiest and least cost route to eventually selling your business potentially tax free.

Unit Trust
A Unit Trust is also a popular structure vehicle. It is easier to understand and has fewer adjustments required, in comparison to a partnership of family trusts, when partners exit or new partners are added to the business. With a Unit Trust, the business partners hold fixed units and so they receive a fixed proportion of income per year and this is set out in the trust deed. Once again the Unit trust should have a Trustee Company to operate it for asset protection purposes and usually the units are held by a family trust of each business partner. Unlike a Partnership of family trusts, the most advantageous structure to sell a business from, partners trading under a unit trust structure will be best served by selling the units in the unit trust to incoming owners. The difficulty with this is that buyers will usually want to buy your business but not your business structure.
If the buyer has their way and they buy the business then you the sellers will pay more capital gains tax than selling their business under a Partnership of family trust structure. This is a simpler structure, less costly to setup, but not as flexible and not as tax effective from a capital gains tax viewpoint.

Private Company
A Private Company is another structure that physios may choose to run their practice from. This is the simplest business structure of the three possibilities here because the entity is taxed for its yearly income before there are distributions to the Partners. This is easily understood but the major problem with the private company structure is that if you cannot sell the shares in your company when you are selling your business you will pay substantially more capital gains tax than the Partnership of Family Trust structures.
There are a number of factors that will affect your decision on the appropriate business/tax structure so you will need to contact your accountant to consult on which one is best for your circumstances. In particular there have been a number of changes to trusts recently that will require this specialist advice for your business.

What economists and tax experts think of the company tax cut

Prime Minister Malcolm Turnbull and the Treasurer Scott Morrison are still trying to sell their plan to cut the company tax rate to 25% by 2026-27. The current rate is 30% and has been since 2001.

The tax cut was introduced in the 2016 federal budget. The government indicated small to medium businesses turning over less than A$10 million would pay a company tax of 27.5% initially. The company turnover threshold for the tax cut would then increase over time from A$10 to $25 million in 2017-18 to A$50 million in 2018-19 and finally A$100 million in 2019-20.

But before any of this happens, the government needs to convince the senate crossbenchers to pass the legislation. It seems the government hasn’t won over tax experts and economists with this policy, here’s some articles that explain why.

Don’t expect an instant wage increase

In a national press club address Malcolm Turnbull justified the tax cut by saying, “company tax is overwhelmingly a tax on workers and their salaries.” It follows that cutting it would increase salaries right?

However there’s a whole lot of decisions businesses need to make before they even consider raising wages. It’s not just as simple as the government makes out, as professor John Freebairn from the University of Melbourne notes:

Individuals benefit from lower corporate tax rates with higher market wages. But the higher wage rates will take some years to materialise, and the magnitude of increase attributed to the lower corporate tax rate, versus other factors, is open to debate.

Businesses would need to consider the savings of international investors, what resources the business might need, what the return for investors would be on these. All of this before it would consider a wage increase for its workers.

The enlarged stock of capital, technology and expertise per worker becomes a key driver of increased worker productivity. In time, more productive workers are able to negotiate higher wages. Via this chain of decision changes, employees benefit from the lower corporate tax rate.

Any modelling on how much a tax cut could be worth to our economy is up for debate

Modelling is sensitive to whatever assumptions the government makes and these assumptions can be oversimplified. ANU principal research fellow Ben Phillips points out that tax reform like this inevitably has winners and losers and is influenced by powerful lobby groups.

In thinking about tax reform it is important to keep in mind that the gains from modest tax reform are not likely to be a revolution in Australia. The models themselves only estimate relatively small gains from tax reform.

Here’s a little something to bear in mind when hearing any figures thrown around on how much a company tax cut could be worth:

Over the past 25 years Australia’s living standards have increased by around 60% whereas the sorts of gains estimated from tax reform are expected to be little more than 1 or 2%. It remains important that in securing such modest gains we don’t ignore fairness.

The benefit to the domestic economy won’t be that big

The idea behind the cut is that companies will be motivated to provide jobs and other economic benefits because they are receiving a tax break. In theory this kind of tax should boost the economy in the long term, but as John Daley and Brendan Coates from the Grattan Institute explain it’s not that simple.

In Australia, the shares of Australian residents in company profits are effectively only taxed once. Investors get franking credits for whatever tax a company has paid, and these credits reduce their personal income tax. Consequently, for Australian investors, the company tax rate doesn’t matter much: they effectively pay tax on corporate profits at their personal rate of income tax.

The Grattan researchers point out that if companies pay less tax then they might reinvest what they save, but in practise most profits are paid out to shareholders. So the tax cut won’t have much of an impact on domestic investment.

They also pick holes in the Treasury’s modelling on the tax cut’s boost to Gross National Income (GNI).

Treasury expects that cutting corporate tax rates to 25% will only increase the incomes of Australians – GNI – by 0.8%. In other words, about a third of the increase in GDP flows out of the country to foreigners as they pay less tax in Australia. And because most of the additional economic activity is financed by foreigners, the profits on much of the additional activity will also tend to flow out of Australia.

It doesn’t make much of a difference

Another argument for cutting Australia’s company tax rate is to deter companies from shifting their profits to other countries where the tax rate is lower. Recently President Trump promised to cut the United States federal corporate tax rate from 35% to 15%.

Antony Ting, associate professor at the University of Sydney notes most countries have been reducing their company tax rates over the past two decades. This hasn’t changed the incentive for multinationals to avoid taxes.

The tax-avoidance “success” stories of multinational enterprises such as Apple, Google and Microsoft suggest this argument is weak. The fact is that the profits these multinationals shift offshore often end up totally tax-free.

A FactCheck by Kevin Davis, research director at the Australian Centre for Financial Studies, reviewed by economist Warwick Smith, says there’s no point to comparing Australia’s company tax rate with other countries anyway.

Australia’s dividend imputation tax system means that any comparison of our current 30% rate with statutory corporate tax rates elsewhere is like comparing apples and oranges.

Small and medium businesses actually lose out

Due to the way the proposed company tax cut is structured, foreign investors get a windfall while local employers including small and medium businesses cop a cost because they remain uncompensated.

Economist Janine Dixon from Victoria University modelled how the cut would play out.

Local owners of unincorporated businesses are taxed at their personal tax rate. Because of Australia’s dividend imputation system, Australian shareholders in incorporated business are also taxed at their personal rate, not the company tax rate.

She explains that 98% of small businesses (employing four or fewer people) are wholly Australian owned and because of this are indifferent to the cut, but 30% of large businesses (employing more than 200 people) have some component of foreign ownership.

An increase in foreign investment is generally understood to be a driver of wage growth. This is the basis for the argument that at least half of the benefit of a cut to company tax flows to workers… We find that benefit to foreign investors will exceed the total increase in GDP. In the domestic economy, benefits to workers will be more than offset with a negative impact on domestic investors and the need to address additional government deficit.

Other things are just as important

Even if some businesses are keen for a tax cut, meaning more money in the kitty, it’s how these businesses spend this money that counts.

Jana Matthews from the Centre for Business Growth at the University of South Australia says many CEOs are uncertain about what to do in order to grow their business and are fearful of making the wrong decisions.

We need to focus as much attention on the management education of founders, CEOs and MDs [managing directors] of medium-sized companies as we do on providing them with more money. Once they learn how to grow their companies, they will definitely need money to become the engines of growth, and they will certainly hire more people, creating the jobs we all want.

Tax Benefit on Home Loan: Section 24, 80EE & 80C

A very important criterion to be kept in mind while taking a Home Loan is the Tax Benefit on Home Loan. To explain the Tax Benefit on Home Loan, we would be dividing the Repayment of Home Loan into 2 components:-
1. Repayment of the Principal Amount
2. Repayment of the Interest on Home Loan
As the repayment comprises of 2 different components, the tax benefit on home loan is governed by different sections of the Income Tax Act and these are claimed as tax deductions under different sections while filing the Income Tax Return.
• Recommended Read: E-filing your Income Tax Return online for Free through Govt Website
The Sections under which Tax Benefit on Home Loan can be claimed are explained below:-

Section 80C: Tax benefit on Home Loan (Principal Amount)
The amount paid as Repayment of Principal Amount of Home Loan by an Individual/HUF is allowed as tax deduction under Section 80C of the Income Tax Act. The maximum tax deduction allowed under

Section 80C is Rs. 1,50,000. (Increased from 1 Lakh to Rs. 1.5 Lakh in Budget 2014)
This tax deduction is the total of the deduction allowed under Section 80C and includes amount invested in PPF Account, Tax Saving Fixed Deposits, Equity Oriented Mutual funds, National Savings Certificate, Senior Citizens Saving Scheme etc.
This tax deduction under Section 80C is available on payment basis irrespective of the year for which the payment has been made. The Amount paid as Stamp Duty & Registration Fee is also allowed as tax deduction under Section 80C even if the Assessee has not taken Loan.
However, tax benefit of home loan under this section for repayment of principal part of the home loan is allowed only after the construction is complete and the completion certificate has been awarded. No deduction would be allowed under this section for repayment of principal for those years during which the property was under construction.
Moreover, in case you are planning to buy an under-construction property as it is priced at a lower price as compared to a fully completed property, you are here also requested to note that Service Tax is also levied on Under Construction Property & the Finance Minister while announcing the Budget 2013 also changed the rates of Service Tax on under Construction Property. However, no Service Tax is levied on properties on which construction has been fully completed.
• Recommended Read: Service Tax on Under Construction Property
However, Section 80C(5) also states that in case the assessee transfers the house property on which he has claimed tax deduction under Section 80C before the expiry of 5 years from the end of the Financial Year in which the possession has been obtained by him, then no deduction and tax benefit on Home Loan shall be allowed under Section 80C. The aggregate amount of tax deduction already claimed in respect of previous years shall be deemed to be the Income of the Assessee of such year in which the property has been sold and the Assessee shall be liable to pay tax on such income.

Tax benefit on Home Loan (Interest Amount)
Tax Benefit on Home Loan for payment of Interest on Home Loan can be claimed as Deduction under Section 24 as well as under the newly inserted section 80EE (Inserted in the Budget 2013, to be applicable from 1st April 2013)

Section 24: Income Tax Benefit on Interest on Home Loan

Tax Benefit on Home Loan for payment of Interest is allowed as a deduction under Section 24 of the Income Tax Act. As per Section 24, the Income from House Property shall be reduced by the amount of Interest paid on Home Loan where the loan has been taken for the purpose of Purchase/ Construction/ Repair/ Renewal/ Reconstruction of a Residential House Property.
The maximum tax deduction allowed under Section 24 of a self-occupied property is subject to a maximum limit of Rs. 2 Lakhs (increased in Budget 2014 from 1.5 Lakhs to Rs. 2 Lakhs).
In case the property for which the Home Loan has been taken is not self-occupied, no maximum limit has been prescribed in this case and the taxpayer can take tax deduction of the whole interest amount under Section 24.
Please Note: In case a property has not been self-occupied by the owner by reason of the fact owing to his employment, business or profession carried on at any other place, he has to reside at that other place not belonging to him, then the amount of tax deduction allowed under Section 24 shall be Rs. 2 Lakhs only.
It is also important to note that this tax deduction of Interest on Home Loan under Section 24 is deductible on payable basis, i.e. on accrual basis. Hence, deduction under Section 24 should be claimed on yearly basis even if no payment has been made during the year as compared to Section 80C which allows for deduction only on payment basis.
Moreover, if the property is not acquired/constructed completed within 3 years from the end of financial year in which the loan was taken, the interest benefit in this case would be reduced from 2 Lakhs to Rs 30 thousand only. This limit of 3 years has been increased to 5 years from Financial Year 2016-17 and onwards.
The Quantum of Deduction allowed for payment of Interest on Home Loan under Section 24 has been summarized below:-
Quantum of Deduction allowed for Payment of Interest on Home Loan under Section 24
Type of Property Self Occupied Property Not Self Occupied Property
Completion Status Completed within 3 years Not completed within 3 years Completed within 3 years Not completed within 3 years
Deduction Allowed Rs. 1,50,000 Rs. 30,000 No Limit No Limit
Budget 2017 Update
In case of non-self occupied property, the interest paid is reduced from the Rent paid to arrive at the Income from House Property. In some cases, it may happen that the Interest paid is more than the Rent earned which will result in Loss from House Property. This Loss is allowed to be set-off with Income from any other head.
The Finance Act 2017 announced on 1st Feb 2017 has put a restriction to the maximum amount of Loss under head House Property that can be set-off from other heads of Income. From Financial Year 2017-18 onwards, Loss of a maximum of Rs. 2 Lakhs is allowed to be set-off with Income from other heads. The amount which is not set-off shall be carried forward to future years.
These new provisions inserted in the Income Tax Act have been very nicely explained in this link – Income Tax Treatment of Loss from House Property.
Income Tax treatment of Pre-Construction Interest
In many cases, amount is paid for the purchase of property even before the construction is completed. Some home buyers, purchase properties on loan before the completion of construction and start paying EMI to the Bank.
In such cases, Section 24 very specifically states that Tax Deduction for payment of Interest shall not be allowed before the construction is complete. In such cases,
1. If Loan is taken for purpose of Repair/ Renewal/ Reconstruction: No Tax Deduction allowed for Interest paid before Completion
2. If Loan is taken for the purpose of Purchase/ Construction: The Interest that has been paid before the completion of construction should be aggregated and the whole aggregated amount shall be allowed as tax deduction in 5 equal installments for 5 successive Financial Years starting from the year in which the construction has been completed.
For eg: Mr. A purchases a House in New Delhi in 2009 and took a loan of Rs. 10,00,000 from a Bank paying Interest @ 10% p.a. The Construction was completed in April 2011.
Now, As per Section 24 of the Income Tax Act, tax deduction for payment of Interest would only be allowed from financial year 2011-12 onwards. However, the Interest paid on Home Loan before the completion of Construction (i.e. Rs. 2,00,000) would be allowed as tax deduction for the next 5 Financial years @ 40,000 p.a. commencing from Financial Year 2011-12 onwards. (Easy amounts have been taken in this example for simplification purposes)

Important Points:-
1. Interest paid for outstanding amount is not allowed as Tax Deduction (Shew Kissan Bhatter v. CIT (1973) 89 ITR 61(SC)
2. This tax deduction shall be available only if the construction is completed within 3 years from the end of the financial year in which the capital is borrowed
3. Taxpayer cannot claim any deduction for Commission Paid for arranging the Loan
4. If the taxpayer is not earning any income from house property, but is paying Municipal Taxes and Int on Home Loan, this would lead to Loss under head Income from House Property. This loss arising under head Income from House Property is allowed to be set-off against income from various other heads in the same Financial Year.
5. In case the loss cannot be set-off against income from other sources in the same financial year, the loss can be carried forward to future years and set-off against income arising from House Property for the next 8 financial years.
6. Tax Benefits of Interest on Home Loan can be claimed only by the person who has acquired or constructed the property with the Borrowed Funds. It is not available to the Successor of the Property.
For the purpose of simplicity and easy understanding, a comparison of Tax Benefit on Home Loan under Section 24 and Section 80C has been made here under:-
Particulars Section 24 Section 80C
Tax Deduction allowed for Interest Principal
Basis of Tax Deduction Accrual basis Paid basis
Quantum of Tax Deduction allowed Self Occupied Property:Rs. 2,00,000Non Self Occupied Property: No Limit Rs. 1,50,000
Purpose of Loan Purchase/ Construction/ Repair/ Renewal/ Reconstruction of a Residential House Property. Purchase / Construction of a new House Property
Eligibility for claiming Tax deduction Purchase/ Construction should be completed within 3 years Nil
Restriction on Sale of Property Nil Tax Deduction claimed would be reversed if Property sold within 5 years

Section 80EE: Income Tax Benefit on Interest on Home Loan (First Time Buyers)
Arun Jaitley while announcing the Budget 2016 re-introduced Section 80EE which provides for additional Deduction of Rs. 50,000 for Interest on Home Loan. This incentive would be over and above the tax deduction of Rs. 2,00,000 under Section 24 and Rs. 1,50,000 under Section 80C.
This Deduction of Section 80EE would be applicable only in the following cases:-
1. This deduction would be allowed only if the value of the property purchased is less than Rs. 50 Lakhs and the value of loan taken is less than Rs. 35 Lakhs.
2. The loan should be sanctioned between 1st April 2016 and 31st March 2017.
3. The benefit of this deduction would be available till the time the repayment of the loan continues.
4. This Deduction would be available from Financial Year 2016-17 onwards.
The above 3 Sections relating to Tax Benefits on Home Loans have been summarised as under:-
Particulars Quantum of Deduction (Rs.)
Self Occupied Property Non-Self Occupied Property
Section 24 2,00,000 No Limit
Section 80C 1,50,000 1,50,000
Section 80EE 50,000 50,000
Please Note:-
1. The above tax deductions are per person and not per Property. So in case you’ve purchased a property jointly and have taken a joint home loan, each person repaying the amount would be eligible to claim whole deduction separately.
2. If you are living in a rented premise and are taking Tax Benefit of HRA Allowance, even then you can claim Tax benefit on home loan under Section 24, Section 80EE & Section 80C.
For claiming the above tax deductions, you would be required to furnish the statement provided by the lender clearly indicating the amount payable and paid towards Interest and Principal. After claiming the above deductions of Tax Benefit on Home Loan, the balance Income of an Individual would be taxed as per the Income Tax Slab Rates. (Recommended Read: Income Tax Slab Rates)
If you need further assistance regarding Tax Benefits of Home Loan, you can book an appointment with the author of this article and get all your queries resolved – Book an Appointment with CA Karan Batra

Seven ways a deduction will not work

The ATO has been paying extra attention to people claiming higher than expected deductions during tax time this year.
Assistant Commissioner Graham Whyte wants taxpayers planning to lodge in the final week of tax time to learn from the mistakes of others this year. He says the ATO’s ability to check out work-related expense claims has become more sophisticated due to enhancements in technology and the extensive use of data.
“If we see a claim that appears to be unusual we will check it with the employer,” said Mr Whyte. “Most people want to do the right thing, but we have seen mistakes, and even instances of people deliberately doing the wrong thing.”
“The ATO wants everyone to claim the work-related expenses they are entitled to – no more and no less. To make it fair, we’re catching and penalising people that deliberately make incorrect claims.”
Make sure your claims for work-related expenses are right by using the series of occupation guides or other general advice available on the ATO website, which help people in specific industries understand and correctly claim the expenses they may be entitled to.
Mr Whyte has three golden rules for you to consider when making a work-related expense claim:
o you must have spent the money yourself and not been reimbursed
o it must be directly related to earning your income
o you must have a record to prove it.
If you use myTax, your claims are compared with the claims of taxpayers in similar occupations and with similar income, giving you a real-time warning if your claims are unusually high in comparison.
To make it easier to claim work-related expenses next year, start using the myDeductions tool in the ATO app. It lets you record your expenses without having to worry about lost or faded receipts and can be uploaded to myTax or your registered tax agent for your next tax return.
For more information, visit ato.gov.au/deductions to learn about work-related expenses, ato.gov.au/occupations to access the occupation guides or visit ato.gov.au/myDeductions for more details about the ATO app.
Here are seven lessons to learn from other taxpayers claiming dodgy deductions this year.
Lesson 1: make sure your claims are justified
A dairy farm employee claimed deductions totalling almost $19,000 including expenses for travel, tractor hire, tools and safety gear, internet and phone. When the ATO spoke to his employer, they said the employee’s duties involved milking cows and changing irrigation. He was provided free rent in a house beside the farm where he worked and he was not required to travel elsewhere for work purposes. The employer also provided a tractor, although the employee didn’t need to use it to undertake his duties. The employer confirmed that the employee was not required to use his mobile phone or internet for work purposes and that he was provided with all the tools and work gear he needed to undertake his duties.
The employee’s deductions were disallowed in full. The ATO educated him about his entitlements and warned him to undertake proper enquiries before making claims in future.
Lesson 2: make sure you weren’t reimbursed already
A business analyst who travelled between Shanghai and Australia for work, claimed over $46,000 in travel expenses. When asked to substantiate his claims, the analyst produced receipts for rent, meals, laundry, phone, taxi and train travel expenses while in Shanghai.
When ATO contacted the employer, they were advised that this employee was reimbursed for the cost of all his meals, accommodation and travel within Australia and internationally.
The analyst’s claims were disallowed on the basis that the expenses were private, incurred while he was at home in Shanghai, between trips to Australia for work.
Lesson 3: make sure you are getting good advice
A tiler lodged his tax return using a registered tax agent and claimed over $4,000 in deductions relating to his car (based on transporting bulky equipment), travel and tools. To verify the tiler’s car claims, the ATO contacted his employer who confirmed that he was not required to transport any equipment to work that would be considered bulky – just a few pencils and a utility knife. The employer also advised that secure lockers were provided at the work site to store tools.
When asked to provide records of the travel and tools expenses, the tiler produced receipts for car parts, and receipts for all-day parking at the same workplace (not for travel between different worksites or jobs). The tiler’s claims for purchasing tools, carrying bulky equipment and car parking were disallowed because they were private expenses, not directly related to earning his income.
His tax agent was reminded to undertake proper enquiries to determine his clients’ eligibility to deductions and has since improved his business practices.
Lesson 4: make sure you have evidence to support your claims
A sales consultant for a motor dealer claimed over $11,000 for car expenses, $3,000 for clothing expenses and almost $24,000 for other work-related expenses. When asked to provide evidence to support her claims, it became apparent that she had overstated her car claims and falsely claimed clothing expenses, including costs for underwear and everyday work wear. The sales consultant produced receipts for personal items including perfume, gift hampers, pillows and movie tickets.
After discussion with the ATO, she agreed to reduce her clothing expense claims to nil. Her car expenses and other expenses were substantially reduced and she was asked to pay a tax shortfall of over $8,000 plus penalties.
The ATO reminded the tax agent of the requirement to verify work-related deduction claims and ensure appropriate record keeping practices.
Lesson 5: make sure your claims are related to your work
A computer network engineer claimed over $4,000 in deductions relating to car, travel, clothing and other work-related expenses, as well as the cost of managing his tax affairs. When queried, the engineer told the ATO he travelled interstate for both work and private purposes, his clothing expenses were for the purchase of general business attire and his claims for managing tax affairs related to managing the family trust.
The engineer’s claims were disallowed by the ATO because they appeared to be of a personal nature and he was unable to substantiate his claims with written evidence.
The ATO educated the engineer about his entitlements and record keeping obligations. He was grateful for the advice, agreeing to amend his tax return and be more careful in future years.
Lesson 6: make sure you know what is and isn’t deductible
A factory meat processing worker claimed $12,800 in deductions including expenses for car, travel, clothing, meals, safety gear, tools and equipment. He also claimed deductions for gifts and donations, and the cost of managing tax affairs.
When the ATO requested evidence of his work-related travel, clothing and other expenses, the worker was unable to produce receipts to substantiate his claims. He advised the ATO that he did not keep receipts for any of his expenses, with the exception of the donations which were automatically deducted from his pay.
When ATO contacted his employer, they were advised that the worker was not required to travel for work purposes, either daily or overnight. The employer also stated that all protective gear and tools required to perform his duties were supplied by the company.
The worker’s deduction claims were disallowed except for the gifts and donations which he was able to verify. The ATO advised the worker that travel between home and work, and meals consumed during normal work hours are considered private expenses and are not usually deductible.
Lesson 7: make sure you back up your data
A soldier from Canberra claimed $1,500 for self-education expenses and $5,000 for gifts and donations. When the ATO requested evidence to substantiate these claims, the soldier said all his receipts were stored as images on his tablet, which had fallen into his child’s bathtub and no longer worked.
We reminded the soldier to keep a backup of any receipts related to future claims. There is an option available in the myDeductions tool. We highly recommend you regularly back up your data in case you can no longer access data on your device – for example, if you lose your phone.

How your super is taxed

Tax on contributions
The amount of tax you pay on contributions into your super depends on how much you contribute and when you contribute it.
Your Tax File Number – the key to paying less tax
If you haven’t given us your Tax File Number (TFN), you’ll pay more tax – up to 49%* on your before-tax and your employer’s SG contributions.
Super funds can’t accept any after-tax contributions from you if you haven’t provided your TFN.
If you’re an AustralianSuper member, you can check whether you’ve provided your TFN and provide it securely online:

Type of contribution Tax (2015/16) Details
Before-tax, aged under 49 years on 30 June 2015
These are mainly employer contributions, salary sacrifice contributions and deductible contributions made by self-employed people. 15% or 30% depending on your income Before-tax contributions are taxed at 15% unless you are a high-income earner, where the tax rate is 30%. See the Tax for high-income earners section below for details.
You can add up to $30,000 to your super from your before tax income. If you exceed your limit you can choose to release up to 85% of your excess contributions from your super account. Excess contributions released from your account will not be counted towards your after tax contributions cap and will be taxed at your personal tax rate, less a 15% tax offset, plus an interest charge.
Before tax, aged 49 years or more on 30 June 2015
These are mainly employer contributions, salary sacrifice contributions and contributions made by self-employed people. 15% or 30% depending on your income Before-tax contributions are taxed at 15% unless you are a high-income earner, where the tax rate is 30%. See the Tax for high-income earners section below for details.
You can add up to $35,000 to your super from your before tax income. If you exceed your limit you can choose to release up to 85% of your excess contributions from your super account. Excess contributions released from your account will not be counted towards your after tax contributions cap and will be taxed at your personal tax rate, less a 15% tax offset, plus an interest charge.
After-tax
These are typically extra, voluntary contributions you make from after-tax money. Spouse contributions fall into this category too. You must give us your Tax File Number before we can accept after-tax contributions. No tax payable up to allowable limits You can contribute up to $180,000 each year. If under age 65, you can contribute up to $540,000 tax-free in a three-year period. The three-year period automatically starts from the first year that you add more than $180,000 after-tax to your super.
If you exceed your after tax contributions cap you may choose to withdraw your excess contributions plus 85% of any associated earnings. The associated earnings withdrawn are taxed at your personal rate of tax, less a 15% tax offset. If you choose not to withdraw your excess after tax contributions they will remain in your super account and taxed at 49%*.
Government co-contribution
No tax payable To be eligible for a Government co-contribution, you need to add to your super after tax and earn less than $50,454. The co-contribution itself is not taxable either when it goes into your super, or when you withdraw your super. For more information on the Government co-contribution arrangements visit our website at australiansuper.com/cocontributions.

Tax for high income earners
Members who earn over $300,000 a year may pay 30% tax on some or all of their before-tax contributions.
If your income# is less than $300,000 a year, but is more than $300,000 when you include your before-tax contributions, the 30% tax rate will apply to the part of your before-tax contributions that take you over the $300,000 threshold.
For example if your income is $280,000 and your before-tax contributions are $25,000, you only pay the 30% tax rate on $5,000.
Tax on withdrawals
Withdrawals from AustralianSuper are tax-free if you are aged 60 or over. Tax rates on lump-sum withdrawals for members under 60 are outlined below:
Super benefit component^ Tax
Tax-free No tax payable
Taxable If you’re under your preservation age, taxed at 22%*.
If you’re between your preservation age and 59 years, the first $195,000 is tax free and the balance is taxed at up to 17%*.
Tax on withdrawals is deducted before you receive your payment.
Tax on investment earnings
Investment earnings in super are taxed up to 15%. This tax, along with investment management fees, is deducted before your investment earnings are applied to your account. Earnings are applied to your account every 12 months or when you transfer out of the Fund or switch investment options.

Government announces superannuation reforms

In early September the Turnbull government released the first tranche of Exposure Draft legislation for superannuation reforms announced in the 2016-17 Budget
There has been a federal election in between, but the Turnbull government has finally released draft legislation of five superannuation reforms that were first mooted in the May budget. These five reforms relate to measures to:
Enshrine the objective of superannuation
Reform tax deductions for personal superannuation contributions;
Improve superannuation balances of low income spouses;
Introduce a Low Income Superannuation Tax Offset (LISTO); and
Harmonise contribution rules for those aged 6574.

In more detail, the legislation aims to:

1. Enshrine the objective of superannuation in legislation
The “objective” of superannuation has been the subject of much debate since March 2016 and the objective has been decided as to provide income in retirement that substitutes or supplements the age pension. This objective has guided the development of the Government’s reforms.
2. Reform tax deductions for personal super contributions
The government aims to improve access to concessional contributions by allowing people (under age 75) to claim a tax deduction for personal superannuation contributions, irrespective of their employment arrangements. According to the government this will assist around 800,000 people.
3. More superannuation contribution flexibility
Provide more flexibility and choice for older Australians, including by removing the restrictions that currently prevent some people aged between 65 and 74 from making voluntary contributions to their superannuation. Around 40,000 older Australians should benefit from this measure. The government also aims to encourage more people to make contributions to the superannuation fund of a low income spouse.
4. Introduce the Low Income Superannuation Tax Offset (LISTO).
Around 3.1 million low income earners will have their superannuation savings boosted by the LISTO, including 1.9 million women. This change will ensure individuals do not pay more tax on their superannuation contributions than on their take-home pay.
5. Industry response to superannuation reform

The announced reforms were widely welcomed by a number of industry groups, including:
a) Industry Super Australia
Industry Super Australia particularly welcomed fairer tax breaks for women and lower income earners.
“This measure is critical to restoring the fairness and integrity of superannuation tax concessions. It starts the process of closing the superannuation gender gap, and making the super tax system more contemporary and in keeping with modern society,” said David Whiteley, Chief Executive of Industry Super Australia (ISA). “It is welcome that the Government has prioritised tax breaks for the Australians who need them and not just the top end of town.”
b) Financial Services Council (FSC)
The FSC also welcomed the release of the first five superannuation measures announced in the 2016-17 Budget, stating that the set of measures will result in more equitable outcomes for Australians contributing to superannuation, improve flexibility in administration of the system and assist in strengthening retirement outcomes.
“Industry is pleased that the Government has adopted an administratively efficient approach to implementing the Low Income Superannuation Tax Offset (LISTO),” said FSC CEO, Sally Loane.
“The FSC supports the allowance of tax deductions for superannuation contributions. This will mean that people who don’t work for an employer with a salary sacrificing arrangements will get the same treatment on personal contributions to superannuation from their income as those who do.”
The FSC did note, however that it felt the objective of superannuation could be improved by including a focus on adequacy of retirement income.
c) Australian Institute of Superannuation Trustees (AIST)
The Australian Institute of Superannuation Trustees (AIST) said the first tranche of draft legislation of the Government’s super policy package –which importantly maintained support measures for low income earners – was a welcome step towards a fairer and more flexible super system.
“Importantly, this first tranche of legislation includes the Low Income Super Tax Offset (LISTO) which will boost the super contributions of about 3 million Australians,” said AIST CEO Tom Garcia.
“Without this targeted equity measure, these individuals face paying more tax on their super than their take home pay when the current low income super contribution system expires on July 1 next year.” Mr Garcia said other measures in the draft legislation would improve access to superannuation and provide more incentives for people to make voluntary contributions.
d) ASFA
ASFA interim CEO Jim Minto commended the government for listening to feedback about arrangements for the Low Income Super Tax Offset (LISTO) and simplifying administrative arrangements.
“It is important to get the details of all the measures right and we welcome the opportunity to work with the Government to ensure the superannuation tax legislation is fit for purpose,” Mr Minto said.
“The legislated objective for the superannuation system is enormously important and we need to ensure it will lead to adequate retirement outcomes for all Australians.”

SMSFs and Property Valuations

The requirements for SMSF property valuations can be confusing. This is partly because there are no hard and fast rules. The ATO has produced guidelines but these are open to some interpretation. Factors to consider include the domain expertise of the Trustee, and the expectations of the ATO and Fund Auditor.

Why Assets Need to be Valued
SMSF Financial Accounts are in some ways unique in that they require the market valuation of assets to be done each year. Reasons for this are so that the SMSF financial reports and member statements are more meaningful to members and allow for decisions to be made. It is also useful for a SMSF to be able to compare its investment returns against the wider superannuation investment sector.

Other Events Requiring Valuation
Certain events may require a valuation at the time of that specific event, for example:
• Business Real Property is acquired from, or disposed to a related party to ensure the transaction is at arm’s length.
• Determining the value of assets that fund a member’s pension.

When to Have an Independent Valuation for Real Property
An external valuation of real property is not required each year, but the decision as to whether to seek an independent valuation should be at least reviewed every year. The valuation approach will be examined by the fund auditor each year. A general rule of thumb is that it would appear reasonable to have an independent external valuation at least every 3 years. In determining whether an external valuation is required, more often the things to consider are:
• the value of the property in proportion of the fund’s overall value;
• significant changes in market conditions;
• any event that may have affected the value of the property such as a natural disaster.

Who can provide a valuation?
The valuation may be undertaken by anyone as long as it is based on objective and supportable data. When valuing real property, relevant factors and considerations may include:
• comparison to similar properties;
• sales history for the property;
• independent appraisals;
• value of any improvements; and
• net income yields.

An independent valuation can be provided through a number of methods. According to the ATO publication ‘Valuation guidelines for self-managed superannuation funds’, “A valuation undertaken by a property valuation service provider, including online services or real estate agent would be acceptable.”

A Trustee can provide a valuation if they can demonstrate that they have a sufficient level of knowledge and can support their valuation with factual data that can be reasonably interpreted by a 3rd party. For most Trustees this method may suffice for years when an independent valuation hasn’t been sought. For example, the Trustee may be able to find statistical evidence that market conditions have not changed significantly as support for their decision to maintain a prior year external independent valuation. If a Trustee arranges an external independent valuation every 3 years, supplemented by an annual internal valuation with objective supporting data, then in general, the requirements will be met to the satisfaction of the Auditor and the ATO.

As a member of the National Tax and Accountants’ Association, we have access to independent online property valuations for residential properties that meet the ATO valuation guidelines. The online service produces a report that lists the property sales history and provides a valuation amount/range, rent estimate and yield estimate based on key market data and comparable properties. The property valuation can be requested in conjunction with fund audits or as an independent service.

Please contact us for details if as a Trustee, this is a service you are interested in

5 Smart things to do with your tax refund

1. Put it into super
Remember the 70 year old you gets better tax treatment. Unless you are already contributing the maximum to your super through a salary sacrifice arrangement, there will not be many other opportunities for tomorrow – proofing.

2. Reduce or pay off HELP debt
The ATO keeps track of your HELP debt balance and allows you to pay it off as you go. If your salary is over the HELP repayment threshold (currently $54,868) repayments are levied from your before-tax income automatically, starting at 4% and rising as your pay increases. For now, if you pay your HELP debt upfront, the government reduces on the offer for repayment contributions that are extra to the compulsory amounts. But this is generosity runs out on January 1, 2017- so this is the last tax refund that you can use to get this “free money”.

3. Pre-pay recurring obligations
It’s a rare luxury to be able to pay any insurances, registrations and re-payment obligations before they roll around. Car registration payments commonly catch people off-guard, and paying extra off your mortgage will save interest on daily compound rates. The other big one could be your credit card bill, which can have high interest rates. These don’t have to be left until last. Bite the bullet – defer those non-essential purchases for now and buy them next quarter when your bills are fully taken care of.

4. Put in a term deposit
This could be your chance to put money away in a “just in case” account. Most Australian banks offer higher interest savings accounts for term deposits, with some requiring minimum monthly deposits. While interest rates are not great at the moment, you can’t go wrong letting your tax refund earn extra returns for a short stretch.
5. If you’ve got a small business or side venture, invest in it
Business tools and resources inevitable age. Why not use your tax refund to update old equipment or replace not-so-good assets with good ones? If you’re a small business, anything you buy for the business will likely be able to be written off. So you’ve got an extra incentive to use your tax refund this way.

Having a better financial destiny is an age-old fight with discipline, but a tax refund is a chance to take some steps in the right direction.