negative gearing

Whenever I discuss with friends or clients about "negative gearing" a rental property I am reminded how little people understand the term "negative gearing". So I've decided to re-visit it and give you an explanation of exactly what it is and how it works.

 "Negative gearing" is the technical term for "losing money".   If this surprises you then you better read on. To "negative gear" an investment means that the expenses are greater then the income which means there is a loss.

The best way to explain "negative gearing" is to use the following profit and loss statement with an assumption that the taxpayer is in the 30% tax bracket, as most Australians currently fall into:

Rental Income	$20,000
Less Deductions
Running expenses	-$5,000
Bank interest	-$25,000
Net Loss	-$5,000

So the first step in understanding the “negative gearing” strategy is the rental property must lose money – and in this example it has lost $5,000. At the end of the year this loss is included or claimed in the tax return and this is where most people get it wrong believing that they will get the full $5,000 refunded by the tax man. Not true!

The amount of the tax benefit a person will get depends on what tax bracket they are in. So if we assume that the tax bracket is 30% then the tax refund applicable to that loss will be $1,500 (i.e. 30% of $5,000). And as you can see this leaves the investor with a net loss of $3,500.

So basically, what has happened is that the investor has lost $5,000 to gain a tax refund of $1,500. At this point you may ask: so why do people get into “negative gearing”? There are tow reasons for this:

The first one, I believe, is most people just don’t understand it and they do it because they heard it from their friends and/or relatives.

The second reason why people get into “negative gearing” strategy is they are hoping that over period of time the value of the property will go up and once they sell it they will make their profit. That's in theory - however, what happens in the real world is another thing. And when you take into account the Capital Gains Tax that will apply when you sell the property - you can only question how good an investment a "negative gearing" is.

And the moral of the story?  DON'T get involved with “negative gearing” because you think or someone told you that "negative gearing" is a good tax deduction. Make sure you understand what it means......

If you have questions specific to your situation, feel free to call me or email me.

tax questions

Every year I get asked many “what can I claim” tax questions by clients but for some reason they are all the same questions every year. Here are my explanations for the top 5 most commonly asked questions:

1. UNIFORM AND LAUNDRY expenses - for a person to be able to claim uniforms it must be a UNIFORM - a uniform is a specific occupation uniform such as a nurse or bank office where the there may be a "logo" and it is a specific colour or shape. Wearing a suit is NOT a uniform. Wearing a nice white shirt or dress at work because the boss asked you to wear is NOT a uniform.  

 2. TRAVEL TO AND FROM WORK - the tax man is very clear that "travelling between home and work is NOT allowed". If you are required to use your own car to go to, say, the bank to do the banking or visit other sites YES you can claim that but you must keep a logbook or make a reasonable calculation of how many kms you have travelled.

 3. TRAVEL OR MEAL ALLOWANCES - if your employer pays you travel allowance then keep records of what kms you did to earn that allowance. Remember! most allowances are paid to you tax-free but come end of the year they need to be included in your taxable income so unless you have deductions to offset them you will pay extra tax.  Same applies to meal allowances.  

4. MOBILE PHONES - how much you can claim depends very much on how much YOU think you use it for work. There is no formula set by the tax man it is up to you to calculate it. I hate having to advise on this because there is no specific answer and my gut feeling is NONE of it is really a business claim. Mobile phone expenses need to be apportioned with regards to itemised account, detailing work and non-work related calls against total costs (even if the fees are capped). My personal test is this – if work requires you to use your mobile phone business then ask the employer to pay for it – end of subject.

 5. HOME COMPUTER – this is also an interesting one and not an easy one to explain when you consider that almost all of us have a computer in our homes. The tax requirement is that YOU must justify the business use of a computer. My gut feeling is that not many people can justify the use of their home computers for business. Same as the mobile phone – if work requires you to use a computer at home then simply ask the employer to provide you with a company computer.

If you have questions specific to your situation, feel free to call me or email me.

greek economy

The troubles with the Greek economy continues to plague the world markets, even as late as this week there was more concerns about the Greeks and the effect it has on the share market, which in turn affects yours and mine superannuation.

Have you stopped to ask why the Greeks are in such difficult times? Has anyone tried to explain to you how could this happened? Last November I gave an explanation so it may be worth that I re-publish it and let’s see if it will help you understand it in “layman” terms:

It is a slow day in a little Greek Village. The rain is beating down and the streets are deserted. Times are tough, everybody is in debt and everybody lives on credit.

On this particular day a rich tourist is driving through the village, stops at the local hotel and lays a $100 note on the desk, telling the hotel owner he wants to inspect the rooms upstairs in order to pick one to spend the night.

The owner gives him some keys and, as soon as the visitor has walked upstairs, the hotelier grabs the $100 note and runs next door to pay his debt to the butcher.

The butcher takes the $100 note and runs down the street to repay his debt to the pig farmer. The pig farmer takes the $100 note and heads off to pay his bill at the supplier of feed and fuel.

The guy at the Farmers' Co-op takes the $100 note and runs to pay his drinks bill at the taverna.

The tavern owner slips the money along to the local prostitute drinking at the bar, who has also been facing hard times and has had to offer him "services" on credit.

The hooker then rushes to the hotel and pays off her room bill to the hotel owner with the $100 note.

The hotel proprietor then places the $100 note back on the counter so the rich traveller will not suspect anything. At that moment the traveller comes down the stairs, picks up the $100 note, states that the rooms are not satisfactory, pockets the money, and leaves town.

And that, Ladies and Gentlemen, is how the Greeks got themselves in trouble:

No one produces anything.

No one earns anything.

And the whole village thinks they are out of debt…….

eurovision 2012

Finally – it’s here – I have been waiting for this weekend for the last 12 months. Forget about the AFL grand final, forget about FA cup – what I am talking about is much better and exciting than that. Yes – I am talking about EUROVISION SONG CONTEST – 3 glorious nights of pure entertainment like we have never seen before. So jump on my band wagon and improve your life by experiencing this extravaganza…….

Now back to more boring taxation:

As we are heading towards the end of the financial year, for the next few weeks I will concentrate on articles to do with tax. Tax time is good for us accountants but not so good with tarpapers because as a rule we all hate tax - right?

The tax office regularly is in contact with us tax agents with emails and here is the latest one:

“In the lead up to tax time, your clients may ask you about minimizing tax through tax-effective schemes. You can help your clients avoid penalties or tax debts by explaining the difference between legitimate tax minimisation and abusive tax avoidance schemes.
Your clients may ask you about minimising tax throughtax-effective schemes. They may ask you to complete a tax return based on advice they obtained from another scheme promoter. You can help your clients avoid penalties or tax debts by explaining the difference between legitimate tax minimisation and abusive tax avoidance schemes. Taxpayers are entitled to minimise their taxation liabilities and receive benefits provided under the law through investment activities. However, investment schemes and legal structures that do not comply with the law are considered to be aggressive tax planning arrangements – commonly referred to as tax schemes.”

To date I don’t think there is a tax avoidance scheme that I have not come across or heard of in the past but they keep coming around every year. Personally, I will never get involved in anything that I know is a sham and clients asking me to get involved with them are quickly shown the door. And yet for some reason there is still that feeling amongst some people that there is that “secret” on how not to pay tax.

There are genuine legal items that may reduce the tax you pay but they are all part of the legitimate tax rules.

So, before you consider any fancy tax schemes – think about it, research it and if still not sure speak to a professional. The Tax Office comes down very hard on tax cheats.

Remember! It is your responsibility to comply with the tax laws. If you are involved in a tax avoidance scheme you will be liable for firstly for the tax that you avoided in the first place, plus penalties plus interest. You have been WARNED……….

news reports

Yesterday morning I got into the car to come to work and as usual I put on the news to catch up with the overnight news and I wish I hadn’t - the leading news item was that the sharemarket overnight lost “billions of dollars!!!!” due to some problems with Greece.

And to make things worse the announcer went on to say that superannuation funds have also lost over $70 billion or as he put it “wiped off”. I thought “oh no, this is not going to be a good day for me” because I know that these sorts of news do create panic and worry in people’s minds.

By now you should know sharemarkets going down is not something to ignore but at the same time it should not cause you concern because the reality is that the sharemarket does not lose money for anyone – what it does is it reduces the “paper value” of any shares at a given point of time

e.g. let’s say you have 1,000 shares in Company X which is valued at say $2.50 each giving a total value of $25,000. If the market goes down to say $2.28 per share - you have not lost any shares, you will still have the same 1,000 shares it is just the total value of those shares as of that moment will be $22,800. Technically, this is a loss of $2,200 but it is only “paper loss”. In other words, you will only lose that money if you choose to sell them then. But if you don’t sell and keep the 1,000 shares and wait for the shares to go up then you would recover that loss.

This is why it is important for people that dabble in the sharemarket to do so for the longer period of time – not for the short term.

And the same applies to property. Recent articles in the papers reported that property values are down by 10% from the same time last year. So if you bought a property last year for let’s say $500,000 then the value of that property now is $450,000. Now if someone told you that your house is worth 10% less than say 12 months, would you feel that you have lost money? Of course not. You would definitely like to know that the value has gone up but if the market says that it is down then you just accept it and get on with life. Would you panic and sell your house for 10% less? Of course not.

I hope my explanation will help you understand what the news reports mean when they scream “Property values are down!! Or billions have been wiped off sharemarkets”.

Just ignore it but if “the worry persists” see your financial adviser.

tax schemes warning

Couple of days ago the Tax Commissioner Michael D’Ascenzo issued a press release warning taxpayers to steer clear of tax avoidance - 

“It is at this time of year we see an increase in the number of tax avoidance schemes being promoted. As appealing as an investment opportunity may sound, sometimes the promised tax benefits might not be available under the law," Mr D'Ascenzo explained.

Modern tax schemes can be very sophisticated and may masquerade as complex investments or other arrangements that can appeal even to experienced investors. Just like genuine investments, these schemes might promise you 'wealth creation' or financial security. Others can exploit your social or environmental conscience by promising you large up-front tax deductions for donations to charity or 'green initiatives'. Many are marketed via social media or glossy promotional brochures, with offers of exclusivity and the stamp of approval from so-called 'experts'.

My advice – DON’T FALL FOR THESE SCHEMES without first doing your research and seeking independent advice. If you're considering entering into an arrangement that will affect your tax liabilities, it's important to carefully investigate and understand the tax consequences before making your investment decision.

You know the old saying: if it seems too good to be true, it probably is.

If not sure, feel free to ask me – my business is to keep your financial affairs in proper order.

super beneficiaries

Superannuation and wills

For most people superannuation will be their second biggest asset after their home and it is important to know how it works with regards to will.

The technical set up of a superannuation fund is this: superannuation benefits are not owned directly by fund members, but are held in trust and only the trustee of the superannuation fund is permitted to pay them. And because superannuation money is put aside for retirement, it is treated differently to other estate assets on the death of a superannuation fund member.

Nominating a beneficiary

A member can not make instructions in their will on how the superannuation funds are to be distributed. What the member can do is to nominate a beneficiary to receive their superannuation benefits in the event of their death. And in order for the trustee of the superannuation fund to accept that member’s nomination of beneficiary, the beneficiary must meets the definition of dependant in the SIS Act, or their legal personal representative (LRP), who may then distribute the proceeds in accordance with the will.

Definition of dependant

The superannuation definition of a dependant, because only superannuation dependants can receive a death benefit (except where there is no dependant), but only tax dependants receive concessional tax treatment on superannuation death benefits received.

Dependants under superannuation legislation

Superannuation death benefits can be paid to ‘dependants’ as defined in sub-section 10(1) of the SIS Act. This includes:

-          spouse (including de facto and same sex partners)

-          children (of any age)

-          financial dependants

-          people in an interdependency relationship with the deceased, or

-          the deceased’s LPR on behalf of the estate.

Dependants under taxation legislation

While the SIS Act governs who can receive superannuation death benefits, it is the Income Tax Assessment Act that governs the tax consequences of the payment of superannuation death benefits. For tax purposes, a death benefits dependant is defined to include:

-          a spouse or former spouse (including de facto and same sex partners)

-          a child, aged less than 18

-          any person who had an interdependency relationship with the member just prior to death

-           any person who was a dependant of the member just prior to death, or

-           any person who receives a superannuation lump sum because of the death of another

Taxation of superannuation death benefits

What all this means is that the dependants you nominate are likely to pay tax unless they fall within the definitions of the tax legislation. For example, all proceed (regardless of the amount) paid to a dependant for tax purposes, will be tax free. The same applies where a lump-sum superannuation death benefit is paid to an estate and the estate pays the proceeds to a dependant for tax purposes.

If the proceeds of a lump-sum superannuation death benefit are to be paid to a non-dependant, the tax-free component of the payment will be tax free. However, the taxable component will be subject to tax at up to either 16.5 per cent or 31.5 per cent (including the Medicare levy but excluding flood levy) depending on whether the taxable component is a taxed element or an untaxed element.

So what should you do?

As soon as you read this blog – take the time to find out from your superannuation fund who your beneficiaries are. Most clients do have their spouses and children, which in most case is OK – but over the years as marriages break-up and the children grow up and stop being financially dependant then it is time to change the nominations. As a rule, if your children are grown up, married and have their own separate lives they should not be nominated as beneficiaries in your superannuation fund.

If not sure, feel free to ask me – my business is to keep your financial affairs in proper order.