October 2022 Newsletter

It’s October and the footy finals are done and dusted, and we've quickly moved onto the summer sport season, with national cricket, basketball and soccer leagues starting their seasons. In Canberra though, Treasurer Jim Chalmers is warming up for his first Budget on October 25 against a background of mounting economic pressures, with stage 3 tax cuts high on the agenda.

In September, persistently high inflation and aggressive rate hikes by the world’s central banks put global share and bond markets under pressure. The US Federal Reserve has lifted rates seven times this year, but US inflation remains at 8.3%. There is now growing fear that central banks may push the world into recession. In a surprise twist, the Bank of England (which has also lifted rates seven times this year) was forced to switch back to Quantitative Easing, buying government bonds to support the British pound which crashed to a record low in response to a stimulatory mini-Budget released by the new Conservative Party leadership. This led to a late relief rally on global share markets and a fall in the US dollar and global bond yields. Even so, major global share markets finished the month down 6% or more.

In Australia, the picture is a little brighter. Economic growth was up 3.6% in the year to June. Company profits are also strong, up 28.5% in the year to June, and unemployment remains low, at 3.5% in August. While inflation eased from 7% in July to 6.8% in August, due to falling petrol prices, it is still well above the Reserve Bank’s 2-3% target. Aussie consumers continue to spend at record levels, pushing up retail spending by 19.2% in the year to August, which has placed upward pressure on inflation being a key factor in the RBA's decision to raise the cash rate target by 25 basis points to 2.50% on October 4.

The Aussie dollar fell more than 3c against the surging US dollar in September, to US65c.

Now for King & Whittle Internal news, we warmly congratulate King & Whittle Director Robert Barrese on his appointment as an honorary Advisor in the capacity of Treasurer and Finance with the Thai Australian Chamber.

The Thai Australian Chamber (TAC) reflects the unwavering passion to promote not only trade and investment opportunities but also to promote the social and cultural aspects of the relationship with the Thai Australian Network.

We are so very proud of Roberts passion and affiliation to such an amazing organisation and worthwhile cause. An inspiration to us all.

We also cordially invite our valued clients to an exclusive Economic Outlook Seminar at our Melbourne CBD office on Thursday October 20th 6pm – 8pm with Bruce Dyason, Director of Wealth Management at King & Whittle.

Bruce will share his key market insights and dive into what lies ahead for 2023.

Please contact Bruce directly for any clarification with regards to the seminar or send an rsvp email to enquiries@kingandwhittle.com.au at your earliest convenience.

ATO focus on rental properties

Rental property owners are now one of the ATO’s top targets after it found nine out of ten tax returns reporting rental income and deductions contained at least one error.ⁱ

The tax office estimates it’s missing out on around $1.5 billion due to over-claiming of rental property expenses and omission of rental income.

Growing interest in rental property tax

Around 2.2 million individuals have an interest in a rental property in Australia. In a recent media release the ATO warned these taxpayers they are under the spotlight as rentals are “an area that’s easy to get wrong, and needs extra care when lodging”.ⁱⁱ

It’s urging property owners to carefully review their rental property records and ensure they understand the income they need to declare and what expenses can be correctly claimed as a deduction.

Declare all rental income

These days the ATO receives rental income data from a range of sources, including sharing economy platforms, rental bond authorities, property management software providers and land title authorities.

This allows the ATO to spot rental income being charged to a tenant but not declared. Landlords must include all rental income, whether it’s from short-term rental arrangements or from rental-related sources like insurance payouts and retained bond money.

Get your expense claims right

Although landlords can deduct many expenses relating to a rental property, claims need to stay within the rules.

Some expenses can be claimed immediately (such as management fees, council rates and insurance premiums), while others (loan interest, borrowing expenses and capital works) must be claimed over time.

Major capital works (such as replacing the property’s roof or existing kitchen) need to be claimed over a number of years.

Depreciating assets (such as a new dishwasher or oven) are claimed over their effective life, although items costing under $300 can be claimed immediately.

If you refinance your rental property loan or draw down on it for private expenses like a holiday, the loan interest relating to the private expense cannot be claimed as a deduction.

Claiming for private usage

Special care is needed if you use your property for certain periods, stop renting it out for a time, or allow family or friends to stay at cheaper rates.

You can’t claim deductions for these periods as the property is not being used to produce rental income. Normal annual expenses must be apportioned to omit these non-income periods.

Deductions also can’t be claimed if you pretend your property is available for rent when it isn’t, or if you place unreasonable restrictions on a potential tenant.

Common mistakes

According to the ATO, the most common tax error relates to apportioning expenses. If you don’t split your expenses – or do it incorrectly – you may find your return being queried or adjusted.

Another mistake is claiming for all the cost of purchasing your property. Costs such as conveyancing fees and stamp duty are used when working out if you need to pay capital gains tax (CGT), not as deductions.

Claims for capital works and capital allowances are also a danger area. Repairs directly related to wear and tear and damage while the property is rented can be claimed in the financial year the expense is incurred, but initial repairs for damage when purchased are not immediately deductible.

Failing to keep detailed records covering the income and expenses for your rental property is also a recipe for trouble. The ATO requires landlords to keep records for five years from when your return is lodged.

Don’t forget other taxes

While the ATO is focussing on income and deduction claims for rental owners, they are not the only tax obligations landlords need to keep in mind.

When you sell your rental property, you may be liable for CGT and detailed records of all your expenditure will be needed to correctly calculate the cost base for the property.

If you are not registered for GST, or if the rental income is from a residential premises, you can include any GST in the rental expenses you claim. GST-registered landlords follow different rules.

You will also need to make PAYG instalment payments if you earn $4,000 or more in rental income. The ATO will inform you if this occurs.

The tax rules around a rental property are complex. If you would like help in this area, contact our office today.

i https://www.ato.gov.au/Media-centre/Media-releases/Tax-time-focus-on-rental-property-income-and-deductions/

ii https://www.ato.gov.au/misc/downloads/pdf/qc70095.pdf

Digital and skills tax incentives return

The Government has opened submissions for a 120 percent deduction for tech and training investment, bringing previous Federal Budget announcements one step closer to becoming reality.

Business leaders have applauded the move to legislate two measures that will allow organisations with turnover under $50 million to claim spending on digital solutions and training backdated to March.

The measures, dubbed the Small Business Technology Investment Boost and the Small Business Skills and Training Boost were announced as initiatives by the previous Government in its March Federal Budget and have now been released as draft legislation for introduction into Parliament later this year.

In a joint announcement by Treasurer Jim Chalmers, Small Business Minister Julie Collins and Assistant Treasurer Stephen Jones, the tax incentives were described as a way to ease the burden of upskilling for small businesses.

“The Government recognises that training employees is expensive and takes time, both of which are at a premium when employers are trying to run a small business,” the ministers said.

“These measures will make it easier for small businesses and help them recoup some of the costs of the investments they make in their employees and digital operations.”

The Small Business Technology Investment Boost

Under the proposed legislation, the boost offers a bonus 20 percent deduction on business expenditure relating to support digital operations.

What can a small business deduct?

At this stage the scope for claiming the digital boost is broad, covering anything that supports the digitisation of operations as well as ongoing investments of a digital nature, such as software licenses, subscriptions and related hardware.

However, the digital tax boost only applies on expenditure up to $100,000 in total, making the maximum deduction available to small businesses $20,000.

When does it apply?

Currently, the digital boost applies to expenses incurred from 7.30pm on 29 March 2022 through to 30 June 2023.

What isn’t included?

Several types of expenditure aren’t covered by the boost, such as:

Salary and wages
Capital works that can be deducted under Division 43 of ITAA 1997
Financing
Training and education (however, these may be covered by the skills and training boost)
Spending associated with the trading of stock

For further information, you can find the draft legislation and explanatory materials for the Technology Investment Boost on the Treasury website.

The Small Business Skills Investment Boost

Similar to the tech boost, the Skills Investment Boost enables an additional 20 percent deduction on small business spending on external training and education of staff.

What can a small business deduct?

According to the draft legislation, the incentive applies to any training for employees conducted in Australia or online, however the expenditure must be charged by a Registered Training Organisation.

The training must also be already deductible under tax law and can’t be offered by the business (or an associate of the business) that is claiming the deduction.

When does it apply?

The skills boost will also be backdated to March, applying from 7.30pm 29 March 2022 and is set to continue to 30 June 2024.

For more details on the Skills Investment Boost, you can find the draft legislation as well as explanatory materials on the Treasury website.

Budgetary win for business

With the new Government set to hand down a second Federal Budget in October, the announcement of these initiatives is being seen as a positive move by business leaders around the country.

And, with MYOB modelling suggesting that nearly half a million Australian small businesses have little to no engagement with digital tools, both initiatives are likely to have a big impact.

“Businesses with meaningful engagement with digital are 50 percent more likely to grow revenue,” said MYOB CEO Greg Ellis.

“They’re eight times more likely to create jobs. They are 14 times more likely to come up with new products or services.

“Productivity is what Australia needs; making sure every business is a digital business needs to be one of our top priorities,” he said.

The sentiment was echoed in a statement from Council of Small Business Organisations Australia CEO Alexi Boyd.

“It is essential to incentivise digitisation to make our small businesses stronger, more productive, and more resilient to future economic shocks.”

Meanwhile, Australian Small Business and Family Enterprise Ombudsman Bruce Billson pointed to more specific benefits.

“The digital tax break will allow [businesses] to invest in items such as cyber security systems, cloud-based services, accounting or eInvoicing software, hardware such as laptops and portable payment devices.

“For a small business, the cost of training staff can be quite significant, and this deduction will support owners to make an investment in upskilling staff to drive productivity and competitiveness.”

The draft legislation for both initiatives is open for consultation until 19 September.

Source: MYOB August 2022

Reproduced with the permission of MYOB. This article by Campbell Phillips was originally published at https://www.myob.com/au/blog/digital-and-training-tax-incentives-return/

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