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 sharemarkets and a fall in the US dollar and global bond yields. Even so, major global sharemarkets 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, and petrol prices are set to increase by at least 22c a litre after the reinstatement of the fuel excise. Both will put upward pressure on inflation and interest rates.
The Aussie dollar fell more than 3c against the surging US dollar in September, to US65c.
ATO focus on rental properties
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.
How to handle a tax debt
Starting with its aged debt book, the ATO is sending letters to taxpayers asking them to engage or face firmer action. An aged debt is an uneconomical debt the ATO has placed on hold and not taken any recent action to collect, but this is about to change.
Potential action includes offsetting tax refunds to pay tax debts and disclosing tax debts to credit reporting bureaus, a move that could affect your business’ credit rating and ability to raise funds.
Business taxpayers have also been warned about their potential personal liability under the director penalty notice (DPN) program for unpaid PAYG withholding and GST amounts.
Dealing with your tax debts
So, what are your options if you are having difficulty meeting your tax or employee super obligations?
The first thing to remember is not to panic. Ensure you lodge all your tax returns on time to avoid a late lodgment penalty and to show the ATO you are aware of your obligations and are doing your best to meet them.
Where you have a good payment history or are in serious hardship, the ATO will offer you support and you are likely to be treated more generously than if you have deliberately set out to avoid tax, or regularly fail to pay your tax.
If you can’t pay by the due date, you may be allowed to set up a payment plan. The ATO has a Payment Plan Estimator tool you can use to work out a suitable payment schedule. Daily interest on your unpaid debt will accrue, however, at an annual rate of 8.00 per cent in the July to September 2022 quarter.
Eligible small businesses owing activity statement amounts may also be able to make interest-free payments over 12 months.
What will the ATO do if I don’t pay?
Aside from charging interest, if you don’t pay, the ATO will begin offsetting future tax refunds to reduce your tax debt and debts to other government agencies, such as overdue child support.
The ATO may take stronger action with taxpayers unwilling to engage, repeatedly defaulting on payment plans, found to have deliberately avoided paying tax, or who are engaged in phoenix activities.
These harsher powers include issuing a garnishee notice or a DPN. Garnishee notices require an employer, bank or trade debtor to pay your money directly to the ATO to reduce your tax debt.
The ATO may also file a claim or summons, which can result in you receiving a bankruptcy notice, or a statutory demand and application to wind-up your company.
Missing super contributions
Failing to meet your obligation as an employer to pay Superannuation Guarantee (SG) contributions into your employees’ super accounts is also in the ATO’s sights.
If you don’t pay your required SG contributions by the quarterly payment deadlines, you must pay the SG Charge (SGC) and lodge an SGC Statement. The SGC consists of a shortfall amount, 10 per cent annual interest and an administration fee for each unpaid employee per quarter. You are also ineligible to claim a tax deduction for the SG contributions against your business income.
Penalties for SG non-payment
The ATO is prepared to support employers who engage and try to get things right with their SG payments but will take firmer action with businesses repeatedly failing to pay correct SG amounts or supply the necessary information.
With employers who pay and lodge their SGC Statement late, or who fail to provide information during an audit, the ATO can impose a Part 7 Penalty, which is up to 200 per cent of the SGC amount payable.
Company directors failing to meet their SGC liabilities risk having the business’ liability become their personal liability. The ATO may also start bankruptcy action or seek to wind-up your business.
Don’t ignore a tax debt
Communication with the ATO is essential when it comes to tax and super debts.
To get on top of the situation, contact the ATO or make an appointment with us to discuss your financial position and possible ways to pay your tax and super obligations. The sooner you act the better the outcome is likely to be.
Tax offset v tax deduction: What’s the difference?
Both can help reduce the amount of tax you pay each year, but a tax offset generally results in a bigger dollar tax saving than a tax deduction of the same amount. The key difference is the point at which they are applied to your income when calculating the final amount of tax payable.
What is a tax deduction?
A tax deduction is one of the first things applied to your income when calculating your tax bill. It reduces your taxable income and hence the amount of tax you pay, potentially moving you into a lower tax bracket. Deductions are intended to ensure you only pay tax on income exceeding the costs associated with earning that income.
For a small business, deductions ensure it doesn’t pay tax if its running costs exceed its revenue. Common deductions include operating expenses such as stationery, and capital expenses such as equipment.
There are also temporary deductions, such as the additional 20 per cent deduction for costs related to digital adoption (like portable payment services and cyber security) and employee training expenditure announced in the 2022 Federal Budget.
Employees can claim deductions in a similar way. Personal deductions include work-related expenses like the cost of a computer if you have a home office, or supplies purchased for classroom use by a teacher. Other deductions include the cost of managing your tax affairs, donations and income protection insurance.
Offsets are similar but different
Tax offsets on the other hand, are deducted at the end of the calculation process and directly reduce the tax you pay.
Offsets are used by the government to encourage specific outcomes, such as uptake of health insurance through the Private Health Offset, or adding money to your spouse’s super through a contribution offset. They are also used to provide tax relief or financial support to certain groups in the community.
Calculating tax using offsets and deductions
The easiest way to understand the difference between an offset and a deduction is to walk through an example.
In the table below, we have two taxpayers. One person has an income of $30,000 a year paying tax of 19c on every dollar above the tax-free threshold of $18,200. This results in tax of $2,242 before any deductions or offsets. The other earns $130,000 a year, paying the top marginal tax rate of 37c in every dollar above $120,000, resulting in tax of $33,167.
As you can see in the table below, the impact of a $1,000 tax deduction provides a bigger tax saving of $370 for the higher income earner, compared with $190 for the lower income earner.
However, not only does a $1,000 tax offset provide both taxpayers with a bigger tax saving of $1,000 each, but it’s worth relatively more to the lower income earner at 3.3 per cent of $30,000 compared with less than one per cent of $130,000.
Impact of a $1,000 tax deduction and tax offset on tax owed
| Assessable income | Tax owed | $1,000 tax deduction | $1,000 tax offset | ||
| Tax owed | Tax saved | Tax owed | Tax saved | ||
| $130,000 | $33,167 | $32,797 | $370 | $32,167 | $1,000 |
| $30,000 | $2,242 | $2,052 | $190 | $1,242 | $1,000 |
Source (with updated figures for 2021-22 financial year): ANU Tax and Transfer Policy Institute Tax Fact #6
How tax offsets affect the tax you pay
Unlike tax deductions, the ATO automatically applies most offsets to your tax payable when you lodge your tax return.
In general, tax offsets can reduce your tax payable to zero, but they can’t be used to generate a tax refund if you don’t pay tax. If your taxable income is $18,200 or less, an offset won’t reduce the tax you pay as your tax payable is already zero. If you have paid any tax on this amount, you receive the tax back as a refund, but no offset is applied.
Also, most tax offsets don’t reduce the Medicare Levy and Medicare Levy Surcharge (if any) you are required to pay.
The amount of tax offset you receive also depends on the particular offset and your taxable income. For example, with the Low and Middle Income Tax Offset (LMITO) for 2021-22, if your taxable income is $37,0000 or less, you will receive a $675 offset on your tax payable when you lodge your tax return. If your income is $48,001 to $90,000, however, the offset is worth $1,500.
