TAXWISE INDIVIDUAL NEWS

JUNE 2004

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What??s in this issue:

· selling your home

· tax tips for 2003/04

· new personal tax rates

· Family Tax Benefit changes

· new maternity bonus

SELLING THE FAMILY HOME

With the recent property boom, you may have seen the value of your home rise substantially and you may have realised a significant gain if you sold your home or will do so if you go ahead and sell.

Set out below are some of the potential tax consequences of selling your home. As with all things in tax, even the simple sale of your home may have its own particular complications, so it??s best to get advice. Also, although not covered in this newsletter, you may need to factor in the impact of different state/territory taxes and duties, depending on where your home is located.

Can I sell my home tax free?

Yes, you can sell your home free of Capital Gains Tax (CGT) provided:

· you moved into your home as soon as practicable after you bought it.

· you occupied it as your ??main residence?? during the time you held the property.

· you haven??t used it for income producing purposes.

Generally, you can only claim this main residence exemption in respect of one home at a time. However, if you buy a new home before you sell your old one, you may be able to claim the main residence exemption for both homes whilst you are trying to sell the old home, but only for a maximum period of 6 months.

As with all basic rules, there are some traps to watch out for so you don??t jeopardise the CGT-free status of you home. Here are some of the more common problem areas.

Running a business from home?

If you use part of your home for income producing purposes (like using a home office from which to run your business) and you are entitled to claim mortgage expenses (even if you don??t actually have a mortgage!), you will have to pay CGT on any gain you make on the sale of your home, based on a business usage proportion.

Moving out for a while?

Provided you have established that your home is your main residence for CGT purposes, you can still claim the main residence exemption from CGT despite any absences you may have for any reason.

Temporary absences (like taking holidays) are not a problem. You need to be careful, however, with more substantial absences (e.g., moving interstate or overseas for work purposes, or moving out and using your home as a rental investment). For example:

if you rent out your home after you move out, you can only be absent for a maximum period of 6 years before you run into trouble. If you remain absent for more than 6 years and continue to rent out the property, the main residence exemption is lost (but only on a pro rata basis for the period exceeding 6 years).

on the other hand, if you don??t use your home to produce income at all after you move out, you can be absent for an unlimited time without jeopardising your entitlement to the main residence exemption from CGT purposes.

A word to the wise?

If you buy a house and rent it out immediately, then later stop renting it out and move in as your main residence ?? beware. You can??t treat the house as your main residence whilst it was rented out no matter how long you live in the house after you move in. You??ll only be entitled to a pro-rata exemption from CGT when you sell. However, there is an exception where ownership passes to you as a beneficiary or as a trustee of a deceased estate.

Who owns the family home?

Some people may consider there to be advantages in holding their family home in a trust or company. Be aware though that the ATO is of the general view that a family trust or company cannot access the main residence exemption. Therefore, if your trust-held or company-held home is sold, CGT will be payable on the full amount of any profit.

Watch out for the income tax trap!

Be careful if you are tempted to buy and sell your home on a regular basis for a profit. Not that there??s anything wrong with buying and selling you home! But if the ATO can establish that this was your main intention rather than occupying your home as your main residence, then you may be subject to income tax (rather than capital gains tax) on the entire profit. This is something the ATO is now taking a closer look at.

Timing can be everything

So how long do you have to live in your home before you can claim it is your main residence for CGT purposes?

In spite of all sorts of rules of thumb - like having to live in your home for at least 12 months - the fact is that there is no specified minimum occupancy period that proves that your home is your main residence for CGT purposes.

Whilst the longer you live in your home the better, you really need to show that you intended to occupy the property as your main residence. For example, it helps if you can demonstrate that:

· your family lives with you in the residence

· your personal belongings are moved into the residence

· your mail is being delivered to the residence

· your name is on the Electoral Roll at this address

· you connect services such as telephone, gas and electricity and make sure the bills are in your name at that address

YOUR TAX RETURN FOR 2003-2004

In the lead up to June 30 take some time to get organised for your 2004 tax return. This essentially means making sure you:

· declare all your income

· claim all relevant deductions, and

· don??t miss out on your eligible tax offsets.

What??s included in my assessable income?

The key point to keep in mind is that your total assessable income is often more than your basic salary. Don??t forget to disclose all your assessable income, including investment income and cash income ?? the ATO conducts regular audits to ensure its records match the income you have disclosed.

Here??s a summary of the more common types of assessable income items:

Salary and wages ?? make sure your employer(s) has given you all your Payment Summaries (group certificates) for the 2003-2004 year.
Interest ?? e.g., from banks, credit unions, building societies, term deposits (watch out for children??s accounts ?? if you have put funds into an account for one of your children, you are a signatory to the account because your child is too young, and you operate the account as if it??s your account, you will have to declare any interest income in your return).
Allowances provided by your employer ?? e.g., meals , travel, or for your car
Pensions or annuities ?? e.g., taxable Government pensions and annuities paid to you by your superannuation fund.
Lump sum payments ?? these are payments made to you by an employer when you terminate your employment to cover your unused annual leave and long service leave (these amounts should be listed on your Payment Summary)
Taxable government benefits ?? e.g., AUSTUDY.
Tips, bonuses and gratuities ?? in particular the ATO has taxi drivers and people in the hospitality industry in their sights!
Dividends ?? be careful if you have entered into a dividend ??reinvestment?? program where you get extra shares instead of actually receiving a dividend ?? the value of the amount of dividend reinvested is still taxable
Capital gains ?? e.g., you have made a taxable gain on the sale of some of your investment shares, or you have sold an investment property for more than you paid for it.

A TIP TO REDUCE ANY GAIN

If you owned the investment property for at least 12 months, you can reduce the amount of capital gain by 50% before it is taxed.

· Rental income ?? with more people buying investment properties, the ATO is paying much closer attention to the disclosure of rental income and expenses.

· Personal services income ?? If you are a contractor or a consultant operating your business through a company, partnership or trust, the personal services income rules (the ?? contactor??s tax?? ) could apply. Generally, if these rules apply you need to include the income earned from providing services to clients in your personal tax return ?? even if your clients originally paid this income into your company, partnership or trust.

How can I maximise my deductions?

You can claim deductions for work related expenses you incurred while earning your assessable income, i.e. doing your job. You can also get deductions for some non-work related expenses, like donations of more than $2 to an approved charity.

As a general rule, if you are going to claim more than a total of $300 worth of work related deductions, you will need to be able to show how you worked out the full amount (e.g., with evidence such as written receipts). If the total claimed is $300 or less you don??t need written evidence to prove your claim (although the ATO may still ask you how you worked it out!).

Check the following list of some of the more common work related deductions to make sure you are maximising your claims:

· Work related travel expenses - You can claim travel expenses directly connected with your job, including:

- the cost of travel on work trips on other forms of transport such as air, bus, train, tram and taxi fares (a note of caution here: the cost of travelling to and from work is not deductible).

- parking fees (but not any parking fines!) .

- bridge and road tolls (e.g., a toll for travelling on an express way).

- meals and accommodation expenses which you pay while travelling overnight on work.

RECEIVED ANY ALLOWANCES?

Allowances for meals, travel, or for a car can be a trap. Although you may get one or more these allowances, this doesn??t mean you are automatically entitled to claim deductions against it. You must still keep written evidence to prove any claim regardless of the amount involved.

· Self-education expenses ?? e.g., tuition and course fees, textbooks, stationery and possibly some travel expenses ?? just to name a few.

A word of caution

HECS payments are not deductible and you can??t claim self education expenses against any Commonwealth education assistance like AUSTUDY.

· Tools of your trade ?? e.g., the cost of loose tools such as hammers, wrenches, chisels and hand operated power tools such as drills and circular saws.

· Special work clothing ?? e.g., the cost of buying and maintaining protective clothing and occupation specific clothing is usually deductible.

· Trade journals ?? but note that it can be difficult sometimes to claim a deduction for newspapers.

· Union dues ?? and also subscriptions to professional associations.

· Home office expenses - make sure your business and private expenses are split correctly, particularly for home computer and mobile phone use.

TIP

If your employer provides an office, but you choose to work from home at times, you can only claim deductions (based on a business usage proportion) for running costs such as electricity, not for place of business expenses such as mortgage interest or rent.

Making the most of tax offsets

The Tax Office is finding that many people are still not taking advantage of a number of rebates (call ??tax offsets??) and concessions. Make sure you are not overlooking an offset which may be of benefit to you, e.g.,

Medical rebate

If your medical expenses (for yourself, your spouse and your dependants) exceeded $1,500, then you are entitled to a rebate of 20% of the excess over this amount. For example if your total medical expenses were $2,500 then you would get a rebate of $200.

CHANGES ON THE HORIZON?

New Personal Tax Rates

The Government plans to redress ??bracket creep?? for middle and high income earners. From 1 July 2004, the 42% threshold will increase from $52,001 to $58,001 and will increase again to $63,001 from 1 July 2005. Also from 1 July 2004, the 47% threshold will increase from $62,501 to $70,001 and will increase again to $80,001 from 1 July 2005.

Family Tax Benefit (FTB) Changes

The Government proposes to introduce the following changes to the current Family Tax Benefit:

Immediate payments

· An increase in the rate of FTB(A) of $600 per child to be paid as a lump sum, which will be paid to your family as part of the annual FTB reconciliation that occurs after the lodgement of your 2003-04 tax return. But, there may be a catch. If you have received an overpayment of the FTB in a previous year, this additional amount will be available to offset any overpayment.

· Before 30 June 2004, if your family is receiving or eligible to receive the FTB(A) in the 2003-04 financial year, you will also receive an additional once off lump sum payment of $600 per child.

From 1 July 2004

· There will be a reduction in the income test taper rate for the maximum rate of FTB(A). This means that you can earn more income before the benefit cuts out. For each additional dollar of your income in excess of the $31,755 threshold, only 20 cents rather than 30 cents of FTB allowance is withdrawn until the base rate of payment is reached.

· If you are the secondary earner in a family, you will be able to earn up to $4,000 a year (instead of the current $1,875) before the FTB (B)benefit is reduced. The income test taper is also to be reduced from 30% to 20%.

From 1 July 2005

· The income earned by a mother after returning to work will not affect FTB(B) received earlier in the same year.

New universal maternity bonus

From 1 July 2004, a new universal maternity payment will replace the existing Maternity Allowance and the Baby Bonus. This will be paid as a lump sum of $3,000 on the birth of each child occurring after 1 July 2004, increasing to $4,000 from 1 July 2005, and increasing again to $5,000 on 1 July 2006. However, the current Baby Bonus will still be available for births occurring prior to 1 July 04.

Disclaimer

Taxwise® News is distributed quarterly by professional tax practitioners to provide information of general interest to their clients. The content of this newsletter does not constitute specific advice. Readers are encouraged to consult their tax adviser for advice on specific matters.