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End-of-year tax report continued

API continues its end-of-year tax report below. For the first part of this article, see page 68 of our June magazine. By Julia Hartman

Budget update
The Federal Budget didn't change anything that was stated in our June tax article from API magazine, but we can now be sure of the 2012 tax rates. This is relevant when considering making interest payments in advance. As payments in advance simply borrow tax deductions from 2012 to claim in 2011, if you're going to be in a higher tax bracket in 2012 then it would be better to save the claim until then. The tax rates for both the 2011 and 2012 financial year will be:

The low income tax offset will be $1500 which will mean taxpayers with only $16,000 in taxable income will pay no tax. The low income tax offset starts to shade out at $30,000 and completely disappears if your income is more than $67,499. This means that taxpayers between $30,000 and $67,500 really have an effective tax rate of 19 per cent until $37,000, then 34 per cent because the low income tax offset shades out by four per cent for every extra dollar earned.

Note, there's one major difference between the 2011 tax rates and 2012 tax rates. These only affect children under 18 years of age who receive passive income, they'll no longer qualify for the low income tax offset which means they can only receive $416 tax free unless they qualify for special circumstances such as being an orphan or receiving passive income from inheritance. Passive income exceeding $416 will be taxed at the maximum tax rate in 2012 and following years.

If you have a trust that you use to distribute income to your children under 18 then making payments in advance is probably not the right strategy for you. This year you have the advantage of being able to redirect up to $3333 in profits to each of them. Next year you won't, so all else being equal you'll probably need those deductions more next year than this year.

Small business concessions and superannuation.
The small business concessions allow business owners to make larger superannuation contributions when they sell an active asset. For example, if they qualify under the small business retirement concession, they can contribute up to $500,000 into superannuation from the sale of an active asset without it being taxed in the hands of the superannuation fund. Further, the capital gain up to that amount isn't taxable. The 15-year exemption is even better; not only is the gain not taxed but they can put $1.155 million of it into superannuation as a non-concessional contribution, although the $1.155 million is reduced by any retirement exemption (the $500,000 cap) already utilised. Note, the $500,000 and $1.155 million cap is over the taxpayer's lifetime, intended as a once-off catch up for business owners who invested in their business instead of superannuation.

Co-contribution (see API for more on this).
Your assessable income needs to be under $31,920. If it exceeds this but is less than $61,920 you'll still get some co-contribution, the $1000 shades out at the rate of 3.333 cents for every dollar over the $31,920. Note, assessable income isn't your taxable income. It's your income plus reportable fringe benefits and reportable superannuation contributions (generally those you salary sacrifice). In the case of the self-employed their assessable income isn't reduced by any superannuation contributions for which they claim a tax deduction. Generally expenses you claim as a tax deduction can't reduce your assessable income, although sole traders are allowed to reduce their assessable income by business deductions. In the case of partnership or trust income, it's only your share and the net amount (income less deductions) that's included as assessable income, regardless of whether it's business or passive income. If you're the sole owner of a rental property, then the gross rent is included in your assessable income without deduction for the expenses. But if you own the property with at least one other person, then it's only your share of the net income from the property that's included in your assessable income. It may be necessary to lodge a partnership tax return to ensure this happens. You won't qualify for a co-contribution if you only have passive income. At least 10 per cent or more of your income needs to be from wages or a business but when doing this calculation you can ignore business expenses, which will make it quite easy to pass the test if you're in business. Note, trust income, even if from a business, is still considered passive so you may need to consider having the trust pay you a wage. Here's a handy chart that explains clearly what's in and what's out:

Here's a handy chart that explains clearly what's in and what's out:

Are you making deductible repairs?
If you're considering doing repairs to your rental property before the end of the financial year, take care to make sure they'll qualify for a full tax deduction. This won't be the case if you replace something in its entirety. For example, replace a worn fence a bit at a time over a few years rather than all at once. Replacing all the cupboards in a kitchen so they match rather than just the damaged one will mean that none of the expenditure is deductible. On the other hand, replacing a vanity can be deductible as a repair if the pipes from the old vanity are used.

Initial repairs are also not deductible. If the house needed painting when you bought it then painting it would be an improvement. On the other hand if during the time of your ownership the paint starts to peel and you repaint, these expenses would be a deduction.

A repair can become an improvement if it doesn't restore things to their original state (i.e. replacing a metal roof with tiles). But a change isn't always an improvement. The Australian Tax Office says the cost of removing carpets and polishing the existing floorboards is a deductible repair, yet underpinning due to subsidence is considered to be an improvement.

Tree removal is claimable if the trees have become diseased or infested during the time of ownership. Removal is also claimable if the tree is causing damage such as roots interfering with pipes and the damage wasn't present when you purchased the property. If a tree is removed because it may cause damage in the future or you're fed up with the leaf litter that has always happened since you bought the property, then you're making an improvement which isn't deductible.

Take care to perform repairs only when the premises is tenanted or in a period where the property will be tenanted before and after with no private use in the middle. It's better not to make repairs in a financial year during which you may not receive any rental income. If a property is used only as a rental property during the whole year then a repair would be fully deductible, even though some of the damage may have been done in previous years when the property was used for private purposes.

Julia Hartman is a chartered accountant, registered tax agent and founder of BAN TACS Accountants Pty Ltd. She's also co-author of Saving Tax on Your Investment Property, available from www.businessmall.com.au.

This information is of a general nature only and does not constitute professional advice. Readers should not act on the basis of any matter on this website without taking professional advice with due regard to their own particular circumstances. The authors and publishers expressly disclaim all and any liability to any person, in respect of anything and of the consequences of anything done or omitted to be done by any such person in reliance, whether in whole or in part, upon the whole or any part of the contents of this website.

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