Tax & Super Newsletter – August 2016
Included in this newsletter:
- Gumboots? check, Akubra? check, tax status?….
- Renting out part or all of your home
- SMSF trustee with the travel bug? How to keep your fund compliant
- 5 smart things to do with your tax refund
- I’m a volunteer. Any taxing issues?
- ATO’s key results in 2014-15
Hobby farming is a lifestyle choice that has been around for years and looks like an option that, if anything, is on the increase.
And while it can be easy to poke fun at the success or otherwise of the average hobby farmer (like the old joke about their skills at growing blackberries and rabbits), for many the choice to embrace the rural idyll leads to a thirst for information about the taxation realities of owning a small country property.
It is true that small rural landholders may be pursuing “lifestyle” dividends rather than a genuine livelihood, but the option to claim the tax concessions that are available to bona fide primary producers is still available, should these small farm holders prove eligible.
The extra tax concessions available make securing primary producer status tempting — such as the three-year write-off for water facilities, deferral of profits in certain circumstances, and the ability to average income (ask us if you would like more information).
Hobby farms can range from a modest block with a cow and a few chooks to quite substantial small working farms capable of generating some income for the erstwhile tree-changers. But owners require more than a ute with a kelpie in the back to be able to turn their small farm into a source of tax breaks.
In business or not?
The vital question that needs to be settled is whether the small farm is indeed a “hobby”, and therefore operates with no expectation of making a profit, or if it is run like a business.
If the latter, the land owner will be looking to make money from the farming operations, and needs to show they are carrying on a productive business, with sound business principles and commercial intention.
This is not to say they need to be making a lot of money, but to qualify as a business, certain eligibility factors need to be satisfied. There is a substantial body of case law that has considered whether a taxpayer is conducting a farming business, with some factors established that contribute to forming a conclusion. None of these factors are decisive on their own, and the ATO considers all of them in combination to determine an overall impression of the activity and its intent.
The indicators that the ATO considers relevant include the following.
|Indicators a business is being carried on||Indicators a business is not being carried on|
|Significant commercial activity||Not a significant commercial activity|
|Purpose and intention of the activity||No purpose or intention|
|Intention to make a profit||No intention to make a profit|
|The activity is or will be profitable||The activity is inherently unprofitable|
|Repetition and regularity of activity||Little repetition or regularity of activity|
|Activity is carried on in a similar manner to ordinary trade||Activity carried on in an ad-hoc manner|
|Activity organised and carried on in a business-like manner and records kept systematically||Activity not organised or carried on in a business-like manner – no records kept|
|Size and scale of the activity||Small size and scale|
|Not a hobby, recreation or sport||A hobby, recreation or sporting activity|
|A business plan exists||No business plan|
|Commercial sales of product||Sale of products to relatives and friends|
|Tax knowledge or skill||Lack of such knowledge|
Examining the factors
The “prospect of profit” is something that the ATO considers to be an important indicator when determining the status of whether the activities relate to a hobby farm or a genuine primary producing business.
For example, if it could be shown that a business plan has been drawn up, or that expert advice was sought from relevant authorities or experienced farmers or consultants in an area of primary production, then this may lead to the conclusion that the taxpayer has the intent of conducting a farming business.
Further, soil and water analysis could have been undertaken for the purpose of determining suitability for a particular agricultural use, which can be viewed as evidence of commercial intent, as well as the investigation of potential markets.
Note however that agistment is not considered by the ATO to be a business activity as the taxpayer in such cases is deriving passive income from such activities. Contact this office if you need help with establishing whether your activities constitute a business.
It is normally the case that these farming activities typically give rise to losses in the early stages before the farming business turns over a profit.
However under the tax law, losses from non-commercial business activities conducted by an individual can only be deductible against other income (such as salary and wages) in the same income year if the activity meets certain criteria, and the taxpayer has an adjusted taxable income of less than $250,000.
There are four criteria, and at least one must be met. The activity must:
- produce assessable income of at least $20,000 during the year
- make a profit in three of the past five years (including the current year)
- use land and buildings (“real” property) valued at $500,000 or more
- use other assets (tractor, machinery, but not cars) valued at $100,000 or more.
Losses can be quarantined where none of the above criteria are met and used in a later year, with no time limit. Note however that the non-commercial loss rules do not extend to companies or trusts. Another exception that is of specific relevance here is that primary production businesses, even if they don’t meet the above criteria, can still offset losses if other taxable income is less than $40,000.
The ATO however maintains wider discretionary powers over these tax laws, so a small rural landholder can always apply for discretion if circumstances beyond their control unduly influence the financial outcomes in any income year. Contact our office if you believe you have a case.
Generally, if you rent out part or all of your home, the rent money you receive is assessable. This means that you must declare your rental income in your income tax return, but you can also claim deductions for any associated expenses.
However, be warned. If you rent put part of your home, such as one room, you also may not be entitled to the full main residence exemption from capital gains tax (CGT). This means you will be required to pay CGT on part of any capital gain made when you sell your house.
Goods and services tax (GST) typically doesn’t apply to residential rents, so you’re not liable for GST on the rent you charge. However, you also can’t claim GST credits for associated costs.
Income and expenses
If you rent out your home at normal commercial rates you will generally be able to claim tax deductions for associated expenses, such as the interest on your home loan. But if only part of your home is used to earn rent, the ATO generally only allows deductions for the part of your expenses that relate to the rental income. As a general guide, you should apportion expenses on a floor-area basis – that is, based on the area solely occupied by the tenant, together with a reasonable figure for their access to the other general living areas.
If you rent out part or all of your home at less than normal commercial rates – for example, to a relative – this may limit the deductions that will be allowed by the ATO. In fact, the deductions are capped at the amount of rental income returned.
Note that payments from a family member for board or lodging are considered to be domestic arrangements and are not considered to be rental income. In these situations, you also can’t claim income tax deductions.
For situations involving non-commercial rental and renting to related parties, ask us for more information.
Capital gains and the main residence exemption
Generally, you don’t pay CGT if you sell the home you live in (under the main residence exemption). However, if you have used any part of your home to produce income – for example, by renting out part or all of it – you are generally not entitled to the full CGT exemption.
To work out the capital gain that is not exempt, you need to take into account a number of factors, including:
- proportion of the floor area that is set aside to produce income
- period you use it for this purpose
- whether you’re eligible for the “absence rule” where you treat a dwelling as your main residence after you move out (ask us for more information if this is the case), and
- whether it was first used to produce income after 20 August 1996 – there is a special market value rule which could impact on the cost of the dwelling for CGT purposes.
Ask us if you need assistance to work out the proportion of your capital gain that is exempt from CGT.
SMSF trustee with the travel bug? How to keep your fund compliant
Are you the trustee of an SMSF but also a travel aficionado? Nothing wrong with that; however trustees need to be aware that there can be negative consequences if you are out of the country for too long.
If a trustee relocates overseas for an extended period, the residency status of the SMSF, its compliance status and its ability to receive tax concessions may be affected. Trustees will need to put strategies in place to avoid their SMSF becoming non-compliant and losing their concessional tax rates (non-compliant funds are taxed at the highest marginal rate).
There are three practical considerations to take care of to retain compliance with regard to these circumstances, however the first of these is relatively easy to satisfy. The fund must be deemed to be an “Australian” fund, which for most (if not every) SMSF will be satisfied as the initial contributions are likely to have been made and accepted by the trustee/s in Australia.
The other two main issues that often arise when a trustee of an SMSF relocates overseas for an extended period of time are as follows.
Central management and control of an SMSF is required to be in Australia
If high-level decisions – such as the formulation of an investment strategy or how assets are used to fund member benefits – are made outside of Australia, trustees need to show that “central management and control” of their SMSF is “ordinarily” in Australia and only temporarily conducted from overseas.
In general, an SMSF will still meet the “ordinarily” definition if its central management and control is temporarily done from offshore for up to two years.
A point to note however, if the absence is not of a temporary nature, it may be concluded that the fund’s central management and control is not “ordinarily in Australia” prior to the elapse of a two year period.
In the event that the “ordinarily” requirement cannot be satisfied, consider the following options:
- appoint a legal personal representative with an enduring power of attorney (who could be one of your adult children for instance) to be trustee in place of you. They will have the same power as a trustee, they will make key decisions and take responsibility as you cannot be seen to be making high-level decisions. If you are involved in high-level decision-making from overseas, central management and control has remained with you and will constitute a breach of the rules. (And be aware that the ATO can monitor email trails to ascertain if this has happened.)
- wind up the fund and roll benefits over into a retail/industry fund
- convert the SMSF into a small APRA fund.
Administrative duties are also imposed on trustees, so although you are overseas you may still find yourself needing to sign financial statements, for instance. An SMSF with up to two members needs to get all trustees to sign documents, and one with more than two members must have at least two signatures.
Problems emerge if you are overseas and unreachable, as documents may need to be signed by you. A possible solution to this is to receive all communications through email but be sure to check that digital signatures can legitimately be used. Or perhaps use an administrator for the fund as they can be responsible for receiving and processing all your paperwork.
If the central management and control of an SMSF is permanently outside Australia, you will not meet the “ordinarily” requirement and your fund may be deemed non-compliant with significant tax consequences arising from this.
Active member test must be fulfilled
A member is classified as active if they are a financial contributor to the fund or if financial contributions to the fund have been made on their behalf. One way to satisfy the “active member test” is to ensure that no contributions are made to the SMSF by a non-resident member.
Alternatively, the “active member test” requires that at least 50% of all assets (either based on market value or the value payable to members) are attributable to active members who are Australian residents. It would be pointless to appoint a legal representative to stand in your place if you breach the active member test.
All in all, the two issues above must be addressed if you are planning to relocate overseas. Be sure to seek professional advice to maintain the residency status of your SMSF.
5 smart things to do with your tax refund
For many people, their tax refund is treated like a mini lottery win. This tax time, consider putting your “gift” from the ATO to good use.
Perhaps it’s the modern world we find ourselves in that taxpayers look at their tax refund like it’s a fortuitous windfall gain. But if you look at your refund instead like it’s a chance to get on top of your fiscal responsibilities, its potential usefulness increases many times. When your refund arrives this season, consider putting it to work and silencing the part of you that wants to fritter it away on things that expire.
- Put it into your super
Remember the 70-year-old you gets better tax treatment. Unless you’re already contributing the maximum to your super through a salary sacrifice arrangement, there won’t be many other opportunities to do some tomorrow-proofing.
- Reduce or pay off your HELP debt
The ATO keeps track of your HELP debt balance and allows you to pay it off as you go. If your salary is over the HELP repayment threshold (currently $54,868) HELP repayments are levied from your before-tax income automatically, with the rate starting at 4% and rising as your pay increases. For now, if you pay your HELP debt upfront, the government reduces your debt by a further 10%, with a 5% reduction on offer for repayment contributions that are extra to the compulsory amounts. But this generosity runs out on January 1, 2017 — so this is the last tax refund that you can use to get this “free money” offer.
- Put it in a term deposit
This could be your chance to have some smart money — that is, money put away in a just-in-case account. Most Australian banks offer higher-interest savings accounts, and while some require minimum monthly deposits, you can’t go wrong letting your tax refund earn some extra returns for a short stretch.
- Pre-pay your recurring obligations
It’s a rare luxury to be able to pay any insurances, registrations and re-payment obligations before they roll around. Car registration payments commonly catch people off-guard, and paying extra off your mortgage will save interest on daily compounding rates. They don’t have to be left until last. Bite the bullet – defer those Manolos for now and buy them next quarter when your bills are fully taken care of.
- If you’ve got a small business or side venture, invest in it
Business tools and resources inevitably age. Why not use your tax refund to update old equipment or replace not-so-good assets with good ones? If you’re a small business, anything you buy for business use will likely be able to be written off, so you’ve got an extra to use your tax refund this way.
Having a better financial destiny is an age-old fight with discipline, but a tax refund is a chance to take some steps in the right direction.
From sporting clubs or environmental groups to many charity associations, volunteers are an indispensible workforce and support network for many organisations. For most, if not all, having volunteers ready to lend a hand is pivotal in them being able to function or survive.
Given that there are many hundreds of volunteers propping up all sorts of good works throughout the nation, and in the spirit of thorough tax planning, an important practical consideration for many may be if payments to volunteers constitute assessable income and are their expenses tax deductible?
What’s a volunteer?
There is no common law definition of “volunteer” for tax purposes, although it typically means someone who enters into any service of their own free will, or who offers to perform a service or undertaking. A genuine volunteer does not work under a contractual obligation for remuneration, and would not be an employee or an independent contractor.
Volunteers can be paid in cash, given non-cash benefits or a combination of both – payments include honorariums, reimbursements and allowances. Generally, receipts which are earned, expected, relied upon and have an element of periodicity, recurrence or regularity are treated as assessable income.
Conversely, where a person’s activities are a pastime or hobby – rather than income producing – money and other benefits received from those activities are not assessable income.
The examples below shed light on whether typical payments such as honorariums, reimbursements and allowances constitute assessable income.
Is an honorarium assessable income?
An honorarium is either an honorary reward for voluntary services, or a fee for professional services voluntarily rendered, and can be paid in money or property.
Example 1: Q. Alex works as a computer programmer at the local city council and volunteers as a referee for the local rugby union. This year he organised an accreditation course for new referees. He applied for a grant, arranged advertising, assembled course materials, and booked venues. Michael is awarded an honorarium of $100 for his efforts.
- No, the honorarium is not assessable income as honorary rewards for voluntary services are not assessable as income and related expenses are not deductible.
Example 2: Q. Mindy has a graphic design business and volunteers at the local art gallery. Mindy prepares the gallery’s annual report using her business’s software and equipment. At the gallery’s annual general meeting, Mindy is awarded an honorarium of $800 in appreciation of her services.
- Yes, this honorarium constitutes assessable income because it is a reward for services connected to her income-producing activities.
Is a reimbursement assessable income?
A reimbursement is precise compensation, in part or full, for an expense already incurred, even if the expense has not yet been paid. A payment is more likely to be a reimbursement where the recipient is required to substantiate expenses and/or refund unspent amounts.
Example 3: Q. Matthew is an electrical contractor. He volunteers to mow the yard of a local not-for-profit childcare centre. Matthew purchases a $15 spare part for the centre’s mower. The childcare centre reimburses Matthew for the cost of the spare part.
- No, the $15 reimbursement is not assessable income because Matthew has not made the payment in the course of his enterprise as an electrician.
Example 4: Q. Rose is a gardener. She volunteers to prune the shrubs of a local nursing home and uses materials from her business’s trading stock.
- Yes, any reimbursement she receives for the cost of the materials is assessable income because the supplies were made in the course of her enterprise.
Is an allowance assessable income?
An allowance is a definite predetermined amount to cover an estimated expense. It is paid even if the recipient does not spend the full amount.
Example 5: Q. Andy volunteers as a telephone counsellor for a crisis centre. He is rostered on night shifts during the week and is occasionally called in on weekends. When Andy works weekends, the centre pays him an allowance of $150. The allowance is paid to acknowledge Andy’s extra efforts and to compensate him for additional costs incurred.
A: Yes, these payments to Andy are considered assessable income because he received the allowance with no regard to actual expenses and there is no requirement to repay unspent money.
Expenses incurred by volunteers
On the tax deductibility of volunteer expenses, a volunteer may be entitled to claim expenses incurred in gaining or producing assessable income – except where the expenses are of a capital, private or domestic nature.
For instance, expenditure on items such as travel, uniforms or safety equipment could be deductible, but expenses incurred for private and income-producing purposes must be apportioned – with only the income-producing portion of the expense being tax deductible.
Example 6: Q. Robert operates a commercial fishing trawler and uses navigational charts in his business. He also volunteers as an unpaid training officer at the volunteer coastguard. Robert purchases two identical sets of navigational charts – one for his business, the other as a training aid in coastguard courses.
- Yes, Robert can claim the part incurred in gaining or producing assessable income – in this case, half the total cost.
What about donations? Are these deductible?
It is also common for volunteers to donate money, goods and time to not-for-profit organisations. To be tax deductible, a gift must comply with relevant gift conditions, and:
- be made voluntarily
- be made to a deductible gift recipient, and
- be in the form of money ($2 or more) or certain types of property.
Donors can claim deductions for most, but not all, gifts they make to registered deductible gift recipients. For instance, a gift of a service, including a volunteer’s time, is not deductible as no money or property is transferred to the deductible gift recipient. However individuals may be entitled to a tax deduction for contributions made at fundraising events, including dinners and charity auctions.
Example 7: Mila buys a clock at a charity auction for $200. This is not a gift even if Mila has paid a lot more than the value of the clock. Payments that are not gifts include those to school building funds as an alternative to an increase in school fees and purchases of raffle or art union tickets, chocolates and pens.
Example 8: Clive receives a lapel badge for his donation to a deductible gift recipient. As the lapel badge is not a material benefit or an advantage, the donation is a gift.
Consult this office for more information on which volunteer payments are considered assessable income and which expenses are typically tax deductible.
ATO’s key results in 2014-15
- 7 million income tax returns lodged
- 2% of tax liabilities were paid on time
- 1,400 taxpayers (individuals and companies) were prosecuted for income tax matters
- 96 million transactions were available for pre-filling
- more than 650 million transactions were reported by third parties for data matching purposes
- 450,000 reviews and audits resulted in over $1.1 billion additional income tax
- more than 26,000 small businesses were reviewed, raising $910 million
- more than 9,400 compliance activities on privately owned and wealthy groups, raising over $2.1 billion in tax liabilities