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Finance Newsletter December 2013/January 2014
December 4, 2013 | 
Author With house prices moving it’s even tougher for first home buyers to enter the market. If you want to assist a family member to buy their first home there are a number of thing you can do:
- Provide a gift or loan
- Offer equity in your own home as security
- Use Commonwealth Bank or other banks Family Equity products.
Family Equity is a home buying solution unlike any other, designed to help first home buyers enter the property market. It’s a range of financing options that can help customers secure a home loan, repay a home loan, or a combination of both. The main customer benefit is the ability to enter the property market by relying on guarantors for security and/or servicing support.
A family member has always been able to assist with providing equity or funds for a deposit. What’s good about family equity is it also allows servicing support. This means that if an applicant’s income is not sufficient to service the loan required, a family member (or anyone for that matter) can assist by paying some of the repayments on an ongoing basis. The person providing the equity or servicing support is not required to be on the title of the property being financed. Remember there is a grant and stamp duty incentives from the State Government for first home buyers too.
Do you have the most suitable loan for your circumstances?
Do you have the best rate available?
If your interest rate is over 4.79% that you may be able to save thousands per year by changing loans and or banks. Citibank is currently offering customers 4.79% variable for loans over $500 000. So if you are interested in saving thousands per year call Mercia finance to see if we can show you how benefit from a better rate.
If you have any questions about Family Equity, Reverse Mortgages or any other type of loan, call Dan Goodridge on 04144 233 40. Our service is free of charge to you the borrower and we have access to all the major lenders in WA.
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Tax Newsletter December 2013/January 2014
Tax changes following carbon tax and mining tax repeal
The Abbott government has introduced into Parliament proposed legislation to repeal the carbon tax and the mining tax.
Importantly, the Bill to remove the mining tax also proposes to repeal or revise a number of tax and superannuation measures. Key changes include:
- capital allowances for small business entities – the instant asset write-off threshold will be reduced to $1,000 and the accelerated depreciation arrangements for motor vehicles will be discontinued;
- company loss carry-back – the repeal of the loss carry-back measure will apply from the start of the 2013–2014 income year;
- superannuation guarantee (SG) charge – the SG charge percentage will be paused at 9.25% for the years starting on 1 July 2014 and 1 July 2015, increase to 9.5% for the year starting on 1 July 2016, and then gradually increase by half a percentage point each year until it reaches 12% for years starting on or after 1 July 2021; and
- low income superannuation contribution (LISC) – the LISC will not be payable in respect of concessional contributions made from 1 July 2013.
No GST following purchase of leased apartments
A taxpayer has been successful before the Full Federal Court in a matter concerning a GST assessment following the purchase of three residential apartments. The taxpayer (a company) had purchased the apartments in a hotel complex from the vendor on a GST-free basis as supply of a going concern. The apartments were subject to leases that the vendor had previously granted to a hotel management company, which was obliged to let the apartments as part of its serviced apartment business. The taxpayer had also elected to participate in a “management rights scheme”, which provided the taxpayer a right to income in exchange for allowing its apartments to be used in the serviced apartment business.
The Commissioner assessed the taxpayer as having a GST liability of $215,000 (ie an increasing adjustment), which represented 10% of the total purchase price paid by the taxpayer for the apartments. On appeal, the Full Court found that the primary judge had made an error in concluding that, following the sale of the reversion from the vendor to the taxpayer, there was a continuing supply, being the supply of residential premises by lease, by the vendor to the hotel management company. The Full Court said there was no continuing supply in relation to the lease; rather, the supply was the grant of the lease, which did not continue for the term of the lease. As a result, the taxpayer’s objection to the GST assessment was allowed.
TIP: At the time of writing it remained unclear whether the Commissioner would apply to the High Court for special leave to appeal against the decision. Assuming that the Full Court’s decision will not be appealed or overturned, purchasers who have previously acquired residential premises as a going concern and then included an increasing adjustment in a subsequent GST return may want to consider whether there is potential for a refund.
Note that there are time limits that can restrict entitlement to refunds. Purchasers who are contemplating acquiring residential premises as a going concern should exercise caution until it is clear whether the decision will be appealed, or whether the government may look into introducing amending legislation.
Individual not a tax resident of Australia
An individual taxpayer has been successful before the Administrative Appeals Tribunal (AAT) in arguing that he was not an Australian resident for tax purposes for the relevant years.
In June 2006, after his release from jail for drug offences, the man decided he had no future in Australia and moved to Thailand. In 2008, he moved to Bali and obtained the right to live in Indonesia as a retired person. During 2008 and 2010, the man made regular trips back to Australia, but during his last visit he was arrested and charged with possession of a precursor to a dangerous drug. The man was convicted and sentenced to 18 months’ imprisonment.
While in prison, the Commissioner commenced an audit of the taxpayer’s affairs and decided that he was an Australian resident with unexplained income, and issued assessments for the 2009 to 2011 income years. The Commissioner also assessed penalties in excess of $350,000. The Commissioner based his decision on documents showing bank interest payments to the taxpayer as well as payments he had made towards the cost of building a boat.
However, the AAT was satisfied that the man was not a resident of Australia in the years in question. It said the man had not been residing in Australia since mid-2006 and that he had established a home in Bali from early 2008.
Legal expense deductions to fight ASIC charges refused
A stockbroker has been unsuccessful before the AAT in arguing that legal expenses he had incurred in the 2011 income year were deductible.
The taxpayer had incurred legal expenses challenging an ASIC banning order in proceedings before the Federal Court and the Full Federal Court. Both courts dismissed his appeals. The banning order, which became operative from 7 May 2010, prohibited the man from providing financial services for five years. The taxpayer had also incurred legal expenses in defending 20 criminal charges for alleged insider trading; he was eventually acquitted on 17 of the charges, with the remaining three withdrawn by ASIC.
The AAT was of view that the legal expenses were not incurred by the taxpayer “in the course” of gaining or producing assessable income. The AAT found that when the taxpayer had incurred the expenses, his position as an authorised representative at the company he worked for had ceased. Accordingly, the AAT held that the expenses incurred in the 2011 income year were not deductible.
Tax debt release based on serious hardship refused
The AAT has affirmed the Commissioner’s decision to refuse to release an individual from his tax liability based on serious hardship grounds. Under the Taxation Administration Act, the Commissioner has a discretion to release an individual from paying a tax liability (in whole or in part) if satisfying the liability would cause that person serious hardship.
The man argued that due to his wife’s illness, he had been increasingly required to care for her and their children and that this has reduced his capacity to earn income. The AAT was satisfied that the individual was facing serious hardship in the immediate future in the sense of lacking the means to purchase food, clothing and medical supplies for his family, and other basic requirements such as accommodation. However, it said the serious hardship was not caused by him being required to meet the tax liability. Rather, the serious hardship was due to the taxpayer’s liabilities, of which tax debt was just one, exceeding his assets, and the outgoings required to service those liabilities exceeding his income. As he had not met the relevant criterion, the AAT said it did not have the power to release him from his tax debts.
TIP: Even if the Commissioner is satisfied that serious hardship will result from payment of a tax liability, the Commissioner is not obliged to exercise his discretion in favour of the individual taxpayer. Nevertheless, it is clear that the ATO is obliged to act reasonably and responsibly, and should not act arbitrarily or capriciously. An application for release from an eligible tax liability must be in the approved form.
GST refund request made too late
An individual taxpayer has been unsuccessful before the AAT in seeking a review of the Commissioner’s decision to refuse a GST refund in relation to the June 2004 quarter. The Commissioner had refused the refund on the basis that the taxpayer’s application was made after the four-year cut-off date for the June 2004 quarter (that is, 28 July 2008).
The taxpayer explained that due to his ill health and troubles with his then business, he did not get around to lodging tax returns until 2011. The Commissioner acknowledged that the man was owed a refund and had recommended that he approach the Department of Finance and Deregulation to obtain an act of grace payment, but said that because more than four years had elapsed since the time the taxpayer could have claimed the money, there was no discretion that could be exercised in the taxpayer’s favour. The AAT agreed with the Commissioner. It also refused the taxpayer’s request for an extension of time to apply to the AAT for review of the Commissioner’s objection decision (dated 31 October 2011) refusing the GST refund for the June 2004 quarter.
Property Newsletter – November 2013
Property Management: Is Being Anti-Pet Costing You Money?
The decision of whether or not to allow your tenants to keep pets in your property is a personal one. For most landlords, the decision is ‘no’. Surveys have shown that only 1 in 4 landlords allow pets, and WA landlords are among the least pet-friendly in the country.
So why are so many landlords anti-pet and could they be putting themselves at a financial disadvantage?
The general concern for anti-pet landlords is about the potential property damage that a pet can cause. Animals, particularly those of the four-legged variety, can certainly cause damage to carpets, floor boards, paint work, and not to mention the garden.
Animals can also affect the ‘aroma’ of a property. How many times have you walked into a home and knew instantly that a dog lived there. And there are noise issues as well. Barking dogs and fighting cats can often create issues between neighbours and put a landlord in a difficult position.
There are, however, plenty of positives to allowing pets in your investment property. For those landlords concerned about vacancies (and who isn’t?), being open to pets can dramatically increase your pool of potential tenants. This can mean shorter vacancies and better quality tenants. Around 60 percent of Australian households have pets and with so few pet-friendly rental properties, it’s easy to see why allowing pets could put you at a competitive advantage.
Some people argue that tenants who own pets are more likely to stay in a property for longer than those without pets. The reason is two-fold. Firstly, pets help tenants feel more ‘at home’ in a property. And secondly, tenants with pets are less likely to want to move for fear of disrupting the pet/family-member..
Clearly, some properties are just not suitable for pets including some strata properties or those with no suitable outdoor areas. But in many cases, it is simply the preference of the landlord not to allow pets. Landlords who are themselves pet owners seem to better understand the relationship people have with their pets and are more open to the issue.
Being too quick to close the door on pets could mean longer vacancies and missing out on quality long-term tenants. This is especially true for owners of property in pet friendly areas such as near dog beaches and parks. And it’s not just families who own pets but also many couples and singles, a growing segment in society.
When making the pet/no-pet decision, it’s perhaps human nature to think of the worst case scenario. There are ways to minimising the risks associated with pets by requiring a pet bond (this only covers fumigation costs), putting restrictions on the number or size of animals and by asking for ‘pet references’ that demonstrates previous good pet behaviour.
Property Acquisitions: How Buyers Can Tell the Difference Between a Salesperson and an Advisor
One of the things all property investors need to understand relates to who you should trust for advice and, specifically, the difference between a salesperson and an advisor.
For anyone considering investing in property, there can be a lot of information to take in, and it’s not just about property. One of the things all property investors need to understand relates to who you should trust for advice and, specifically, the difference between a salesperson and an advisor.
You would think that this is an easy distinction to make, but not so. Many salespeople wrongly present themselves as “advisors” and go to great lengths to convince you of this. They do this to build trust, knowing that you would probably rather buy from someone you trust. So how do you tell the difference? Here are some key things to look out for.
The ready-made solution
There are many skilled and honest salespeople out there, and many of them may genuinely want to help you. The problem lies in the fact that salespeople often have a solution already in mind before they even know what you might need.
Salespeople may appear as though they are representing you, the buyer, but in fact they are working for a seller or property developer. How many times have you heard a salesperson recommend a competitor’s product or steer you towards an option that doesn’t result in a sale? And you can’t really expect any different because it’s their job to sell.
Advisors will generally provide a consultation before recommending any course of action, carefully listening to your needs before considering a variety of options. A true advisor won’t be swayed one way or another but rather focus on what is best for you.
It’s their duty
Salespeople are trained to overcome objections, win trust and ultimately get the deal done. Advisors, on the other hand, are trained to asses a client’s circumstances and offer the best alternatives in the area of their expertise, whether it is property investment or taxation.
Advisors generally have a legal duty to do what is best for their clients. But it’s important you always know whether or not you are actually ‘the client’. Many buyers take the advice of selling agents, for instance, even though these agents must represent the interests of their sellers.
Follow the money trail
If you’re unsure whether someone is a salesperson or an advisor, just ask them how they get paid. Generally, people who are paid by the seller are sales people, whereas those who charge a fee for their service are more likely to be advisors.
Buyers’ agents typically get paid when you buy, but their fee is fully disclosed at the start in a very transparent manner, which can’t be said for many salespeople cloaking themselves as advisors.
Conclusion
Whenever seeking advice or guidance on buying property, it’s important to be acutely aware of the differences between an advisor and a salesperson. While you are free to hear anyone’s advice, you should always put the advice into the correct context and consider whether the advice has been tainted by any specific motivations. Your ‘advisor’ may end up just being a salesperson in disguise.
Suburb Snapshot: Inglewood
Inglewood is sometimes noted for being ‘where you buy when you can’t afford Mount Lawley’ but this is probably an unfair description as the suburb has a lot to offer beyond its proximity to its “fashionable” neighbour.
Inglewood is located 5km from the Perth CBD and part of the City of Stirling. It borders Mount Lawley to the south, Dianella and Yokine to the North/East, Bedford to the North/West and Maylands to the West.
Inglewood is a relatively small but affluent suburb that is popular amongst families and professionals. It is sometimes noted for being ‘where you buy when you can’t afford Mount Lawley’ but this is probably an unfair description as the suburb has a lot to offer beyond its proximity to its “fashionable” neighbour.
It is admired by its residents for its safety, strong community feel, cafe culture, wonderful mix of character and modern homes, and attractive tree-lined streets.
Dwellings in the area are predominantly of pre-war vintage, including many Federation and Californian Bungalow style homes sitting on green title lots. There are also a number of unit developments and flats, mainly constructed after 1960, as well as many modern homes scattered throughout the suburb.
Like Mount Lawley, Inglewood is designated a Heritage Precinct by the Council, ensuring streetscapes are protected and the demolition of older dwellings is all but impossible.
The main commercial area and cafe/restaurant precinct within Inglewood is concentrated on Beaufort Street, which contains retail services, fantastic eateries, a library and a recreation centre.
Young families in the area are well catered to with Inglewood having two very popular local primary schools. However, secondary school students typically attend either Mt Lawley Senior High School or John Forrest Senior High School in Morley.
There are plenty of parks and recreational facilities for residents in Inglewood including the popular MacAuley Park, Mount Lawley Tennis and Golf Clubs (both located in Inglewood) and the Terry Tyzack Leisure Centre.
With its location so near to the city, public transport options are in good supply. There are numerous bus services passing through the suburb, especially on Beaufort Street, and there is a train station in nearby Maylands.
According to REIWA, the median price in Inglewood currently sits at $792,500. In terms of price growth, the suburb has outperformed the Perth metropolitan area over the past 1 year and 5 years, but not over 10 years. The proportion of renters in the suburb is higher than the Perth average.
Recently, Inglewood received prominent attention when it was identified in Australian Property Investor magazine as one of only a few WA suburbs considered to be “immune” to drops in home prices. This is based on data that showed it ended each year in the past decade in positive property price territory.
There seems to be nothing significant on the horizon that could change the landscape of the Inglewood property market. The proposed MAX light rail system will have a stop adjacent to Terry Tyzack Aquatic Centre, which will benefit the northern end of suburb, but this project is certainly not set in concrete.
With its mix of ‘suburbia’ and inner-city living, which many people crave, Inglewood will always be a popular choice for owners and renters. As a destination for property investors, it should remain a reliable if not an extraordinary performer.
| Growth rate (1 year average) | 8.6% |
| Growth rate (5 year average) | 2.7% |
| Growth rate (10 year average) | 8.9% |
| Population | 5,503 |
| Median age of residents | 37 |
| Median weekly household income | $1,573 |
| Percentage of rentals | 37% |
Source: REIWA.com.au, September 2013
Finance: Two Ways to Fund a Renovation
Planning a renovation? One of the difficult decisions you will face is how to pay for it. You have 2 main options when it comes to getting a loan for a renovation.
In Australia, renovating is one of the most popular reasons for refinancing, whether it is for lifestyle purposes or to add value to a property. But one of the many difficult decisions facing would-be renovators is how to pay for the renovation.
Some people may have savings or the ability to redraw funds from their home loan. Others may use a credit card or personal loan as a quick way of getting the money they need. But most renovators, especially those planning large renovations, will need to organise financing.
You have 2 main options when it comes to getting a loan for a renovation.
The first is to borrow against your equity, which either involves increasing or refinancing an existing loan or taking out a new loan on an existing property. This is probably the most common method because it’s relatively easy.
The amount you can borrow is determined by the amount of equity available and the lender’s servicing criteria. Typically, you can borrow up to 80 percent of the value of the property without paying Lender’s Mortgage Insurance (LMI), but every lender has different policies.
With an equity loan, interest only starts accumulating when equity is drawn down. This is why these loans require discipline because the money can essentially be used for anything.
The key thing to remember about this type of renovation financing is that the lender won’t take into account the post-renovation value of your property, which could limit the amount you can borrow.
If you don’t have enough equity to fund your renovation, you could consider another option: the construction loan.
This sort of loan is similar to an equity loan but in this case the lender will take into account the finished value of the property when determining how much to lend you. This means you could potentially borrow a larger amount, making the loan a good option for more substantial renovations.
Like an equity loan, interest on a construction loan is only charged when money is drawn. But the lender won’t give you all the money upfront because a construction loan is a riskier prospect for the lender. The money is generally released in stages as the renovation progresses, just as if you were building an entirely new home. This gives the lender more control and ensures the money is not used for other purposes.
Getting approval for a construction loan may require you to have council-approved building plans and a fixed-price building contract in place. Plus, the lender will not only organise a valuation pre-renovation but also assess the project at each stage before an instalment is paid. When the project is completed the loan will generally revert to a standard variable loan or you may be able to refinance to a loan of your choice.
Beware the Lure of the ‘Sexy’ Investments
In Greek mythology, there lived a beautiful but dangerous creature known as the Siren. This femme fatale would supposedly lure nearby sailors with an enchanting song, causing them to shipwreck and ultimately perish.
For property investors, there are modern day equivalents of the Siren that need to be resisted at all costs. I am talking about the types of property that look unbelievably good – sexy even – but that don’t particularly make good investments. For those without the right knowledge or cool head, the consequences can be disastrous.
Here are some of the common culprits…
Culprit #1: Brand new house and land packages
Let’s face it, we all love shiny new things, which is why it’s easy to see the appeal of investing in a new home and land package. Not only does this type of property look amazing in the brochures, but it is loved by tenants and can even be tailored to suit your specific needs.
The tax benefits of new property, with its depreciation, are well-documented, plus there should be no maintenance, at least for the first few years. Clearly, investing in a beautiful house and land package is an easy option.
Like so many things, however, what looks good isn’t necessarily good for you. And when it comes to house and land packages, there are a few reasons why they often let investors down.
Firstly, when you buy new property, you’re not just paying for the building and land. Factored into the price are also the developer’s profit margin and a proportion of the marketing costs that come with selling this type of property. These hidden ‘costs’ could be the equivalent of a few years of capital growth, putting you behind the eight ball from day one.
Secondly, the superficial appeal of these properties is often enough to distract investors from the fact that the location of the property is less than ideal. The majority of house and land packages are located on the outskirts of the city in areas with abundant potential supply.
The bottom line is that while investing in new property can seem appealing, it often proves unsatisfying over the long term due to poor capital growth.
Culprit #2: Off the plan apartments
Like a brand new house and land package, a stylish off the plan apartment can seem an attractive option. The innovative architecture, modern interiors and funky inner-city location can make any investor weak at the knees. Add into the mix potentially strong rental yields and great tax benefits and you have one pretty package.
Sadly, however, the reality rarely lives up to the fantasy. Low valuations and finishes that don’t meet expectations are common outcomes after settlement. Worse still, investors later realise that their property is one of hundreds of similar properties all competing for tenants and buyers, driving values down.
When it comes to off the plan apartments, you must not be distracted by the glossy brochures, incentives and promised rent returns. In the cold light of day, these investments just don’t deliver the capital growth on offer with other types of investments.
Culprit #3: Holiday homes
Who hasn’t been on holiday, fallen in love with a place and thought to themselves ‘I should buy an investment property here so I can enjoy it while also earning an income’.
Holidays have a wonderful way of distorting reality – making everything seem better – and this can lead a normally astute investor to make extraordinarily bad decisions.
There are certain types of holiday investments, such as short stay apartments, that are particularly risky. But even a regular type of property in a holiday location can seem a far better investment than it actually is.
Holiday destinations typically have a very transient population, which means that demand for property can fluctuate immensely. Property investors often have to put up with massive vacancy periods, putting a major dent in their wallet. Also, a holiday home investment can require many additional costs to furnish, maintain and manage the property, which investors fail to take into account.
Selling a holiday home investment can often be tricky and take far longer than an equivalent property in the city. Property values in holiday destinations are notoriously vulnerable to changes in the economy. It’s an asset that quickly gets offloaded when times are bad, which drags down prices. Holiday destinations were some of the hardest hit during the GFC and many have yet to recover.
Competition with your future self
Why are so many investors lured in by these seemingly attractive investment options? I think it comes down to the fact that when faced with certain decisions, especially involving your future, it can be hard to put the needs of your future self ahead of your present impulses.
Some investments look good and might even seem satisfying at first, but they are ultimately not good for your future self. And making the wrong investment decision can cost you.
Ugly is often the way to go
If you care about building wealth and retiring wealthier or sooner, you need to beware of the types of investments I have mentioned. This advice applies not only to investors but also to home buyers who want to build equity and upgrade their home down the track.
There is always a compromise with ‘sexy’ investments. You’re paying for all the ‘gloss’ and in most cases sacrificing important aspects such as location, which inevitabley leads to poor growth. They may offer short term benefits because they are ‘easy’ and immediately gratifying, but the lure quickly fades.
Sometimes the best property investment option is the ‘ugly’ one. Picture an old house needing renovation, sitting on a large block in an established suburb. It might not look that great to the eye, but it could offer an exceptional opportunity for the investor who can see its true beauty – potential for strong capital growth.
Unglamorous properties don’t attract a lot of attention, which means you can often secure them at a great price. Plus, they allow you to manufacture growth by making them a little sexier.
The bottom line is that before entering the market as an investor, you need to be absolutely clear on why you are investing. Is it to show-off to your friends and family? Is it to pay less tax? Or is it to build serious wealth that provides you with a financially secure future? Keeping your eye on the prize will help you stay on course for the long term, even if you encounter many distractions along the way.
Perth Offers Above Average Yields Despite Being Growth Leader
The big story for property investors in Perth is that despite very strong growth in values, the city’s rental yield remains above the average for all capital cities.
Perth currently has the strongest housing market of all the capital cities, according to RP Data’s Australian Housing Market Update for September.
House values are up 9.7 percent over the past year, while the growth in unit values was lower but still significant at 6.1 percent.
Accompanying the lift in values has been a monumental jump in the number of properties sold. In the 3 months to June 2013, there were 23.2 more sales than over the same period last year.
Rents in Perth have also increased, with house rents growing by 5.6 percent over the past year and unit rents growing by 6.5 percent.
However, with many renters taking advantage of cheap credit to buy their first home, the pressure on the rental market has now eased and the vacancy rate has increased.
Properties in Perth are selling much quicker than they were last year with the average time on the market falling from 64 days to just 34 days.
The big story for investors is that despite very strong growth in values, the rental yield remains above the average for all capital cities. The average rental yield for a house is 4.4 percent and 5.0 percent for a unit
Tax Newsletter – November 2013
Residency requirement for CGT home exemption failed
The Administrative Appeals Tribunal (AAT) has denied an individual’s claim that an exemption from capital gains tax (CGT) should apply to a property that he and his ex-de facto partner had sold. The individual had purchased land in 2002 with his then partner, and construction of a house on the land commenced in April 2004. However, the couple ended their relationship in September 2004.
Despite this, the individual argued that they had moved into the house in around May or June 2005 to meet the requirements under the law to sell the property without being subject to CGT. The AAT found that the evidence before it failed to establish that the house became the individual’s main residence “as soon as practicable” after construction was completed, and failed to establish that the house continued to be his main residence for at least three months after that. In this case, both requirements had to be met in order for the exemption to apply.
Parent liable to CGT on half-share of townhouse
An individual has been unsuccessful before the AAT in arguing that he should not have to pay CGT on the sale of a townhouse he owned jointly with his son because, he argued, he was only holding his interest in the property to protect his inexperienced son from selling it on a whim.
The individual had purchased the property for his adult son to live in and transferred the property to himself and his son as joint tenants. After living in the townhouse for a few years, the son moved out to another property. The townhouse was then sold and all of the funds were used to pay down the mortgage on a new property. The individual argued that he received no proceeds from the sale and that he held his interest in the property in trust for his son, or alternatively, that an exemption under the CGT law should apply. The AAT did not accept the arguments and held that as a joint tenant, the individual was liable to CGT on 50 per cent of the net capital gain on the sale.
Penalty for unsubstantiated work-related deduction claims
The AAT has recently affirmed a decision of the Tax Commissioner to impose a penalty on an individual equal to 50 per cent of the tax shortfall amount arising from deduction claims for work-related expenses that were unsubstantiated.
The individual worked as a cars salesman and in his 2011–2012 tax return made various claims for work-related expenses amounting to around $34,300. The Tax Commissioner determined that most of the claims were unsubstantiated and imposed a penalty of around $6,100, representing 50 per cent of the tax shortfall. The Commissioner also told the AAT that the individual had made similar claims in previous years.
The individual did not dispute that the claims were unsubstantiated, but argued that the penalty was severe and that he was unable to pay an outstanding portion of the penalty of $1,400. The AAT noted, among other things, that the individual did not retain invoices or receipts, or provide satisfactory evidence to substantiate the claims. The AAT was of the view that the individual’s conduct was more serious than mere failure to take reasonable care, and held that the penalty imposed was appropriate.
No enterprise, so GST credits refused
The AAT has refused an individual’s claim for input tax credits as it found no evidence that the individual was carrying on an “enterprise”. The individual claimed that before she was required to serve a term of imprisonment, she had tried to start a “services business”. She claimed that she had purchased, among other things, two motor vehicles, various office equipment, and business promotional materials. The individual made claims for input tax credits totalling almost $74,000 in respect of the various purchases over four years. However, the individual said the attempts to start the business did not succeed and straddled her term of imprisonment. The individual also claimed that any records she had of the purchases were lost or destroyed, or that she had not been asked to produce documentation by the Tax Commissioner.
The AAT said the individual was given various opportunities to produce documents to back her claims before the hearing; however, it noted that her evidence, being mostly personal testimony, did not satisfy the burden of proof that the Commissioner’s assessment denying the input tax credits was excessive. The AAT found that there was no “enterprise” for the purposes of the GST law and that the decision to deny the input tax credits was correct.
Special GST clause in contract unclear
A company (a trustee of a family trust) that had sold a property to an individual has been unsuccessful before the Victorian Supreme Court in a matter concerning whether the individual was required to pay GST in addition to the purchase price on the property.
The purchase price was set out in the Particulars of Sale in the contract as $2,250,000. The Supreme Court reviewed the contract, and in particular, a “special condition” dealing with GST. While the Court accepted that the commercial aim of the special clause may have been to allocate responsibility for any GST liability attached to the sale of the property, it considered that the contract said nothing about whether the purchase price in the Particulars of Sale was actually intended to include GST. Further, it could not discern from the special clause any particular contractual intention of the parties. In conclusion, the Court held that the special clause should be removed from the contract. As a result, it said the $2,250,000 amount in the Particulars of Sale should be understood to be inclusive of any GST payable on the sale.
TIP: This case highlights the importance of ensuring that a contract for the sale of property clearly specifies whether the sale is subject to GST and whether the price is GST-inclusive or GST-exclusive.
Plumbers were full-time casuals, not contractors
The AAT has found that individuals working for a plumbing business were employees of the business and that the business was required to provide superannuation contributions for them. The business argued that the workers were independent contractors and that there was no superannuation requirement.
After reviewing the individuals’ relationship with the business, the AAT was of the view that, effectively, the workers were full-time casuals paid on an hourly rate and not eligible for holiday or sick leave. The AAT considered various factors, including that the individuals all had the same contract (with the same terms) with the business. The AAT said one would expect independent contractors to have differing terms, but the fact that their contracts were the same was “extraordinary”. Another key factor was that the hourly rates charged by the workers to customers were largely set by the business. Overall, the AAT concluded that the workers were employees and affirmed the requirement to pay superannuation.
ATO warns of schemes to access additional franking credits
The ATO has cautioned taxpayers against trading shares on a special market operated by the Australian Securities Exchange (ASX) with the sole purpose of obtaining additional franking credits. The ATO says these arrangements involve a taxpayer selling shares in a company on the ordinary market after a franked dividend has been announced, and retaining the franked dividends. Then, within days, the taxpayer buys back a similar parcel of shares in the same company on the special market, which also has franked dividends. The ATO says the transactions could constitute “dividend washing” and that the taxpayer could face penalties under the law.
TIP: Dividend washing occurs where shareholders seek to claim two sets of franking credits on what is effectively the same parcel of shares. Taxpayers who are unsure about their own circumstances should seek independent advice or apply for an ATO private ruling.
ATO focuses on dodgy financial products
The ATO has highlighted areas of concern in relation to certain financial products, particularly a small number of financial products that may offer the promise of tax benefits that may not actually be available to some or all investors who invest in the product.
Key factors that draw the ATO’s attention include suggestions that the investor could obtain tax advantages (that most taxpayers would not in fact receive in their individual circumstances), or that the tax law’s anti-avoidance provisions may not apply.
Finance Newsletter October 2013
Mercia’s Mortgage Brokers
Where are Interest rates going?
Reading the business press and thinking of fixing your home or investment loan?
There are some great variable and fixed rates available.
4.74% variable with a non major bank. Including no application fee.
And 4.89% fixed for 3 years with a bank that allows on offset on a fixed rate loan.
If you are not sure if you have the best loan, we can help you look at your options and may be able to help you get a better rate.
Remember that Mercia finance brokers can assist you with car loans, home loans, Lo-Doc home loans for the self employed, construction loans and any other type of mortgage or loan. Our service is free of charge to you the borrower and we have access to all the major lenders in WA.
A Mercia Mortgage broker can give you advice and comparisons between all the major lenders.
All these services are provided by our friendly and professional mortgage brokers at no cost to you – so you have nothing to lose and everything to gain.
If you would like to speak to a broker, call Dan Goodridge on 0414 423 340 or e-mail dg@iinet.net.au .