The end of financial year is approaching fast and soon it will be time to start preparing and lodging your clients 2011 tax returns. We discuss some of the areas that are commonly missed and what you need to consider when preparing your clients 2011 tax returns.
Rental Properties
Depreciation
Investors are eligible to obtain tax deductions for the wear and tear on plant and equipment. This can include items such as carpets, light fittings, air conditioning units, etc.
Investors are also entitled to a capital works deduction on
- buildings begun in Australia after 21 August 1979
- buildings begun outside Australia after 21 August 1990
- capital works begun after 26 February 1992 that are structural improvements or extensions, alterations or improvements whether in Australia or outside of Australia; and
- environmental protection earthworks on which expenditure was incurred after 18 August 1992.
The rate allowed will depend on the time when the capital works and the type of capital works.
As cash is not physically paid out during the claim period it is worthwhile obtaining a depreciation schedule to not only maximise your claim for depreciation and capital works but also to ensure that complies with the requirements set out by the ATO. Omega Partners preferred supplier for depreciation schedules is www.depreciator.com.au
We often find that investors are either unaware of the ability to claim depreciation on their investment properties or are unaware of the capital allowance that they can claim. This can be significant.
Borrowing Expenses
Borrowing expenses should not be confused with interest. The difference is between the cost of the actual borrowing compared to the cost of the use of the funds. Typical borrowing expenses include
- loan acquisition fees
- guarantee fees
- valuation fees
- search, survey and registration fees
- mortgage lender insurance
- broker’s commissions
- some legal costs.
The deduction is normally spread over the term of the loan or 5 years whichever is less. It is important to pro-rata the expenses in the first and last income year and this is a common error made by many individuals. The other common error is to disregard mortgage insurance which can be a significant expense.
Foreign Income
If your client hold funds offshore in a currency other than Australian dollars and remit that currency into Australian dollars then your client has a foreign exchange event. Many individuals forgot to include the gain or loss in the calculation of their taxable income. As the Australian dollar has appreciated significantly against other currencies it is important to analyse your transactions to determine the method for calculating the gain or loss (which recently will generally be a loss) and determining the amount of your foreign income deduction. Changes to tax laws means that these losses are no longer quarantined and can be deducted against your other Australian income
The rules have also changed for expats from 1 July 2009 and this means that if you are a resident for tax purposes then the old rules no longer apply. If this is an area of concern give us a call as we have significant experience in dealing with expats.
Personal Services Income
This is a complex area and applies to many small business operators including consultants, IT consultants, real estate agents, etc. It is important to ensure that if you are earning personal services income, and in particular operating this through a company or trust, then you ensure that you have had your accountant look at this area in detail.
Capital Gains
One of the frequently overlooked areas when calculating capital gains is the impact of the capital allowance on the calculation. The capital allowances claimed or which could have been claimed must be taken into consideration when calculating your capital gain. If this is not taken into account then it will increase your capital gain and your taxable income. The ATO can then apply penalties and interest to the error you have made. If you are selling your investment property then talk to us about how this will impact on your clients 2011 tax return.