How to use Queensland flood donations to offset your tax

STEVE DOUGLAS explains how Australian charitable donations can be offset against income tax.

Can I claim taxes on my donation to the Queensland Flood Relief Appeal?
 
The Victorian bushfires of 2009 and the current Queensland floods are a reminder of Mother Nature’s power over us and how helpless we are when exposed to her wrath. But such tragic events also bear witness to the best of humanity – our ability to cope with adversity, overcome misfortune, rebuild, recover and most importantly, our willingness to help our fellow man.
     The Australian Government, like almost every other Government, recognises the importance donation and charity play in the modern world. As such, any contribution to an Australian-registered charity is allowed as a tax deduction against your Australian income tax in the financial year the payment is made. This is in recognition of the importance
of your donation and is also a manner of appreciation for your gesture.
     But in order to claim a donation you first need to have a taxable income to offset it against. If you’re an Australian living overseas, it’s unlikely you’ll have any taxable income as your offshore salary is not taxed in Australia. And if you have an Australian rental property with a sensible level of finance on it, you might realise you’re in a tax-loss position each year, with no tax payable in Australia and some tax benefits carrying forward into the future. If this is the case, donating to a charity will not improve your Australian tax position, as it can’t increase any tax-loss position and will be ignored once you have an income less than zero in your tax year.
     If you have an Australian rental property generating more income than your ownership expenses, including interest and depreciation, the donation can be used to reduce your net rental income and lower your annual tax liability. To claim the deduction in the current financial year, the donation needs to be paid and cleared by June 30, which is Australia’s financial year-end. Remember to keep the receipt as proof of payment.

     Of course, the decision to make a donation should never be based on the ability to offset tax. Rather it should be on the importance of the contribution. Many of us living overseas are fortunate to experience favourable circumstances, so it’s fair to lend a helping hand to the less fortunate, especially when their circumstances are borne from events out of their control. In these trying times, let’s all dig deeper to help those in need.

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Posted by smats Wed, 23 Feb 2011 07:23:00 GMT


Capitalise on the strong Aussie dollar

Don’t shy away from investing in the strong Aussie dollar, cash in on it – advises STEVE DOUGLAS.

Is it wise to wait for the strong Australian dollar to weaken before investing in Australian property?
 
A There’s always an excuse –market bubbles, interest rates, or fluctuating currency – to delay a decision to invest. But the cost of procrastination is more than you think.
     From a taxation perspective, the many incentives on offer to reduce tax on future Australian salary require time to accrue and achieve the best result. And from an investment perspective, the Australian property market continues to achieve sound and stable growth, so delaying entry can prove more costly than any potential currency cost. Quality lending can in fact act as a natural currency hedge, by minimising the deposit required and your exposure to high currency cost on the funds required, rather than the full purchase value. When using sensible lending, your cash outlay is limited to a 20 percent deposit, plus a five percent allowance for stamp duty and legal fees.
     Depending on which direction you think the currency might move, or how much it may be overvalued, it’s important to figure out what’s holding you back. Say you purchase an A$500,000 property, for which you require 25 percent for deposit and costs, with the remainder covered by an Australian dollar loan. If you feel the Australian dollar is currently overvalued by 10 percent and would improve that much in the next 12 months, then the additional cost of acting now would be 10 percent of the cash required (A$125,000), which is A$12,500. So if you wait a year for the currency to improve – and assuming it does – you’d be better off by A$12,500. But if the property grows by an average rate of seven percent per annum over the next year, it will be more expensive. Because when calculated on the total purchase price of A$500,000, your property would be worth A$35,000 more in 12 months if it achieves average growth. Hence the net cost of delay is the potential increase in property value – A$35,000 less the assumed currency cost of A$12,500, resulting in A$22,500. Remember, this could be a cost or an additional profit.

     The cost of delay is often far greater than any potential currency loss. You can always make additional reductions to your loan when you feel the Australian dollar has reached a better value. And an Australian property with available equity can provide a full hedge on your next purchase, as the deposit can be borrowed against your current property holdings. This ensures you don’t need to convert any currency, so you won’t experience issues with currency fluctuations.

 

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Posted by smats Wed, 26 Jan 2011 08:11:00 GMT


Fixed or variable interest rates – which works best in Australia?

STEVE DOUGLAS suggests ways to stay on top of Australia’s rising interest rates.

Q  Australia’s interest rates are rising – should I switch my loan from a variable interest rate to a fixed rate?
 
Australia’s recent rise in interest rates has catapulted it above most other global markets. With the Reserve Bank of Australia’s latest rise in November 2010, the base lending rate in Australia is now 4.75 percent per annum and the standard lending rate is approximately 7.8 percent per annum, inclusive of the banks’ margins. Surprisingly, this remains at the lower end of historic averages.
     It’s possible to fix your interest rate over a specified period – usually up to five years – which means any further increase wouldn’t affect you. This is useful if you want the certainty of knowing your interest costs regardless of changes. Or if you believe rates will rise even further and want to save money, since your fixed rate will remain unchanged. Certainty has its own value. Most people aren’t concerned about the savings but do prefer to have a set expense. But you’re still taking a chance, albeit on a wider platform. The current three-year fixed rate is 7.09 percent per annum, which is a considerable saving on the standard variable rate. Additionally, most banks offer substantial discounts to valued customers. After allowing for discounts, a typical Australian-dollar loan should near 6.97 percent per annum narrowing the gap between fixed and variable interest rates.
     If you fix your interest rate you’re hoping rates will continue to rise or stay the same. If rates reduce, fixing your terms could cost you more in the long run since you’re locked into a potentially higher rate. And cancelling a fixed-rate agreement comes at a risk of incurring early repayment penalties.
     It’s challenging to predict which way rates will go, but observing market movements can make your decision easier. Many factors influence interest rates including health of the economy, inflation, exchange rates and the availability of capital. In general, when the fixed rate is lower than the variable, the market is suggesting rates will remain the same or reduce. When the fixed rate is higher than the variable, the market is predicting rates will rise. The most important issue is to ensure you have the most cost-efficient loan available.
     Australasian Taxation Services’ Specialist Mortgage division can review your loan and compare it with what’s on offer and provides current variable and fixed interest rate updates.
Call to arrange a free, no-obligation assessment.

 

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Posted by smats Tue, 21 Dec 2010 05:05:00 GMT


Capital Gains Tax on Aussie property

STEVE DOUGLAS urge you to know your entitlements before selling your Aussie property, to enjoy maximum tax benefits.

Q. Once I move back to Australia I intend on living in my property before selling it. How long do I have to live there before it’s tax free?

A.
Under Australian Capital Gains Tax rules, your family home or Principal Place of Residence is free of Capital Gains Tax on the condition you’ve not rented it out for a while. In such a case, tax-free status is only allowed on a pro-rata basis. Your home is tax free only for the time you resided there, the rented period remains taxable. For example, if you rented out your property for four years and moved back in for one year prior to selling, only one-fifth of any gain is tax free; the remainder taxable. But as long as you’ve owned the property for more than 12 months, you’re still entitled to the usual half tax-free allowance on the taxable portion.
     While there’s no minimum time for living in the property, the authenticity of the period will have to be supported with documentation such as electrical accounts, removalists’ invoices, license address and electoral roll address. You might also be able to take advantage of some special rule. If you’ve lived in the property prior to moving abroad or renting it out, it can still be considered your primary residence for up to six years even if you rented it out during this period. In such cases you’ll have to obtain a valuation when you originally move out, which becomes your new cost base for tax purposes. So any capital gains from the original purchase price up to the new valuation will remain tax free. If you sell the property within the six years no tax is applicable. But if sold after, it will be pro-rata from the time you left, to the time of sale. This could be a minor cost – so don’t sell just to protect yourself against potential tax issues.
     For Australian tax purposes, you can only nominate the property as your home if you’ve actually lived in the property while being an Aussie resident. If you move back into the property, the pro-rata tax-free period will be increased even further. While living abroad, protect yourself against Capital Gains Tax through sensible planning – such as further acquisition and debt management. Don’t be afraid of its effects as Australian tax rates have recently reduced significantly. Even the full tax cost may be far less than you thought it might be. But if you can legally reduce the potential cost, this should be investigated and considered.

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Posted by smats Wed, 24 Nov 2010 08:19:00 GMT


Tax on foreign income

STEVE DOUGLAS reveals the importance of confirming Resident or Non-resident status in Australia, for tax purposes.

Q. As an Australian citizen working in Singapore, is my income taxable in Australia?

A. In July 2009 the Rudd Labour Government changed the process of determining taxes on foreign income earned by Australian Resident taxpayers living aboard. Under the old rules, if an Australian worked abroad for more than 90 consecutive days and already paid tax in the country of earning, their income was exempt from being taxed in Australia. But now, foreign income is fully taxed in Australia, with a credit given for tax paid in the country of earning. However, these rule apply only to Australian Resident taxpayers – Australian citizens temporarily working overseas. If you have confirmed Non-resident status, such rules do not apply.
    
The Australian Taxation Office (ATO) has recently increased its audit activity in this specific area, sending letters to all Australians working abroad. While these letters are intended to be “soft” audit checks on the accuracy of your income tax return, they can be confusing. The letter suggests your residency status has been found to be as an Australian Resident and therefore, all offshore income is automatically taxable and inaction on your part will result in additional costs. If you have an intention to remain overseas in the long term and receive such a letter, do the following immediately: 
•   Contact the ATO, preferably through your tax agent.
•   Make it clear you’re a Non-resident for tax purposes and therefore your foreign income is not taxable in Australia. You will not be required to alter past lodged returns.
•   Submit a completed Residency questionnaire to confirm your claim. Once this is done, the matter will be concluded in
your favour.

     If you decide not to respond to the questionnaire, the ATO will issue an amended assessment. This will include any income they’re aware of – including money transfers back to Australia – and you may be imposed with a sizeable tax and penalty cost. While you can dispute this matter, it will be a long and troublesome process – easily avoidable by confirming Non-residency status at the time you receive the questionnaire.     
     The ATO is easy to deal with on these matters as long as you remain attentive, cooperative and polite, so don’t feel threatened by the difficult but mandatory administrative process. If you have any doubts or concerns about your situation ask your tax advisor for advice, or contact ATS for assistance.

 

 

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Posted by smats Tue, 09 Nov 2010 07:05:00 GMT


Property purchase rules

 Australian property tax and expatriate tax expert STEVE DOUGLAS explains why setting up a company to purchase property requires careful consideration.

Q. I’m thinking of buying a property in Australia. Should I set up a company to do this?

A. Using a legal structure to purchase property is a very personal decision and should be based on a number of issues. These include legal protection, succession planning, transferability – and of course, taxation. As a general rule it’s not ideal, as the company will not benefit from the 50 percent Tax Exemption on Capital Gains. If a legal structure is deemed necessary, a Unit Trust or Family Trust would be more appropriate.
     The nature of the property also makes a difference. If it’s commercial rather than residential, a legal structure may be more suitable – particularly when multiple owners are coming together to make the purchase. In this instance a record of a defined unit allocation can help to determine each individual’s ownership of the asset. With residential property, it’s usually best to make an acquisition in your personal name. This is because if you can keep the debt levels high on the property during the time rent is collected, it can prove very tax effective – both during your time abroad and upon your return to Australia. Buying in your own name is also essential if you wish to take advantage of the Principal Residence Exemption on Capital Gains Tax rule. This can only apply if you live in the property some time in the future, upon your return to Australia.
     Setting up a legal structure may also incur the loss of any benefits in building up tax credits on excess holding costs. In such an instance, any tax losses can become trapped in the entity, disenabling you to offset any personal salary income against these losses, upon your return to Australia.
In all cases, the use of a structure should be carefully considered. If your only reason is to obtain an artificial tax benefit – which some schemes and Hybrid Trusts promote – you may find yourself in trouble with the authorities. The
Australian Tax Office has the power to look through and void the entity for tax purposes.
The current system and legal incentives for purchases as an individual already promotes the ability for you to enjoy a tax-free investment. So if tax avoidance is your sole motivation, using a legal entity could prove detrimental – you may just outsmart yourself!

 

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Posted by smats Mon, 30 Aug 2010 09:39:00 GMT


Should you declare your Aussie property income?

Australian property tax and expatriate tax expert STEVE DOUGLAS explains how Aussie property owners can determine if they need to submit an Australian tax return.

Q. I’m an Australian living in Singapore and recently rented out a property I own back home, so I understand I’ll be liable for Australian tax. Will the Australian Tax Office calculate tax owed on a base income of my Australian rent earnings, or on my overseas earnings?

 

A. Usually when you’re genuinely living outside of Australia for an indefinite or extended period, you’re considered Non Resident in Australia for tax purposes – regardless of the fact you may be a citizen. When this occurs, the only taxable activity is usually the rental property income and any earnings from services performed in Australia. You do not need to declare your offshore earnings to the Australian Taxation Office.  

If you’re only in Singapore on a temporary assignment, you may still be classed as Resident for tax in Australia. In this instance you’d need to declare all offshore Income and you’ll receive a credit for any Foreign Tax paid on it, when the Australian tax payable is calculated. This only applies if you intend to remain overseas for the short-term, so you need to be clear on your long-term plans.

Legally, if you’re earning rental income in Australia, you’re required to lodge a tax return each year to declare income earned and detail any expenses relating to the property – such as interest, agent fees, maintenance, rates and even travel expenses for inspection. Usually once all expenses are deducted there’s a shortfall. This shortfall can then be carried forward into future years when you return home, offsetting rental profits, capital gains on sale, or even income tax on an Australian-earned salary. You may also qualify for special building write-offs and depreciation allowances on your property, which can further enhance the tax effectiveness of your investment. Such incentives make purchasing Australian property an attractive proposition and it shouldn’t be underestimated as a powerful financial planning option.

If you choose to lodge your tax return yourself, the due date is October 31 of each year. If a Registered Tax Agent, such as ATS, prepares it on your behalf, you’ll usually enjoy an extension for submission until April of the following year. Make sure you do lodge your Australian tax return each year. The penalty for not doing so is A$550 per year per person and you may lose out on the tax benefits you’re rightfully entitled to.

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Posted by smats Mon, 26 Jul 2010 03:48:00 GMT


Australia Budget 2010: Tax roundup

Australian property tax and expatriate tax expert STEVE DOUGLAS highlights the tax implications of Australia’s recent 2010 Budget.  

 

With the release of the Australian Federal Budget in May 2010 some tax issues and changes will affect expatriates, intended migrants and foreign investors.

 

Personal Tax Rate Reductions 2010 saw minor reductions in personal tax rates, with a lift in the second threshold from A$35,000 to A$37,000 and a reduction in the tax rate in the second top tier from 38 percent to 37 percent. Although a minor cutback it’s still significant, as the Government reaffirmed its campaign promise of a 40 percent top from July 1, 2013 and a move to merge the current “A$37,000 to A$180,000” bracket into a single 30 percent rate.
          The Government also clearly stipulated it will maintain the previously stated reductions. Non Resident taxpayers will not be affected by the tax-free threshold and the 15 percent rate. Instead, there’ll be a 29 percent flat rate on the first A$37,000 of taxable income.

Company Tax Rate Reductions Effective July 1, 2013, Company Tax will be reduced from 30 percent to 29 percent and 28 percent shortly thereafter. Small businesses will receive the 28 percent reduction ahead of larger corporations.

Mining Super Tax The Government will be introducing a new, controversial 40 percent Mining Tax of all profits above a yet-to-be-confirmed Government stipulated return. One of the key recommendations of the Budget, this move may prove to be challenging to implement and is currently receiving great pressure from the mining industry and State Governments.

Quicker Investment Write-off for Small Business Small businesses will enjoy an immediate deduction for capital investments under A$5,000 – an increase from the current A$1,000.

Property Gearing & Tax Credits Deductions for property investors remain unchanged, allowing a full deduction for all costs including interest. In its brief to the Henry Tax Review, the Government stated this as a clear direction to preserve current benefits. This ensures with sensible tax planning and debt management, a nil tax environment can continue to be enjoyed on all Australian property investments made by offshore-based expatriates and investors. Further information on the Budget can be obtained at www.aussieproperty.com

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Posted by smats Thu, 24 Jun 2010 08:01:00 GMT


Enjoy tax incentives on your superfund

Australian property tax and expatriate tax expert STEVE DOUGLAS explains how to enjoy tax incentives on your superannuation fund.


Q. I’m depositing funds into my Australian superannuation fund – will I get a tax deduction?

 

A. Overseas residents can still make a contribution to their Australian superannuation fund and it can be claimed as a tax deduction. But some important factors should be considered.

            Contributions can only be claimed as deductions to a maximum that will take your taxable income to nil. For example, if your taxable income from property rental or other taxable items is A$3,000, even if you contribute A$10,000 to your superannuation fund, you’re only able to claim A$3,000. This is important to remember, as you’ll need to notify your superannuation fund manager to ensure they deduct the correct amount of contribution tax and record the balance as a personal contribution. Should you fail to do so, you might end up losing 15 percent of your contribution unnecessarily.

            Maximum annual deductions are A$25,000 if you’re 50 years old and younger and A$50,000 if you’re older. Make your contribution before June 30, as the funds must first be cleared to ensure a tax deduction.

            If you have no other taxable income or a tax loss, then a superannuation contribution will create no tax benefit, as it can’t increase a loss any further. In such a case, it’s better not to make a contribution unless your sole intention is to increase your retirement savings.

            In most cases, cash is better invested under your personal name, as there’s no tax on dividends or capital gains on share investments in Australia for persons living outside of Australia, whereas your superannuation fund may be taxed if invested in contributed funds. Furthermore, if you’re still facing a sizeable mortgage on your intended Australian residence, it’s wiser to keep the money out of the superannuation fund so it can be used to reduce the debt on your home. You can then make additional future contributions from the cash flow savings of having a low or zero private mortgage.

            Superannuation is an important part of retirement in Australia and comes with some special tax incentives. But it needs to be balanced with your overall objectives. Don’t be overly concerned if you’re not contributing to a superannuation fund while overseas, as long as you can see some increase in your overall financial circumstances. Focus on building an increased savings base that can be used to financially support you upon your return to Australia. Once you’re confident funds are sufficient to ensure a comfortable lifestyle, then consider making voluntary contributions into your superannuation fund.

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Posted by smats Mon, 31 May 2010 08:34:00 GMT


Tax on refinanced property

Australian property tax and expatriate tax expert STEVE DOUGLAS explains the tax implications when refinancing your property loan.


Q. If I refinance my Australian property loan, will I lose my tax deduction?


A.
Refinancing your property usually improves the interest rate or general terms on the loan and is also advisable if you wish to use the built-up equity in your property to assist with the purchase of another property. What matters most is what the original drawdown of the loan was used for. Any subsequent change or refinance keeps the original purpose and appropriate tax treatment. If you increase your loan, a pro-rata allocation of the loan against the different uses is made and applied against each expense. It’s irrelevant what the loan is secured against, or what it may be called, the sole deciding factor is what the money was used for.

          If you borrowed A$80,000 to buy a property for the purpose of renting, the bank advances the money to the settlement agent, so it’s clear the loan is designated for that property and since it’s rented, you can claim a tax deduction. If you borrow an additional A$20,000 to renovate the property, the loan will be considered as part of the property expenditure. Thus, interest against the new total of A$100,000 still remains tax deductable.
          But if you borrow another A$25,000 to go on vacation, using the equity in the house as collateral and increasing your loan to A$125,000, you’ll not be allowed to claim this amount – since it’s for private purposes. You’ll incur a pro-rata claim of 100/125, or 80 percent, of the interest as a deduction and the remaining as private with no claim allowed.
          Should you decide to use the equity to help with a deposit on another rental property, that portion would be a deduction against the new rental property – not the original one. If you refinance with another bank later, this ratio comes with the new loan as the original use is tracked forward. It doesn’t matter how many times this occurs, each time a redraw or refinance happens you simply recalculate the ratio and bring that forward.

          If the loan is in a single amount any repayment will be allocated in the ratio of the loan use. So if you wanted to pay off the A$25,000 holiday loan, only 20 percent would be allocated to reduce that portion on a proportionate basis. To avoid confusion, split such loans.

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Posted by smats Wed, 28 Apr 2010 06:27:00 GMT

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Australian Tax & Property Advice

With Steve Douglas, specialising in taxation & migration planning

Smats

Profile

Steve Douglas is the co-founder and Managing Director of Australasian Taxation Services (ATS), established in Singapore in 1995. ATS provides specialist taxation services to people of any nationality investing in Australian property, as well as Australian expatriates living overseas. Areas of specialisation include the Australian taxation aspects of property investment, as well as expatriate and migration planning.

Contact Info

Australasian Taxation
Services Pty Ltd

10 Jalan Besar
#17-01 Sim Lim Tower

Singapore 208787

 


Tel: 6293 3858 

Fax: 6293 4332

Web: www.smats.net 

Email: tax@smats.net