Records you need to keep on rental properties

When you own a rental property, keeping records is important. These will help you meet tax obligations. Generally, only individuals with their name on the title deed declare income and claim expenses.

Remember that the records must be kept in English or should be easily translatable into English, and kept for a minimum period of 5 years.

The records you need to keep include:

• Dates and costs of buying the property: These will help work out any capital gain or loss when the property is disposed of – the date entered into the contact is the purchase date, not the settlement date.
• Any rent and rent-related income: This will be required to report tax return.
• Expenses associated with the property: These are important to claim deductions you may be entitled to. These records should include the name of the supplier, the amount of the expense, nature of the goods or services, the date the expense was incurred, date of the document
• Significant changes: These include repairs or improvements or partial or all sale of the property – the cost of repairs and improvements should be kept separate from depreciation costs so that deductions and capital gains and losses can be calculated correctly.
• Costs of selling or disposing of property: To be able to work out any capital gain or loss

The amounts you don’t need to include as income

Amounts which are not classified as income are split into 3 categories.

Exempt income

This is income that you do not pay tax on, although, some exempt income may be taken into account when determining:

• Tax losses of earlier income years that you can deduct
• Adjusted taxable income of dependants

Some examples include certain Government pensions, certain Government allowances, certain overseas pay, some scholarships, etc.

Non-assessable, non-exempt income

This is also income that you don’t pay tax on – it does not affect your tax losses.

Some examples include the tax-free component of an employment termination payment (ETP), genuine redundancy payments, super co-contributions, etc.

Other amounts

There are also other amounts that are not taxable.

Some examples include: Rewards or gifts received on special occasions, prizes won in ordinary lotteries, child support and spouse maintenance payments, etc.

Tax treatment of insurance payments for damaged or destroyed property after a disaster

The Australian weather can be unpredictable, resulting in intense weather conditions. Bushfires, severe storms or floods can cause personal properties and assets a lot of damage. In the case that this does occur, individuals need to determine the tax treatment of any insurance payouts or relief payments that they may receive.

Usually, individuals are unlikely to experience tax consequences for payments for personal property or assets. Personal property or assets include your home and household assets.

On the other hand, if an individual’s income-producing assets incur damage, then they will need to determine the proper tax treatment of the payouts or relief payments that they receive and the costs involved in repairing or replacing the assets.

If you have been working from home and using personal assets to produce income (such as a personal laptop you are repurposing) then determining which tax treatment applies could get complicated. You may have to talk to the ATO or an advisor to clarify the specificities of your situation.

Trustees and beneficiaries registering for tax in trusts

Trusts have their own tax file number (TFN) that should be used to complete tax returns. Trusts are also able to apply for an Australian business number (ABN) on the condition that the trust is carrying on an enterprise. If a trustee applies for a TFN or ABN, then this is in the capacity of a trustee and is separate from any other registration the trustee may require for other capacities.

Trustees

The trustee is responsible for managing the tax affairs associated with the trust. This includes registration of the trust in the tax system, lodgement of trust tax returns, as well as paying certain tax liabilities.

Beneficiaries

For beneficiaries, their share of the trust’s net income is included in their tax returns. Further, payments on the expected tax liability may need to be made, for which the pay as you go (PAYG) instalment system can be used.

Taxation of your unused leave when leaving a job

When your job ends, whether there has been a termination of employment or redundancy you will receive a payment for unused leave. This payment will be taxed differently from your normal income.

The taxation will vary depending on the reason why you left the job and any unused entitlements that have been accrued over your employment (long service leave or sick leave).

Lump sum payments that you receive for unused annual leave or unused long service leave are taxed at a lower rate than other income. These lump sum payments will appear on your income statement or payment summary as either ‘lump sum A’ or ‘lump sum B’.

These payments may also be taxed differently if you lost your job as a result of Covid-19.

Fuel tax credits for businesses

The government provides fuel tax credits for businesses with a credit for the fuel tax (excise or customs) that is included in the price of fuel used in machinery, plant, equipment, heavy vehicles, and light vehicles travelling off public roads or on private roads.

Fuel tax credits a business receives depend on when the fuel was acquired, which fuel you used, and what it was used for. Since fuel credits change regularly, it is necessary to check rates each time the business activity statement (BAS) is filled out.

Eligibility

• Certain fuels and activities are not eligible
• Must be registered for GST when fuel was acquired
• Must be registered for fuel tax credits when you lodge the claim

Lodging your business activity statement

Businesses that are registered for GST are required to lodge a business activity statement (BAS). These assist in the reporting and payment of:

• Goods and services tax (GST)
• Pay as you go (PAYG) instalments
• PAYG withholding tax
• Other tax obligations

ATO will automatically send businesses who are registered for an ABN and GST a BAS when it is due for lodgement.

Businesses are given various options to lodge their BAS:

• Online services for individuals and sole traders – which may be accessed through myGov
• Business Portal – which is a secure website created by the ATO to assist businesses in managing their tax online
• SBR-enabled software – which allows access to lodgement from different financial, accounting and payroll software and can be integrated to industry-specific business software.

What do tax audits involve?

Tax audits are conducted when the ATO deems that a more extensive examination of an issue is necessary. These audits can be conducted on a fairly basic level or they can be much more in-depth and analytical.

In most cases, there will be a review which then leads to an audit, but this isn’t always necessary. A review may not be deemed necessary in cases where fraud or evasion is suspected or there is a high risk associated with the transaction.

The ATO states that they will be transparent about the following aspects of an Audit:

• Scope, periods under audit and expected completion date
• ATO’s risk hypothesis and information required to assess the hypothesis
• Choice of channel to provide information to ATO
• How audit will be conducted (key milestones and relevant guidelines)
• Advantages of, and procedures for, making voluntary disclosures
• Expectations from individuals/businesses when information has been requested for records
• Circumstances in which ATO can be expected to use their formal powers

Cooperating with the ATO’s requests is the ideal response. If there is a lack of cooperation, then the ATO can use their formal powers to access the information they are seeking:

• Notice powers: Require you to give information, attend and give evidence or produce documents
• Access powers: Give free access to the ATO to all places, books and documents and require that assistance be given to ATO’s officers to exercise their powers.

Cooperation makes this process much easier for both parties as a lack of cooperation can not only create a bad image but can be easily overcome by the ATO’s powers.

How to reduce the tax you pay

There are various potential ways you can reduce the tax you pay. You may be entitled to tax deductions, offsets or you may choose to opt for salary packaging.

Tax deductions will reduce your taxable income amount. For example, potential tax deductions are work-related expenses, self-education expenses, charitable donations, the cost of managing your taxes. These deductions will reduce the amount of income on which tax is calculated.

Tax offsets apply after tax has been calculated, alternatively known as rebates. These will reduce the amount of tax payable. For example, some offsets you could claim are low/middle-income earners, taxpayers with an invalid relative, pensioners and senior Australians, the taxable portion of a superannuation income stream.

Salary packaging allows you to ‘package’ your income into salary and benefits. There are many potential ways you can package your salary. For example, you could arrange to earn less salary in exchange for higher superannuation payments. By reducing your salary this way, you are reducing your taxable income.

What record-keeping requirements does the ATO have in place?

Record-keeping, if done well, can help running a business much easier. It gives you an overview of the business’ financial progress so that owners can assess their strengths and weaknesses and make decisions accordingly. Record keeping also enables owners to meet their tax and superannuation obligations easily – all the data and information required is readily available. Finally, record-keeping provides owners with a profile, of sorts, which demonstrates the financial position of the business to banks or other lenders.

Record-keeping requirements related to tax and superannuation need to be met. The specifics will depend on the unique tax and superannuation and obligations your business may have and the structure of your business (sole trader, partnership, company or trust).

The Australian Taxation Office (ATO), requires the following from all businesses:

• The records cannot be changed and further, the information should be kept so that it cannot be changed or damaged.
• The records must be kept for 5 years from the date they were prepared, obtained or a transaction was completed – or the latest act they relate to. The records might need to be kept for longer periods in certain circumstances.
• The business must be able to show the ATO their records if requested.
• The records must be in English or easily translated into English.

The ATO will accept paper and electronic records.

• There has been an inclination towards electronic record-keeping for both tax and super requirements as this makes certain tasks easier and reduces workload after initial set up. There may be some laws which require paper records in addition to electronic ones.
• Businesses may also keep paper records electronically i.e. scan paper documents and store them on an electronic medium (and dispose of papers).
• If records are stored electronically, then they should be on a device which owners have all access to, has been backed up, and allows the owner to have control over the information that is processed, entered or sent from the device.