Tax implications of leasing commercial premises

Leasing commercial premises, such as an office building, hotels or stores have their own struggles compared to being a residential landlord. Making the correct tax payment and knowing what you can and can’t claim is key in being a successful commercial landlord.

When leasing out a commercial property, you must include the full amount of rent in you earn in your income tax return. You can claim deductions for expense related to renting out the property for the periods it is being rented or is available for rent, such as:

• Immediate deductions can generally be claimed for expenses relating to the management and maintenance of the property, including interest on loans.
• Expenses such as depreciation costs of assets and certain construction expenditure can be claimed over a number of years.

Tax deductions cannot be claimed on:

• Acquisition and disposal costs of the premise.
• Expenses that you do not pay for, such as water and electricity costs that your tenants pay for.
• Expenses that are not actually used for the commercial property.

As a commercial property landlord, you are liable for GST when your property is up for lease if you are registered, or required to be registered for GST. You can claim GST credits on your purchases that relate to renting out your property, such as managing agent’s fees subject to the normal GST credits rules.

What happens to your super in a divorce? 

Divorce or separation can be emotionally draining and stressful as it is, but the legal and financial responsibilities you also need to think about add an extra burden to dealing with the spit. One key area that needs to be considered to protect your financial future is your superannuation and what happens to it after your divorce.

The superannuation splitting law treats superannuation as a different type of property. This means that like any other asset it can be divided between partners who were in a marriage or de facto relationships either through:

• A formal written agreement where both parties sign a certificate confirming that independent legal advice about the agreement has been provided.
• Seeking Consent Orders to split the superannuation.
• Seeking a court order to split the superannuation in the event you cannot reach an agreement.

Splitting the super does not automatically give you a cash asset as it is still subject to superannuation laws.

There are three main options for dealing with your super in a split:

• A payment split: this is the most common way of dealing with super at the end of a relationship. If you are not yet eligible to withdraw your super, the benefit will be split whilst remaining in the super system. If you have retired or are eligible to withdraw your super, your split can be done as a payment.
• Payment flag: you can defer your decision if you want to wait for a specific event to occur, such as retirement or the maturation of an investment. Flagging allows you to protect the interest in your super fund and prevents the super fund from making a payment out of the super account until the flag is lifted.
• No split or flag: this is when you choose to treat super as a financial asset instead of splitting or flagging the super. The super is then a relationship asset that can be divided between the parties. This option is often used by de facto relationships in Western Australia as their super cannot be split, making it their only legal option.

Restoring damaged tax records after a natural disaster

In the event that your records have been damaged or destroyed in a natural disaster, such as bushfires, there are a number of ways you can reconstruct them. The ATO is able to help with reconstruction in the event tax records have been lost or damaged.

Where the tax records are lost or destroyed as a result of a natural disaster, the ATO will allow time for individuals to get their more pressing issues in order. They provide support by:

• Allowing lodgment deferrals of activity statements or tax returns without penalties.
• Allowing additional time to pay tax debts without incurring general interest charges.
• Making arrangements for tax payments to be done by instalments.
• Fast-tracking refunds.
• Arranging field visits to help with reconstructing tax records.

The ATO holds and can re-issue or supply copies of tax documents, such as income tax returns, activity statements and notices of assessment. If you have lost your TFN, you can still access your tax information by phoning the ATO.

If you are unable to substantiate claims made in your tax returns or activity statements because records have been damaged or destroyed, the ATO can accept the claim without substantiation, where it is not reasonably possible to obtain the original documents.

Updates to the unclaimed superannuation money protocol

The Superannuation (Unclaimed Money and Lost Members) Act 1999 (SUMLMA), more commonly known as the unclaimed superannuation money protocol, has been updated recently to provide a clearer structure going forward.

SUMLMA provides guidance on in relation to unclaimed money, lost member accounts, superannuation accounts of former temporary residents and their associated reporting and payment obligations. The update has now added content on inactive low balance accounts.

The act now clearly defines what is an inactive low-balance account, how statements and payments work, the registering of lost members and various rules for special cases.

It is important to note that the information in the protocol does not apply to super providers that are trustees of a state or territory public sector super scheme, in which:

• The state or territory has laws requiring the reporting and payment of unclaimed super money to the state or territory government. Or;
• The state or territory public sector super scheme complies with relevant state or territory laws.

The protocol provides administrative guidance only and should not be taken as a replacement for the law or technical reporting specifications.

What are franking credits?

Franking credits are a kind of tax credit that allows Australian companies to pass on the tax paid at a company level to shareholders. Franking credits can reduce the income tax paid on dividends or potentially be received as a tax refund.

Where a company distributes fully franked dividends (and those dividends are included in the taxable income of the taxpayer) the taxpayer can claim a credit against their taxable income for the tax that has already been paid by the company from which the dividend was paid.

Since the 2016-17 income year, the standard formula for calculating the maximum franking credits is:

Franking credit = (dividend amount / (1-company tax rate)) – dividend amount

Franking credits are paid to investors in a 0-30% tax bracket, proportionally to the investor’s tax rate. If an individual’s top tax rate is less than the company’s tax rate, the ATO will refund the difference. Therefore, an investor with a 0% tax rate will receive the full tax payment paid by the company to the ATO as a tax credit. Franking credit payouts decrease proportionally as an investor’s tax rate increases. Investors with a tax rate above 30% do not receive franking credits with dividends and may even have had to pay additional tax.

There can be eligibility requirements that must be met before franking credits can be paid, such as that you must hold the shares ‘at risk’ for at least 45 days to receive a total franking credits entitlement of $5,000 or more. There are also rules that can apply to buying, holding and selling shares with franking credits attached.

SMSF schemes for illegal access of super

The ATO has issued a warning for Australians to be aware of scheme promoters that promise to allow you to withdraw your superannuation early, and illegally.

Individuals can legally withdraw super when they turn 65, even when they haven’t retired, are at their preservation age and retire, or under the transition to retirement rules while continuing to work. Super can only be accessed early under circumstances that mainly relate to specific medical conditions or severe financial hardship.

The ATO is taking action to shut down promoters who tell people they can gain access to their super before they are eligible to by setting up a self-managed super fund (SMSF), which is illegal. There has been a number of schemes that encourage individuals to channel money inappropriately and deliberately to avoid paying tax.

Penalties for involvement in illegal super schemes include fines up to $420,000 for individuals and up to $1.1 million for corporate trustees. An individual may also lose their right to be a trustee of their superannuation fund or, in some cases, jail time up to five years.

Fund trustees or members who have knowingly been involved in a scheme or been approached by anyone claiming that they can withdraw their super early should contact the ATO immediately to advise of the situation and avoid further penalties.

Tax implications of buying a holiday home

Buying a holiday house can seem appealing, whether it’s to rent out for income, for your own holidays or both. However, it is important to be aware of the different tax implications for how you choose to use your holiday house.

If you own a holiday house and do not rent it out, you cannot claim any expenses relating to the property. If you decide to sell the property, you will need to calculate your capital gain or loss. Even though you don’t need to include anything in your tax return while you own the property, it is still important to keep all records to determine the capital gains tax implications for when you sell it.

If you own a holiday house and rent it out to others, you have to include the income you receive from rent as part of your income in your tax return. Deductions can be claimed on expenses incurred for the purpose of producing rental income, such as cleaning, advertising costs, pest control, insurance, maintenance and repairs. The cost of repairs and renovations cannot be claimed immediately, but are deductible over a number of years.

You are only able to claim deductions for the periods the property is rented out or genuinely available for rent. A holiday house may not be considered genuinely available when:

• It has none or limited advertising, e.g. when you only advertise by word of mouth or restricted social media pages.
• It is rented out free or discounted to family and friends.
• You use the property for yourself.
• There are unreasonable conditions for renting, e.g. restricting children and pets and only being available during off-peak holiday seasons.

If a holiday house is shared between two owners, then the deductions need to be split accordingly. For example, if the house is owned 50-50, then the owners can claim equal shares of the expenses. If one partner owns 20% of the property, they can only claim 20% of the expenses.

Removal of the main residence exemption for non-residents

The government has changed capital gains tax (CGT) rules for foreign residents under the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019, which was granted assent on 12 December 2019.

The law change no longer allows foreign residents to claim the CGT main residence exemption, which will impact people who are overseas or will be going overseas and want to sell residential property in Australia while they are a tax non-resident of Australia. However, this may not apply if you were a foreign resident for tax purposes for a period of six years or less during a CGT event occurrence on your Australian residential property, and a ‘life event’ occurred, including if:

• You, your spouse or your underaged child had a terminal medical condition.
• Your spouse or underaged child died.
• The CGT event involved the distribution of assets between you and your spouse because of divorce, separation or other maintenance agreements.

Individuals who will be impacted by the changes are non-tax residents who:

• Sell a property bought after 9 May 2017 and do not experience a ‘life event’.
• Sell property after six years of becoming a tax non-resident of Australia, regardless of a life event.

If you were not an Australian resident for tax purposes while living in your property, then it is unlikely that you will meet the requirements for the CGT main residence exemption.

Do you have insurance with your super?

Most super funds offer insurance as part of their super plan. It is important to be aware of what types of insurance you are covered by through your super fund to help you determine if you need extra cover outside your super and if you have adequate support in the event that you cannot work. There are three types of insurance that can be available through super funds:

Life insurance (also known as death cover):
This is the most common of all personal super insurances, and is part of the benefits your beneficiaries will receive when you die. Life insurance is typically applied to your super account by default. It is not compulsory with your super, however, if you have a self-managed super fund (SMSF), then you are required to consider insurance as part of your investment strategy.

Total and permanent disability (TPD) cover:
This insurance pays a lump sum if you become permanently disabled and are unable to work again, protecting you against the risk that your retirement income is cut unexpectedly short. TPD cover is often automatically joined with life insurance as a default cover.

Income protection (IP) cover:
This pays you an income stream for a period of time that you are not able to work due to temporary disability or illness. It is only available as a default cover in about one-third of super funds. It may be particularly useful if you are self-employed or have debts.

From 1 April 2020, you will not be given insurance through your super fund if you are a new member under the age of 25 unless you specifically request insurance and they accept, or if you work in a dangerous job.

You can check what insurance you have with your super fund on your annual super statement, your online super account or by contacting them. Through these you can see the type and amount of cover you have, and how much you are paying for it.

Proposed measures to increase retirement savings 

Currently, people aged 65 to 74 can only make voluntary superannuation contributions if they meet the ‘work test.’ This means they must report themselves to be working a minimum of 40 hours over a 30 day period within the financial year to qualify.

The government has proposed that from 1 July 2020, individuals aged 65 and 66 will be able to make voluntary concessional and non-concessional superannuation contributions without meeting the work test. This approach will enable participants nearing retirement to increase their superannuation savings regardless of their working arrangements.

As well as this, the government also proposes to increase the age limit for receiving spouse contributions from 70 to 74, to be implemented on 1 July 2020. Currently, people aged 70 and over cannot receive any contributions made by another person on their behalf, and the change will give older Australians greater flexibility to save for their retirement.