Claiming deductions for employee training courses

Business owners sometimes need their employees to develop their expertise or skills in a particular area. While training courses like seminars and one-day intensives can be a worthwhile investment, there are still a few things employers should consider from a tax point of view.

Although employers can claim deductions for the full costs incurred when providing education to employees, including aspects like travel costs, many owners tend to forget to consider FBT implications.

Paying for employee work-related course fees generally constitutes as a fringe benefit and is subject to FBT. However, FBT law allows a full or partial reduction of FBT payable provided that the ‘otherwise deductible’ rule is met. The ‘otherwise deductible rule’ implies that if the employee had incurred the expense themselves, they could claim a deduction for the expense.

An education expense is considered to be hypothetically deductible to the employee depending on the type of course or education studied by the employee. The course must have a satisfactory connection to an employee’s current employment, maintain or improve the skills or knowledge required for the employee’s current role, or result in an increase in the employee’s income.

Employees cannot claim a deduction for education expenses if there is no connection to their current employment, even if it assists them gain new employment.

Claiming tax deductions for your holiday house

Leasing out your holiday house to others can make owning the property more affordable.

The principles that apply to an investment rental property also apply to leased or rented holiday houses. This means owners are entitled to claim expenses for the property based on the proportion of the income year when it was rented or available for rent. Some deductible expenses include:

• Property insurance

• Interest on any funds borrowed to purchase the house

• Repairs and maintenance costs (such as materials, council tip fees, trailer hire)

• An agent’s commission

• The decline in value of depreciating assets

• Capital works

However, if owners use the holiday house during the year, they cannot claim any deductions for the expenses that relate to that private use. This includes use by other family members, relatives or friends. For example, if the house is available to rent for most of the year, but two weeks are unavailable for personal use, then that two weeks must be ignored when calculating deductions.

If owners choose to charge relatives and friends a lower rent rate, the ATO will only allow deductions that are confined to the amount of rent received for that period. However, if the rent received surpasses the allocated rental fees for that period, then the total expense may be claimed.

Owners can also make claims for feasible travel costs if any travel is made to inspect, maintain or repair the holiday house. The provision is that travel must be solely for these purposes, and not combined with simply visiting the property to have a holiday.

Tax deductions misconceptions

Wrongly claiming tax deductions can result in heavy penalties from the tax office. Despite this, many Australian taxpayers continue to attempt claiming invalid tax deductions that are rejected by the tax office. While some are not quite so obvious, below are some common misconceptions about deductions that many taxpayers believe.

Driver’s licence: While claiming deductions for vehicle expenses such as repairs and servicing is allowed, claiming for the cost of a standard driving licence is not.

Vaccinations: Vaccinations against the diseases an employee may be in contact with due to work are not tax deductible

Childcare: Claiming deductions on the expenses paid to have someone care for your children during work hours is not viable, even when this is necessary for a person’s career advancement.

Commuting to work: Although certain circumstances, such as picking up or delivering heavy equipment, can allow a deduction, general travel between home and work does not.

Relocation expenses: The costs associated with changing employment, such as moving house or meeting an employment agreement are not deductible. This is because the expenses are often regarded as being incurred by gaining an assessable income.

Employee reimbursements and GST

Business owners registered for GST may be able to claim GST credits for an employee-reimbursed expense. A reimbursement occurs when a business repays an employee for the price (or part of the price) of a purchase they have made.

There are three conditions that an owner must meet in order to claim GST credits:

• the employee’s purchase must be taxable.

• the purchase is related to the employee’s work activities.

• the employee is not entitled to a GST credit for the expense.

To substantiate the claim, the owner must also be able to provide the relevant receipts or tax invoices issued to the employee. However, business owners need to be aware that they may be liable to Fringe Benefits Tax (FBT) when items are purchased for personal use or the purchase is part of non-cash employee benefits.

Business owners cannot claim GST credits for employee allowances, non-deductible expenses and reimbursed expenses that contribute to the running of the business that exceed the financial purchases threshold.

Changes to the taxation of employee share schemes

Changes to the tax treatment of employee share schemes, which took effect on 1 July 2015, means employees can now share in and gain from the future growth and success of a business.

The changes allow employees, who are issued with share options, to defer paying tax until they are able to grasp a benefit from the options. The new 15-year tax deferral period gives employees enough time to cash in their shares and options while removing the risk of paying an unfunded tax liability. This was a reoccurring issue when the maximum period of tax deferral was seven years.

As part of the improvements, eligible start-up businesses will also be offered a tax discount on employee options and share schemes. However, the start-up business, the scheme and employee must meet specific conditions to be eligible for the start-up concession.

The start-up business:
– must not be listed on the stock exchange.
– have an aggregated annual turnover of no more than $50 million.
– must be an Australian resident business.
– must have been incorporated for less than ten years before the share or option is granted.

The scheme:
– a share must be issued at a discount of 15 per cent of the market price or less.
– options must have an exercise price that reflects the current market value of a share or a greater value.

The employee:
–  must hold employee share scheme interests for at least three years.

Employees who acquire shares and held them for at least 12 months will benefit from the 50 per cent Capital Gains Tax discount when they sell their shares, including employees who acquire options that qualify for the start-up concession.

Small business CGT concession common errors

The ATO recently reported that small business owners were repeatedly making common mistakes when applying for capital gains tax (CGT) concessions eligibility tests.

A taxpayer may qualify for the CGT concessions if they:

– own a business with an annual aggregated turnover of less than $2 million;

– are involved in a partnership that owns a CGT asset;

– own active business assets that are used by an associated small business;

– satisfy the maximum $6 million net asset value test;

– satisfy the active asset test. This test requires the asset to be active for seven and a half years if owned for more than 15 years, or half the period of the ownership if owned for 15 years or less.

Business owners were recording the settlement date of the CGT event, instead of the contract date. As a result of this error, the asset may not be active for the required period or the 15-year exemption concession may not be applied correctly.

Many businesses struggled with the maximum net asset value test, where a business cannot own more than $6 million at the time the CGT event occurs. The net value is the total market value of a business’s assets and any entities and affiliates connected to those assets. The ATO revealed a prevailing error was the failure to identify liabilities related to the asset. In addition, business owners were also:

– not including the calculation of the CGT asset sold

– valuing assets at historical cost instead of market value, and

– not including calculations for goodwill assets.

Tax discount for unincorporated small businesses

To drive small business growth, the Government’s 5 per cent tax discount for unincorporated small businesses with an annual turnover of less than $2 million will take effect from 1 July 2015. The discount will be capped at $1000 per individual for each income year and will be delivered as a tax credit in their tax return.

It is expected to deliver a tax cut of $1.8 billion over the next four years.

Individual taxpayers can still calculate their business income the same way and then add a 5 per cent discount on the income tax payable on the business income.

The tax discount builds on the success of the first two small business bills passed through the Senate, where all small businesses gained access to an immediate tax deduction for assets costing less than $20,000 and small companies with an annual turnover of less than $2 million were handed a 1.5 per cent tax cut.

Last-minute tax tips for individuals

With just over a week until June 30, here are some tips that can help savvy individuals make the most out of their tax refund for the 2014-15 year. The following tips are by no means exhaustive and may not be relevant to every personal situation.

• Keep your receipts

The most important thing every individual taxpayer needs to know when it comes to claiming their tax is what expenses they can claim.  For most individuals, finding and organising receipts at tax time can be challenging and time-consuming. But, some of this stress can be avoided if they are mindful that they can claim up to $300 of work-related expenses without receipts. Even though there is no written evidence, taxpayers must be able to show how they worked out their claims.

• Claim your work uniform

People who are required to wear a uniform for work may be able to claim  clothes or laundry expenses.

•  Bring forward deductible expenses

Individuals who are earning less next year due to maternity leave or working part-time may be better off bringing forward any tax-deductible payments into this financial year. Rental property investors may also find it beneficial bringing forward any property maintenance costs, as they can be claimed in full or in part.

•  Hit contribution caps

Self-employed individuals who are younger than 50 and haven’t exceeded the before-tax contribution cap of $30,000, or $35,000 if they are aged 50 or older, can make a personal deductible contribution.

•  Delay any income

Investors who are selling a property should consider deferring the sale until after 30 June 2015 to delay incurring CGT for another financial year. Although it will need to be paid eventually, freeing up short-term cash flow may be handy.

• Claim vehicle expenses

Individuals who use their car for a work purpose beyond travelling to and from their workplace can deduct the cost if they have a log book.

ATO cracks down on high work-related deductions

The ATO is closely scrutinising employees who make abnormally high work-related expense claims.

The tax office is using advanced data and technology to identify and investigate claims that stand out from the usual. They are repeatedly targeting people who claim a tax deduction for using their computer, phone or other electronic devices to perform duties, transport bulky tools and equipment, or travel between work and home.

If an employee has to use their computer, phone or other electronic devices for work purposes, they cannot claim a private usage portion. They must ensure they claim the correct amount and have evidence to validate their claim.

Employees usually can’t claim a deduction for travel between home and work unless they are transporting bulky tools and equipment. But there are certain rules that they must comply too. While overnight work-related travel is deductible, the ATO provides a reasonable travel allowance each year to cover the expenses for meals, accommodation and other incidental costs.

The ATO has provided three characteristics to help employees qualify a work-related expense claim:

– the claim must relate to the job.

– employees must have spent the money themselves.

– employees must have a record to prove it.

CGT on property in deceased estates

If you are appointed as an executor in a will, your responsibilities commence following the death of the will-maker. It is important for executors to consider the capital gains tax implications of a deceased estate when it is time to administer the estate property for its beneficiaries.

There is generally no CGT payable for the transfer of an asset from the deceased’s name to a beneficiary or the executor. However, the asset will become liable for CGT when it is sold by the beneficiary or an executor.

If the property was the deceased’s main residence, then the estate will have an exemption from paying CGT if it is sold within two years from the date of death. Spouses or beneficiaries can generally claim the main residence exemption when the deceased’s property becomes their main residence or when the property was purchased before tax on capital gains came into effect (on 20 September 1985).

If it is the beneficiary’s or executor’s intention not to sell the property within two years of the date of death, then they should obtain a valuation from a registered valuer. This will be used to calculate the capital gains payable when the property is eventually sold.