SJM Accountants Pty Ltd


Landlords Beware: Key issues for property investors
June 27, 2015, 6:16 am
Filed under: Uncategorized

Are you relying on negative gearing?

There has been a lot of negative conversation about negative gearing lately.  But, if you are currently negative gearing your investment property, should you be concerned?

Negative gearing is when you claim more in deductions than you earn for an income producing asset that you have purchased using debt.  It is not limited to property, you can for example negatively gear shares, but property is the dominant negatively geared asset claimed by Australians.

The latest Taxation Statistics show that we claimed $22.5 bn in rental interest deductions in 2012-13 against gross rental income of $36.6 bn.  While these statistics are not as bad as previous years because of the low cost of borrowing ($1.6 bn less than 2011-12), it’s more than the total Defence budget in 2013-14 at $22.1 bn.

The use of these property deductions does not vary widely across income ranges – that is, it’s not just those on the highest income bracket using negative gearing.  The highest proportional losses were experienced by those with incomes (net of the rental loss) between $55,001 and $80,000, where deductions exceeded rental income by more than 28%.  Negative gearing makes owning an investment property accessible to those who potentially would not invest for the long term gain in property value alone.

The Reserve Bank has stated that the ‘hot’ property market, particularly in Sydney, is because “Investor demand continues to drive housing and mortgage markets, with low interest rates and strong competition among lenders translating into robust growth in investor lending.”  In NSW, lending to investors now accounts for almost half of the value of all housing loan approvals.  Demand drives price.

The tax policy experts we canvassed generally held the view that negative gearing distorts the market and – in combination with the CGT discount – provides considerable and unnecessary tax advantages to those who least need them.  To quote one, “[Negative gearing] is a uniquely Australian phenomenon (no other country is so generous) and I would abolish it (and the CGT discount) immediately (and not be so generous as to grandfather existing owners). The suggestion that its (temporary) abolition in the early 1990s led to an increase in rent was based on spurious and incomplete evidence.  More relevant research has subsequently debunked the suggestion that the spike that happened in Sydney house prices had little to do with the abolition and a lot more to do with other, unrelated market forces.”

At present, the Government and property investors want to keep negative gearing.  It’s a lonely policy position. The Government Tax White Paper is due out later this year and may provide a better indication of any potential risk for investment property owners.  But, negative gearing is not something to bank on as a long term strategy.  It’s just a question of which Government will have the support to remove it.

Friends, family and holiday homes

If you have a rental property in a known holiday location, chances are the ATO is looking closely at what you are claiming.  If you rent out your holiday home, you can only claim expenses for the property based on the time the property was rented out or genuinely available for rent.

If you, your relatives or friends use the property for free or at a reduced rent, it is unlikely to be genuinely available for rent and as a result, this may reduce the deductions available.  It’s a tricky balance particularly when you are only allowing friends or relatives to use the property in the down time when renting it out is unlikely.

A property is more likely to be considered unavailable if it is not advertised widely, is located somewhere unappealing or difficult to access, and the rental conditions – price, no children clause, references for short terms stays, etc., – make it unappealing and uncompetitive.

Repairs or maintenance?

Deductions claimed for repairs and maintenance is an area that the Tax Office is looking very closely at so it’s important to understand the rules.  An area of major confusion is the difference between repairs and maintenance, and capital works. While repairs and maintenance can be claimed immediately, the deduction for capital works is generally spread over a number of years.

Repairs must relate directly to the wear and tear resulting from the property being rented out. This generally involves a replacement or renewal of a worn out or broken part – for example, replacing damaged palings of a fence or fixing a broken toilet. The following expenses will not qualify as deductible repairs, but are capital:

  • Replacement of an entire structure (for example, a complete fence, a new hot water system, oven, etc.)
  • Improvements and extensions

Also remember that any repairs and maintenance undertaken to fix problems that existed at the time the property was purchased are not deductible.

Travel expenses to see your property

If you fly to inspect your rental property, stay overnight, and return home the following day, all of the airfares and accommodation expenses would generally be allowed as a deduction. Where travel is combined with a holiday, your travel expenses need to be apportioned. If the main purpose of the trip is to have a holiday and the inspection is incidental, a deduction for travel is not allowed. In these circumstances you can only claim a deduction for the direct costs involved in inspecting the property such as the cost of taking a taxi to see the property and a proportion of your accommodation expenses.

If you drive a car to and from your rental property to collect rent or for inspections, you can claim your car expenses.   Just keep in mind that you need to be able to prove that you needed to visit the property.

Redrawing on your loan

The interest component of your investment property loan is generally deductible.  Take care if you have made redraws on your investment loan for personal purposes.  A portion of the loan may be non-deductible.

Borrowing costs

You are able to claim a deduction for borrowing costs over 5 years such as application fees, mortgage registration and filing, mortgage broker fees, stamp duty on mortgage, title search fee, valuation fee, mortgage insurance and legals on the loan. Life insurance to pay the loan on death is not deductible even if taking out the insurance was a requirement to get finance.  If the loan is repaid early or refinanced, the whole amount including mortgage discharge expenses and penalty interest become deductible.

Tax scams catching out the unwary

Every tax time is an opportunity for scammers to target the unwary. This time around, the scammers are phoning and claiming to be from the prosecutions department of the ATO.  They then state that they believe you have committed fraud and the Sheriff’s Office has been called.  You can of course make this all go away by transferring cash using the details they provide or by giving your details to them.  All of it is fake. There are a number of variations to this fake arrest warrant scam. In some cases a message is left on an answering machine obliging the person to call back.

Understandably for those with outstanding tax debt, these calls can cause concern. If you receive a call like this, you should feel free to hang up.  We can contact the ATO on your behalf to verify there are no known issues.

Or, if you would like to report the scammers, take as many details as possible without giving any information away (phone numbers, supposed section of the ATO, name of the person calling, etc.,) and pass them onto us.  Once again we’ll verify with the ATO and report any known details about the scam for further investigation.

If you are contacted by email by the ATO or a group purporting to represent the ATO, you can forward these emails directly to the ATO at ReportEmailFraud@ato.gov.au.

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The material and contents provided in this publication are informative in nature only.  It is not intended to be advice and you should not act specifically on the basis of this information alone.  If expert assistance is required, professional advice should be obtained.



Xero: Find and Recode
April 20, 2015, 9:50 pm
Filed under: Uncategorized

Brilliant new feature for accountants and bookkeepers



XERO: New and Improved Inventory
March 24, 2015, 10:38 am
Filed under: Uncategorized

Inventory; one of the last limitations of Xero has been resolved, great news!!!

https://www.xero.com/blog/2015/03/introducing-new-and-improved-inventory/



In the company of strangers: should your business bring in investors?
February 25, 2015, 8:21 am
Filed under: Uncategorized

Sometimes the difference between a good business and a great business is simply having sufficient capital to execute your business plan.  For many businesses, the owners have put everything they have into growing the business but there is still a gap.  Investors offer an opportunity to close that gap but at what cost?

How do you know you need investors?

Unfortunately, most businesses seek investment funding at the point it is most critical or for the wrong reasons – seeking funding for a business when it is in financial distress is always going to be hard.   Neediness is never a good negotiating position or very attractive.   And, few will be prepared to invest to save you.

Funding from investors is used to fund growth where a major investment is required – where the business cannot service its growth or capital requirements and these requirements are greater than what the business can fund on its own.

On most occasions, investment is needed to build out scale and take advantage of the potential of the business.  In many cases the owners can only afford to fund a portion of what is required but the scale they need will make the difference between an okay business and a great business.

What will investors expect?

Before seeking investors you need to get your house in order.

Every business operator knows that they should have a business plan in place.  Most don’t.  With a strategic business plan, you can track performance and growth, departures from the plan, etc., and this management information will tell you the point at which you need investment – either debt or another form.  A strategic business plan will also inject reality into blue sky entrepreneurialism and flush out many of the issues that investors will inevitably question.  It will shore up the business case and demonstrate that the growth path anticipated has been sufficiently thought through – a big issue for many entrepreneurs.

This planning stage is important because there are more ideas chasing capital than there is capital chasing ideas.  You have one chance to pitch to investors and often you are competing with a range of unrelated or different opportunities.

Investment types

Investment can be debt or equity investment.  A debt investment is paid back in some form.   There are many ways to structure debt investment from traditional interest payments to profit sharing.

Equity investment however is what most people think of when they think of investors.  Equity investment is where the injection of capital buys equity in the business and often a degree of management participation or control.  There are many ways of structuring these arrangements depending on the motivation of the parties involved – everything from a direct injection of cash to the provision of essential infrastructure and knowledge.

Investor types

The most common investor for SMEs is family or friends investing out of loyalty and often a belief in the skill set of the business operators.  The key problem with family and friends as investors is that often the details of the investment are loose.  Trust is high and everyone has a belief, at the beginning, that the other party will act in their best interest.  If family and friends are investing, you must put in place the same level of formality to the arrangement as if strangers were investing.  It prevents confusion and upset.

Another reason for a high degree of formality is that on some occasions, the person looking to unwind or exit the arrangement in the future will not be the person who entered into it.  It’s important to ensure that the exit provisions are clear in case someone dies.

Commercial investors come in many forms – angel investors, venture capitalists, private equity, or investment by associated parties.  At the SME end of the market, angel and venture capitalists dominate.

Angel investors tend to operate at investment levels between $100k and $500k.  Angels are generally individuals looking to for a great idea from a start up that they can capitalise on.

Private equity investors are at the other end of the scale and look to invest tens of millions – generally with established businesses reaching for another level and expectations of high growth.   Private equity generally look for a compound internal rate of return on capital in excess of 30%.  They look for high returns and an identified exit timeline.  They want confidence in return on capital and ultimately, return of capital.

In general, commercial investors will seek a regimented approach – shareholders agreement, restrictions around what can be done without their consent, and a clear exit path.  This is not an area you should approach without expert advice.

Some things to look out for

  • Insufficient formality around the agreement – misunderstandings and boardroom battles over direction take the focus off achieving growth
  • The wrong structure at the beginning – a bad deal won’t get better
  • Exit clauses – look at what the deal looks like at the end of the investment not just at the beginning
  • Not being able to fulfil the stated plan – be certain about what you’re offering
  • What are you giving away? Often business owners are so keen to secure the investment they forget about what they are giving away.
  • Control and how much the investor can achieve over time and the influence they have – you don’t want to be voted out of your own company once it’s successful
  • The level of management control and influence exerted – infighting and debates about direction will only take the focus off the big picture

The 1 April salary packaging trap

Why a tax on high income earners will disadvantage many with salary packaging agreements.

In last year’s Budget, the Government introduced a 2% ‘debt tax’ on high income earners – the temporary budget repair levy.  Unlike many other announced Budget changes, the debt tax bill passed Parliament in record time – 12 sitting days with no amendments.

While the debt tax itself only directly affects those with taxable income above $180,000, there are a number of other tax changes that came in with the debt tax that affect everyone else.

To prevent high income earners planning around the debt tax, the Government increased the Fringe Benefits Tax (FBT) rate from 47% to 49% from 1 April 2015 – bringing it in line with the top marginal tax rate.  Like the debt tax, the FBT rate change is temporary, with the tax scheduled to reduce back to 47% on 1 April 2017.  The gross up rate for reportable fringe benefits also increases from 1 April 2015 – 2.1463 for type 1, and 1.9608 for type 2 (type 2 is used for employee payment summaries).

What does this all mean?

In general, the FBT rate change will make providing employee benefits more expensive and potentially less attractive over the next few years.

For those with salary packaging arrangements in place, it is important to review the details of those arrangements and ensure that they still achieve the intended goals.

For employers, you need to review all salary packaging arrangements and any expenses where you have a large FBT exposure.

For employees, it’s essential to understand how these rate changes impact on you.  Changes to income and fringe benefits tax over the years have made salary packaging less effective in general and in some scenarios, you might be worse off.  Employers may also seek to pass on the FBT rate increase which will increase the amount you are sacrificing and reduce the effectiveness of the packaging.

If you receive family tax benefits or other assistance payments from the Government, it’s essential to review salary packaging arrangements as the changes may have a direct impact on any benefits you receive.  This is because fringe benefits reported on your payment summary are taken into account for a number of family benefit income tests.   The FBT gross up rate used to calculate these reportable fringe benefits has increased and as a result, the reportable fringe benefits on your payment summary will also increase.

The FBT rate change will generally not affect not-for-profit entities and other tax exempt entities because the annual maximum value of the capped FBT exemption has also gone up – so employees of these entities should be no worse off than before the FBT rate change.

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The material and contents provided in this publication are informative in nature only.  It is not intended to be advice and you should not act specifically on the basis of this information alone.  If expert assistance is required, professional advice should be obtained.



Xero: Quotes
January 29, 2015, 8:13 am
Filed under: Uncategorized

Use quotes in Xero to streamline your organisation’s sales process. Quotes tell your customers the goods and services you will provide to them. They also define details such as terms and prices.

<p><a href=”http://vimeo.com/113970830″>Sales Quotes in Xero</a> from <a href=”http://vimeo.com/xerotv”>Xero Limited</a> on <a href=”https://vimeo.com”>Vimeo</a&gt;.</p>



What to expect in 2015
January 29, 2015, 6:00 am
Filed under: Uncategorized

The economy

It’s almost impossible to predict what the local and global economic environment has in store for us in 2015.  The ‘who knows’ factor is adding to uncertainty and in general, business is not ramping up for growth but maintaining a ‘steady as she goes’ approach – meaning low investment and jobs growth.

The Reserve Bank of Australia (RBA) meets again in early February with economists torn on whether interest rates will fall at that point.  Previously, the Reserve Bank Governor stated that inflation was an impediment to cutting interest rates.  But back when he said this, the RBA was looking at a crude oil price of USD $86 (Brent crude), compared to current levels of around $50.  For Australians, other than a general enthusiasm about filling up for around $1 a litre, oil prices have had a dramatic impact on inflation.  The latest figures released late January put inflation at 1.7% – well below the RBAs target of between 2% and 3%.  The markets have already factored in an 80% chance of an interest rate cut in 2015; it’s just a question of when.

In January, the Australian dollar slipped to its lowest point since July 2009 falling to under USD $0.80.  This financial year, the dollar reached its highest point at USD $0.93 in early September 2014 and its lowest in late January 2015 with a difference between the two of just over 16%.

On top of that, commodity prices have dropped dramatically by around 20% and unemployment is edging up.

So, we have a low interest environment with a falling Australian dollar and stilted economic growth – Australian growth levels have been below trend for over 6 years and are likely to continue that way.  The question is, what now?

Politics & taxes

The last Federal Budget contained a series of severe cuts.  Some of those have passed Parliament and become law while others are pending the outcome of negotiations with the minor parties, while others have died a slow and protracted death.  Keeping track of what announcements are now law is difficult.  Here’s a quick summary:

  • Carbon Tax – abolished.
  • Mining Tax – abolished along with the associated business initiatives such as the loss carry back rules, accelerated depreciation for motor vehicles and the instant asset write off.
  • Superannuation guarantee (SG) – rephased as part of the mining tax repeal. Now, the SG rate will remain at 9.5% until 1 July 2021.
  • School kids bonus – was to be abolished as part of the mining tax repeal but is now means tested until 31 December 2016, before being abolished.
  • 2% Debt tax – applies between 1 July 2014 until 30 June 2017 to those with annual taxable incomes over $180,000. In line with the debt tax, FBT rates will also increase from 47% to 49% from 1 April 2015 until 31 March 2017.
  • Biannual indexing of fuel excise – introduced by stealth as a tariff proposal.

There are a series of other announced reforms that have either been rejected or stalled in the Senate.  These include Family Tax Benefit reform, the $7 fee for GP visits, an increase in the pension age to 70, the 6 month wait for unemployment benefits, and deregulation of University fees.  The Coalition’s paid parental leave scheme also seems to have faded from view.

The problem for the Government is that national debt is increasing – the mid year economic review revealed a $10.6bn blowout.  Falling commodity prices and sluggish growth mean that the deficit is not going to be plugged any time soon.

To bring debt under control, the Government needs to cut spending somewhere or increase taxes.  At this stage, it’s uncertain what and how this might be achieved.  Cutting spending will rely on amending legislation passing the Senate with agreement by the minor parties – something the Government has not been able to achieve to date.  On the tax front, the Government’s Tax White Paper is due out within weeks.  The much anticipated review of the tax system is reported to outline the need to change the current system’s reliance on personal and corporate taxes including broadening the base and increasing the rate of GST, and changing how superannuation is taxed.  However, an increase in the GST requires the agreement of the States and as a result, all parties involved will be savaged by voters for any increase.  If the Government acts on the reform measures set out in the Tax White Paper they have until mid 2016 to sell the concept to voters (according to the ABC’s Antony Green, the first possible date for a normal House and half-Senate election is 6 August 2016).

So, what does all this mean to you?

What now for your business?

The key to survival and growth this year is constant monitoring and adjustment.  The environment we started with on 1 July 2014 is already quite different.  Keep an eye on top line growth as much as the growth of your bottom line.  Keep your focus on increasing your market not just cost cutting to make the numbers look right.

Importers need to look at the price impact of the fluctuating currency on profit margins.  Do you need to put your prices up or are there other strategies to mitigate the impact?  It is important to understand that anything that impacts on your margins will have a magnified impact on net profit.

If you are not already doing it and your business is impacted by currency fluctuations – and this could be as simple as having all your software licensed from US providers, explore hedging options to protect against further falls in the dollar.  If you are using debt, there are numerous products from offset accounts to local currency overdrafts.  But, don’t try to be a currency trader.  It’s unlikely you will win.  Business is tough enough without trying to make decisions in areas you are not experienced in.  Even the pros get it wrong.

Exporters also need to consider their pricing.  Can you hold your price and maintain margins or should you move your price to attract volume?  Price, volume and margin are critical to work through when the currency is volatile.

In general, if your business has debt, do your housekeeping and ensure you are getting the best available deal.  The financiers are hungry for business right now so if you have not had your debt mix reviewed in a while, now is the time.

What now for your superannuation?

A positive this year is the reform of excess contributions tax that is currently before Parliament.  If passed, the amendments will enable individuals the option of withdrawing contributions in excess of the non‑concessional contributions cap and 85% of the earnings.  If you choose this option, no excess contributions tax will be payable and any related earnings will be taxed at your marginal tax rate.  That’s quite a difference to the current system that can apply a tax of up to 93%.  And, the changes apply retrospectively to excess contributions from the 2013/2014 financial year.

For those with SMSFs, make sure your fund is acting within the rules.  There is too much money tied up in SMSFs for the Tax Commissioner to take a gentle approach to non-compliance.  Key issues include borrowings, unlawful interactions with related parties, overseas members and maintaining the residency of your fund, and ensuring that where pensions are being paid, they meet the maximum and minimum requirements.  Plus, if your SMSF auditor has flagged issues with you, you must act to correct these.

There is talk of changes to the way superannuation is taxed and how and what funds can invest in, but there is no point reacting to these recommendations until there is more certainty about reform.

What now for you?

The impact of Government policy is likely to be the biggest issue for many individuals but at this stage, it is unclear how and when the Government will seek to recoup the deficit.  That leaves the regulators to try and plug the hole.  A key target is individuals with overseas sourced income – if this is you, you need to be absolutely certain about what income is taxable in Australia.

But what the Government and regulators are likely to do to us is nothing compared to what we’re doing to ourselves.  Figures released by the RBA in mid January show that credit card debt is sitting at $50.5bn with $33bn of that accruing interest.  Having credit card debt is never a good idea. It’s a short term lending option not a long term one.  Get rid of it.

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The material and contents provided in this publication are informative in nature only.  It is not intended to be advice and you should not act specifically on the basis of this information alone.  If expert assistance is required, professional advice should be obtained.



Xero Certified Advisor
April 24, 2014, 11:57 pm
Filed under: Uncategorized

SJM Accountants is pleased to announce the following achievement:

XERO CERTIFIED ADVISOR

https://profiles.xero.com/people/stevenmillar

 

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