Archives: Investax FAQs

No, you cannot claim a full Capital Gains Tax (CGT) exemption if you purchase a home with an existing lease agreement. Your primary residence is typically exempt from capital gains tax (CGT). For CGT purposes, this exemption applies from the time you acquire your home, as long as you move in as soon as practicable. 

There are specific circumstances that can affect when your property qualifies as your main residence for CGT purposes:

• Delays Due to Illness or Unforeseen Circumstances: If moving in is delayed due to illness or other unexpected events, your home remains exempt from CGT, provided you move in as soon as the cause of the delay is resolved (e.g., upon recovery from illness).
• Property Rented to Someone Else: If you cannot move in immediately because the property is rented out, it will not be considered your main residence until you actually move in.
• Owning Two Homes: If you buy a new home before selling your old one, you can designate both properties as your main residence for up to 6 months.

 

Example: 

Emily signed a contract to buy a house in February. She took possession when settlement occurred in March. 

We have provided two different scenarios below to explain what is considered practicable after settlement.

Scenario 1: Moving in as soon as practicable due to interstate work assignment

In early March, Emily’s employer assigned her to an interstate project for 5 months. She moved into the house when she returned in August.

Emily’s interstate assignment was unforeseen at the time she bought the house. She moved in as soon as practicable after the settlement of the contract. Therefore, she can treat the house as her main residence from the date she acquired it.

Scenario 2: Not practicable due to tenancy agreement

Alternatively, the house had an existing tenancy agreement that would not end until September, 6 months after the settlement. Due to this tenancy agreement, Emily could not move into the house until the lease ended in September.

In this case, Emily cannot treat the house as her main residence until she moves in. The property will only be exempt from CGT from the time she actually moves in, as it was not practicable for her to move in due to the existing tenancy agreement.

For Capital Gains Tax (CGT) purposes, your home qualifies for the main residence exemption from the time you acquire it, provided you move in as soon as practicable. 

If you acquire a new home before you dispose of your old one, you can treat both properties as your main residence for up to 6 months under certain conditions.

You can claim this exemption if all of the following are true:

1. You lived in your old home as your main residence for a continuous period of at least 3 months in the 12 months before you disposed of it.
2. You did not use your old home to produce income (such as rent) during any part of that 12 months when it was not your main residence.
3. The new property becomes your main residence.

If it takes longer than 6 months to dispose of your old home, the main residence exemption applies to both homes only for the last 6 months before you dispose of your old home. For the period before this, when you owned both homes, you can choose which home to treat as your main residence. The other property will be subject to CGT for that period.

Reference :

ATO – Moving to a new main residence 

Buying your Principal Place of Residence (PPOR) in a Trust may initially seem like a strategic move for asset protection or tax planning. However, there are several significant drawbacks and complications that typically outweigh the potential benefits. Here are key reasons why you shouldn’t buy your PPOR in a trust:

1. Loss of Main Residence CGT Exemption

When you sell your principal place of residence, any capital gain is generally exempt from Capital Gains Tax (CGT) under the main residence exemption. If the property is held in a trust, this exemption is not available, meaning any capital gain realized on the sale of the property would be subject to CGT, potentially resulting in a significant tax liability.

2. No Land Tax Exemption

In most Australian states, your principal place of residence is exempt from land tax. However, this exemption does not apply if the property is owned by a trust. Consequently, you could be liable for land tax, which can be a substantial annual expense depending on the value of the property and the rates in your state.

3. Complexity and Costs

Setting up and maintaining a trust involves legal and administrative costs. Trusts require formal documentation, regular compliance, and annual financial reporting, all of which incur ongoing expenses without generating income from the property. This complexity adds an extra layer of management that is often unnecessary for a principal place of residence.

4. Financing Difficulties

Obtaining a mortgage for a property held in a trust can be more challenging than for a property held in an individual’s name. Lenders often view trust arrangements as higher risk and may require additional documentation, or larger deposits, making it more difficult and expensive to secure financing.

6. Personal Use Restrictions

A property held in a trust is generally considered a trust asset, which can complicate matters if you wish to make personal use of the property. Trust laws and the trust deed may restrict how the property can be used.

In conclusion, while there are scenarios where holding property in a trust can be beneficial, these are typically not applicable to a principal place of residence. The loss of significant tax exemptions, increased costs, and complexities usually make it an unattractive option for most homeowners. For tailored advice, it’s always best to consult with Investax Property Tax Specialists who can consider your specific circumstances.

References and Further Reading

• ATO Website: Main residence exemption from CGT
• Revenue NSW: Land Tax Exemptions

When claiming tax deductions, proper documentation is crucial. While bank statements can provide a record of transactions, they often do not include the detailed information required by the Australian Taxation Office (ATO) to substantiate your claims under section 900-115 of the Income Tax Assessment Act 1997.

To meet the substantiation requirements, you must obtain documents from the supplier that cover the following information:

1. The name or business name of the supplier.
2. The amount of the expense, expressed in the currency in which it was incurred.
3. The nature of the goods or services.
4. The day the expense was incurred.
5. The day the document is made out.

The document must be in English. However, if the expense was incurred in a country outside Australia, the document can be in the language of that country.

According to the case of Copley and Commissioner of Taxation [2024] AATA 8 (Copley), the Tribunal considered the substantiation requirements under section 900-115 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) and the sufficiency of bank account statements in proving allowable deductions.

In this case, the Commissioner of Taxation issued amended assessments disallowing deductions claimed by the taxpayer under section 8-1 of the ITAA 1997. 

The central issues before the Tribunal were whether the: 

• expenses were incurred in gaining or producing the taxpayer’s assessable income; 

• expenses were of a private or domestic nature; and 

• taxpayer could substantiate the expenses pursuant to the record keeping requirements in Division 28 and Division 900 of the ITAA 1997.

Senior Member Dr. M Evans-Bonner held that the taxpayer did not satisfy the burden of proving that the amended assessments were excessive or incorrect. The decision was based on the fact that the taxpayer failed to meet the substantiation requirements outlined in subsection 900-115(2) of the ITAA 1997, which stipulate the need for specific records such as receipts and invoices to support the expenses claimed.

The Tribunal concluded that bank account transaction statements are insufficient for substantiation purposes as they do not comply with the requirements set out in subsection 900-115(2) of the ITAA 1997. The Copley case underscores the importance of keeping detailed records, such as receipts and invoices, to substantiate expenses claimed as tax deductions.

If you need further assistance understanding substantiation requirements or any other tax-related matters, feel free to contact an Investax Group Tax Specialist for expert guidance and support.

Reference – 

Copley and Commissioner of Taxation 

section 900-115

Understanding the Nature of Legal Fees for Tax Purposes

The deductibility of legal fees hinges on the nature or character of the expense. This determination is guided by the benefit that is sought through incurring the expense.

1. Capital vs. Operational Purpose: 
   • Legal fees incurred to create an asset or secure an enduring benefit are considered capital expenditures. These are not deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), as established in the Sun Newspaper Ltd case (1938). For instance, John purchased a property and incurred legal fees to secure the title deed. Since this legal expense aims to create an asset with an enduring benefit, it is considered a capital expense and is not deductible.

    

   • Conversely, legal fees incurred for operational purposes may be deductible. For example, John, a contractor, sued a client to recover unpaid wages for work completed. Since the sole purpose of the legal action is to recover assessable income, the related legal fees and costs should be deductible.

    

    

2. Employment-Related Legal Fees: 
   • Lost Wages: If the sole purpose of the legal action is to recover unpaid wages, bonus, contract payment, or leave payments that are assessable to the client, then the legal fees and related costs should be deductible. For instance, John lost his employment unfairly, and his employer didn’t pay his annual leave and long service leave. He sued his employer for unfair dismissal to retrieve his annual leave and long service leave. Since the purpose of the legal action is to recover assessable income, the legal fees should be deductible.

    

   • Reinstatement: If an employee incurs legal fees after termination and one of the purposes is to seek reinstatement to their former position, these expenses are generally of a capital nature. According to the Australian Taxation Office (ATO), such fees are not deductible because they aim to secure an enduring benefit (i.e., reinstatement of employment). For instance, if John also sought reinstatement to his job as part of the legal action, the legal fees related to seeking reinstatement would be considered capital expenses and thus not deductible. For further guidance, refer to paragraph 5 of Taxation Determination TD 93/29.

The Land Tax Surcharge is an additional tax imposed on foreign persons who own residential land in New South Wales (NSW).

Here are the key details:

• Applicability:
  • The surcharge is specifically for foreign persons who own residential land in NSW.
  • It is charged in addition to any regular land tax that the property owner may already be paying.
  • Even if a foreign owner does not owe the standard land tax, they may still be required to pay this surcharge.

• Definition of a Foreign Person:
  • You are generally considered a foreign person unless:
    • You are an Australian citizen, or
    • You have lived in Australia for 200 days or more in the 12 months prior to the taxing date of 31 December and are a permanent resident of Australia.
• Taxing Date:
  • The surcharge is assessed based on the taxable value of all residential land owned as at 31 December each year.

• No Tax-Free Threshold:
  • Unlike standard land tax, there is no tax-free threshold for the foreign owner surcharge. This means the surcharge applies to the entire taxable value of the residential land.
• Surcharge Rate:
  • Starting from the 2023 land tax year, the surcharge rate is 4% of the taxable value of the residential land.

By understanding these points, foreign owners of residential land in NSW can better navigate their tax obligations and ensure compliance with local regulations.

Even if you are not a business owner, you may still be liable for Pay as You Go (PAYG) instalments if you had a tax liability in the previous financial year. This can occur due to several reasons beyond just your employment income.

For instance, you might be an employee with wages, but you also have other sources of income, such as:

• An investment property that earns positive rental income.
• A share portfolio that earns dividend income annually.
• A substantial amount of cash savings that earn interest income.
• Trust distributions from a related trust.
• You are liable for the Medicare Levy Surcharge because you do not have appropriate hospital cover for yourself and your family, and your income is above the threshold.

In these cases, your employer only withholds tax on your employment income. However, when you file your tax return, you will need to account for the additional income from these other sources. This often results in a tax payable situation due to the positive income earned on top of your wages.

To manage this, the ATO may require you to make PAYG instalments throughout the year to cover your expected tax liability, helping you avoid a large tax bill at the end of the financial year. If you anticipate lower income this year compared to last year, you may consider varying your last quarter PAYG instalment to improve your cash flow. Feel free to reach out to Investax Group tax specialists if you need any help with this. 

Division 293 tax is an extra tax on superannuation contributions. It applies to people whose total income and super contributions add up to more than $250,000 in a year. This tax reduces the tax break they get on their super contributions by making them pay an additional 15% tax on top of the regular 15% tax that super contributions usually attract. 

Division 293 tax is an extra 15% tax. It is applied to the smaller amount between the excess income over $250,000 and the taxable super contributions. Check Sarah’s example below for further explanation.

Your ‘Division 293 Notice of Assessment’ will only be sent to you once the ATO receives the contribution information from your super fund.

The income component of the Division 293 tax calculation is based on the same income calculation used to determine the Medicare levy surcharge (MLS), disregarding any reportable superannuation contributions. The components of this income calculation are:

• Taxable income (assessable income minus allowable deductions)
• Total reportable fringe benefits amount
• Net financial investment loss
• Net rental property loss
• Net amount on which family trust distribution tax has been paid
• Super lump sum taxed elements with a zero-tax rate
• Assessable first home super saver released amount

Example for John:

John earns a salary of $190,000, and his employer contributes $25,000 into superannuation for him. John also has a net rental property loss of $10,000.

Taxable Income:

• Salary: $190,000
• Net rental property loss: -$10,000

So, John’s taxable income is $190,000 – $10,000 = $180,000.

Division 293 Income:

• Taxable income: $180,000
• Net rental property loss: +$10,000
• Employer super contributions: +$25,000

John’s Division 293 income is $180,000 + $10,000 + $25,000 = $215,000, which is within the limit of $250,000. Therefore, John’s entire concessional contributions (CCs) would be taxed at 15%, and Division 293 tax does not apply.

Example for Sarah:

Sarah earns a salary of $240,000, and her employer contributions for the year are $30,000. Sarah also has a net rental property loss of $5,000.

Taxable Income:

• Salary: $240,000
• Net rental property loss: -$5,000

So, Sarah’s taxable income is $240,000 – $5,000 = $235,000.

Division 293 Income:

• Taxable income: $235,000
• Net rental property loss: +$5,500
• Employer super contributions: +$27,500

So, Sarah’s Division 293 income is $235,000 + $5,500 + $27,500 = $268,000. Since Sarah’s income exceeds the threshold of $250,000, she will pay 15% contributions tax on her employer contributions and will also be liable for Division 293 tax. Division 293 taxable contributions are the lesser of Division 293 super contributions ($27,500) or the amount above the $250,000 threshold ($18,000). Sarah will pay additional 15% tax on $18,000. 

She can choose to pay this tax personally, or she can choose to release the tax from her super fund.

ATO Reference – Div 293