Posted on November 27, 2018 by Francis Soale
The distinction between accounting for investment returns as revenue or capital is not always clear and the characterisation of a receipt will ultimately be subject to the circumstances that apply to the taxpayer.
Generally speaking, an income receipt is regarded as an amount that is regular, recurring and has income tax applied to the net amount of income. The main example of this would be a dividend received from a shareholding.
However, what may appear to be a capital gain for example may in fact be classified more correctly as income where the taxpayer has been undertaking a profit-making operation. The relevant factors to consider whether a gain is to be treated as revenue or capital are the intention of the taxpayer when the asset is acquired, and any subsequent change of intention, as well as the length of the time the asset was owned. Importantly, where the amount is a capital return, the investor may have access to the CGT discount provisions which may end up being better tax result than would if the amount received were to be treated as assessable income.
Likewise, the treatment of an outgoing expense is important to determine whether an immediate deduction is allowable or whether the outgoing forms part of the cost base of a CGT asset.
Points to be consider when deciding whether an outgoing expense should be treated as revenue or capital:
- the advantage sought by the taxpayer
- the character of the advantage sought by the outgoing and,
- how the advantage comes about (recurrent or one-off payments).
Generally speaking, investors will fall into one of two categories – traders or long-term investors.
Investors on revenue account:
Where the holder of an investment product carries on activities for the purpose of earning income from buying and selling investments, that holder will be in the business of trading. Generally, a trader:
- holds investment products as trading stock
- includes gross receipts from the sale of investment products as income
- recognises expenses incurred in relation to trading activities as allowable deductions, and
- includes in assessable income investment returns such as interest, dividends and distributions.
Note that where the holder of an investment product enters into an isolated transaction with a profit making intention, they will not be in the business of trading. However, any net profit from the transaction will be assessable on revenue account.
Investors on capital account:
Where the investment is held with the intention of earning regular income from those investments, the investor may be seen as generally not carrying on a business. This type of investor generally:
- does not include gross receipts from the sale of investments as income. Any net gain is assessable under the capital gains tax provisions
- cannot include capital losses from the sale of investments against income from any other sources except current or future capital gains (quarantining these losses)
- cannot include expenses incurred in relation to buying and selling investments as a deduction when incurred. These are taken into account in determining the amount of any capital gain or loss instead, and
- includes investment returns such as interest, dividends and distributions in assessable income.
The above information is very general in nature and the nuances of each taxpayer’s situation needs to be fully considered before either method is applied for tax purposes, so if you think any the above applies to you please contact us.
Posted on by Joshua Fiorentino
Tip 1 – Take Advantage of the Instant Asset Write-Off
The ATO have once again extended the period in which the instant asset write-off threshold applies to now be 30 June 2019.
This means that if you qualify as a small business you may continue to deduct the full cost of an asset which is bought and used or installed and made ready to use costing less than $20,000. It does not matter if the asset is bought brand new or second-hand.
The entire cost of the asset must be less than the threshold amount which is irrespective of any trade-in amount. Depending if you are registered for GST or not will determine the amount paid on the asset.
For example, you purchase a new car for $19,500 exclusive of GST and trade in your current vehicle for $6,000. The GST portion of the car is $1,950.
Registered for GST – You do not include the GST portion in the amount paid as you will claim a credit for the GST on the relevant activity statement. This means the car is valued at $19,500 (we do not reduce the amount paid even though you traded in a vehicle) and as such the asset would be allowed to be claimed as an instant asset write-off.
Not Registered for GST – You include the GST portion in the amount paid. Even though you are only out of pocket $15,450 due to the $6,000 trade in, the car is valued at $21,450 and as such the asset would not be allowed to be claimed as an instant asset write-off.
You must also subtract any private use proportion before claiming the deduction. This is called the taxable purpose proportion. The entire cost of the asset must be less than the threshold however.
For example, a car is purchased at $30,000 and is used for 50% business use. Even though the business use value is $15,000 it is not allowed as an instant asset write-off as the cost was $30,000.
Tip 2 – Maximise Superannuation Contributions
You may contribute up to $25,000 for the 2019 financial year, although this is dependent on the type of concessional contribution being made and your age. If you have more than one fund, all concessional contributions to all funds are added together to determine if you have exceeded the $25,000 limit. This includes the compulsory contributions made by your employer.
Concessional contributions are only taxed at 15%, which is lower than any individual tax rate and are an allowed deduction in your tax return if paid by the member personally to their super fund.
You need to ensure the money is paid into the super fund by 30 June and must also complete a notice of intent to claim form to your super fund.
The disadvantage is that your money would be ‘locked away’ until retirement.
Tip 3 – Keeping Good Tax Records
You may claim deductions for certain expenses which are directly related to earning income. By keeping proper tax records, you may maximise the deductions you are entitled to. A big area for improvement in this regard is motor vehicle deductions as a lot of people don’t keep appropriate records and then fall short on the deduction they are entitled to.
When calculating motor vehicle deductions, you may use two methods; the cents per kilometre method or the logbook method.
Cents per Kilometre Method
You may claim a maximum of 5,000km at 0.68 cents per kilometre in the 2019 financial year. The total deduction allowed is $3,400. The benefit is you do not need written evidence to show how many kilometres you travelled, but you will still need to be able to substantiate your claim.
You may claim the business use percentage of each car expense based on the logbook records. You must maintain a logbook for 12 continuous weeks which will be used to represent your travel over the income year. The logbook is valid for five years; however, you may start a new logbook at any time. You must record each trip, personal and business, to calculate the percentage of business use to personal use.
Regarding your expenses, you must maintain receipts for all your claim. By doing this, you are eligible to claim deductions for most of your motor vehicle expenses including but not limited to repairs and maintenance, insurance, registration, fuel & oil, depreciation of the motor vehicle, and interest. If the total cost of all your expenses for the business use portion of your motor vehicle is greater than $3,400, it would be beneficial to start a logbook to maximise the deductions you may claim, and for a lot of workers who use a vehicle for work, this is the case!
If you would like further information on any of the above tips, please contact our office.