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INCOME TAX - Questions
01. Can I claim a home office in my tax return as I am working from home fairly regularly?
02. Am I going to be effected by the new personal services income rules as I am operating in a company but am only working for one contractor?
03. When do I have to do a new log book?
04. What is the overtime meal allowance expense claim for 2007/08
05. The Tax Office's 2004/05 Compliance Program
06. Can I claim sun protection items
07. Will the ATO allow deductions without receipts
08. Concession for substantiation of work and car expenses
09. Common work-related claims made by individuals
10. Can I claim a donation to the Tsunami appeal 'bucket collections'
11. What is the car depreciation limit for 2007/08
12. When do I need a new log book
13. Donations to certain hurricane charities to be deductible
14. No deduction for fees paid to a psychologist
15. Interest and dividend checks
16. Medicare Levy Surcharge from 31st October 2008
 

INCOME TAX - Answers
01. Can I claim a home office in my tax return as I am working from home fairly regularly?
When it comes to tax there is a substantial distinction between the deductions available for the use of a private residence for income producing activities where the home is a place of business and where it is a home office.

The distinction is where either a) the home can be characterised as a place of business; and b) where a room is used as study or home office merely as matter of convenience.

Where the income earning activities are merely conducted from a home office, only expenses relating to the use of these facilities are deductible (not outgoings such as mortgage, interest and rent).

The factors the Australian Taxation Office will consider to determine whether an area of a home is a place of business are:
• If the area is clearly identifiable as a place of business;
• If the area is not readily suitable or adaptable for private or domestic use;
• If the area is used exclusively for carrying on a business; or
• If the area is used regularly for visits of clients.

The decision of the ATO as to whether an area is a place of business will depend on a balanced consideration of:
• The essential character of the area;
• The nature of the taxpayer's business; and
• Any other relevant factors.

If the area is found not to be a place of business but it is still used for income earning activities - then it is a home office.
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02. Am I going to be effected by the new personal services income rules as I am operating in a company but am only working for one contractor?
From 1 July 2000, new measures applied to income earned as a result of providing personal services. Income is the personal services income of an individual service provider, if a client is mainly paying for the personal skills or effort of that individual.
Where individuals are providing personal services and operating through a personal services entity to earn this type of income, any payments received by the entity are treated as if the individual had earned the income directly and, as such, will now have additional obligations under the PAYG withholding system.

To establish if you were a Personal Services Business (PSB) in the last income year, and therefore exempt from this new legislation, you will need to determine whether you satisfied any of the personal service business tests.

One of the rules was commonly referred to as the '80/20 rule' and although not utilised by the ATO in 100% of the circumstances today, it is still used as a good measure to determine whether the taxpayer is defined as an employee or contractor in the eyes of the ATO.
A) If you receive 80 per cent or more of your personal services income from one client (including associates of the client), you are conducting a PSB if you obtain a PSB determination from the ATO.
B) If you receive less than 80 per cent of your personal services income from each client, you will need to assess yourself to determine if you satisfy at least one of the three business tests. The three business tests are:

1. The employment test -relates to whether you engage others to do at least 20 per cent of the principal work that you are paid to provide. It also relates to whether you have one or more apprentices for at least half of the income year.
2. The business premises test -relates to whether you use and maintain business premises for the whole income year to conduct the activities that gain or produce the income. The premises must be physically separate from the home of the service provider or any associates, and the premises of the client to which you provide services.
3. The unrelated clients test -relates to whether you have 2 or more clients to whom services are provided as a direct result of making offers or invitations. For example, by advertising.

Please contact our office if you feel these arrangements effect you and the way that you conduct your business. Under self-assessment, the ATO will leave the decision to the taxpayer whether they need to address these issues, and only when the taxpayer is audited, will the ATO make a determination.
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03. When do I have to do a new log book?
If your business percentage hasn’t changed by more than 10% your log book can be used for 5 years.
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04. What is the overtime meal allowance expense claim for 2007/08
Overtime meal allowance expense claims up to an amount of $22.60 per meal are considered reasonable for 2007/08 where the amount was actually incurred to buy food or drink in connection with paid overtime, under a relevant industry award or enterprise bargaining agreement.

If the deduction claimed is more than the reasonable amount, the whole claim must be substantiated with written evidence, not just the excess over the reasonable amount.
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05. The Tax Office's 2004/05 Compliance Program
The Tax Office has recently issued its 2004/05 Compliance Program, which can be found on the ATO's Website (www.ato.gov.au). It details the areas they will be focusing on in this financial year, including:

• employers who fail to meet obligations such as pay as you go withholding, superannuation guarantee payments for their employees, and FBT;

• large businesses and high wealth individuals;

• capital gains tax;

• rental deductions, including:

- expenses not being apportioned, even though the property is not available for rent for the full year or only part of the property is used to earn rent.

- deductions for legal expenses and other legal costs;

- improvements to properties being incorrectly claimed as repairs;

- large differences in claims for similar properties in the same area.

• work-related expenses through tax agents; and

• tax agents whose clients are at a high risk of over-claiming.

They will be specifically targeting the following industries and occupations:

• road transport;

• real estate;

• entertainment;

• airline;

• prison officers;

• financial advisers; and

• travel agents.

They are also examining high-risk cash economy industries, including:

• motor vehicle retailing and wholesaling;

• tourism and hospitality;

• fishing;

• gold bullion, antiques and art dealing;

• horse racing and exports;

• property, building and construction;

• restaurant, cafe and takeaway;

• licensed hotels and registered clubs; and

• barter.

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06. Can I claim sun protection items
The Tax Office has issued a fact sheet on the deductibility of items purchased by taxpayers to protect them against the sun. The ATO acknowledges that taxpayers can claim tax deductions for the cost of sunscreen lotion, sunhats or sunglasses if their job requires them to work in the sun and they have purchased and used these items at work. A non-exhaustive list of occupations and industries where people work in the sun for sustained periods for all or part of the day includes

- building and construction;
- delivery and courier services;
- farming, agriculture and horticulture;
- fishing;
- forestry and logging;
- landscaping and gardening services;
- open-air minerals, oil and gas exploration and extraction;
- outdoor sports; and
- other outdoor services.

There is also a reminder that any deductions must be apportioned if the sun protection items are used for any private purposes, although they state they "are not looking for fine distinctions on small amounts or asking for elaborate calculations".
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07. Will the ATO allow deductions without receipts
Taxpayers who do not have a receipt for work-related expenses, but who can prove the expense from other records, may still be able to claim a tax deduction.

The ATO has issued a practice statement to clarify the types of records that are acceptable as proof for work-related expenses.

Where there is a good reason why people don’t have a valid receipt or one that contains the right information, the ATO will take a practical approach to administering the law.

The ATO will accept documents containing similar information to what appears on a traditional paper receipt.

These documents may include:
- online banking and credit card statements;
- online, email, electronically-stored and photocopied receipts; and
- BPAY reference numbers combined with bank statements or tax invoices.

This recognises that, even though standard paper receipts are still the most common form of documentation, e-commerce, electronic transactions and online purchases are a growing part of the economy.
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08. Concession for substantiation of work and car expenses
The ATO has announced that it may allow deductions for work and car expenses without proper receipts, as long as the taxpayer can otherwise show they have incurred the expense.

Where a taxpayer's total work related expenses exceed $300, the ATO will:
• look at whether the taxpayer has a legible receipt from the supplier of the goods or services;
• if not, look at whether the taxpayer has a credit card or bank statement or another document or combination of documents with supplier details and enough information to support their claim; and
• if not, look at whether the taxpayer has obtained other third party evidence that provides the details that would otherwise be found on a valid receipt.

If the tax officer can find evidence under the above approach, it will be accepted that the expense is substantiated.

Examples

The following are some examples of where documents will be accepted by the ATO as substantiating the relevant expenses:

- a bank or credit card statement for annual professional subscription fees, which sets out the date of the transaction, the name of the supplier and the amount paid;
- the combination of a tax invoice sent on account, along with a bank statement showing payment at the end of the month by way of an electronic transfer from the taxpayer's bank account; and
- use of an internet-generated receipt kept on a computer but which can be printed out and which can be verified as a genuine receipt by the ATO with the issuer of the receipt.
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09. Common work-related claims made by individuals
The following outlines common types of deductible expenses claimed by individual taxpayers, such as employees and rental property owners, plus some strategies that can be adopted to increase deductions.

1. Depreciable plant costing $300 or less
Salary and wage earners and rental property owners will be entitled to an immediate deduction if plant costing $300 or less is purchased before 1 July.

Some purchases you may consider include:
• answering machines;
• beepers and pagers;
• books and trade journals;
• briefcases/luggage or suitcases;
• calculators, electronic organisers;
• software;
• stationery;
• tools of trade.

2. Clothing expenses
Purchase or pay for work-related clothing expenses prior to the end of the income year, such as:
• compulsory, non-compulsory (and registered), occupational specific and protective clothing;
• other expenses associated with such work related clothing such as dry cleaning and laundry expenses.

3. Self education expenses

Consider pre-paying the following self education items before the end of the income year:

• course fees, student union fees, and tutorial fees;
• interest on borrowings used to pay for any deductible self education expenses.

Also bring forward purchases of stationery and text books (i.e., those which are not required to be depreciated).

4. Other work-related expenses

Prepay any of the following expenses prior to 1 July:
• union fees;
• subscriptions to trade, professional or business associations;
• magazine and newspaper subscriptions;
• seminars and conferences;
• income protection insurance (excluding death and total/permanent disability).

Note: When prepaying any of the expenses above, ensure that the services are provided within 12 months of the payment. If the prepayment exceeds 12 months then deductions must be claimed over the period of the prepayment

Deductions (in addition to those mentioned above):

• award transport allowance claims;
• bank and government charges on deposits of income, and deductible expenditure;
• bridge/road tolls (travelling on business);
• car parking (when travelling on business);
• conventions, conferences and seminars;
• depreciation of library, tools, business equipment, incl. portion of home computer;
• gifts or donations;
• home office running expenses:
- cleaning
- cooling and heating
- depreciation of office furniture
- lighting
- telephone;
• interest and dividend deductions:
- account keeping fees
- ongoing management fees
- interest on borrowings to acquire shares
- advice relating to changing investments (but not setting them up);
• interest on loans to purchase equipment or income earning investments;
• motor vehicle expenses (business);
• overtime meal allowances;
• rental property expenses – including:
- advertising expenses
- council/water rates
- insurance
- interest
- land tax
• legal expenses/management fees
• genuine repairs and maintenance
• telephone expenses
• travelling to inspect property;
• superannuation contributions by sole traders or substantially unsupported taxpayers;
• sun protection items;
• tax agent fees;
• telephone expenses (business);
• tools of trade.
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10. Can I claim a donation to the Tsunami appeal 'bucket collections'
Ordinarily, an individual who makes a monetary gift or donation of $2 or more to a deductible gift recipient is allowed a deduction for the amount of the donation provided they can produce supporting documentary evidence, such as a receipt.

However, many people made donations of spare change to "bucket collections" for the Boxing Day 2004 Tsunami disaster and would not have obtained receipts.

Recognising this, the ATO will allow taxpayers to claim a deduction of up to $10 where they made one or more small cash donations (each of $2 or more) to "bucket collections" conducted by deductible gift recipients collecting for the Tsunami appeals, even though they have not obtained receipts or other evidence.
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11. What is the car depreciation limit for 2007/08
The car limit for the 2007/08 financial year is $57,123.

The car limit of $57,123 is used to calculate depreciation deductions.

This amount is also used to determine the luxury car tax threshold, at which point luxury car tax becomes payable.
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12. When do I need a new log book
A number of clients of accounting firms have received letters from the Tax Office telling them they had to produce car log books for claims made in the 2005 income tax year.

The correspondence incorrectly stated that a new log book had to be completed if they purchased a new vehicle during the year.

This advice ignored a section of the Act which allows a taxpayer to nominate one car as having replaced another car, meaning that the original log book can be used for the replacement car.

The Tax Office has now confirmed that letters will be sent to the affected taxpayers to rectify the problem.

The letter in question should have stated that a new log book would be required for each additional vehicle rather than each new vehicle.
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13. Donations to certain hurricane charities to be deductible
The Government has announced that donations to certain charities for the purposes of providing relief to victims of Hurricane Katrina in the US will be tax deductible:
• Donations to the Red Cross Hurricane Katrina Appeal; and
• Donations to the Salvation Army Hurricane Katrina Appeal.

These charities have been approved for deductible gift recipient status.

The law will be amended to allow deductibility for gifts to the charities for a period of one year from the beginning of September 2005.
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14. No deduction for fees paid to a psychologist
The AAT has held that fees paid to a psychologist by a nurse who worked in an extremely stressful work environment were not deductible because treatment for physical or mental health is inherently private in nature (even though it helped him progress in his career).

Furthermore, the fees were not rebatable medical expenses as the psychologist was not a legally qualified medical practitioner.

Unfortunately for the taxpayer, the Tribunal made the point that all that may have been required for him to receive the rebate was to arrange for his general practitioner to formally refer him for psychotherapy.
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15. Interest and dividend checks
Each year the ATO runs an income matching program whereby information supplied by:

• banks;

• other financial institutions;

• companies;

• Centrelink; and

• employers;

is matched with taxpayers’ returns to check that interest and dividends (including distributions from managed funds) are correctly reported.

In 2004 around 36 million records were matched raising additional revenue of $176 million from some 320,000 taxpayers who had failed to report income. The ATO expects to match 40 million records in 2005.
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16. Medicare Levy Surcharge from 31st October 2008
The Government has compromised to get its Medicare levy surcharge thresholds Bill passed, which finally became law on 31 October 2008.

The Government has increased the Medicare levy surcharge threshold to $70,000 for individuals (with annual indexation) and to $140,000 for families (to be twice the individual rate in future years).

Taxpayers whose income exceeds the threshold normally only have to pay the Medicare levy surcharge if they (and their dependants) do not have private patient hospital cover for the full year.

However, transitional arrangements will apply so that taxpayers who obtain private health cover before 1 January 2009 can avoid the surcharge for the period 1 July to 31 December 2008.
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