Rental property expenses – what you can and can’t claim
It’s not uncommon for landlords to be confused about what they can and can’t claim for their rental properties. What often seems to make perfect sense in the real world does not always make sense for the Australian Tax Office (ATO).
In general, deductions can only be claimed if they were incurred in the period that you rented the property or during the period the property was available for rent. This means a tenant needs to be in property or you are actively looking for a tenant. If, for example, you don’t put a tenant into the property so that you can renovate it, then
you might not be able to claim the expenses during the renovation period if it was not rented or available for rent during this time (there are some exceptions to this general rule). There needs to be a relationship between the money you make and the deductions you claim. Here are a few common problem areas:
Travelling to inspect your property
You can claim the cost of travelling to inspect your rental property. For example, if you fly interstate to inspect your property, stay overnight then fly home, you can claim the full cost of the trip. If however, the purpose of the travel is a holiday and the inspection is incidental to it, the trip is non-deductible except direct expenses and a reasonable portion of your accommodation.
Interest on bank loans
Only the interest on repayments for investment property loans, and bank charges, are deductible - not the actual loan itself.
Repairs & maintenance
Expenses you incur for repairs and maintenance are deductible if the expenses relate to wear, tear, damage through rental activities.
If the repair improves function or if it replaces an entire structure (e.g. a whole fence as opposed to repairing damaged palings), it’s unlikely to be deductible but will be capital and depreciated over time.
Rental income from overseas
If you are an Australian resident, the ATO looks at your worldwide income. This means that if you own rental property overseas, you have to declare any income earned in your tax return - even if you have lodged a tax return and paid tax on the rental income in the country where the property is located.
Superannuation - What Happens To It When You Die?
The general rule is that superannuation is not part of your estate unless you expressly make it part of your will, right? Well, maybe not. A recent case before the courts serves as a warning to make sure that you take care of the details.
Generally, superannuation is passed directly to your nominated beneficiaries and not to your estate. However, a recent case before the Supreme Court, however, may change current belief and convention on what happens to your superannuation when you die.
In this case, an unmarried son, James, tragically dies at the age of 40. His mother and father had an acrimonious relationship since separating when James was 5 (divorcing just under 2 years later).
At the time of his death, James did not have a valid will in place (intestate). Generally, when a child dies intestate, the estate is divided equally between the parents. James’ estate was worth about $80,000 and his superannuation over $450,000.
James lived with his mother at the time of his death. She applied for Letters of Administration and Probate to manage his estate as there was no will. As administrator of his estate, her obligation was to “use her best endeavours to maximise the size of the estate.”
The mother received advice from her lawyers that superannuation does not form part of the estate. As such, she sought to have James’ superannuation distributed to her in her personal capacity (and not to the estate). While James’ mother was not a nominated beneficiary for James superannuation, she was a non-binding beneficiary because of their interdependent relationship.
The superannuation benefits were eventually paid to the mother by three different funds because she had a relationship of financial and emotional dependency with James (James was bipolar and had lived with her 30 of his 40 years and they shared the household expenses).
During this time, the father’s lawyers queried the mother’s intentions for the superannuation benefits stating that to have the superannuation transferred to her in person was a breach of her fiduciary duties as administrator of the estate. The response they received was that superannuation is not an asset of the estate. And so it went to court.
The court agreed with the father’s lawyers, ordering that the superannuation benefits form part of the estate, that the mother (having been granted Letters of Administration to deal with the estate) had a duty to maximise the value of the estate, and that her self interest in the superannuation benefits should not have come before her responsibilities as administrator.
By becoming an asset of the estate, the superannuation benefits were to be split between the mother and father.
The outcome of this case would have been different had James had a binding death benefit nomination in place for his superannuation in favour of his mother, and made a will naming his mother as executor. While these factors do not guarantee that the payment of superannuation benefits will not be contested (and there are a number of SMSF related cases that do), the measures will go a long way.
The top three things you must do:
1. Check your superannuation death benefit nominations - who is nominated and do you want them to receive your superannuation benefits if you die?
2. Review your will to make sure it is up to date for your current circumstances.
3. Check nominations for the legal representative of your estate and whether this nomination is current and appropriate.
Tax - the new spectator sport?
Who would have thought that the passage of legislation through the Senate would become a spectator sport? The highly anticipated new composition of Senators sat for the first time in July with the Government’s Budget reforms before them.
The key item of legislation to actually pass the Senate was the Carbon Tax repeal. The legislation contains measures to strengthen the Australian Competition and Consumer Commission’s (ACCCs) position to pursue businesses that do not pass on savings from the carbon tax repeal. Specifically, the ACCC will now require electricity and natural gas retailers and importers of bulk synthetic greenhouse gases to prove their efforts to pass on cost savings to customers.
The Government’s push to remove the mining tax and the myriad of spending measures associated with it – the loss carry back rules for companies, the slowing of the superannuation guarantee increase, the $5,000 instant motor vehicle deduction for small business, and the generous instant asset write off threshold also for small business – failed. So too did the legislation to encourage the privatisation of State assets (known as asset recycling).
With some of the budget measures retrospectively applied to the 2013/2014 income year, it will be interesting to see what happens from here as many of the measures may significantly affect the tax outcomes for business. We’ll keep you posted.
The risky business of dying
Why the death of your business partners can have dire consequences
Imagine this scenario…. Michael, James, and Nadine are shareholders in a successful business, MJN Solutions. The shares in the company are fairly evenly split reflecting the contribution that each has made to the business, with Michael and James each holding 35% and Nadine holding 30%. They have been working together for years to build the business to its current level. The business is now worth around $4 million and is still on a growth path. While no one is related to each other, everyone is close. They have had their disagreements but they trust each other and respect each other’s ability. It’s a fairly common scenario.
But one morning Michael and Nadine are shocked by a call from James’ wife Monica, telling them that James has died in a car accident.
If you are in business with shareholders, your business faces a major potential threat and its shareholders unexpected personal costs, if one of your fellow shareholders dies or becomes permanently disabled. And, the situation can be exacerbated where the shareholders are not related.
Good planning through buy/sell agreements and appropriate insurance can make all the difference.
For many businesses, if no pre-existing arrangements are in place, the death of a shareholder can mean having an unknown person (the beneficiary of the shares) actively involved in the business or an unwilling shareholder. The alternative is for the original shareholders to find the cash, then and there, to buy back the shares. Think about the value of your company…do you have enough cash to quickly fund the buy back for another shareholder?
What does a buy/sell agreement do?
Many companies do not have a plan in place that contemplates the untimely death of its shareholders or a break-up of the shareholders, and as a result, do not have buy/sell agreements in place.
Buy/sell agreements are legal documents that define what happens in an event that may trigger the disposal of a shareholder’s interest in a company. Amongst other things, the agreement determines how the company will be valued, and how shares can be disposed of in a series of scenarios including death.
Outcome 1 – Nothing planned
Michael and Nadine have a problem beyond dealing with the demise of a close friend and trusted professional in the business. While everyone knows that the unexpected can happen, nothing was planned or put in place to manage a worst case scenario.
James’ shareholding and the rights that come with it, transfer through his estate to his wife Monica. Monica however wants nothing to do with the business that consumed so much of her husband’s time. She just wants to cash out the shares and get on with her life.
MJN Solutions is still on a growth path and does not have the cash available to buy back James’ shares. This means that Michael and Nadine now need to personally fund the purchase of Monica’s shares (assuming they can come to an agreement about what the company is really worth). If they are unable to come up with the money, then Monica will become an unwilling shareholder.
Outcome 2 – Pre planning
Michael, James and Nadine worked with their accountants to put a buy/sell agreement in place to manage succession and unplanned events, such as the death of one of the shareholders. The buy/sell agreement defines how MJN Solutions will be valued and how the equity will be managed. In this scenario, the buy/sell agreement states that James’ shareholding will be purchased by Nadine and Michael if James dies or becomes permanently disabled.
During the planning process, the funding arrangements necessary were put in place should the buy/sell agreement be triggered. In this scenario, Michael, James and Nadine opt to manage the funding through an insurance policy taken out in their own names (another way would be to fund the policy through a self-managed superannuation fund - although there may be changes in this area with the ATO flagging that they will soon release their position on insurance held through superannuation for buy/sell agreements. Whichever way you go, it will be important to get current, structured advice in this area).
When James dies, the insurance proceeds are used to purchase James’ shareholding. As a result, neither Michael nor Nadine are out of pocket or take on debt, they own an increased share of the business, they avoid having an unplanned shareholder running the company, and they can get on with business.
Disclaimer: All material contained in this paper is written by way of general comment. No material should be accepted as authorative advice and any reader wishing to act upon material contained in this paper should first contact Youngs for properly considered professional advice, which takes into account specific situations.
Remember to call (03) 5559 1444 for a free discussion if you have any queries.