Many small businesses operate from the owner’s home. This could mean the factory is a shed in the backyard and the office a corner of the kitchen or dining room table.

For others the business can have a separate section of the home or permanent structure on the property used exclusively by the business. The facts of each case will determine what costs can be claimed as a tax deduction.

Business owners are often keen to claim a percentage of the interest on a loan where a mortgage has been taken out to purchase the property. The ability to claim property related expenses will depend on two tests being passed.

The first requires part of the home or the property to be set aside exclusively as a place of business. This would mean the part of the home used for business purposes could not have a dual private usage component. Setting up half of a large rumpus room as an office, with the rest being used for private purposes, would not satisfy this test.

In addition to the exclusive use test the section used for business purposes must be clearly identifiable. This can often mean that there is an entrance for the part used as a home and a separate entrance for the section relating to the business.

Building a shed that is used exclusively by a business for manufacturing or storage purposes would result in part of a property being classed as business premises.

If these tests are passed a portion of the property related expenses can be claimed including interest on the loan to purchase the property and rates. The method used to apportion the expenses must be able to stand up to the scrutiny of the ATO. An accepted method is calculating the area used for business purposes as percentage of the total area of the home.

In addition to the property related costs a tax deduction can also be claimed for the occupancy costs such as electricity, gas, telephone and internet usage. For these costs the owners must again be able to prove how they apportioned them between business and private usage.

Where the business property tests cannot be passed a business can still claim a portion of occupancy costs.

The ability to claim property related expenses does however come at a cost. By establishing a home or property is used for business results in a loss of the main residence capital gains tax exemption for that part of the home or property.

This will mean the owners of the business need to have the home valued at the time it starts to be used for business purposes. When the property is sold a portion of the difference between the net sale proceeds and the value when the business was started will be taxable as a capital gain.

Thankfully in this situation if a business owner passes the small business capital gains tax exemption tests income tax may still not be payable.

Tax for small business, a survival guide, by Max Newnham is available in bookstores.

Story source: www.domain.com.au

Amid news that finding a rental property may have temporarily gotten a little easier with asking rents for units dropping 1.1 per cent during the first three months of the year, comes a warning that the easing won’t last.

Dr Andrew Wilson, the senior economist at Australian Property Monitors, says ongoing shortages of accommodation, low levels of new supply and continued inactivity by investors, will lead to upward pressure on rentals this year.

APM figures show weekly asking rents for units either fell or were steady across all capital cities in the first three months of the year.

Median weekly asking rents for houses remained unchanged in Sydney, Melbourne, Brisbane and Perth.

Minor relief was handed to house renters in Canberra with a 2 per cent fall, and in Adelaide to a lesser extent, where the asking rent for houses dipped 0.6 per cent.

The ongoing tight rental situation has led to renewed calls from two experts for the Federal Government to take a fresh look at negative gearing.

Dr Chris Martin, a senior policy officer at the Tenants’ Union of NSW, says bluntly: "There’s a bunch of things that could be done to negative gearing that would go some way to changing what it currently does to our housing system, which is screw up house prices and distort the rental market to the disadvantage of low-income renters.

"We have such a large number of landlords who have small holdings, typically most of them [own] only one property, and they are amateur speculators," Martin argues.

"They are more interested in being able to sell the place when they judge the time is right to either realise gain or lever up into some new, even higher-value property. And so their … strategy, depends on being able to get vacant possession when it suits them.

"Even more than our renting laws, it’s the nature of our landlords and their strategy that makes renting as insecure as it is."

Martin says the tenants most acutely affected by a shortage of rental properties are low-income earners who don’t qualify for social housing.

The union has found backing in Saul Eslake, who recently took up a role as chief economist of Bank of America-Merrill Lynch Australia.

Eslake has been following the Australian property market for more than three decades.

"Interests associated with landlords and the real estate industry more generally will always tell you that the abolition of negative gearing would be the worst thing that could possibly happen to tenants, not to them but to tenants, because they think it would lead to a landlord strike and huge increases in rents," says Elsake.

"They sometimes argue that ‘look at what happened in 1986 when the Hawke Government temporarily abolished negative gearing for rental property investment’, which they allege was a surge in rents as evidence of their assertions.

"In fact there was a significant increase in rents in Sydney and to some extent also in Perth … but it was only in Sydney and in Perth and in other parts of the country, the rate of increase in rents either slowed or actually fell.

"The truth is that negative gearing was abolished temporarily everywhere and if the abolition of negative gearing was going to cause a problem then … rent should have gone up everywhere rather than in just two cities.

"That’s a sort of an urban myth that has been living for the last 25 years to the detriment of informed policy making."

However, Eslake isn’t just advocating the abolition of negative gearing on investment properties.

"That would be quite unfair," he says. "I mean why should property investors be denied tax breaks that would still be available for investors in shares or bonds or artworks or gold? So I think it should be abolished for everyone.

"I’d even support, as a compromise, what the Henry Review proposed, which is that expenses association with property should be deducted at the rate at which the income from property is ultimately taxed on i.e. at the capital gains tax rate, that would be, to my way of thinking, a reasonable compromise, even though it falls short of what I’d regard as the ideal."

Story by Carolyn Boyd, Story source: www.domain.com.au

The Australian Government has chosen to simultaneously introduce three significant tax changes that directly affect the Australian Construction Industry. See what those big tax changes are and how they will affect you.

According to the Australian Bureau of Statistics the construction industry is the fourth largest contributor to Australia’s GDP accounting for around 7% of Australia’s total economy and over 9% of Australia’s employment. Construction has been a backbone of the Australian economy and the Australian way of life. Notwithstanding, the Australian government has chosen to simultaneously introduce three very significant tax changes that directly affect the Australian construction industry.

As of July 1, 2012, the construction industry will be hit with the implications of:

• Carbon Tax
• Mining Tax
• Compulsory reporting of subcontracting arrangements

This is a time when the government has already withdrawn support from those in the building and construction industry through:

Eliminating the free home insulation scheme.

Not continuing or increasing the School Building and Renovations program.

Being extremely inconsistent on when and if they are going to subsidise solar.

Taking longer than expected to roll out the National Broadband Network (a major infrastructure project consuming huge construction industry resources)

It has also come at a time when the Federal and State Governments are applying increasing requirements for builders to build green home and green renovations such as Victoria’s recent upgrade to a minimum 6 star rating for new homes at the same time that consumers are trying to build bigger homes with smaller budgets.

The Carbon Tax and the Construction Industry

Service Central has already published a review of how the Carbon Tax will affect the Construction Industry here, however let’s go over the key points once again.

Manufacturing the materials used in construction of new homes and renovations is extremely carbon intensive. As a result the carbon tax will add thousands of dollars of new costs to a new home. The HIA estimates that with the introduction of carbon tax the price of a new home will increase by between 0.8% and 1.7%.The Allen Consulting Group have released a carbon price mechanism report that estimates that the carbon tax will add around $3,821 to its model two storey detached brick veneer 200m2 house.

The Allen Consulting Group report found that in building a two storey home in NSW you would see increases in a broad variety of building costs, including:

• Direct Energy: 6.8%
• Aluminium: 4.1%
• Bricks: 4%
• Concrete: 3.2%
• Steel: 3%
• Carpet: 2.6%
• Paint: 1.5%
• Timber: 1.5%
• Glass: 1.1%
• Plasterboard: 1%

The Mining Tax and the Construction Industry

Whilst the Mining Tax is not directly related to the Construction Industry, the Government’s Mining Tax will increase the costs to an industry that supplies materials to Australia’s Construction Industry.

The mining tax that is set to commence from July 1 2012, imposes on select sectors of the Australia’s Mining Industry a 30% tax on extraordinary profits, specifically in the coal and iron ore sectors.

Similar to the Carbon Tax, this Mining Tax could have a flow-on effect to the Construction Industry that causes price increases in building materials and construction costs. An increased cost of production in the coal industry could lead to even further increases in the cost of Direct Energy as a significant proportion of Australia’s electricity is produced using coal. Building products that use a lot of energy in their production such as aluminium, steel and glass could be hit hard.

Targeting the iron ore sector also could have a direct flow-on to the cost of steel, a major component in the manufacture of Australian homes.

Tax Office targets Construction Industry in Sub-Contractor Crackdown

The third prong in the Government’s three-prong attack on Australia’s Construction industry is a significant crack-down on payments to subcontractors by builders with the introduction of mandatory reporting to the ATO of all payments made to subcontractors.

The new tax regime starts on July 1, 2012, and requires builders to report to the tax office all of the following:

The details of sub-contractors used by the builder.

The ABN of each subcontractor.

The exact amounts paid to each subcontractor.

It is proposed that the ATO will be using this information to data-match against the tax returns of each subcontractor. It is possible that discrepancies in the amounts reported by the builder and the subcontractors could lead to further scrutiny of their accounts by the Australian Tax Office.

The ATO has also indicated that it may share this information with various State and Territory authorities that could, for example match with payroll tax and workers compensation payment records.  Should this information also find its way into the hands of construction industry run superannuation and insurance schemes, significant additional costs could be imposed on small businesses.

Accountants have said that this extra reporting requirement will cost builders on average of $300-$500 per year extra in compliance costs. There are also risks that builders will be hit with extra costs as a result of increased audits from the ATO of their businesses and the businesses of their subcontractors. Furthermore, subcontractors may seek to increase their rates to builders as a result of the extra risk of the builders reporting their payments directly to the tax office.

The guidance from the ATO as to what needs to be reported and what doesn’t has been confusing to say the least. For example, the ATO has said that domestic building projects will be exempt from the program, however if the domestic building projects involve the use of subcontractors then they will need to be reported. Given that nearly every building project (of any size) involves the collaboration between various contractors (plumbers, electricians, painters, tilers, etc) it would seem that this “exclusion” actually might still capture the vast majority of projects.

This change comes into operation on July 1, 2012, so we would highly recommend that everyone in the building industry (builders as well as subcontractors) speak to their accountant about how this is going to affect them. If you’re accountant is not experienced in these matters then it is important that you post a job request for an accountant and get some quality advice for your business.

Resources:

Carbon Tax

http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/1350.0Feature+Article1Oct+2010

http://hia.com.au/media/Industry-policy/~/media/Files/documents/Carbon%20Tax%20documents/carbon_tax_price_adjustment.ashx

http://www.allenconsult.com.au/resources/acgcarbonprice2011.pdf

Subcontracting

http://www.smartcompany.com.au/construction-and-engineering/048605-the-building-industry-gets-ready-for-changes-to-tax-reporting.html

According to the Australian Bureau of Statistics the construction industry is the fourth largest contributor to Australia’s GDP accounting for around 7% of Australia’s total economy and over 9% of Australia’s employment. Construction has been a backbone of the Australian economy and the Australian way of life. Notwithstanding, the Australian government has chosen to simultaneously introduce three very significant tax changes that directly affect the Australian construction industry.

Story source: http://www.servicecentral.com.au

INVESTORS will be allowed to improve properties in their self-managed superannuation funds, following a tax office move to abolish a ruling that banned the practice when money had been borrowed to buy the property.

Investors have always been allowed to maintain their properties, but they were banned from changing them because it would negate the concept of the "single acquirable asset" that the Australian Taxation Office had come up with to more clearly identify assets in SMSFs.

Ken Reiss, a director at accounting firm Chan & Naylor, said the new ruling was a "huge win" and would turn around a situation where investors had lost the desire to use their SMSF to use debt to buy property.

He said the previous rules meant, for instance, that "if an SMSF had used debt to buy a property in Queensland that was destroyed in the recent floods, the insurance proceeds could only be used to pay down debt rather than rebuild".

"In that case, the investor would be left with a block of land that they had no option but to sell" because any reconstruction, even an identical one, would be classed as a new asset.

The new ruling still insists that the improvements be paid for by cash resources in the SMSF rather than by borrowing.

The draft ruling will not, however, allow SMSF investors to buy and bulldoze houses and put up units using borrowings, for example. Allowable changes include pools, extensions and bigger kitchens, but they must not "fundamentally change" the property.

It also gives owners more room to move when buying a rundown property that needs more than maintenance, although, again, the new work cannot be financed by borrowing.

The decision caps a succession of policies that used to allow borrowing to buy property in super funds until June 1999, which was then banned except for existing arrangements until September 2007. The ATO brought in the no-improvements rule last year.

Story by Andrew Main, source: www.theaustralian.com.au

REINSW members will recall that on 1 July 2010 the former NSW Labor Government introduced the Torrens Assurance Levy, which is an ad valorem tax payable on the registration of a transfer of NSW property where the purchase price is more than $500,000. The greater the purchase price, the higher the levy payable. By way of example, the tax amounts to $204 on a property with a price of $600,000, and increases to $1,004 for a property at $1,000,000 and $6,004 for a property at $3 million.

REINSW immediately sought, and received, an undertaking from the then Opposition Leader Barry O’Farrell that he would repeal the ad valorem tax should the NSW Liberals & Nationals be elected to government at the 2011 NSW election.

REINSW is pleased to report that the Real Property Amendment (Torrens Assurance Levy Repeal) Bill 2011 was introduced into the NSW Parliament yesterday on 9 May 2011.

While the Bill is not yet law, we are pleased to see the new Government taking steps to honour its undertaking to REINSW. We will monitor the progress of the Bill as it makes its way through Parliament and will keep members informed of further developments.

The Bill is proposed to come into effect on 1 July 2011. Under transitional provisions, the tax will continue to apply to registrations of transfers that are executed to give effect to Contracts for Sale of Land entered into on or after 1 July 2010 and before 1 July 2011. Only registrations of transfers made to give effect to Contracts for Sale where the contract for sale is entered into on or after 1 July 2011 will benefit from the abolition of the tax.

Accordingly, REINSW members may notice and reasonably expect some resistance to exchange of contracts by purchasers between now and 1 July 2011, as by delaying exchange to 1 July 2011 they can avoid paying the levy. The resistance may be more pronounced with respect to purchasers of premium properties who would be liable for much higher levies.

Property industry groups have slammed the New South Wales Government’s decision to introduce a new tax on property transactions, but what impact will it really have on the market?

In the shadow of the Federal Budget last week, the NSW Government announced it was introducing a new transaction charge of 0.2 per cent for properties valued at $500,000 and above, or 0.25 per cent above $1 million.

The decision to introduce what’s become known as the ‘ad valorem’ levy (ad valorem is Latin for ‘according to value’) brought a furious response from the property industry.

The acting executive director of the Property Council in NSW, Glenn Byres, says the new tax will “hurt homebuyers and hurt the NSW economy” and deliver “a significant hit” to “homebuyers, the residential development market and (the) commercial property market”.

“NSW is barely creeping back from 50-year lows in residential construction levels,” Byres says. ”We can’t afford to strangle progress with a new stealth tax.” Sal Carrero, chief executive of property accountants Chan & Naylor, says the move will worsen affordability and hurt many prospective homebuyers in one of the most active market segments in the state.

“There are few family homes under the $500,000 threshold, particularly in Sydney, which will penalise families hoping to enter the market. This tax hits first homebuyers square in the eyes,” Carrero says.

“It’s also an added burden to property investors, who are likely to pass on the increased cost to renters. Increasing the cost of property to investors may seem like a populist approach but it will hurt the vulnerable as well.”

Urban Taskforce Australia chief executive Aaron Gadiel says the tax is merely a disguised increase in the rate of stamp duty.

“It again sends the message that anyone who invests in NSW will be subject to unpredictable and ever-changing imposts.”

NSW Opposition leader Barry O’Farrell has also chipped in, saying the “unfair” tax would make it even tougher for families looking to buy a home, and potentially impact on jobs if businesses took their investments interstate.

So just how big is this tax slug that’s going to hit homebuyers “square in the eyes” and “strangle progress”?

Well, as it turns out, it would total $170 on the sale of a $585,000 house, which RP Data puts as the current median price in Sydney.

That sounds more like a small pain in the behind rather than a true punch right between the eyes, but perhaps Aaron Gadiel gives a better picture of how the new tax will affect the marketplace.

He points out the levy would be a $23,500 impost on the purchase of a $10 million development site and a $123,500 impost on a $50 million development site.

That seems less like chump change.

Or perhaps the hyperbole over the new property tax is less a case of how much it will cost, and more about, as Wakelin Property Advisory director Monique Wakelin puts it, just how dysfunctional property taxes have become.

“Federal and state governments alike are growing increasingly dependent on taxes raised from property owners and this over-dependence comes at a high cost,” Wakelin writes for the Eureka Report this week.

“Rapidly decreasing housing affordability, a growing shortage of housing for buyers and renters and significant financial penalties for residential property investors are among the chief symptoms of a chronic problem requiring urgent reform.”

By Mathew Liddy Australian Property Investor

The Minister for Lands, Tony Kelly, confirmed today the new tax would begin on July 1 and had been formulated as a NSW budget measure.

The tax will be levied on the buyer.

Tens of thousands of NSW home buyers a year are set to be hit with a new tax that will cash in on the improving property market and boost state government coffers by an estimated $90 million annually.

Quietly released by the Minister for Lands, Tony Kelly, amid the wash-up of the federal budget, the new land transfer charge will be imposed on the sale of residential and commercial property worth more than $500,000.

The announcement has outraged property groups, which branded it ”just another stamp duty increase”, while the opposition has criticised the timing of its release as ”sneaky”.

Under the proposal, the portion of the sale amount between $500,000 and $1 million will attract a tax rate of 0.2 per cent, before the charge rises to 0.25 per cent for the portion of the sale above $1 million.

The median Sydney house price is about $600,000, which would attract a charge of $200, while the tax on a property sold for $1.2 million would be $1500.

According to figures provided by the Department of Lands, almost 30,000 residential and commercial property sales of between $500,000 and $1 million were settled in the past 12 months. More than 10,000 properties sold for more than $1 million in the same period.

Aaron Gadiel, the chief executive of the developer lobby group Urban Taskforce, said the new charge amounted to a 4.5 per cent increase in stamp duty for the top end of the property market.

He estimated that a developer looking to acquire a $10 million development site for new housing would be hit with an extra cost of $23,000.

Mr Gadiel said that it ”flies in the face” of the recommendations of the recently released Henry tax review, which criticised transfer duties.

”The Henry review said they were unfair; they hit some members of the community harder than others and they could cause economic distortions and reduce business activity,” he said.

The acting NSW executive director of the Property Council of Australia, Glen Byers, said that the tax was introduced ”without consultation, without explanation at a time when the investment climate in NSW is fragile”.

It is understood that legislation for the new tax will not be introduced before the next session of Parliament, which begins next month.

The government is not indicating when the tax might begin, but a spokesman for the Treasurer, Eric Roozendaal, said the revenue forecast to be generated by the tax would be included in the state budget on June 8.

The announcement was labelled ”sneaky” by the Opposition Leader, Barry O’Farrell, because it was buried in a press release which focused on new security measures for land transfer documents.

Mr Kelly’s release suggested part of the tax would be used to fund the security measures.

A spokesman for Mr Kelly said revenue from the charge would flow to the Department of Lands, not the Office of State Revenue, as was the case with stamp duty.

However Mr O’Farrell said: ”This is another attempt under the cover of a federal budget to get some bad news out from the state budget, well away from polling day in Penrith.”

Figures provided by Mr Kelly’s office suggest that the proposed NSW charge is at the lower end when compared with similar charges imposed by other states.

Based on a sale worth $750,000, the spokesman said only Western Australia charged a lower ”registration charge” of $260, compared with $500 proposed in NSW. In Victoria, the figure is $1350, in Queensland it is $1623 and in South Australia it is $4759.

Story by Sean Nicholls www.domain.com.au

Next week’s Federal Government Budget should address the recommendations of the Henry tax review to improve housing affordability and assist low-income private renters, according to the Australian Council of Social Service (ACOSS).

"Rising housing costs are putting increasing pressures on low-income Australians who are struggling to make ends meet in a tight rental market," says ACOSS chief executive officer Clare Martin.

"The Henry Review identified what low-income renters have known for years – rent assistance is too low for many people to secure adequate housing."

"ACOSS is urging government to take up the Henry Review proposal to increase rent assistance and link maximum rates to market rents."

"We have asked for a 30 per cent increase in rent assistance for low-income households which is about $15 per week."

Martin says rent assistance levels have fallen behind market rates – the Henry Review noted that over the past three years annual rents have risen at an annual rate of 10 per cent, while rent assistance has increased by only 2.7 per cent.

"The Henry Review notes that a single unemployed person spends about half of their payments on rent, leaving them with little left for other living expenses," she says.

Story from API Magazine