Tax and Accounting
What’s on our mind as we start client reporting as of 30th June 2022?
- Interest rate rises
- Tax Compliance
- Rental Properties
- Trust distributions
- Contractors and superannuation contributions
- Changes in Residency
- Losses on crypto currency
- Land Tax
- The effect of increasing Land Values
- Vacant Residential Land Tax
Our Client Newsletter of June last year posed the thought of inflation and the need to gain skills in adjusting selling prices to maintain margins. During the year inflation came and was fuelled beyond expectations by shortages of material, labour and international and local freight costs in particular.
We have been supporting clients implementing new strategies to maintain and hopefully enhance margins with strong analytics and counsel.
Governments seem to be using interest rates as a somewhat lonely tool to lower inflation. How high will interest rates go?
The RBA lifted the cash rate to 1.85% in early August 2022. The increase comes a few weeks after Reserve Bank Governor Philip Lowe told the Australian Strategic Business Forum that “…we’re going through a process now of steadily increasing interest rates, and there’s more of that to come. We’ve got to move away from these very low levels of interest rates we had during the emergency.” He went on to say that we should expect interest rates of 2.5% - how quickly we get there really depends on inflation.
The RBA Governor has come under increasing pressure over comments made in October 2021 suggesting that interest rates would not rise until 2024. At the time however, Australia was coming out of the Delta outbreak, wage and pricing pressure was subdued, and inflation was low. That all changed and changed dramatically. Inflation is now forecast to reach 7.75% over 2022 before trending down. We’re not expected to reach the RBA’s target inflation rate range of 2% to 3% until the 2023-24 financial year.
In the UK, the situation is worse with the Bank of England predicting that inflation will reach around 13% over the next few months. The UK has been heavily impacted by the war in Ukraine with the price of gas doubling, compounding pressure from post pandemic supply chain issues and price increases.
With interest rates rising, what can we expect? Deputy RBA Governor Michele Bullock recently said that Australia’s household credit-to-income ratio is a relatively high 150%, increasing in an environment that enabled households to service higher levels of debt. But it is not all doom and gloom. “Strong growth in housing prices over 2021 and early 2022 has boosted asset values for many homeowners, with housing assets now comprising around half of household assets,” she said. The recent downturn in house prices has only marginally eroded the large increases over recent years. Plus, households have saved around $260m since the pandemic creating a buffer for rising interest rates. This, however, is a macro view of the economy at large and individual households and businesses will face different pressures depending on their individual circumstances.
For businesses, the rate increase has a twofold effect. It is not just the rate rise and the higher cost of funds in their borrowings. That by itself is significant but at this stage, if anything, it is the lesser issue. The more significant impact comes from negative consumer sentiment and the flow through effect on sales and cash flow.
- In general, your debts should not exceed around 35-40% of your assets. There will be some exceptions to this with new business start-ups and first home buyers.
- Review the cost of cash in your business, reviewing rates, and the configuration and mix of loans to ensure you are not paying more than you need to.
- If possible, avoid having private debt as well as business and investment debts. You can’t get tax relief on your private debt.
- Keep an eye on debtors and don’t become your customer’s bank.
The Tax Office data analysis is reaching new levels of sophistication leading to the reasonable expectation that, if your tax returns does not comply, the data matching will identify the non-compliance.
The focus on rental property expenses and Trust distribution compliance have been the subject of our past newsletter.
The liability to pay superannuation at 10.5% on contractor payments is still a controversial area. If you are generally paying contractors for time spent on a regular and systematic basis then we recommend a review for your potential liability to this superannuation guarantee charge (SGC).
Anecdotally many families have a non-resident or potential for a non-resident in the family. There are ramifications of changes in residency and again we recommend the discussion particularly giving rise to capital gains taxes, repayment of Higher Education debts and passing assets through generations under gift or Will. There may also be implications for trusts purchasing or holding land where non-residents qualify as a beneficiary.
Can I claim my crypto losses?
The ATO has released updated information on claiming cryptocurrency losses and gains in your tax return.
The first point to understand is that gains and losses from crypto are only reported in your tax return when you dispose of it – you sell it, convert it to fiat currency, exchange it for another type of asset (including other forms of crypto), buy something with it, etc. You cannot recognise market fluctuations or claim a loss because the value of your crypto assets changed until the loss is realised or crystallised.
Gains and losses from the disposal of cryptocurrency should be reported in your tax return in the year that the disposal occurred.
If you made a capital gain on crypto that was held as an investment and you held the crypto for more than 12 months then you may be able to access the 50% Capital Gains Tax (CGT) discount and halve the tax you would otherwise pay on revenue account.
If you made a loss on the cryptocurrency (capital loss) when you disposed of it, you can generally offset the loss against capital gains you might have (unless the crypto is a personal use asset). But, you can only offset capital losses against capital gains. You cannot offset these losses against other forms of income like salary and wages, unfortunately. If you don’t have any capital gains to offset, you can hold the losses and carry them forward for another future year when you can use them.
If you earned income from crypto such as airdrops or staking rewards, then these also need to be reported in your tax return.
And remember, keep records of your crypto transactions. The ATO has sophisticated data matching programs in place and cryptocurrency reporting is a major area of focus.
State Governments are keen to recoup deficits with whatever taxes they have at their disposal. State Land tax rates are a progressive scale and the scale has not been indexed or otherwise adjusted for over a decade. In simple terms land values doubling have an exponential effect on land taxes. For example, in Victoria, the single holding land tax on land at $1m is $2,975 but at $2m it is $12,475
Lands held in trusts are subject to a surcharge.
Landlords generally cannot pass on the land tax cost to tenants, unless the lease is a specific type of commercial lease. However, land tax is not payable if the property is leased to a tax-exempt entity eg a charity. If you think you may qualify for this exemption, please contact us to assist.
In addition, there is Vacant Property Residential Land Tax which is not really a land tax because it is levied at 1.0% of the capital value of the land and buildings. This tax was suspended during Covid but is now back and needs to be anticipated and hopefully not applied.