WSC NEWS - SEPTEMBER 2009 

This issue includes the following topics:

 Private Patient Hospital Cover
Adjusting the Cost Base of Investment Properties for Capital Gains Tax Purposes
Get your 2009 Tax Refund in Time for Christmas
Improving Customer Service
Declaring the Right Bank Interest Income
Government "Tax Break" and Hire Purchase Agreements
ATO:  Be Careful When Claiming Losses on Shares
Changes to the Taxation of Foreign Employment Income
Resident Minors' Effective 2009/10 Tax-Free Threshold
The Cost of Discounting
 WSC Caringbah - Business Referral Network

Private Patient Hospital Cover - avoiding the Medicare Levy Surcharge 

Private patient hospital cover is cover provided by an insurance policy issued by a registered health insurer for some or all hospital treatment provided in an Australian hospital or day hospital facility.  However, an insurance policy for hospital cover taken out after 24 May 2000 that has an excess of more than $500 in the case of a policy covering only one person, or more than $1,000 for all other policies, does not provide private patient hospital cover for Medicare Levy Surcharge ("MLS") purposes.  The same applies to an insurance policy for hospital cover with a high excess that was taken out before 24 May 2000 if the policy either ceased to provide continuous cover after that date or has provided continuous cover but has increased the excess.

If you made a payment to cover a shortfall in the cost of hospital treatment, other than the excess agreed in your policy, this is not an excess.  Your health insurer may include details of the level of front-end deductible amount or excess that applied to your policy in the private health insurance statement that is sent you.

Your health insurer statement will indicate the maximum number of days that your policy may have provided an appropriate level of private patient hospital cover at label A.  However, this may not always be correct so it is important that if you have an excess, you confirm it is under the above thresholds.

General cover (formerly called "Ancillary Cover"), is commonly known as "extras".  General cover is not private patient hospital cover.  It covers items such as optical, dental, physiotherapy or chiropractic treatment.

Dependants - A dependant is an Australian resident, being your spouse (even if they worked during the income year or had their own income); any of your children who were under 21 years of age; or any of your children aged 21 years and older but under 25 years of age who were full-time students.  For MSL purposes you need to have contributed to your dependant's maintenance.

Family - The ATO consider you to be a member of a family during any part of the income year that you contributed to the maintenance of a dependant.  Any parent (including a sole parent) who contributed to the maintenance of a dependant child or children is considered to be a member of a family.

Spouse (married or de facto) - If you are living separately and apart from your spouse we treat you as not being married.

We recommend that all Health Fund members check their policy details carefully.

Adjusting the Cost Base of Investment Properties for Capital Gains Tax Purposes

To work out the net capital gain (or loss) of an asset, you need to know its cost base.  With property, the cost base is generally what the property cost the owner plus any improvements or holding costs (not claimed as a tax deduction), buying costs and selling costs.

It is also important to note that the cost base must be reduced for any Capital Works Deductions (where the property was acquired after 13 May 1997 or before that date and the construction expenditure was incurred after 30 June 1999) or Capital Allowance Deductions claimed or to be claimed.  This has the effect of increasing the assessable capital gain.

Capital Works Deductions are basically a write-off of certain types of construction expenditure (eg. a building or extension; alterations such as removing or adding an internal wall; or structural improvements to the property such as adding a gazebo, carport, sealed driveway, retaining wall or fence).  The amount written off each year will depend on the type of construction and the date construction commenced, but will generally be over 25 or 40 years.

Capital Allowance Deductions are effectively depreciation on property-related assets that fall outside the capital works deduction (eg. fixtures and fittings).

You don't need to adjust the cost base if you did not claim the deductions and the period for amending the relevant income tax assessment has expired or you do not have sufficient information to determine the amount and nature of the capital expenditure and you do not intend to claim a deduction of any capital works expenditure.

Example

John bought a new investment property in July 2006 for $300,000.  He incurred legal fees, commission and stamp duty amounting to $40,000 in total.  He sold the property in June 2009 for $410,000.  During the period of ownership, he did not make any improvements nor purchase any additional fixtures or fittings.  He claimed capital works deductions of $11,000 and capital allowance deductions of $19,000.

Therefore, the cost base for capital gains tax purposes is $310,000 ($300,000 + $40,000 - $11,000 - $19,000).  Accordingly, the gross capital gain (before 50% general concession) is $100,000 ($410,000 - $310,000).  However, after the 50% general concession, John only needs to declare a net gain of $50,000.

Although, John has to reduce his cost base by $30,000 due to capital works and capital allowance deductions claimed, only 50% of this adjustment flows through to his taxable income whereas he has received a tax deduction of 100% over the 3 years of ownership.  Therefore, it is much better to claim these deductions than not to claim.  So, if you own an investment property but don't already have a Tax Depreciation, contact us to see if you are eligible.

Get your 2009 Tax Refund in Time for Christmas!

It is less than 14 weeks away from Christmas.  If you expect a tax refund for the 2009 income year, would like to receive your refund cheque in time to spend for Christmas, and have not already submitted your tax information to us, we recommend you get your information to us before the end of November but preferably earlier.  If you would like an Information Checklist to help ensure you provide all the necessary information, you can access one at our website under the "Resources" tab or click here.

For businesses wanting to have their financials and tax returns finalised before Christmas, we recommend you arrange a meeting to see one of our team members by around mid-October.  Businesses can also access an Information Checklist from our website. 

Improving Customer Service

From time to time, clients will call us with a query regarding their tax or software issues or with one of a number of other queries.  Quite often our admin girls (Kath, Lisa and Jen) will be able to assist clients with these queries whether it is accessing a tax file number, outstanding tax details, or obtaining a copy of correspondence received from the Tax Office or other government department.

If the team member you are calling for is unavailable, it helps them answer your call more efficiently if they have been made aware of the relevant question, issue or enquiry before returning your call.  For example, sometimes they may have to pull out a file or access additional information elsewhere before being able to answer your question accurately and fully.  So, when our admin girls ask you "...what is it regarding?" it is in an effort to improve the service we offer to our clients rather than just being nosey.

Declaring the Right Bank Interest Income

Each year, the Australian Tax Office receives information from financial institutions regarding interest earned by account holders.  This information is connected to the tax file number provided by the account holder and used by the Tax Office in ensuring taxpayers declare all income earned.  Usually, it takes the Tax Office around 12 to 18 months to notify taxpayers of any interest income that may have been omitted in their tax return and quite often it is a matter of the wrong tax file number being advised to the financial institution when the account was established.  A common example is an individual tax file number being provided for a superannuation fund bank account.

Therefore, it is important that clients ensure that they always notify the relevant institution of the correct tax file number when setting up a bank account.  The same applies when purchasing shares in listed companies or units in managed funds.

Government "Tax Break" and Hire Purchase Agreements

The small business and general business tax break (also known as the 'tax break' or 'investment allowance') was originally announced by the Government on 12 December 2008 but went through a number of changes before the legislation was passed.

It basically gives small businesses a bonus deduction of 50% (30% reduced to 10% for other businesses) for depreciating assets acquired between 13 December 2008 and 31 December 2009.

If a taxpayer wishes to claim the tax break in respect of an asset they are acquiring under a hire purchase arrangement, it is the date of the hire purchase contract that is the relevant date for establishing eligibility for the tax break, and not the time any purchase order for the asset is placed with the supplier.

For example, if a taxpayer placed an order with a supplier in August 2008 for a new depreciating asset, but did not enter into the hire purchase agreement with the financier until the asset was delivered in April 2009, then the relevant date for establishing eligibility for the tax break is April 2009, not August 2008.

ATO: Be Careful When Claiming Losses on Shares

The ATO recognises that the global economic downturn has decreased the value of many people's investments over the past year, and that some taxpayers may be 'confused' about the difference between capital losses (share holding) and revenue losses (share trading).

They remind taxpayers that the taxation of their investments in prior years is relevant when working out the treatment of a loss in the current year, so if there has been minimal change in the nature of their investment activity, it is likely that the same tax treatment applies in the current year.

For example, if a taxpayer has previously sold shares and claimed the 50% CGT discount, and has then realised a loss in the current year, they would be expected to claim this as a capital loss which can only be offset against capital gains in the same year or future years.

Taxpayers who seek to reclassify their activities may be asked to provide evidence that demonstrates a change in the nature of their activities or that they have declared their income incorrectly in the past.

Resident Minors' Effective 2009/10 Tax-Free Threshold

The increase in the low-income tax offset to $1,350 for 2009/10 (from $1,200 in 2008/09) effectively means that $3,000 can be distributed to minors tax-free in the 2009/10 year.

Ordinarily, and excluding the offset, once a minor's income exceeds $1,307, the entire amount is taxed at 45%.

However, applying the low-income tax offset of $1,350 means that no income tax will be payable until the minor's taxable income exceeds $3,000, i.e. $1,350 divided by 0.45 = $3,000. 

The Cost of Discounting

Anyone can sell at a discount.  You can't be a success if you only focus on sales volume without identifying the cost of your discounting strategy.

Discounting creates a leverage impact on profits.  Essentially, by discounting you are giving away some or all of your profits.  The key is to understand the impact and just how far you can go.  For example, a business with a 30% gross profit margin that offers a 25% discount (certainly nothing unusual about that in today's market) needs a 500% increase in sales volume just to maintain the same position.  And in almost all cases, that's just not going to happen.  The result generally is that the business trades below its break-even point and generates a loss.  You can only do that for a limited amount of time (and yes, some of your larger competitors might be engaging in a discounting war with you in an attempt to bury you once and for all).

Many businesses don't understand the impact of pricing on their business and instead measure success by sales activity rather than by their gross profit.  This can result in a false perspective of the business's true trading performance and profitability.

Contact Brett Woods or Matt Bell if you would like to know more about how to measure and monitor the key profit drivers of your business.

WSC Caringbah - Business Referral Network

We are continuing to grow our Business Referral Network on our website.  If you know of any reputable businesses in the Sutherland Shire or St George areas that have a modern and functional website and who would like to promote their business on our website at no cost and in return would be happy to promote our firm on their website, please pass on our details or contact Matt Bell, the practice manager.  Check out our current list of Network members at here.

2009 Sutherland Shire Business Awards

Voting recently closed for the 2009 in the Sutherland Shire Local Business Awards and we are pleased to advise that WSC Caringbah have made it into the Finalist's list in the Professional Services category.  Around 50 professional services businesses entered the Awards from around the Shire and we are honoured to have made it into the Final 4 once again.  The award winners will be announced at the presentation evening on 14 October.

Thank you to all our clients and business colleagues for your support and votes.

From all the team at WSC Caringbah.