Deep Inside The Shoe Box There Might Just Be A Surprise Claim

Sun Herald

Sunday June 3, 2007

Debra Cleveland

It's decision - and action - time in many households, writes Debra Cleveland.

MAKE sure you are not one of thousands of taxpayers missing out on deductions when you organise this year's tax return. It is time to get out those receipts, do some tax housekeeping and be sure of your entitlements.

Accountants say there are no huge changes in terms of what you can claim on your tax return. Even so, many taxpayers are still ignorant of tax rules, which means they may be paying more tax than necessary, say accountants.

Did you know, for instance, that certain pharmacy receipts could be useful in your tax return? Or that, if you bring work home from the office, there is a set Australian Tax Office formula for working out a tax deduction?

If you use child care - even after-school care - the child-care tax offset will reimburse you for 30per cent of your out-of-pocket child-care expenses, up to $4000 a child, and it is not means tested.

"Many people would be missing out," says Tony Greco, chief executive officer of Taxpayers Australia, an independent tax watchdog.

"Understanding tax can be pretty daunting. Not everyone would be motivated to do all the research and they could be missing out on eligible deductions."

The list of possible deductions is exhaustive, but for our purposes we are focusing on some that pertain to households, employees, small businesses and investors. You will find many in the ATO's tax pack (http://www.ato.gov.au/content/downloads/NAT0976deduct-06.pdf). Or try Taxpayers Australia's summary for householders, small businesses and investors, $41.80 including postage (and don't forget it is tax deductible) for the 2006-07 version from www.taxpayer.com.au.

TIPS FOR HOUSEHOLDS

The child-care tax offset is retrospective so any claims will be made for last year (July 1, 2005, to June 30, 2006). The offset is 30per cent of your out-of-pocket expenses - that is, total child-care fees minus any child-care benefit (CCB) entitlements.

There is some paperwork involved but it is worth making the claim. You will need to be registered with the Family Assistance Office (FAO) and claiming for CCB, which is means tested. Once you have been paid CCB you can access the tax offset via your tax return.

If not, you can make a lump-sum CCB claim with the Family Assistance Office but this needs to be lodged within two years of the end of the financial year for which you are claiming. The offset is available only for "approved" child-care centres. Your child-care centre will know the answer to that one.

If you have sold a holiday house this year, know what you can add to the cost base -the price that is used to work out your profit after a sale. Typically the cost base comprises the initial purchase price, rates, insurance and interest (if you've borrowed to buy the property). When you sell, this is subtracted from the selling price to work out your taxable gain (or loss).

You can add to the cost base trips to the property to carry out maintenance, Greco says. "If you're making regular trips down to maintain the house, the cost of travel should be added to your cost base so when you do sell down the track you pay less capital gains tax," he says.

So even if selling is not imminent, keep track of receipts.

Visits to your accountant can be claimed as a tax deduction, Greco says. So can accommodation costs if your accountant is out of town or in another city.

And haul out your receipts for donations to charity to claim as deductions.

Parents of school-going children should look at any building fund donations to the school. If the fund contributions are voluntary, they are tax deductible.

If you have a family trust, make sure you decide on or before June 30 how trust income is going to be distributed.

"This is absolutely critical," Paul Hockridge, senior tax consulting partner with William Buck, says.

"It means mum and dad as trustees have until Saturday, June 30, to resolve who is going to get trust income for the year. If they leave it until Sunday, July 1, the trustee will have to pay tax on trust income at the top rate of 46.5per cent rather than distributing it to the most tax-efficient beneficiaries."

Beneficiaries could be family members on lower tax brackets or those who are primary caregivers on no income. This year, children can "earn" $1333 in unearned income such as bank interest or dividends, Hockridge says. Anything over that amount is taxable.

Accountants say many households are unaware they can claim for net medical expenses. These are "out of pocket" medical expenses after you have been refunded by Medicare and/or your private health fund. For net expenses of more than $1500 for the year you will receive a tax offset of 20per cent of the excess.

Be careful here because, while many accountants may tell you this includes pharmacy items such as headache tablets or bandages, this is not always the case. The ATO website specifically excludes chemist purchases that are not related to an illness or operation.

Where you can, it might be useful to time medical procedures to take advantage of the offset. "If you have two kids who both require braces and one has them fitted in June and the other child has them a month later, the family might not qualify for the offset," Moran says. "But if they both have it done in the same financial year, you're likely to get something back."

TIPS FOR EMPLOYEES

If you are using a car for work purposes, you can claim car washes, among other items. Make sure that you keep receipts, Greco says. If this is not possible, perhaps in a coin-operated situation, make sure you diarise it to keep a record.

If you sometimes work from home or bring work home and you haven't kept a record of the exact number of hours, there is a set ATO rate you can use instead, Greco says.

Say you use your home office on average for two hours five times a week, that is 10 hours a week. To get an annual estimate, multiply this by 48 hours (taking into account annual leave) and you've got 480 hours a year. Multiply this by 26cents (the set ATO rate) and the amount you can claim as a deduction (with no documentation required) is $124.80. While this is not exactly a fortune, the little things do add up.

TIPS FOR SMALL BUSINESSES

Many people involved in starting small businesses are unaware they can qualify for a tax rebate, Greco says. If turnover is less than $75,000, the entrepreneur tax offset is a 25per cent rebate off their tax bill.

"This applies to any taxpayer - whether it's their main source of income or they're involved in a start-up on the side," Greco says.

TIPS FOR INVESTORS

For those owning shares, property or any other investments, think about the timing of potential sales. "People need to make a decision about whether to realise an investment," Hockridge says.

"If you're sitting on a big profit, don't sell before June 30 [because it will increase your tax liability]," he says. "If you're facing a loss, sell before the year end [to offset any other gains]." See page 8 for more on reducing capital gains tax.

Along similar lines, if you own an investment property that needs repairs, get them done before June 30. Repairs carried out in this financial year can be claimed as deductions in your current tax return. Interestingly, for a repair to be claimed as a tax deduction this financial year you don't actually need to have paid the bill, just received it. "So you can get the bill in June and pay it in July," Hockridge says.

He advises caution when it comes to rental property deductions. "There are 1.5million rental property owners in Australia but the deductions claimed amount to $18billion. The Tax Office is having a closer look at rental property claims and it would be wise for people to exercise some caution in preparing their claims."

A common error is to claim as a deduction a repair that is actually an improvement to the property. "For example if you replace the whole ceiling and the back wall - is it a capital improvement or a mere repair?" Hockridge says.

Many investors, such as our case history investment property owner Glenn Allen, choose to pre-pay interest on investment loans so they claim the interest as a tax deduction in the current year.

Be aware of a tax bracket change in the next financial year - at the moment anything between $25,000 and $75,000 is taxed at 31.5per cent but from July 1 the lower bracket is changing to $30,001. If your taxable income is between $25,000 and $30,000, defer interest to the following year to make the most of the tax change, Paul Moran of Paul Moran Financial Planning suggests.

Be aware that brokerage from share deals is not deductable. It is normally a capital cost, Moran says, and should be added to your cost base. But do make sure you claim deductions for any research into your investments such as investment subscriptions, newsletters, books and software.

Smart way back

CASE STUDY

MANUFACTURING operations manager Glenn Allen is re-entering the property market after four years. Following the cyclical nature of real estate, he made gains at the time by selling the investment properties he owned and put his money into shares instead. Now he's getting back into property and settled his recent town house purchase on Friday, having timed it to get in before the end of the tax year and to make the most of negative gearing. With the help of Smartline mortgage broker Emmanuel Psathias, he's opted for a fixed-rate, three-year, interest-only loan with Westpac. He's prepaying the interest for the 2007-08 tax year so he can claim the tax deduction this year.

© 2007 Sun Herald

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