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I am about to purchase an investment property. What is the difference between positive gearing & negative gearing?

Alot of people (particularly property developers and real estate agents) talk up the benefits of negatively geared investments but very few realise that it is actually costing them money.

A negatively geared investment occurs when your expenses (such as interest, rates, repairs and commission) are greater than the rent received. The difference is a tax deduction.

But the maximum tax deduction that you can receive is at 46.5%. If you are like most Australians and earn less than $80,000, your marginal rate of tax is 31.5%. So a $10,000 net outlay will still cost you $6,850 out of pocket. Not good maths particularly if property prices aren’t moving north quickly.

To get a property positively geared you should look at smaller places where your deposit becomes larger or you can be really focused and work hard on eliminating your mortgage.

I would be more than happy to pay tax from rental property income because my bank balance would have increased due to the extra rent. Granted that I would still try to reduce the tax debt as much as legally possible but you are not out of pocket.

Good luck with the purchase!

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When do I have to do my tax by? What happens if I am late in lodging my return?

We all need to get our income tax returns in by 31 October before the taxman starts getting cranky with us.

Whilst the ATO has the ability to fine everyone that is late in lodging their return they generally only penalise those that have to pay tax.

If you want a strong incentive to get all your paperwork together then look no further than the current interest rate that the taxman charges on late returns - a whopping 14.31%!!

If you are due a refund, the quicker you lodge, the quicker you will get the cash in your bank account. So don’t delay!

You can also go onto the lodgment program of a Registered Tax Agent before the 31 October deadline and you will generally get an automatic extension to lodge your return as late as May next year without penalty.

You will also probably find that a tax agent will find you a few extra deductions and their fee is tax deductible.

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How much money should one have in super funds to comfortably retire on?

Great question. In a perfect world it would be great if we could spend our last dollar just the split second before we stop breathing. Unfortunately there are a lot of variables that simply make this impossible such as:

· what our spending habits are now & in the future;

· what risk we are willing to take with our investments; and

· not knowing exactly when we are going to die.

ASIC, via their FIDO website, has a great calculator to calculate how much you need to have in super when you retire.

Based on the calculator, if you were to retire at age 60 and needed to live on $40,000 per annum then a super balance of $350,000 invested in a balanced strategy (8%) will last til age 72. Unfortunately the life expectancy for males is 82 and rising these days so assuming that you lead a good healthy life then you are going to run out of money in retirement.

Not a good situation to be in and worthwhile sparing a thought for the lucky ones (or they unlucky?) that live to 100!

However, simply by reducing your spending to $30,000 per annum and taking on slightly more risk with your investment (8.5%) the same super balance will last to age 87.

If you can’t reduce your spending yet want to have your super last to at least 87 then you need over $600,000 at retirement.

To calculate how much that you need to plan for retirement go to www.fido.gov.au and click on the Retirement Planner in the Calculators section.

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I am having a baby in December and intend to stop work on a full-time basis. Is there anything that I should do tax-wise to maximise our position?

This is one of the most common questions that we get asked. There are a few simple strategies for you to follow and they all largely revolve around the marginal tax rates for yourself and your husband, both now and in the future.

Firstly, ensure that all investments are in your name so that you can take advantage of your lower tax rate (particularly the first $6,000 which is tax free) on any investment income derived.

Likewise, have all passive deductions such as charitable donations in your husband’s name as he may get a return of up to 46.5% pending his income level.

If you want to sell some of your investments which have made a gain, then you might want to defer the sale til after 1 July next year when your tax rate would be lower, although you need to hope that the value of the investments don’t fall before then.

With you only working a part year, yet paying tax based on a full year, I would expect that you will get a nice tax refund for the 2008/09 financial year. So put in your tax return as soon as July hits.

All the best with the birth.

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My husband wants to cash in his ACER (a kind of workers comp that will tide him over if he gets made redundant) account from work to clear our debt. It has $17,000 in it. Is that a good idea?

It is always good to get rid of debt but there are a few things that you should take into account before you run with this strategy.

Firstly make sure that you find out what the exit penalties, if any, there are in exiting from ACER fund as I have seen similar sized investments charge a ludicrous $5,000 and thus negate any benefit in repaying debt.

Next you should consider the cost of the debt compared to the current return that the investment is generating. Whilst there is no point having an investment earning only 6% if you have a credit card debt at 22%, you may re-consider if the returns are the other way around.

I believe that all debt is bad debt, but if you have debt then make it tax effective. So pay off non-tax deductible debt first (eg credit card, personal loan, home loan) before you pay off tax deductible debt (eg investment property loan, car loan used for work purposes).

Lastly, you need to analyse how the debt originally arose. If it is due to poor spending habits, then you really need to address these issues otherwise you will be in the same debt situation again in the future.

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My dad want to give me my inheritance of $13,000 now so I can help pay my mortgage, will it be taxed? What’s the best way to avoid paying tax on it?

What a great dad!

Good news for you - there is no tax payable if you were to receive money in cash as a gift or an inheritance from your dad (or from anyone else for that matter). Whilst the ATO would gladly tax you on any earnings derived from the inheritance, as you are putting it against your mortgage there is no tax for you to worry about.

There may be some implications for your dad though. Whilst he wouldn’t have any tax to worry about either, there may be an adjustment required if he received a pension or benefit from Centrelink.

Pensioners can gift a maximum of $10,000 per year, up to $30,000 over a five year period. Any excess above these figures are added back as “excluded assets” under the assets test for pension calculation purposes.

In your situation, $3,000 would be considered an “excluded asset” for your dad. It may not have an impact for him if his assets are well under the assets test threshold anyway but it is something that should be checked, particularly if he intends on gifting you more money in the future.

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I have a complaint to make about my bank and the fees they charge me, is there anyone I can complain to?

Bloodsuckers they may be but you may not be able to file a complaint merely because they charge you a fee.

The Code of Banking Practice gives customers important legal rights, and confirms their existing rights, in a number of areas. These include:

  • disclosure of fees and charges and other terms and conditions
  • changes to terms and conditions and fees and charges
  • disclosure of general information about banking services
  • privacy and confidentiality
  • statements of account
  • copies of documents
  • direct debits
  • chargebacks on credit cards
  • debt collection
  • complaints handling.

If you believe that your bank has breached the Code and wish to make a complaint then you should first discuss the matter with your bank. They will have an internal complaint handling service. If your complaint is not immediately resolved, the Banking and Financial Services Ombudsman (BFSO) may be able to help. You can contact the BFSO by ringing 1300 780 808 or visit their website at www.bfso.org.au.

The Code also gives loan guarantors important disclosure and other rights. In addition, there is a general commitment to act fairly and reasonably towards customers and guarantors in a consistent and ethical manner. You can obtain more information and a copy of the Code from the Australian Bankers’ Association website www.bankers.asn.au.

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I am in the process of buying a computer for about $1,000 and the retailer offered to finance it at only $12 per week for 3 years. Is this a good deal?

Don’t finance through them - they are trying to rip you off. Did you know that they are effectively trying to charge you a ludicrous 47% interest on this finance arrangement? At these rates it would be cheaper to use a credit card to purchase the computer and we all know how high their rates are. If you can afford to purchase outright then that would be the best option.

It is quite common for people to get suckered in on these deals. Whilst $12 per week may seem like a nice small number that is quite manageable, you are actually paying them another $872 on top of the original purchase price (total payments = $12 x 52 x 3 = $1,872).

That is a whopping mark-up of 87%!

And don’t get caught out either if they say that it could be tax deductible if you use it for work. Assuming that you are on the marginal tax rate of 31.5% and have work related usage of 50%, this finance deal still leaves you $1,577 out of pocket.

Whilst it seems a simple solution to purchase and finance at the one place, you are better off shopping around for a better finance deal and getting a more affordable (and realistic) interest rate.

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What can I do to set my son up financially, he is 7 months old and I want to give him the best possible start in life?

Congratulations on the new addition to the family. And well done in wanting to financially help him. I can only imagine what the affordability of housing will be like 20 years from now so there is no better time to start a savings plan than now. As your son gets older he will benefit from your lessons in saving.

Did you know that by investing the baby bonus at 8% pa as well as putting away as little as $100 per month you would have saved $87,000 by the time your son is 21?

There are some good bank accounts specifically for kids. But watch out where the promotional rate may reduce to as little as 0.01% if the account balance is not at a certain level or if you don’t maintain the regular savings plan.

You also need to be careful with the amount of income your son’s savings earns as the taxman may come knocking. From 1 July, children’s investment earnings are taxed at 45% if they are more than $1,667 per year (increasing to $2,667 from the 2008/09 year). In this case it may be better to have the excess investments in your name and pay a lower rate of tax.

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I have recently started my own business and work from home. What proportion of my rent can I claim as a tax deduction?

The Australian Taxation Office (ATO) is quite particular with the claiming of home office expenses. As you are genuinely operating your business from home then you are allowed to claim a proportion of rent based on the actual floor space that you use for the business.

If, for example, your home office space is 4m x 5m (ie 20sqm) and the total house is 140sqm in size then you can claim 14% of your rent for tax purposes.

The ATO will not accept estimates in an audit, so you will need to get quite accurate with your calculations. Get the measuring tape out and write down the dimensions of your office and house. It also assists if you take photos of your office for your own records.

You can also make a claim for a portion of other home office running expenses such as phone, internet, electricity and your computer. I suggest that you sit at your desk and scan your eye around the room for other expenses that you could claim as well.

Good luck with the business!

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Can you explain what the First Home Saver Account is? Is it replacing the First Home Owners Grant?

From 1 October 2008, those between the ages of 18 & 65 will be able to open a First Home Saver Account (FHSA) as a way to save for their first home through a combination of Government contributions and low taxes. It seems like a great idea.

The government will contribute an extra 17% to your savings into your FHSA, up to $850 each year. No further contributions can be made once the balance reaches $75,000.

FHSAs are a bit similar to super funds in that:

· The income is taxed at only 15%;

· Funds may be rolled over into other super funds; and

· You can access the funds tax free once you reach age 60.

However the key difference is that once you have an account for a minimum of four years, you can withdraw the funds tax free to buy or build a home. There are penalties if you don’t live in your home for at least 6 months within the first year of purchase.

The FHSA does not replace the First Home Owners Grant. In fact, you may still be eligible to this grant as well.

Let’s hope that the FHSA doesn’t end up sounding like its name & become a “fizzer”.

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I’ve read that “Eligible families can claim a 50 per cent tax refund when they spend up to $750 on key education materials for each primary school child” But I’m confused about what that means. Can I buy a computer for the whole family and claim for it?

It was announced in the Federal Budget that parents who receive the Family Tax Benefit Part A with children attending either primary or secondary school, or whose school children receive the Youth Allowance, will be able to claim the “Education Tax Refund” every financial year from 2008/09 for eligible education expenses.

The claim is made though your income tax return. The annual tax deduction is $750 for each primary school child and $1,500 for each secondary school child. So if you are on a marginal tax rate of 31.5%, then you will get a refund of up to $236 for each primary school child and $472 for each secondary school child.

The eligible education-related expenses include:

· Laptops;

· Home computer and associated costs;

· Home internet connection;

· Printers and paper;

· Education software;

· School textbook materials (including prescribed textbooks, associated learning materials, study guides and stationery);

· Prescribed trade tools

Whilst I have yet to see the draft legislation, I expect that any computer purchase will need to be depreciated over a few years in accordance with normal income tax rules and that private usage for non-education related use will need to be added back as well. As a result, it is possible that you may only be able to claim a proportion of the cost of the computer, particularly if it is not used by school children or for work related purposes.

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I don’t understand the means-tested Baby Bonus, is the $150,000 threshold calculated on the two parents’ wage before the woman goes on maternity leave? Or is it what their household wage would be once she’s on maternity leave?

According to the Budget, from 1 January 2009, the Baby Bonus will be only available where your family income is not greater than $75,000 in the six months from the birth of the child. This figure will be indexed annually and is effectively $150,000 when annualised.

Couples will need to provide the Family Assistance Office with an estimate of their income for the first six months in order to receive the Baby Bonus which is increasing from $4,258 to $5,000 from 1 July this year. The bonus will also be paid in thirteen fortnightly instalments of $385 instead of the current lump sum payment.

Whilst I do have concerns in how effective the policing of the calculation of the $75,000 income threshold will be, it is possible for higher income families to implement a few simple strategies to still get the baby bonus. Some of these strategies may include:

· deferring income to outside the six month period;

· income splitting to other family members;

· utilising family trust and company structures; or

· salary sacrificing.

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What are the rules with claiming car trips for tax purposes? I work at night shifts and have to drive home at 4am because there is no public transport.

You cannot claim the cost of normal trips between home and work as that travel is private. You cannot claim it even if:

· you did minor tasks – for example, picking up the mail on the way to work or home

· you had to travel between home and work more than once a day

· you were on call – for example, you were on standby duty and your employer contacted you at home to come into work

· there was no public transport near where you work

· you worked outside normal business hours – for example, shift work or overtime, or

· your home was a place of business and you travelled directly to a place of employment.

You can claim the cost of trips between home and work if:

· you used your car because you had to carry bulky tools or equipment that you used for work and could not leave at work – for example, an extension ladder or cello

· your home was a base of employment – you started your work at home and travelled to a workplace to continue the work, or

· you had shifting places of employment – you regularly worked at more than one site each day before returning home.

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My husband earns $55,000 and I earn $5,000. My friend told me that it’s not worth me working for that amount of money because now my husband misses out on the dependent spouse rebate, worth $5,000. Now I am totally confused.

As much as you probably hate me for saying this, you are actually better off financially if you remained working.

Your friend got it slightly wrong with the amount of the dependent spouse rebate. It is a maximum of $2,100, not the $5,000 that she quoted you.

And just because you do some work doesn't mean that you miss out altogether either.

The rebate, paid to the higher earning spouse, is reduced by $1 for every $4 that the lower earning spouse earns over $282. So in your particular instance your husband would have the rebate reduced by $1,180, and receive $920.

As a result the family would receive $5,920 if you worked versus only $2,100 if you didn’t work.

You can obtain the dependent spouse rebate from Centrelink. If you have no children then no can also claim the rebate via your tax return.

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