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This blog post will take you through a few of the recent updates and key points of discussion within Australian tax law at the moment. It is a good idea that taxpayers have at minimum a rough understanding of what is going on within our economy and how the tax laws are currently impacting you as an individual and our society as a whole.

STAGE 3 TAX CUTS

The stage 3 tax cuts now looks to definitely be going ahead. Agreement with the opposition has been reached – and as such, it does appear that this legislation WILL happen. (As much as we can guarantee that legislation will go ahead that is!). The final version of these tax cuts is not as beneficial to higher income earners as the original proposed version was. On $180K of income, the tax change WAS going to be a movement of $45.5 K (from $51,600). If the bill passes through parliament, tax will be just under $48K. Still a saving on the 2024 rates – just not as much as the original plan. Map out how much you will save using this handy calculator.

TAX DEDUCTIONS & SUBSTANTIATION

The ATO reminds taxpayers that NOTHING in the tax world happens, unless you can properly substantiate it! When you plug your occupation code into your personal tax return, the ATO then has certain benchmarks for expected deductions associated with that occupation. If you claim more than expected, you’ll almost certainly be an audit target.

Recently, a case arose whereby a real estate agent was audited as a result of claiming excessive deductions over 3 years worth of income tax returns. In this particular case, the tax payer had claimed (among other things) the cost of phone calls (made from a phone in his spouse’s name), along with a variety of interest charges on credit cards that were used for personal purchases such as “CrownBet” and Bras & things- NO! Please remember the basic rule of tax deductibility as follows:

• The expense is NECESSARY for the taxpayer to derive taxable income.
• The expense is incurred in the DIRECT course of earning income.
• The expenses is incurred within the applicable financial year.
• The expense must not be private or domestic in nature.
• The expense must not be capital in nature.
• You must have clear evidence of the expenditure
• The expense must be been incurred by the taxpayer.

If you have a bundled mobile phone plan for example, you must be able to show that your phone expenses relate to you.

Donations to ‘deductible gift recipients’ (DGR’s) are tax deductible, however it’s important to note that donations via a Go Fund Me page – are often not deductible due to the lack of DGR status. While there are some fantastic causes on these pages, unfortunately this doesn’t necessarily mean they constitute tax deductible donations.

MID-YEAR FISCAL & ECONOMIC OUTLOOK

Typically 6 months after the May budget, the government re-visits the plan to basically just ensure everything is running on track as part of it’s Mid-Year economic and Fiscal outlook (MYEFO). Generally speaking at this stage, there are no new announcements however this time was a little different with 4 key points of note raised:

• An increase in the amount of the Commonwealth penalty unit by 5.4 per cent from $313 to $330, commencing four weeks after the passage of legislation. In Australia, penalty units are used as a way to quantify the fines for various offences, including those related to tax law. The value of a penalty unit is set by the government and can be adjusted periodically to account for changes in the cost of living. Lets take the failure to lodge penalty for a small business as an example. Currently the fine is calculated as 1 penalty unit for a period of 28 days up to a maximum of 5 penalty units.
• From 1 July 2025, it is suggested that both general & shortfall interest charges become non tax deductible. (GIC & SIC). GIC is applied to unpaid amounts, such as overdue tax debts or other outstanding payments. It is a general interest rate that accrues on a daily basis.  SIC is applied when there’s a shortfall between the amount of tax assessed by the ATO and the amount initially reported by the taxpayer. SIC is intended to compensate for the delayed receipt of the correct amount of tax.
• Changes to the Foreign Resident Capital Gains Withholding regime (FRCGW). Of note, the FRCGW tax rate will be increased from 12.5% to 15% and the withholding threshold will be reduced from $750,000 to $0, for real property disposals entered into from 1 January 2025. The regime is applied to foreign resident vendors who dispose of certain taxable property, including taxable real property with a value of $750,000 or more, and other assets such as indirect Australian real property interests in Australian entities.
• Luxury Car Tax will undergo a significant change from the 2025-2026 Financial Year which will see many previously-exempt petrol, diesel and hybrid cars hit with the tariffs – despite years of calls from the car industry to scrap the tax entirely. At present, the Luxury Car Tax (LCT) adds a 33% tariff to each dollar of a car’s price above the threshold – which stands at $76,950 for vehicles with claimed fuel use ratings of more than 7.0 litres per 100km, or $89,332 for ‘fuel-efficient vehicles’ which consume less than 7.0L/100km. Under the proposed changes, the definition of a ‘fuel-efficient vehicle’ will be tightened to those which consume less than 3.5 litres per 100km from 1 July 2025 – meaning more cars which are above the consumption threshold will be pushed into the lower LCT bracket.

DEPRECIATING ASSETS – CAPITAL V IMMEDIATELY DEDUCTIBLE

The ATO has finalised Taxation Ruling TR 2024/1 on how to identify the relevant asset for tax depreciation purposes when an asset is made up of different parts and components. The point of this ruling is to identity when a the purchase of a component of a larger asset is considered capital in nature V when a purchase is considered a repair and thus fully deductible. The ruling guides taxpayers to apply a “functionality test” in order to make this decision.

If a small component of a large asset breaks and needs replacing (in order for that asset to actually function), then this cost is likely a repair eg: a new hard drive within a computer. Conversely, say a new terminal is added to a large computer network. In this case, the terminal would be considered a second element cost of a larger asset, thus adding to the cost of the asset. Take the example of some roof-racks on a car- the car can operate without the roof racks, thus they would again be considered capital in nature and not directly tax-deductible when purchased.

SUBDIVIDING LAND & GST REGISTRATION

Imagine you own a piece of land perfect for subdivision. You’ve ironed out the details with the council, builders, and the bank. However, one crucial aspect remains overlooked – the tax implications. Many small-scale developers assume their tax exposure is minimal, but this isn’t always the case. The tax treatment of a subdivision project can significantly affect cash flow and project viability. The ATO has recently released guidance outlining the tax impact of small-scale subdivision projects. Here are the key aspects to consider:

• Assuming a small development’s profit will be taxed as a capital gain and qualify for CGT concessions is not always accurate.
• If you personally own a property used for private purposes, subdivide it, and sell the newly created block, capital gains tax is likely to apply. The gain is recognised from the initial land acquisition, with potential complications if the property contains your home.
• Developing the land, building a house, and selling it in the short term might be taxed as income rather than under capital gains tax rules. This can limit CGT concessions and expose owners to GST liabilities.

We hope that you have found our February 2024 tax update helpful and informative! Should you have any queries in relation to any of the above aspects, or require assistance in determining how you’ll be impacted, don’t hesitate to get in touch with our team.