The 10 Tax Commandments

tax_return_smallThe taxman has long had a reputation for having an endless appetite for our money, but after years of generous pickings throughout the boom times experienced over the last 10 years, his sources have been drying up.

The worst share market downturn in over 3 decades has pushed capital gains tax down, many business profits have significantly fallen, and income tax has taken a hit from the new breed of workforce that are more concerned about holding on to their jobs than getting a pay rise.

One thing remains unchanged. There are still a number of traps that can catch out people when filling out their tax return forms.

Some have only recently been introduced, while others have been catching out unsuspecting taxpayers for many years.

Here are the 10 commandments you need to be aware of when avoiding tax-traps:

1. Don’t lose interest in your income

A common mistake made by taxpayers is to inadvertently fail to declare income earned from interest paid on savings accounts.

Gone are the days when this type of error is missed, as the ATO now use sophisticated systems that can cross reference all kinds of data, making it easier to track income.

2. Never mix business with pleasure

People that invest in real estate often borrow money against the equity in their property. This is all well and good, until they use some of the funds to pay for private purchases such as a new car or to pay for a vacation – which are not tax deductible.

The problem comes when they fail to declare these extra purchases, as these do not qualify for tax deductions.

To avoid falling into this trap, you need to work out exactly how much of the loan was used to pay for business purchases, and state this amount when declaring the business loan.

Another one to watch is when refinancing a loan, as this can mix several loans together making it difficult to go through and identify the relevant figures.

3. Don’t forget to declare your gains

If you sold any assets, shares or managed funds within the last financial year and made a profit you will need to declare this so it can be added onto your taxable income. If the share/managed funds have been held for a year or more they will qualify for a 50% discount.

Capital losses can only offset capital gains, not general taxable income.

4. Be wary when dealing with property

There are a number of traps than can easily catch out property investors.

A common misconception is when people declare property improvements that effectively add capital to rental properties as repairs, allowing them to claim a 100% deduction over one year.

People that make large claims for repair expenses, are likely to be asked by the ATO to provide further details.

5. Don’t mix up your dates

Another trap people fall in to is using the settlement date of a sale when working out capital gains tax, as opposed to the actual date on which the contract was signed.

Property sales are a common victim to this trap because of the nature of the chain causing longer settlement periods. Problems may also arise when disposing of shares and other investments.

6. Never forget your spouce

People commonly fail to include the details of their spouse when filling out their tax return, which can cause problems later on in terms of tax rebates and offsets.

This can have an affect on the amount required for Medicare charges at higher individuals rates instead of a couples rates.

Some senior Australians may only receive the Senior Australian Tax Offset at the single rate rather than the couples rate, which would result in additional tax being paid. Private health insurance details should also be included when filling out your tax return, as this will effect the Medicare Levy Surcharge.

7. Hold on to those papers

Many of us will clear out our old records from time to time, but you must remember that the ATO requires you to keep records for a certain period of time. This can be up to five years in some cases.

These records include:

  • Payments received, which include salaries, pensions, bank interest from bank accounts and share dividends.
  • Income related expenses, such as work expenses.
  • Assets bought or sold such property or shares.
  • Tax-deductible donations or gifts.
  • Medical expenses.

8. Desperate times shouldn’t call for desperate measures

The recent turbulent times in the financial industry have caused the ATO to pay more attention to work-related expenses deductions. There are growing  concerns that declining profits and detrimental effects brought on by the financial crisis may tempt tax payers into fiddling their claims.

This year, the ATO is likely to target sales and marketing managers, sales representatives, electricians and truck drivers.

9. Don’t drive your costs up

One of the most common tax deductions are based around car expenses, so holding onto records is vital.

The majority of people choose the easiest way to make a claim against vehicle costs – cents per kilometre, which is capped at 5000 kilometres.

However, those that use their vehicle frequently for work related purposes may be better off using the logbook method, as this can provide bigger tax deductions.

10. Not so super

On July 1, a number of new changes were made to the rules around superannuation which could have serious affects to strategies this year.

The most significant change has been made to the amount of money eligible for salary sacrifice – providing tax free benefits, which  has halved to  $25,000 – $50,000 for those aged 50 and over.

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