Navigating new tax laws for 2019

Overview:

Some of the most frequent questions we receive from clients around the end of the Financial Year relate to their responsibilities for declaring income outside of their primary employment, and knowing what deductions they are eligible for. In 2019, we have seen several key changes and updates to the taxation regime that you may not be aware of. To ensure that you are ahead of the curve, we’ve summarised these changes below, as well as your rights and obligations for each.

Declaring income from cryptocurrencies

By now, most people are aware of cryptocurrencies – their meteoric rise in recent years has been well documented in the media and cryptocurrency trading is fast becoming part of the everyday investor’s vernacular. In fact, according to ATO estimates, between 500,000 to one million Australians have invested in crypto assets.

The decentralised and disruptive nature of cryptocurrencies has presented a significant challenge for legislators and one they have struggled to keep pace with. Until recently, the obligations for reporting income through the sale or trade of cryptocurrencies has been poorly defined but, for 2019, the ATO has introduced a clearer set of requirements for the declaration of income received from the sale or trade of cryptocurrencies.

When do you have to pay tax?

In general terms, Capital Gains Tax (CGT) may be applicable when you dispose of your cryptocurrency, either by selling it in exchange for regulated currency (e.g. Australian dollars), trading it for other cryptocurrency or by using cryptocurrency to obtain goods and services.

It is important to note that, for tax purposes, the income generated from the disposal of cryptocurrency in any of the ways above is calculated in Australian dollars. For example, if you were to buy a cryptocurrency (token A) for $1,000 and then exchange it for another (token B) once the value of your holding has risen to $7,000, you have potentially generated a form of income of $6,000 despite the fact you have not received any goods or regulated currency.

For individuals, there are key distinctions that will determine whether CGT is applicable on income received from the disposal of cryptocurrencies.

In most circumstances, cryptocurrency held by an individual will be considered an investment and any subsequent trade, sale or exchange that nets you a profit may be subject to CGT. It is important to note that, in circumstances where you hold a crypto asset for a period greater than 12 months, you may be eligible to reduce any gain on its sale by 50%  before adding it to your assessable income.

Personal use assets are excluded from the CGT regime if they are acquired for less than $10,000.  A personal use asset is one primarily used and kept for personal use and enjoyment.  Cryptocurrency may be a personal use asset if the owner is dabbling with the technology rather than genuinely intending to make a profit.  This includes where cryptocurrency is used for the purchase of items for personal use or consumption or converted to Australian dollars (or to a different cryptocurrency) for the purchase of items for personal use or consumption.

Where cryptocurrency is used for business purposes or the sale or trade of cryptocurrency is the business you conduct, any profits are assessed as ordinary income rather than capital gains.

Deductions for environmental activities

In recent years, the ATO has sought to increase clarity around the application of deductions for expenditure on environmental activities designed to prevent, fight or remedy pollution or to treat, clean up, remove or store waste.

The ATO has therefore released a draft ruling due to be finalised in August, which outlines what environmental protection activities (expenses) a taxpayer can immediately deduct..

To claim an immediate deduction, the expenses must be incurred to prevent, fight or remedy pollution or to treat, clean up, remove or store waste:

• Resulting, or are likely to result, from your earning activity;
• On or from the site of your earning activity; or
• On or from a site where an entity was carrying on a business that you have acquired and you continue to carry on that business substantially unchanged as your earning activity.

There must be a significant link between your earning activity or site of business and the pollution/waste.

The draft ruling also outlines the following activities for which you cannot claim a deduction:

• Expenditure for acquiring land.
• Capital expenditure for constructing a building structure or structural improvement (including an extension, alteration or improvement to any of these).
• A bond or security for performing environmental activities.
• Expenditure to the extent that it is incurred in carrying out an activity for environmental impact assessment of your project.
• Expenditure to the extent that you can deduct an amount for it under any other provision.

A good example of an applicable activity, and a situation in which many of our clients with investment properties may find themselves, is where a landowner seeks to replace a dilapidated shed contaminated with asbestos on a property they rent out.  The cost of the demolition and removal of the shed would be  immediately deductible, however, the building of a new shed would be considered a capital expenditure and is not immediately deductible.

Holiday home rental deductions

For those clients who own holiday homes that they make available for rent, there are certain tax obligations and rights that you need to be aware of.

The ATO is presently very active in this space and has been focussing on the extent of deductions claimed by taxpayers as opposed to how genuinely available the holiday home is for rent.  As a holiday home is never in full use throughout the income year, the question becomes to what extent does a taxpayer apportion private use versus income producing use for deduction purposes, especially when the home remained vacant for the majority of the year.

Where a holiday home is considered genuinely available for rent in the relevant income year, the taxpayer can claim deductions on the basis that the home is generally used for income producing purposes for the full income year.  That is, the taxpayer will not claim deductions proportionate to the amount of days the home was used for actual private use.

Traditionally, taxpayers would treat a holiday home as an income producing asset and merely not claim deductions proportionate to the actual private use (e.g. maybe 2 weeks over Christmas).  However, the ATO has made clear in recent publications that the starting point for a holiday home is to consider the asset private unless a taxpayer can substantiate that it is genuinely available for rent for the full income year.  From this point of view, a taxpayer would only be able to claim deductions proportionate to the actual days the holiday home was rented and income generated.

Accordingly, it is important to take note of the specific criteria that govern whether a holiday home is classified as genuinely available for rent.

According to the ATO, factors that may indicate a property is not genuinely available for rent include:

• Advertising rental availability in ways that limit its exposure to potential tenants – for example, the property is only advertised:
  • at your workplace;
  • by word of mouth;
  • on restricted social media groups; or
  • outside annual holiday periods when the likelihood of it being rented out is very low.
• The location, condition of the property, or accessibility to the property, mean that it is unlikely tenants will seek to rent it.
• You place unreasonable or stringent conditions on renting out the property that restrict the likelihood of the property being rented out – such as setting the rent above the rate of comparable properties in the area.
• Placing a combination of restrictions on renting out the property – such as requiring prospective tenants to provide references for short holiday stays and having conditions like “no children” and “no pets”.
• Setting the minimum night stay to five but booking Friday-Sunday for personal use.
• You refuse to rent out the property to interested people without adequate reasons.

For those holiday home owners who satisfy the conditions for a property to be considered genuinely available for rent, there is also an obligation to ensure you do not claim deductions proportionate to the private use of the home.  This includes where the home is used by family and friends or where you charged lower than the rental market rate.  The remainder of the income year should be seen as income producing periods and thus deductible.

With all the above updates to taxation law in Australia, it is important to seek advice from an expert. The Perks Tax Consulting team have the experience and in-depth knowledge of our tax laws to give you the confidence that you are meeting your compliance obligations while also ensuring that you receive any deductions and entitlements available to you.

With the end of the Financial Year upon us, we advise you to get in touch with a Perks Tax adviser as soon as possible to ensure that you are prepared to file your return by the cut-off date.