Tax Tip 180: 10 Tax Myths

There are many tax myths out there, here are some of the more common ones that I hear or come across.


1. I have a good accountant so my income appears low!

This is probably wrong for most – your income is low because you are not earning as much as you want to make out you are. You can only claim legitimate expenses.


2. My mate claimed X so it is deductible

Just because someone does something doesn’t mean it is legal. It might just mean they have not been caught yet.


3. Before you move out of the main residence you just increase the loan so you can claim more interest when it is rented.

This is a common one – deductibility of interest depends on the use to which the borrowed money is put. Simply increasing a loan will not mean the interest is deductible.


4. If a Company or trust reinvests the profit there will be no income to tax

Another common one. For some reason many would understand this doesn’t apply to a person but think trusts are different somehow.

Example – Trust makes $100,000 and buys a $100,000 property. The purchase of the property doesn’t cancel out the income.


5. You can only claim the main residence CGT exemption on one property.

Strictly not true because it could be claimed on 2 (or more) properties where they are adjoining each other and used as the main residence – and all sold at once under one contract.

It is also to claim 2 main residences on 6 month overlapping concession when you buy a new property and sell on old one.


6. Transfer from a Trust to a beneficiary means CGT would be payable.

Not always. The following could be exempt:

· Transfer from a trustee of a testamentary trust to a beneficiary

· Transfer from a bare trustee to a beneficiary

· Transfer from a SMSF custodian to the SMSF trustee


7. I have to sell to avoid CGT

Had a client who was planning on moving out of his main residence and to rent in a different state. His plan was to sell and buy another property which he would rent out. He told me his accountant told him he would have to sell the main residence as if he rented it out it would be subject to CGT and it had doubled in value since he bought it and didn’t want to pay tax on it for the period he lived in it and the only solution was to sell.


I pointed out 2 things

a) The cost base would be reset to the value it is when first rented out. So all that gain up to now would not be taxed, and

b) Going forward you could use the 6 year absence rule so it could be rented out for the next 6 years yet still CGT exempt.

I think I must have saved him about $50,000 in buying and selling costs – or this is what his ill-informed accountant could have cost him if he sold the property and bought another. He already had the property on the market.


8. If I reduce the Loan on an Investment I will pay more CGT when it is sold.


CGT is worked out by calculating the cost base of a property. The amount owing on a loan used to buy the property doesn’t directly affect CGT. It will affect the amount of cash you receive from the sale but not the amount of tax paid.


The exception is where interest on the loan is not claimed – is might be able to be used to reduce the CGT. But the loan amount itself would not directly change the amount of CGT payable.


9. Accountants can give tax advice

The accountant would need to be a registered tax agent or a lawyer to give tax advice.

The general public seem to call tax agents accountants but they are really 2 different classes – but many accountants are tax agents and many tax agents are accountants, but not all. Many accountants do not work in the area of tax at all and may not have much knowledge in this area.



10. If I subdivide and sell for less than the costs there is no profit

This myth goes like this

I buy a property for $500,000. Subdivide the land into 2 and sell the one of the 2 blocks for $400,000. Because $400,000 is less than what I paid for the property there will be no profit and therefore no tax payable. (often the person will also say they will claim the remaining property as their main residence and avoid tax on this too).


This is wrong in because part of the purchase price relates to the second block. Costs will need to be apportioned and there probably will be a profit.

=

Paul and Mike will no doubt know of many more.

 

11. There are standard deductions I can claim
eg I can claim $300 for uniforms. Incorrect. The $300 rule needs a LOT of clarity.
A taxpayer with ONLY $300 or less of deductions in total may not need to possess substantiation evidence. They will need records to show how they arrived at the amount claimed. However for property owners this method CANNOT BE USED.

There is no such thing as a standard deduction. There are typical deductions some people can claim (eg Nurses, Teachers etc) but they must incur those costs AND possess receipts and proof of the costs. Many people mistakenly believe they clan claim $100 here and $250 there

eg : I can claim uniform deductions. Most taxpayers cannot claim uniform deductions. Uniforms must be compulsory (eg Police, nurses) and the taxpayer must wash, launder them or replace them at personal expense. Uniforms that are ordinary clothing eg bar staff etc is NOT eligible for any deduction. Uniforms with a logo dont make them deductible. However some uniforms that contain a logo are registered workwear and are eligible eg Coles checkout staff uniforms, bank tellers etc.

12. I have a company, I can claim my car and loads of other costs.
Wrong. In most cases the deductions available to the company are no different to those a employee can claim. Working at home does NOT mean that car use is always to work. That brings my next one. A % of ownership costs or rent are only available if the home is also a place of business. That doesnt mean a home office.


13. Travel for work is deductible
Travel from home to work and back is NOT deductible. Even if you work at home. Once this rule is understood read up and understand what travel IS deductible.

Working as a contractor in a particular suburb means that the travel to / from that workplace is not deductible.

14. Deductions dont mean spending $1 = $1 refund
Tax deductions are regressive. The taxpayer will have a marginal tax rate. This is the rate of tax that applies to the next dollar or income OR the next dollar of deductions. Its often between 34-40%. So for every $100 of extra deductions the refund MAY increase by $34-$40.. Leaving the taxpayer 66% to 60% out of pocket.

15. I use my mobile phone for work.
Catching up with friends on facebook, SMSs to friends and emails while at work are not work related use. Having a phone that receives work related calls isnt work related use either. This same rule applies to casuals who claim to be on call. You must use the phone to make work calls, and use the data for work use. If its not 100% work use then a record of a typical month must be used to calculate the % to claim.
ATO Guidance is found here : Claiming mobile phone, internet and home phone expenses

16. Companies pay just 27.5% Tax
This is a very dangerous mistake many believe. A company will pay a low tax rate however for the shareholders to benefit they must receive a dividend. Borrowing the profit falls foul of tax laws. For the owners to get the benefit of company profit a dividend must be paid. The shareholder will then be taxed on this. Full and final tax on company profits is a rate of UP to 47%.

17. Small Businesses can write off assets under $20K and this increases tax benefits
Incorrect. The small business write off merely BRINGS FORWARD all depreciation into one large initial deduction. If the asset is later sold an assessable amount will result. This happens with cars. If Fred Pty Ltd buys a Mazda 3 for $19,999 then a deduction CAN be claimed. However in 18months if the car is traded for a new Porsche Cayenne for $17,000 then a assessable amount of $15,545 results. GST of $1545 is also likely payable.

18. Logbooks
No logbook = NO deduction for the vehicle expecting some commercial vehicles with limited incidental private use. Improperly prepared logbooks can invalidate deductions. eg Not 12 continuous weeks. No records of ALL travel. eg a logbook written in the same pen at the same time. (A false logbook) Using a USA app !! etc.....

I have a book on my desk - Its full of this stuff. Its called the Australian Master Tax Guide. It includes common law decisions, ATO rulings and a load of factors that influence what can be assumed.

Only catch is the book took me 5+ years of study to learn how to read it
And 20+ years of experience on top

 

Myth no 19

All accountants are fat ugly dudes wearing glasses. I think im quite sexy

 

Paul doesn't wear glasses.

 

@MikeLivingTheDream wears rose coloured glasses

 

I do to read....Trifecta.
Mike needs to go to specsavers

 

One I have heard on more than one occasion: "I have to be careful not to earn too much otherwise I will go up into the next tax bracket" with the assumption being that as soon as you earn one dollar in the next bracket your entire income is now taxed at the new rate.

 

Paul needs to introduce me to his Porsche dealer.

 

I had meant to edit it to a Kia SitBox.

 

Or "I don't want positively geared property because then I will have to pay tax"

Source: my investment partner

Very frustrating!

 

I would love to double my tax and would willingly pay a high average tax rate of 47% if it meant I earned millions. Paying tax is a regressive sign of success. You keep more than half.

I am continually amazed about those who will avoid self funded wealth or super because they want an aged pension. I would give my left nut not to qualify for an aged pension !! I would much prefer a $100K pa super pension over the $21K a year aged pension.

 

An attitude I have heard many times and one I simply do not understand. Same with divesting extensive income producing assets in order to obtain the age pension.

 

Ah the old 'i wanna get the pension trick' is a good one.
As is the negative geared property one. I have seen people try to make it more negative to save even more tax.

 

Of course, if you are worried about tax, you can have an infinitely high income and legally pay zero tax. How? Donate it all to charity (where contributions are 100% tax deductible).

 

Here is another...This one creates a stir each time I use it

19. Negative Geared Loans are "Good Debt"
Many people think of deductible debt as "good debt"and non-deductible debt as "bad debt". They are thinking about it all wrong.

Bad debt occurs when a loan is used to buy something that produces poor income and returns. Some IPs are bad debt. A loan for a holiday, boat etc is probably bad debt. A car loan is almost always bad debt but can be good debt if its used to produce essential income. eg a delivery truck, a tradie ute etc.

Unless the property will produce a return (capital growth or income or both) then the debt is bad debt. Good example is Port Headland real estate bought a few years back in the mining boom. Some investors assume IPs are always a good investment only because of past performance. Future performance is less certain in some areas.

A non-deductible home loan is often mislabelled as bad debt. But it isnt typically bad debt as such if its a solid appreciating asset. But it is less effective tax wise than a IP loan. But the gain on the asset may be tax free which offsets the non-deductible loan. Many people can use that assets growth and obtain equity. And the bad debt means avoiding rents etc.

Many people think endless property debt means "wealth". But it isnt unless the property has prospects to appreciate in value. And a IP loan may still be bad debt if the cost of servicing that loan consumes excessive cashflow. We are starting to see a rise in investors forced to switch from IO loans to P&I.

 

20. Accountants need to be in walking distance of your home

There seem to be many posts on here asking if anyone can recommend an accountant in XX.

Unlike your hairdresser, there is no reason to meet your accountant face to face. If you do want to meet then it is likely only going to be once, or once per year. Surely people could drive 20 min or even 2 hours to their accountant once per year (tax deductible trip too!)

 

21. Legal Advisers need to be someone you can meet

As Terry says with accountants and tax agents same applies with legal advice. A great lawyer who knows property doesnt need to be in your suburb. Thats a terrible way to find a good professional. Its fine to have a Doctor or a dentist who are close to you but unnecessary for tax and law. They may be out of state and be unfamiliar with issues in the state where the property is.

22. Solicitors are conveyancers who charge more

I have never used a conveyancer and probably never will. A property transfer is a legal process and if anything goes wrong you WILL need a solicitor. When I say goes wrong - It may even just be a unusual request. Handled well it may avoid a issue. Its also a great time for them to advise on structure, estate planning and a few other things a conveyancers cant assist with.

 

23. Use my accountant, he got me a big refund!
What applies to A may not apply to B.

A's employer may have withheld too much tax, had a negative geared property or claimed things illegally, or B's employer may not have know about her HECS debt.

 

24. My tax agent got my return all wrong.

The onus is on the taxpayer to lodge a correct return. That means checking and and questioning anything you feel unsure about. Dont sign a thing until you are comfortable the return is correct. Penalties can be applied to the TAXPAYER for the acts of the agent. So when you think that the very ambitious claims made by a tax agent are questionable but their responsibility you should rethink that view. Self assessment applies to tax returns lodgements.

Only when the Commissioner has advised it is satisfied with a return OR time has expired to amend AND the taxpayer is not party to a claim of fraud or evasion (which can include mistakes) then the return is said to be full and final and complete.

Errors made by the tax agent may be something you can take action against them for however the primary tax and often penalties may be the taxpayer responsibility.

 

The ATO also has a list of 10 Tax Myths

• Myth 1: Everyone can automatically claim $150 for clothing and laundry, 5000 kilometres for car related expenses, or $300 for work-related expenses, even if they didn't spend the money
• Myth 2: I don't need a receipt, I can just use my bank or credit card statement
• Myth 3: I can claim makeup that contains sunscreen if I work outside
• Myth 4: I can claim my gym membership because I need to be fit for work
• Myth 5: I can claim all my travel expenses if I add a conference or a few days' work to my holiday
• Myth 6: I can claim my work clothes because my boss told me to wear a certain colour
• Myth 7: I can claim my whole Netflix or Foxtel subscription because I need to keep up to date for work
• Myth 8: I can claim home-to-work travel because I need to get to work to earn my income
• Myth 9: I've got a capped phone plan, so I can claim both personal and private phone calls
• Myth 10: If I use an agent, they will take responsibility for my claims

Tax myths busted!