Tax Tip 180: 10 Tax Myths

But you look so hot in stockings Terry

 

Those legs make me sick!

You need to live in a property for 12 months to be able to claim it as the main residence.

Another myth, people probably confusing the 50% discount after owning a property for 12 months. There is no specific time requirement to live in a property before it can be classed as the 'main residence'. I guess it is like being pregnant, you either is or ain't,

 

A further Myth then.....

I will live or stay briefly in a property so I can claim the main residence exemption

Incorrect. A taxpayer (and their family) must fully reside in a property as their MAIN residence. Living at mums and moving a few items in is not a main residence. Renting elsewhere is also not likely to establish a main residence if it can be argued it wasnt your primary place of residence at least for an initial period. An intention to quickly move out does not establish a main residence. Taxpayers mistakely believe they can "look" to move in, change license address etc and then just do a reno and its a tax free project.

That bring me to another

After completing a reno you can sell it tax free like they suggest on telly.

In order to do this you MUST have originally used the property as your main residence AND after the reno is completed you and your family MUST have returned and re-occipied the property fully as your main residence for three months BEFORE selling. If you continue to rent / lease elsewhere that is going to be difficult to argue. - It is not a choice and you cannot use the 6 year absence rule in place of the 3month occupancy rule in such examples

 

Generally the date at which you have a right to occupy it or at settlement, whichever is earlier.

 

Myth - I can move into my rental property for a few days before selling it and claim it as the main residence and get the full exemption for CGT.

Nope. Once you move in it could the main residence from that point on, but prior to that it wasn't the main residence so cannot be fully exempt.

Imagine if you could just move in and sell a property tax free, there would be no one paying tax on investment properties.

This one has come up twice in recent posts.

 

This a very common myth propagated at BBQs by people who have no idea. But they can always quote a seemingly reliable source of someone who says its correct. Even an accountant who told them it is correct.

ONLY a property that has been you own home for 100% of its ownership (and you have no spouse property issues) OR a pre-CGT asset will escape CGT

Myth - We own a property. I sell my 50% to my partner, it is tax free.
Firstly duties may apply. And legals. If the property was the family home during the ownership period then yes the CGT may be Nil. However if it was not always exempt then CGT may be payable. The spouse may now TWO assets each with different costs and dates of acquisition. And if the former owner moves out it could even affect the owners 100% CGT exemption. CGT doesnt only impact owners !!!

 

Myth - My same sex partner and I arent spouses because we are not married. This means we ignore each other for tax purposes and each can claim a main residence (her other property is our holiday home !) and so on.

Back in the dark days yes that was the rule of law. However, long before same sex marriages became recognised the Commonwealth tax laws were altered in 2008 to include same sex relationships in the definition of spouse.

This rule affects defacto relationships, married same sex partnerships or unregistered and unmarried relationships same sex or otherwise.

Same-sex relationships and income tax

Your spouse includes another person (of any sex):

• who you were in a relationship with that was registered under a prescribed state or territory law, or
• who, although not legally married to you, lived with you on a genuine domestic basis in a relationship as a couple.

 

There are plenty of slum lords out there who wouldn't be caught dead in their IPs (even if it meant not paying CGT).

 

What is considered when assessing a "genuine domestic basis"?

 

Myth - if I am a professional property developer and if I purchase a property to develop, and hold it for at least 1 year, I am entitled to the 50% CGT discount when I sell.

 

This would even apply to non- or unprofessional developers.

 

Thats a matter for a solicitor since the Family Law Act defines this term. Or common sense at its most practical level. Examples can be found in agency views etc : 1.21.4 Relationship as a couple living together on a genuine domestic basis

Genuine domestic basis v's a carer who lives in. Sharing bed, intimacy, sharing costs. eg daily life.

 

I don't want to work overtime because it all goes on tax!

Since the top tax rate is 47% this is obviously incorrect. If you have a HECS debt too perhaps more than half will go on 'tax' but no where near 'all' of extra earnings would go in tax.

 

"Second job tax" is one I used to get all the time from resigning employees in my pizza biz, after they'd get a day job. I'd explain tax brackets and tax free threshold, but mostly they just thought I was trying to scam them somehow.

 

I used to work a second job, and of course 100% of income is taxed at your top marginal rate (ie. the rate you are on after taking account of all income from 1st job). MTR is pretty high, so you don’t feel so good about 2nd job.

But is that the correct way to view it? Should you think of the second job as being taxed at your average tax rate (taking account of income from both jobs). Should you not work out your average tax rate across both jobs, and say that is the percentage tax you are effectively paying on your second job. In other words, why should the 1st job effectively get all the ‘benefits’ of the tax free threshold and the lower tax rates at the lower income levels.

Come to think about it, why not think of the 2nd job and your 1st job. Swap them around. 2nd job is taxed first and 1st job is taxed 2nd. That way, your second job could almost be tax free.

That is how I rationalised it when working a second job. Did 2 jobs for about 5 years!

 

In many cases a second job creates a tax debt

1. Second employer tax isnt withheld
2. No allowance for health offset hecs and centrelink
3. Tax is withheld but its still a shortfall

And reasons why peope later query their effort. Its usually because tgey received the extra income and 12mths later dislike a tax debt. Because the tax witheld was not enough.

One of tge worst is help debts. Other is centrelink.Second job triggers threshold and leaves them really short

 

If you're concerned about how much of that second job is going to tax, don't look at it in isolation, get a tax variation upwards or salary sacrifice the lot to super (watching your contributions limits).

 

In some cases a second job can be quite regressive.

What is the highest marginal tax rate in Australia ?? The answer will shock you.

Its 56.5% not 45%. So you can end up with a huge shortfall if the employer tax scales assume your top tax rate is 45cents. Then delay lodgement by 9 months using a tax agent and you owe 1.75 years of tax shortfall.

And throw in the ATO asking for tax instalments on top and its a double whammy. Some of the worst tax debts to manage are people with multiple income sources and high incomes as a result. They can even be affected when they apply for finance and the lender notes a tax debt. Until its paid they cant access new borrowings in some cases. They get understandably upset that they are working hard and cant get ahead.

 

Is that with the hecs/help debt?

Another myth top rate is 47%

 

Yes HELP debt (8%) and medicare (2%) and medicare levy surcharge (1.5%)