Contractors may have Capital Gains Tax and Land Tax problems
Friday, 25 February 2005
A couple more tax problems have surfaced for contractors, or anyone with a home based business. NSW has changed its land tax rules, catching many home offices, and the ATO have recently published some information about home based businesses.
NSW Land Tax
The rules changed effectively on 31 December 2004, there is no threshold anymore. Basically anyone with property other than principal residence is probably liable for land tax.
We believe this catches people who work from home – part of their home is no longer exempt. Strictly speaking, it’s the proportion of land: a single room, a garage, whatever. A “fair and reasonable” apportionment is allowed, although this can be overridden by the Valuer General.
An exemption for your home office still applies if your business is primarily conducted somewhere else.
And because the Office of State Revenue (OSR) are only interested in the proportion of land used for business, working from home as an employee would also be exempt.
What to do? An “Initial Return” should be lodged. Ignoring this liability is not really an option. If you’re in business, you’ll have an ABN. And ABNs are the public identifiers with which governments exchange information. Sooner or later the OSR will do a data match.
The ATO Home Based Business Segment Partnership Meeting
Some ATO views about working from home have been published, and its not all good news.
1. The CGT main residence exemption is not safe! Its commonly believed that if a taxpayer doesn’t claim mortgage interest, insurance, rates etc, then the home office is CGT free under the residence exemption. Not so: the ATO argue that it’s the entitlement to claim interest as a tax deduction that is the trigger, not whether the interest was claimed.
2. As a result, the ATO advises that the home needs to be valued at the time someone starts using it as a place of business.
The basis of claiming home office expenses was laid out by the ATO in the mid 1990s in a Tax Office Ruling. This draws a distinction between working from home as an employee, and as a business. Its important to remember that distinction, and be clear about who’s claiming what, if you’re an employee of your own company! That much hasn’t changed. Its worth reviewing that Ruling.
What to do? Review your tax returns and understand exactly the basis of those home office claims. Determine if you are liable for CGT in the future. If you are, then amend as many prior years as you can, and claim that interest.
Other things to come out of the meeting:
3. The issue of who is a contractor and who is an employee just won’t go away. THE ATO is working on a decision tool, hopefully this will be on the ATO website by 1 July 2005.
4. PSI – the ATO advises that even though a taxpayer might pass the PSI tests, the schedules in the tax return must still be completed.
Its never simple!
Max Pegler is a Chartered Accountant, and a director of The Contractors Back Office Company Pty Limited
Max Pegler (admin@cboc.com.au)
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It should not be this hard?!!!Thanks to the f***wits the NSW government we are in this fine mess. I hope everyone remembers this when the next election comes around. Vendor stamp duty killed the investment property market. The ill concieved changes to Land Tax laws will soon be repealed (here's hoping). Sh!itty Rail never runs on time. Our roads are always congested.. It should not be this hard. I know this has nothing to do with IT, but it's always good to get it off one's chest. Ranier Wolfcastle, 02/24/2005 09:37:12 PM
GoodAnd what do you think the Liberals would have done? Have you heard of a recent called the Kennett government in Victoria, and what it did to that state? The Liberals would let the trains deteriorate even further, because trains are only for losers. Successful people drive to work. (This is how the Libs think.) It's good the see the investment property market die. It's done enormous damage to Australia, the results of which we will start to see soon. Bruce, 02/25/2005 12:18:48 AM
Capital gains Tax on separated land from homeowner landIf I separate 2 acres into 1 acre parcels and sell one acre after living there for 2 years do I pay Capital Gains Tax? Ralph , 03/05/2007 12:42:19 PM
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