Common Tax Questions Answered

In the words of the late Kerry Packer: “I am not evading tax in any way, shape or form. Now of course I am minimising my tax and if anybody in this country doesn’t minimise their tax they want their heads read because as a government I can tell you you’re not spending it that well that we should be donating extra.”

While many people think they understand the existing tax regulations, myths and misconceptions still abound. In this article, we aim to address some of the more common tax questions

Question 1

“If I put a work sticker on my car, can I deduct 100% of my car expenses?”

Answer

Simply – no. Deductions are based on four different methods. The methods are:

  • Cents per kilometre (limited to 5,000 business kms per year)
  • 12% of original value (this can be used if you travelled more than 5,000 business kms per year)
  • One-third of actual expenses (this can be used if you travelled more than 5,000 business kms per year)
  • Logbook method (this requires a logbook to be kept over a continuous 12 week period; the logbook can last for five years as long as it still represents continued use of the car).

Whether the car is heavily branded with work logos or not, the deduction only applies to kilometres travelled for business. Travel from home to work or work to home is generally not deductible. Attending meetings, running business errands and the like are deductible.

For those individuals who do use their car extensively for work in terms of kilometres travelled, log books are good. For those who do not use their car extensively, speak with your Chartered Accountant to determine which deduction method to apply.

Question 2

“I’m looking at buying a car, should I lease, hire purchase or Chattel mortgage?”

Answer

A lot of time can be spent analysing the benefits of each purchase option however it usually comes down to personal preference. Chattel mortgage and hire purchase (for income tax) are treated similarly. Some agreements that say “lease” are actually hire purchase upon reading the detail.

Before committing to any such agreement, have your Chartered Accountant look over the document or, better still, call your Chartered Accountant before you get the finance. Here is a brief matrix of the two:

For hire purchase arrangements entered into after 1 July 2012, GST applies to the entire repayment amount (including the interest component). For that reason, a purchaser who is not able to claim back the GST credit would generally prefer a chattel mortgage over a lease or hire purchase.

Question 3

“I’m looking to start a business, what structure should I have?”

Answer

Many factors need to be considered when deciding what structure to adopt – income tax, capital gains tax, GST and stamp duty, to name a few. Making the wrong decision can become a costly mistake.

While this article cannot cover all the areas of tax structuring, there are some important points to consider as a starting point:

  • In today’s litigious environment there are not many businesses that suit a sole trader structure for the long term. Being a sole trader includes basically a personal ABN and, in some instances, a business name. While many may start as a sole trader, this structure needs to be reconsidered once the business is established and generating an ongoing income.
  • Family Trusts allow distribution of income to other family members, which may help to reduce income tax. (Children under 18 are effectively limited to $416 each per year.)
  • Having a company somewhere in the structure (usually as the trustee of a trust) provides asset protection – an important feature protecting your personal assets from creditors.
  • Forming a company is not necessarily a great business or investment structure, mainly for capital gains tax and stamp duty reasons.
  • For businesses or investments with two or more individuals or families, partnerships should be considered. Unit trusts are also effective, as are hybrid trusts. It is worth getting your Chartered Accountant to explore these options.

Getting your tax structuring right provides huge tax benefits (both in terms of capital gains tax and income tax), asset protection and can even improve your chances of getting bank finance. Talk to your Chartered Accountant to determine what will work best for you and your business.

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