Tax time 2024: what you need to know

Garreth Hanley:
This is With Interest, a business, finance, and accounting news podcast brought to you by CPA Australia.

Gavan Ord:
Hello and welcome to With Interest's 2024 tax time series. I'm Gavan Ord from CPA Australia. Tax time is just around the corner, and to help you navigate this year's tax season, we have got four special editions of With Interest that will cover all the need-to-know topics for accountants and finance and business professionals. Today, we'll be talking to Assistant Commissioner Rob Thomson from the ATO about the ATO's focus areas for this year.

Today, we'll cover rental property repairs, capital allowances, record-keeping, the Medicare levy, and what's the ATO's approach to debt collection this year. We'll also talk about record-keeping, lodgement advice and different working-from-home calculation methods. And did I mention record-keeping? Welcome to With Interest, Rob.

Rob Thomson:
Thanks for having me, Gavan.

Gavan Ord:
Well, let's get straight into it. What's the ATO's major areas of focus this tax time.

Rob Thomson:
Yeah, so this year we're really focused on getting the basics right, particularly when it comes to work-related expenses and keeping the right records. And so, work-related deductions continue to be the largest contributor to the individual tax gap, which, for all the listeners, is the difference between what we estimate is the total amount of tax that should be paid and what is actually paid.

And so, we really want to focus on creating good habits and investing in education, specifically around things like nexus apportioning between work and private use and substantiation. One example we want to flag there is we see people thinking they can use bank statements to substantiate their deductions.

And in most cases, actually, a credit card statement or a bank statement isn't evidence enough to support a working-from-home expense and you have to have receipts. So that's one area we're definitely focused on. Another is rental property investments. So incorrect claims for interest expenses alone account for about 1.2 billion in missed revenue. And a lot of that's around people not apportioning between private use and the amount that's related to their investment property.

We also see a lot of confusion when it comes to repairs and capital expenses and the difference between them and when they can be claimed. And look, we recognise these things are a bit tricky and so if you're planning around these things, we just want to make sure that people understand what their obligations are, understand what they need to do and make sure that they're claiming everything they're entitled to, but no more.

Gavan Ord:
It's about getting it right and having the right records, and if uncertain, seek advice, whether from the ATO or elsewhere. We'll cover work-related expenses in more detail on a future episode, but we should touch on it here. With the new hybrid working environment still very common, and I also work quite a lot from home as well, what advice do you have for people who are calculating working from home deductions this year?

Rob Thomson:
So working from home, it's going to stay for a lot of industries for a while. So I think my biggest advice is to keep all your records. So this includes a record of the hours you've worked from home, for example, like a time sheet or your diary, evidence of your running expenses like your phone and your electricity, and finally, receipts supporting the documents for depreciating assets like your technology, your IT equipment, and your office furniture.

So there are two different ways you can work out your working from home deduction, there's the fixed rate method and the actual cost method. And having records means that you and your clients can choose whichever method they want to use and whichever gives them the best outcome given their individual circumstances.

Gavan Ord:
And to remind our listeners, what is the difference between these two methods?

Rob Thomson:
So the fixed rate method allows you to claim a set rate for every hour worked from home and covers your additional running expenses, including things that are actually difficult to apportion at times like your internet and your phone, your electricity. So that's one method. And the actual cost method allows you to claim the actual additional expenses that you've incurred as a result of working from home.

To calculate that, you need to work out the work related proportion of each of these expenses and have records to show how it's calculated. So they're both there, both available. It's really a decision on which one gives the best outcome for the client and which one the client wants to do considering the record keeping requirements for both.

Gavan Ord:
As you said, you have to have the records to be able to choose the right methods.

Rob Thomson:
That's right. It's all about records. I think by the end of this, Gavan, I'll say records a hundred times, but it is super important that people understand this, and it really does allow them to make sure they can get the maximum claim that they're entitled to, so that's super important.

Gavan Ord:
Paying the right amount of tax.

Rob Thomson:
That's right.

Gavan Ord:
Rob, you mentioned that rental properties are another focus for the ATO this year. So what are initial repairs and how does the ATO treat repair claims on rental properties?

Rob Thomson:
Yeah, so Gavan, if there's any work being done to a rental property when it's first purchased, it's considered an initial repair. And this includes fixing damage that was already there when the property was first purchased, whether your clients knew about it at the time or not when they purchased it. And whether a deduction is allowable really comes down to the item being repaired. So for initial repairs to the structure of the building, they're considered capital works and they're claimed at 2.5% over 40 years.

Repairs to the structure of a building or to a depreciating asset because of wear and tear or damage from renting the property are deductible. However, if this work results in an improvement rather than just repairing the damage or results in a replacement of the entire structure or a unit of property, then the expenses will be capital in nature and a deduction won't be allowable as a repair. Also, capital works and capital allowances may need to be factored into your capital gains calculations when you sell.

So the key here, once again, is to make sure that you've got good records are kept because your clients might not be claiming everything that they can, but they also might need to claim and keep them for seven years until they sell the property. And so, really here, good record-keeping is really good evidence for supporting their claims.

Gavan Ord:
Obviously, this is not a new issue, this has been a long-running issue around initial repairs versus improvement when you purchase the property. What about depreciating assets in the rental property and how they are treated for tax purposes?

Rob Thomson:
So when it comes to depreciating assets the decline in value or the depreciation can be claimed over the asset's effective life. So depreciating assets include things like air conditioners, pool pumps, other appliances, window covers, removable furnishings like carpet. So there's a number of things that can be depreciating asset. Some people think that if you're replacing something, it's an immediate write-off, but that's only true if the individual item costs $300 or less, or the items form part of a set that together that set costs $300 or less.

So all depreciating assets have an effective life, and this is the period of time that something is reasonably expected to last. And the amount you can claim each year on your client's tax return depends on the purchase price and then the effective life for that asset. A deduction can also be limited by whether it's new or secondhand, and that depends on actually when the property was purchased.

But our rental property guide has a lot of detail here that helps people to understand what is a depreciating asset and the effective life of it. So that's super useful in terms of people understanding that, because that then allows them to understand what they can claim on their tax return every year. And so, the bottom line is that there might be deductions that your clients might be missing out on if they don't have a depreciation schedule, even if that's just as simple as something as a spreadsheet.

Gavan Ord:
Just on that rental property guide, I've looked at it and there is a lot of detail in there on the effective life for different types of assets. So please have a look at that, it's on the ATO website, just have a look or Google it and you'll be able to see it. What about if the depreciating asset was an initial repair itself?

Rob Thomson:
Good point. It can get confusing. So if your client replaces a depreciating asset as an initial repair, a decline in value deduction can be claimed over its effective life and a capital gain or loss on the disposal of the depreciating asset may arise. So initial repairs of an asset that was already in the property when you bought it are not deductible.

Jacqueline Blondell:
If you're enjoying this podcast, you should check out our in-depth business and finance show, In the Black. Search for In the Black on your favourite podcast app today. Now, back to With Interest.

Gavan Ord:
So let's talk about private health insurance. Almost half of the Australian population have private health insurance and many of these people will be able to access the tiered government rebate, the private health insurance rebate. Can you explain the private health insurance rebate and how a pay rise could impact the person's rebate at tax time?

Rob Thomson:
Yeah, so if your clients have a private health insurance, then they may have access to the private health insurance rebate and whether they receive the rebate and the amount they receive depends on their income or their combined income where they have a spouse. And there are income tiers, so as their income increases, then actually the rebate amount reduces.

And if they claim the rebate as a reduction on their premiums, it might be worth checking that they're getting the right rebate. So if their combined income has increased, that may shift them into the next income tier. And if they haven't advised their private health insurer, then they'll be getting too much of the rebate. And then, when this happens, we recover the excess in their tax return, which can lead to either a reduced refund or actually a tax bill.

So when you're doing your tax return this year, just a good point, have a review of that and see if you need to inform your health insurance provider if your income’s gone up, just a quick check to do at tax time that can save you in the future.

Gavan Ord:
That's a good tip. And I think something that many people might forget, an adjunct to private health insurance is a Medicare Levy Surcharge. Do income tiers also apply to the Medicare Levy Surcharge?

Rob Thomson:
Yeah, they certainly do, Gavan. So if your client or their dependents don't have adequate private health insurance, they'll need to pay the Medicare Levy Surcharge if their combined income is above a certain threshold and as their income increases, they move into a higher tier and they pay a high percentage of their income for the surcharge.

And if you have clients that are likely to pay the Medicare Levy Surcharge, let them know that this amount is not covered in the tax that's taken out of their pay throughout the year by their employer, and this means that any Medicare Levy Surcharge that they need to pay will actually reduce their tax refund or they might end up with a tax bill at tax time.

Gavan Ord:
That's a really good tip there. And we now move on to debt collection and we know that the ATO, last year, returned to more of a business as usual approach to collecting outstanding tax liabilities, and that was after pausing some debt collection activities during COVID. What can you tell us about the ATO's approach to debt collection now?

Rob Thomson:
So all taxpayers have an obligation to lodge and pay the right amount of tax, and most taxpayers do this. However, the collectible debt has increased, over the last four years, from $26 billion in December 2019 to around $50 billion by December 2023. So this is a 98% increase in the trend that we need to turn around. We shifted our approach to addressing debt and payment behaviour and as your client's trusted advisers, I think we need agents help to continue to help shift this positive payment culture.

We think it's really important that accountants discuss with their clients how they'll take action with respect to their lodgements and payments when they're not being made on time, and also, things like their employer contribution. And this is really to ensure that clients are best placed to manage their bills and avoid penalties and interest charges and firmer action when necessary, which can have lasting effects including on the business' credit rating, so super important.

We also think that it can help your clients avoid bill shock by encouraging them to put GST or PAYG withholding contributions into a separate bank account, and this will help them to avoid the temptation of using that money to run their business, which can create difficulties later. And I think the last bit I'd say is encourage your clients to talk to us and speak to their accountant, but then also, speak to us if they're having any financial difficulties. The earlier they can get in contact with us is probably the better.

Gavan Ord:
And from a CPA Australia point of view, we totally agree, if you do have an outstanding tax liability, engage with the tax office and engage early. The earlier you engage, the more options that are available to you. From CPA Australia, that's also our advice as well. And finally, Rob, is there anything else that we should remember this tax time?

Rob Thomson:
Yeah, so probably one or two things, Gavan, just as a quick reminder to people. One thing is that the recently announced changes to the individual income tax rates and thresholds are now law and these result in a few changes. So there's a reduction from the 19% rate to 16% for the first year. A reduction from 32.5% tax rate to 30% for the next year. An increase in the threshold above which the 37% tax rate applies from 120 to 135,000.

And an increase in the threshold above which the 45% tax rate applies from 180,000 to 190,000. We're making sure people understand that this isn't actually going to impact the size of their tax refund this year and that people are actually just going to see this from 1 July in their take home pay. So that's one important thing that we're asking accountants remind their clients as well because we are seeing a little bit of confusion there.

The other bit is as the new rates do apply from 1 July, just a reminder to anyone that's an employer to make sure that they've kind of updated their software to make sure those new rates are reflected or that they're looking at the ATO's new withholding table. So that's one area. Another quick thing, we talked earlier about the private health insurance check, the other thing is it's a really good time to remind your clients just to do a quick check to make sure their super's in order at tax time.

Super is one of the biggest assets that a lot of Australians hold during their lifetime, and so, the sooner they get on top of it, the better. And your clients can use the ATO's Super Health Fund check to review the health of their super, and it's about five simple steps that you can use to get you super under control. So we just suggest that when people are lodging, they also just go and look at our website and do a quick super health check. And that's just something to do as well at this tax time.

Gavan Ord:
And just a little bit of an extra CPA Australia observation to listeners is you don't need to rush into your tax agent on 1 July, wait a little bit, there is pre-fill information that comes through. Often, we find that people who rush in, get their tax return done will have to correct their mistake. So you don't need to rush in, wait a little bit, wait till the end of July, around that time, and then, start to speak to your tax agent.

Rob Thomson:
That's definitely a message we've been encouraging too as well, Gavan. People are twice as likely to have their refunds stopped and asked questions if they lodge before the end of July when all the pre-fill data is ready. So what we're saying to people is, hold off, wait. Whether you're lodging through a tax agent or you're lodging yourself online, your tax agent's got the same information that you will, if you wait, it allows you to make sure you get it right the first time, it's a lot smoother process for everyone and they don't have to worry about it until next year.

Gavan Ord:
Well, thanks for joining us on this special tax time edition of With Interest today, Rob.

Rob Thomson:
Thanks Gavan. Thanks for having me.

Gavan Ord:
For more information about the topics covered in today's episode, don't forget to check the show notes where you'll find links to additional resources from CPA Australia and the ATO. We'll be back next week to talk about what you need to know about work-related expenses for tax time 2024. With Interest is a regular podcast. If you like today's show, you can subscribe on your favourite podcast app by searching CPA Australia's With Interest. And until next time, thanks for listening.

Garreth Hanley:
You've been listening to with Interest, a CPA Australia podcast. If you've enjoyed this episode, help others discover with interest by leaving us a review and sharing this episode with colleagues, clients, or anyone else interested in the latest finance, business and accounting news. To find out more about our other podcasts and CPA Australia, check the show notes for this episode. And we hope you can join us again for another episode of With Interest.