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Tax traps you can
July, 20th 2009

THE taxman is hungry. After years of rich pickings during the boom times earlier this decade, his food source has dried up.

Capital gains tax has all but disappeared amid the worst share market downturn in more than 30 years, business profits have slumped, and even income tax receipts are affected by a workforce more interested in keeping jobs than pay rises.

One thing unchanged is the number of traps that can snare those completing tax returns.

Some are new, a result of constant tinkering with tax and superannuation laws by federal governments, while others have always been there but still catch unsuspecting taxpayers.

Matthew Laming, associate director of accountancy firm PKF, says employees and investors often get caught.

"There's a whole range of things that people miss," Laming says.

We examine 10 traps to beware of this year.

1. Completely losing interest
It is easy to forget interest received on bank accounts, but Laming warns that the tax man is watching.

"The tax office does data matching with bank accounts and Tax File Numbers, and also data matching with dividends from shares," he says.

The ATO has made keeping track of income much easier in recent years, with the introduction of pre-filling of information into tax returns for people who lodge electronically.

It collects data from banks and other financial institutions and pre-populates your tax return, but the technology also means it can easily cross-check its figures and catch people who conveniently forget to declare some income.

2. Mixing investing with pleasure
Real estate investors often borrow against the equity in their investment property but use some of the funds for private purposes such as a holiday or new family car, which are not tax deductible.

"The trap is that they say the whole loan is their investment loan, but they cannot claim all the interest if they use some for private purposes," Laming says.

"They need to say that's not deductible, and need to do a calculation to work it out." Rawson Verco financial planner Tim Lindsay says deductible and personal interest often gets mixed up.

"Another trap is when a loan is refinanced and loans are bundled together by a mortgage broker or bank lender, which can create a headache for the accountants to unravel," he says.

3. No gain - hopefully no pain
Did you sell an asset such as a share or managed fund last financial year and make a profit?
Not as likely in 2008-09 as other years, but any gains need to be declared in the year they are booked and added to your taxable income.

The gain is discounted by 50 per cent if the asset has been held more than a year, but it still can create a nasty tax bill, particularly on a large asset sale such as an investment property.

Capital losses - much more likely over the past two years - can only offset capital gains, not general taxable income.

Lindsay says with capital gains tax, timing is critical.

"There's nothing like the agony of paying tax on capital gains one year, then incurring a loss in the next." Lindsay says.

Laming says many mistakes are innocent.

"A lot of people tend to forget about it or not even think they have a tax problem," he says.

Sales of managed funds can cause more issues, because many of these investments - particularly real estate investment trusts - often have deferred tax components that need to be taken off the cost base, he says.

4. Property can be a problem
There is a minefield of traps awaiting property investors.

HLB Mann Judd partner Annett Bonnett says a common mistake is declaring that capital improvements to rental properties are repairs and claiming a 100 per cent deduction over just one year.

"Instead, any new assets or substantial renovations should be written off according to the Tax Commissioner's prescribed rates of self-assessed useful life, which in many cases may be five to 10 years," she says.

5. Make it a date
Bonnett says another trap is using the settlement date of a sale, rather than the date the contract was signed, when working out capital gains tax.

While property is a prime suspect here because of its longer settlement periods, problems can also arise with the disposal of shares and other investments.

"'This may see people paying capital gains tax before they are required to, or may result in capital losses not being utilised until a future year," Bonnett says.

6. A spouse is mostly grouse
Bonnett says people often fail to include their spouse details - including de facto and same-sex relationships - in their tax return, which can cause problems with receiving tax rebates and offsets.

"If their spouses' details are omitted, people may be paying the Medicare Levy at higher individuals rates rather than the couples rate," she says.

"For senior Australians, some may only receive the Senior Australian Tax Offset at the single rate rather than the couples rate, resulting in additional tax being paid." Private health insurance details should be included in your tax return, otherwise you may be paying a higher Medicare Levy Surcharge.

7. Stop that paper shredder
Lindsay says people are often busy purging records from their filing cabinets in July, but the ATO "requires records to be kept for a certain time period".

"Things like depreciation records and dividend reinvestment information may need to be kept until a number of years after the asset is sold, so CGT can be calculated properly," he says.

The ATO says generally people must hold on to written evidence of their tax deductions for five years. They should keep records of:

* Payments received, including salary, pensions, share dividends or bank interest.
* Expenses related to income received, such as work-related expenses or repairs made to a rental property.
* Buying or selling assets such as shares or a rental property.
* Tax-deductible gifts or donations.
* Medical expenses.

8. Taxman has some targets
Second tax commissioner Jennie Granger says the ATO is paying particular attention to deductions for work-related expenses this year.

"We are concerned the difficult times may tempt more people to inflate their claims," she says.

The ATO will target sales representatives, sales and marketing managers, truck drivers and electricians this year.

People must have incurred the expense in the year they are claiming it, and cannot claim a deduction for an expense reimbursed by their employer.

9. Driving my deductions is essential
Car expenses are one of the most common tax deductions, and the ATO says record keeping is vital.

PKF's Laming says most people opt for the easiest way to claim motor vehicle costs - the cents per kilometre method, which is capped at 5000km.

However, the logbook method can deliver a bigger tax deduction for those who use their vehicle a lot for work.

"Make sure you actually have a logbook and it's substantiated over a 12-week period, and that stands for five years," he says.

10. Super can be a slippery slope
Several superannuation changes came into effect on July 1, which can seriously affect super strategies this financial year.

The amount people can salary sacrifice and enjoy a tax benefit has halved, to $50,000 for over-50s and $25,000 for others.

William Buck tax manager David Martland says another July 1 change will treat salary sacrificed income as assessable income for various income tests.

This will affect a popular strategy where some people salary sacrifice most of their wage and then claim a tax deduction for other super contributions, he says.

"Salary sacrifice super contributions will be an ineffective strategy for those using salary sacrifice arrangements to claim a deduction for a super contribution from July 1, 2009," he says. "You should review your salary sacrifice arrangements now for the June 30, 2010, year."

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