Your Knowledge
December 2016


This month, we explore the Christmas headaches business typically face.  Plus, would you buy a house with friends or relatives?  We explore the tax and legal issues and how clients can protect themselves.


Festive Season Fails

Binging on Christmas expenses

It’s easy to spend too much at Christmas. Just remember that if you are splurging on clients, to be a legitimate business expense and therefore deductible, the expense has to be related to how your business generates income. So, excessive expenses may draw the attention of the regulators and the deduction denied. 

The exception is entertainment (food, drinks, sports tickets, theatre etc.,).  If you are hosting client functions, inviting them to lunch, or to your Christmas party, these entertainment costs are not deductible.  

For staff, if you really want to avoid tax on your work Christmas party then host it in the office on a work day - that way, it’s likely to be exempt from Fringe Benefits Tax (FBT) regardless of what you spend per person.  

But, if you are hosting a work Christmas party outside of the office, keep expenses under $300 (GST incl.) per employee to stay under the FBT minor benefit exemption threshold. So, post Christmas party taxi travel expenses, the cost of the Christmas party itself (including meals, drinks and entertainment etc.,), will all be exempt from FBT as long as the cost is kept below $300 per employee.  But, employers cannot then claim a deduction for the Christmas expenses or claim GST credits. 

Christmas gifts for the team should also be kept to under $300 (GST incl.) to ensure they do not incur FBT. Employers can claim a deduction for ad hoc Christmas gifts as long as they do not relate to entertainment.

Post Christmas regrets

Just remember that February is when a lot of small and medium businesses pay their Activity Statements.  Any cashflow Christmas hangovers may have implications into the New Year.  Make sure you protect your position and stay on top of not just Christmas expenses but debtors, stock, and staffing costs.


Would you buy a house with friends or relatives?

 

It’s not uncommon for friends and relatives to band together to capitalise on the investment property market.  But what happens when it all goes wrong? 

The Housing Industry Association shows that it now takes 2.04 average full time salaries to comfortably service a standard mortgage on a median priced detached house in Sydney.  So why not pool your assets?

The tax issues

Capital Gains Tax applies to any change of ownership of a CGT asset, unless the asset was acquired before 20 September 1985 when the CGT rules first came into effect. 

In general, if you jointly own an investment property, your individual exposure to CGT will depend on how the property is owned.  If the property is held as tenants in common then any CGT exposure is in line with your ownership interest – this might be 50/50 or some other configuration. If the property is owned as joint tenantsthen each owner is treated as holding an equal interest in the property for CGT purposes.

Like CGT, how the expenses and income from the investment property is represented in your tax return also depends on how the property is held.  For example, if you and a family member each own a 50% interest in the property you will need to split the rental income and expenses 50/50 when preparing your tax returns. 

The main exceptions to this are where you are carrying on a rental property business (e.g., you own a significant number of rental properties and manage this in a business-like manner) in which case a partnership agreement will generally determine how the income and expenses are split or where one owner has borrowed money to acquire their interest in the property in which case they can claim a deduction for their own interest expenses (these do not need to be split with other owners who may have used their own savings to acquire the property). 

The legal issues

Disputes between friends and relatives can occur very easily. One area that often triggers a dispute is when one party wants to take some form of action and the other doesn’t – like selling the property or investing in expensive renovations. If the problem cannot be resolved the issue may be taken to court to force a resolution.  State laws allow for one party (a co-owner) to make an application to the Supreme Court for the sale or partition of the property. Following an application under the partition laws of each State and Territory, a court may make an order for partition or sale of the property. 

This is where a legal agreement, a Co-owners Agreement, to underpin the terms of ownership can really help – even for the best of friends or the closest of relatives.  Legal issues covered include: 

  • Ways to resolve disputes;
  • What share each party owns;
  • When you can sell;
  • Who pays the bills;
  • What happens when a party dies;
  • What happens if a party becomes bankrupt;
  • When you can exit the agreement; and
  • When you can buy the other party out.
If you are considering buying property with friends, relatives or other investors, we can help you with a Co-owners Agreement and the tax implications.

The material and contents provided in this publication are informative in nature only.  It is not intended to be advice and you should not act specifically on the basis of this information alone.  If expert assistance is required, professional advice should be obtained.