CGT Main Residence Exemption – Tips, Tricks, and Traps

Under ordinary circumstances the sale of a property would attract Capital Gains Tax (CGT). However, you can avoid paying CGT if you sell a dwelling that is considered to be your main place of residence. But what is your ‘Main Residence,’ and how do you know if the exemption applies?

Is the Property I’m Selling my Main Residence?

Generally speaking, your main residence is your home. A few examples of factors the Australian Taxation Office (ATO) considers relevant in identifying your main residency are:

• Whether you and your family live there;
• Whether you have moved your personal belongings into the home;
• The address to which your mail is delivered;
• Your address on the electoral roll
• The connection of services and utilities (for example, phone, gas, or electricity);
• Your intention in occupying the dwelling.

 

Please note there is no minimum time a person has to live in a home before it is considered to be their main residence

 

In order for the Main Residence CGT exemption to apply, the property being sold must include a dwelling. A dwelling is anything that is used wholly or mainly for residential accommodation. Examples of a dwelling are:

• a home or cottage;
• an apartment or flat;
• a strata title unit;
• a unit in a retirement village;
• a caravan, houseboat or other mobile home.

A mere intention to construct or occupy a dwelling as your main residence – without actually doing so – is not sufficient to obtain the exemption. You must physically occupy the dwelling.

Can I Have More Than One Main Residence?

You can only ever have one main residence at any given point in time unless you’re selling your old main residence and buying another. In this case you’re entitled to an overlap period of six months as long as:

1) the new property will be your main residence after the sale of the old property;

2) you lived in the old property for at least three continuous months in the 12 months prior to sale; and

3) it wasn’t used to produce rent in this same 12 month period.

Can I Earn Rental Income from My Main Residence?

While you can only have one main residence at any point in time you do not need to live in the dwelling for the entire holding period for it to continue to qualify for the exemption. If you own a property which is currently your main residence you can move out of the property for up to six years. During that time you can earn rental income on the property and claim a tax deduction for expenditure as you would with a normal investment property. Providing you re-occupy the building before the end of the six period and do not dispose of the property within the same financial year that the property was earning rental income you can still qualify for the full exemption.

Does the Main Residence Apply to Property Renovators?

The simple answer is yes! If you purchase a property, occupy the dwelling while undertaking renovations and then sell the property only to move into another dwelling and repeat the process, any profit you make on the sale of each property is generally tax exempt.

Can I Subdivide My Block of Land and Apply the Main Residence Exemption to the Proceeds from the Sale?

As discussed, the main residence exemption requires a dwelling to exist on the property that is sold. If you have a large block of land and subdivide the land so that you can sell off a part of the unused land, there is typically not a dwelling on this parcel. Therefore, any profit on this sale would attract Capital Gain Tax.

However, it is important to note that if the reverse situation applies and you purchase the neighbouring block of land to obtain a larger back yard, the main residence exemption will apply to the sale of your main residence and the adjoining block provided both properties are sold together and the total area of land does not exceed 2 hectares.

What if I Can No Longer Live in My Main Residence?

The main residence exemption can also apply where the owner is no longer able to reside in the dwelling, because they have lost the ability to live independently and require full time care. This ensures that property owners who spend extended a period in hospital, must  relocate to a residential care facility, or who relocate to live with a care giver can still access the main residence exemption when they sell the property to pay living and medical expenses.

[Podcast] The accountant with a coffee shop in his office. – Pricing Power

The original article was published by Pricing Power on 26 March 2014. Written by Steve Major.  You can access the Pricing Power podcast here.

 

Why would an accountant open a coffee shop as part of his accounting business? Ben Walker did and it has created a fantastic business.

Ben Walker lists himself as the Chief Inspiration Officer of Inspire CA (the accounting firm) and the Beer Development Manager of Inspire Cafe  Inspire CA has its mission to inspire people to build phenomenal businesses. The dream for the cafe is create a place where you can enjoy a good coffee and something decent to eat with entrepreneurs and business people.

In the short time that Ben has been in business he has made a mark. I first heard of Ben from a colleague in the United States. Impressive. The cafe is fast becoming a hub for business events and a thriving community.

And by the way Ben does not do timesheets, he value prices, extensively uses the cloud amongst other impressive aspects of his business. During this interview we talk about why he created the Coffee shop and how that changed his business. As Ben talks about it has not all been plain sailing but he has fought hard to create this fantastic business.

Business Structures Made Easy! Part 2: Sole Trader

Should I Trade as a Sole Trader?

Establishing a business as a sole trader is the simplest form of business structure. It is relatively easy and inexpensive to start and maintain.

Many sole traders choose to trade under their own name but this is not a requirement. A sole trader can register a business name with the Australian Securities and Investments Commission (ASIC) and trade using this name instead.

A sole trader is essentially just the individual in business for themselves – they retain complete control of the business operation. There is no division between business assets or personal assets, which includes any assets jointly owned with another person (such as your house or car).

Your liability is unlimited which means that personal assets can be used to pay business debts. The individual is also responsible for remitting the tax on any business profits made at their marginal income tax rates.

After your first year of business profits the Australian Taxation Office will enter you into the pay as you go (PAYG) instalments system. The PAYG system requires regular payments of preliminary tax based on expected profits for the following year. Any excess tax paid as a result of this will be refunded on lodgement of your income tax return.

Pro’s and Con’s of Running a Business as a Sole Trader

Advantages of Trading as a Sole Trader

• Easy and inexpensive to establish and maintain; Complete control of your assets and business decisions is retained by individual;
• Fewer reporting requirements;
• Any losses incurred as a result of business activities may be offset against other income earned (such as investment income or wages), subject to satisfying certain conditions;
• You are not considered an employee of your own business and are free of any obligation to pay payroll tax, superannuation contributions or workers’ compensation on income your draw from the business;
• Relatively easy to change your legal structure if the business grows, or if you wish to wind things up.

Disadvantages of Trading as a Sole Trader

• Unlimited liability which means all your personal assets are at risk if the business operation gets in trouble;
• Little opportunity for tax planning – you can’t split business profits or losses made with family members and you are personally liable to pay tax on all the income derived;
• Business debts and losses cannot be shared;
• Requirements to pay preliminary tax on business income which may not have been earned;
• Limited access to additional capital for business growth;

Click Here to Download our eBook “Business Structures Made Easy”

Word of Warning Against Trading as a Sole Trader

At Inspire CA we strongly recommend business owners avoid operating as a sole trader.

Even a business which is not generating sufficient income to require a great deal of tax planning can still expose the owner’s personal assets to significant risk.

If you are currently operating a small business as a sole trader please refer to the articles later in this series which explore your alternative structuring options, or contact Inspire CA for assistance.

Business Structures Made Easy! Part 1: The Basics

One of the most important decisions a business owner needs to make (after the name of the business of course!) is the choice of business structure. In fact, getting this choice right is so important that we begin the analysis of every potential client with their proposed business structure and we then work out from that point.

Click Here to Download our eBook “Business Structures Made Easy”

Choosing Your Business Structure

The choice of how to structure your business depends on a number of factors:

1. The type of business you operate;
2. Your personal financial circumstances;
3. How large you intend to grow the business; and
4. Whether you are building the business to operate or to sell.

A basic comparison of the most common business structures is provided below:	Sole trader	Partnership	Company	Trust
Cost to establish and operate	Low	Medium	High	High
Complexity	Simple	Moderate	Complex	Complex
Limited Liability	No	No	Yes	Yes (with a corporate Trustee)
Do I receive full profits made from the business?	Yes	No	No	No
Can I employ staff?	Yes	Yes	Yes	Yes
Do I have to pay myself superannuation?	No	No	Yes	No
Can I change the legal structure easily?	Yes	No	No	No
Ability for tax planning e.g. income splitting?	No	Limited	Limited	Yes
Is it easy to raise capital?	No	No	Yes	Yes
Is it easy to dissolve or exit?	Yes	Yes	No	No

 

Each structure has advantages, disadvantages and responsibilities which need to be considered before making a decision. While it is possible to change the structure as the business grows or your circumstances change, getting the structure right in the first place can avoid any unnecessary tax and administration costs. Your accountant or business adviser can help you make the right choice for your business.

Where Do You Go from Here?

Choosing the right business structure is extremely important. We strongly recommend seeking professional advice before making a final decision. We offer a wealth of experience in business structuring and can help you make the right choice now and avoid problems later on.

For additional information please look out for our future articles which look at each of the business structuring options in more detail.

Email Speed Dating: Tackling 50 emails in 50 minutes

Every second and fourth Friday of the month we hold the Inspiring Business at Inspire Cafe event. It’s a great way to wrap up a big week! Recently, I’d made a breakthrough in something that I now know a lot of people struggle with, so shared it as our “Win of the Week”.

One thing that has plagued me for quite a while was my inability to achieve what some call ‘Inbox Zero’.  Despite my best efforts, I had what I called ‘Inbox 120’. On average I ended each day with 120 unread emails!  The subconscious weight on my shoulders was overbearing and I realised something must be done.

Over a weekend, I was able to deal with the vast majority of these unread emails. Not only that, but I was able to apply what I learned with this exercise and now there’s no struggle to totally clear my Inbox each time I sit down to it. Until I shared this at the Inspiring Business breakfast, I didn’t realise it was such a common problem!

I’d love to share with you the ‘tricks’ I learned to kill 50 emails in 50 minutes.

Radio Silence: Allocate Uninterrupted Time

You can’t deal with your inbox piecemeal, with endless distractions. Block out time in your calendar ahead of time. Let your team know you’re going into ‘radio silence’ and just get it done!  Also make sure you’re not going to be interrupted by technology. Two things that can achieve this:

1. Disconnect from WiFi so you won’t be distracted by Facebook, incoming emails, the urge to check the news etc. Some of you won’t be able to disconnect from WiFi especially if your email is hosted online, but do your best to get rid of procrastination-related distractions.

2. Activate your phone’s ‘Do Not Disturb’ mode.  If someone calls or texts during Do Not Disturb mode, the screen of the phone stays blank. Usually you have the ability to make exceptions to this by tagging ‘Favourites’ in the contact list for family or close friends so they can get through to you if there is something pressing.

The Shot Clock: Set a Countdown Timer

A countdown timer in your peripheral vision does wonders for keeping you on task and focussed.  There are a number of ways you could do this, like using an App or a website  such as e.ggtimer.com.  Whatever your method, make sure you can see it while you work.

e.ggtimer.com has only one function, which is a countdown timer in a web browser. Choose how long you wish to count down, simply add the time after the web address, for example:

– 50 minutes would be: http://e.ggtimer.com/50minutes

– 60 seconds would be: http://e.ggtimer.com/60 (if nothing is written after your number, the site assumes seconds).

Keep It Simple, Stupid: Reply Using Four Sentences

Another thing that I struggle with is not getting too bogged down into the pleasantries. When your clients are also good friends, it’s hard not to check in on how their newborn is, or where they’ve travelled and so on … but there is a better method for doing that – it’s called picking up the phone!

But getting back to email: My tip is to simply get straight to the core of the email.

A website that has been designed to aid in this problem is four.sentenc.es. This policy keeps your responses brief, fast, and efficient, allowing you to respond in one minute or less to every email. The web site offers a template for a signature you can add automatically to your emails explaining your brevity.

Hit the Ground Running: Set Yourself Up for the Week

After reading a LinkedIn article a few months ago about starting your week on a Sunday afternoon, I’ve implemented a couple of recommendations from the article, including clearing email and small tasks before the week starts.  This stuff works a treat for your Monday Mindset!

In Summary

There’s quite a bit to implement here, but it’s all low cost and fairly easy to do. In summary, your moves are:

– Plan out and allocate uninterrupted time;

– Set a countdown timer;

– Reply using four sentences or less;

– Clear emails (and other small tasks) before the week starts.

Don’t Drive Your Business with Crap on the Windscreen – Why Xero Keeps it Clean

Imagine you’ve unknowingly parked under a tree full of birds, who all decide to use your windscreen for target practice. By the time you hop back in your car is covered in so much crap you can barely see the road, let alone what’s coming up ahead.

Now, would you start the engine and drive away?

You may think it’s a stupid question to ask. Of course you wouldn’t. That would be dangerous. But as we mentioned in our previous post of things that Business Owners need to implement to be successful, many businesses operate just as dangerously because their financial reports and forecasts aren’t up-to-date.

The shocking truth

Most accountants report on and deliver to clients using data that can be more than 11 months old.

It’s true. When accountants prepare a business’ End-Of-Year financials for June, they typically use bookkeeping records up to May the following year. And if the accountant provides any additional value (other than lodging the tax return), their advice is based made from the figures reported in these financials.

Ignoring everything that changed between July and May–practically an entire year.

As business owners, we often look to our accountants for advice. But if that advice comes only once a year, based on what may well be year-old data, how can we reliably hit our targets?

Fortunately for our business clients, Inspire CA takes advantage of a tool that can significantly improve report turnaround times.

Introducing cloud-based accounting software

The key to having live and (almost) real-time financial data is cloud-based accounting software. And that’s where our business clients have the advantage, because they all use Xero. We are solely Xero accountants.

Xero can connect directly with their bank, and receive expense information from photo-recognition data entry software and other add-ons to automate and streamline their reporting.

And because Xero is cloud-based, their data is never more than a few days old and can be reconciled quickly and easily each day, ready for reporting.

Another great benefit is their advisers can access the reporting and data just as easily. And as an adviser, there’s nothing like being able to run your eyes over a client’s reports and call to either congratulate them or see how things are going (depending on the figures).

The benefits of real-time reporting

It’s vital to know what’s happening in the business world in real-time. Trends are shifting more and more quickly, and you need to know how your business is performing and responding to internal and external forces. It’s the only way you can make clear financial decisions.

And that’s what makes cloud-based accounting such a smart business decision.

How many days after the month is over do you get your reports? If it’s more than 30 days, things really needs to improve. If you’re thinking about outsourcing your monthly bookkeeping, aim to have them ready no later than two weeks after the month is over. And if you’re doing your own bookkeeping, you should finish reconciling them within a week.

Make or break your business with Xero

Hopefully I’m preaching to the converted. But if you haven’t switched to cloud-based accounting software, do it now. You’ll have the information you need to make important decisions in real time.

Which is a lot better than trying to drive with business crap all over your windscreen.

Businesses for Good: Embedding the Concept of Giving into Everyday Life

One of the most exciting aspects of modern life is the feeling we wake up with every morning that something amazing could happen at any given time. The world is so huge, people are diligently working somewhere while we‘re asleep, and the world is so connected these days that if someone has an idea halfway around the world while we‘re sleeping, it‘s sitting in our Inbox when we sit down to have our morning coffee. That‘s an exciting way to live, and here at Inspire CA we‘ve always got our ear to the ground for new ideas – especially when it comes to making the world a better place.

Negative Inertia

Most people have difficulty overcoming the negative inertia that affects everyone. People at rest tend to stay at rest – the end result is that your chances of getting a donation or other contribution for a good cause goes up inversely with the level of effort required.

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When we were introduced to Paul Dunn and the Buy One Give One (B1G1: Business For Good) Project, we knew we‘d found one of those brilliant ideas.

Business for Good

B1G1 is an awesome concept. When your business joins up, it literally embeds giving into your everyday actions. It‘s called “micro-giving” and it is brilliant.

The examples are infinite. Your local coffee shop joins, and every time they sell a coffee, someone in the world got access to clean water – which we’ve even adopted right here at Inspire Café! Or you engage an accountant, and part of the fee you pay them automatically feeds a dozen people who are starving. It’s all about embedding the giving so it’s automatic, and about the giving being micro, so it’s painless and effortless – but cumulative.

Businesses get to choose the initiatives they want to support, and all it takes is joining B1G1 and configuring the impact you want to have. But that’s not all. It gets even more exciting when you learn about the Map.

The Map

The map can be found at http://businessesforgood.com, and Paul Dunn, current Chairman of B1G1, has created an awesome video explaining the sheer genius of the Business for Good Map below. On the B1G1 Map, you can see all the areas of the world where businesses have signed up with B1G1, and not only that – you can click on any individual business and see in real time the donations they’ve generated, precisely where those donations went and what for, and what other businesses support those specific initiatives. In fact, if you go to the B1G1 Map right now and type “Inspire CA” into the search box, we’ll pop up and you can see all the good we’ve done so far. Here’s a quick look:

[youtube id=”rCmquSzjUiw” width=”600″ height=”350″]

It’s brilliant. Removing the barriers that prevent people from doing well and making it into a constant, everyday part of normal life. No sudden efforts that then fade away, no stops and starts. Just a constant stream of good being done, all while we’re just living our lives and getting our work done.

If this aligns to your values, you can join today. There is literally no reason not to. Join today and experience what it’s like to know that everything you do not only benefits you and your business professionally, but benefits the world – and benefits it in a real-time way you can literally see on the map.

De-Mystifying Superannuation Contributions and Bonus Structures

Every good employer knows that rewarding your employees properly is the best investment in your company’s future you can make. (Maybe tying for importance with the correct business structure!)

With a competitive salary as the base, the Superannuation program intends to provide all workers with resources in their retirement through a cooperative funding between their employers over the years and their own personal contributions.

Bonuses paid out as part of an overall motivational compensation structure or as a reward for a particular service can be a fantastic tool for motivating and rewarding employees as well. Unfortunately, for many employers bonuses in relation to Superannuation Contributions is a confusing and intimidating field.

One unfortunate result of this confusion is fewer employers offering their employees bonuses of any kind. But the bonus is one of the most powerful tools we have to recognize and reward the people who make our businesses hum. Here’s our fast guide to superannuation contributions and bonus structures.

Superannuation Guarantee

We all know that superannuation is based on the employee’s ordinary time hours – that is, their usual set work time. In the case of a bonus, the first question to answer is whether or not the bonus should be considered part of these ‛regular’ hours:

If the bonus is a reward for achievements during an employee’s ordinary time hours, then the bonus sum incurs the usual superannuation guarantee requirements. This is the case for the majority of bonus payments made to employees under a salary agreement.

However, if the bonus is linked to a specific project or performance that is wholly outside of the employee’s ordinary hours, then Superannuation Guarantee payments are not necessary.

For example, if the employee takes it upon themselves to develop an internal program without direction from management and this is deemed an extraordinary effort that deserves a bonus as reward, these monies would not be counted as part of the company’s superannuation contribution burden.

Contribution Base

Business owners should also keep in mind that bonuses paid out do not necessarily affect the contribution base for superannuation contributions.

For example, in the 2013/2014 financial year, the base is $48,040 per quarter. Thus, any compensation package for an employee (which includes all bonuses and salaries as separate from ‛special’ bonuses discussed above) that exceeds an average of $48,040 per quarter hits the ceiling on contributions and thus the company does not have to pay more in superannuation contributions no matter how far the employee’s overall compensation exceeds the base.

What does it mean?

In the end, the benefits of motivating employees with bonus payouts far exceed the difficulties these bonuses cause in terms of tax and superannuation contributions.

The procedures and equations are not terribly difficult once the basic concepts have been mastered, and the company that offers a generous bonus structure in addition to a competitive base salary will of course attract the best talent in their field.

But everyone needs a little help now and then, and if you’re confused about superannuation and bonus issues, feel free to sign out and we can explain everything in clear language.

Looking for more? Here’s some resources from the ATO:

http://law.ato.gov.au/atolaw/view.htm?docid=SGR/SGR20092/NAT/ATO/00001

http://www.ato.gov.au/Rates/Key-superannuation-rates-and-thresholds/?page=21#Maximum_super_contribution_base

This guest article was written by Nick Webb, Financial Adviser of Brisbane Wealth Management firm, Stonehouse Wealth Management.

Ensure you Insure – The Golden Egg

I would like to share a story with you. It’s a story that will be familiar to a lot of you, especially because of its similarities to the classic tale of ‘The Goose That Laid The Golden Eggs’.

In a lot of ways, this story of the Golden Goose is a situation I face every day – but what does this have to do with Financial Planning?

The answer is that the story of the Golden Goose is one that many of my clients across all ages, income levels, and social positions deal with.

Would you insure the Goose, or the Eggs?

It all comes down to a single, fundamental question: If you had the mythical Goose that laid Golden Eggs, would you insure the Goose, or the Eggs?

All of us are alike in basic ways. We all have a source of income, we all carry some debts, and most of us have at least one dependent – a child or a spouse, or both. But one of the fundamental mistakes people make is thinking of insurance as something other than what it really is: Income Protection. Believe me, I know: I was once pretty naive about this subject too. Just like most of my clients, my answer to the question used to be: The Goose, of course!

Despite how fast most people come up with this answer, the answer they offer to my follow-up question is usually the same. When I ask, do you currently insure your income or your car? They almost always reply their car. And yet your income is the Goose in this metaphor, and your car is one of the Golden Eggs. Once you start labelling things like this, the illogic of insuring a car and not insuring your income becomes plain.

Income Protection: The Golden Goose

Income Protection will not only provide you with the means to sustain a lifestyle for you and your loved ones should you be rendered (through illness or injury) unable to work. I urge you to consider this paradigm that is so readily overlooked by the majority of us in our daily lives. While it is undeniably important to insure your Eggs, don’t forget to insure the Goose as well – that is, yourself!

Have more questions? Looking to fund your insurance from your superannuation?

Please get in touch with the team at Inspire CA or Nick Webb directly if you would like to learn more about Income Protection insurance. There are also avenues to structure Income Protection Insurance within your superannuation so that there is no direct hit on your personal cashflow.

Think you are a contractor? The ATO may disagree!