Property losses and impact on FTB

[Apocalypse]

Being in the throes of assembling data for tax returns, it has struck me that the areas where a property loss is "added back" to your taxable income to determine an income for calculating certain things is effectively decreasing (super changes), but one of these remains Family Tax Benefit. I've seen the argument where it may be possible for a person to salary sacrifice 100% of interest costs even with a jointly held property.

If I was to at least salary sacrifice my share of cash expenses, this is FBT exempt as an otherwise deductible expense, and it wont change my taxable income, but I wont, for the purposes of FTB assessment, be seen to be making a loss, and hence wont have to add back that loss. Does this seem plausible?

Edit: bah...title is wrong, I meant FTB not FBT in the title. <Fixed now - Les>

 

[duncan_m]

Does this seem plausible?

Yes, it seems very plausible.

 

[DaleGG]

Hi

Not only is this strategy plausible; it is very effective.

Dale

 

[Mry]

I recommended it to someone just yesterday so he could effectively reduce his income for Centrelink purposes by $10,000 and it won't change his tax position one bit. If you are in the Centrelink pipeline and you can salary sacrifice, sacrifice as much as you can. If you can plan ahead in the tax year, aim between a zero and a slight profit in your personal return from your IPs.

 

[Apocalypse]

I recommended it to someone just yesterday so he could effectively reduce his income for Centrelink purposes by $10,000 and it won't change his tax position one bit. If you are in the Centrelink pipeline and you can salary sacrifice, sacrifice as much as you can. If you can plan ahead in the tax year, aim between a zero and a slight profit in your personal return from your IPs.

On the actual mechanics of it...my company pays me quarterly, yet expenses occur monthly or infrequently...is it OK for the salary sacrifice to occur some weeks after the expense has occurred? Or does it need to occur instantly?

 

[coastymike]

This is a classic case of the law creating problems for people.

ATPF issues log

A158 – Family tax benefit and adjusted taxable income calculation

A husband and wife jointly own a negatively geared rental property. They have incurred a family tax benefit debt because the legislation defines a spouse's taxable income to exclude tax losses, however adds back negative gearing tax losses per the ‘adjusted taxable income’ formula to create a higher family income than actually occurs. The spouse has $nil other income in this case, the negative gearing tax loss creates an actual tax loss which is disregarded in the formula. However, the negative gearing loss is the added to $nil taxable income to generate a higher family income by the amount of the negative gearing loss, thereby precluding the family from receiving their FTB. If the ‘adjusted taxable income’ formula allowed for actual tax losses then the problem would not occur as the ‘adjusted taxable income’ contributed by the spouse in this case would be $nil. The above appears to lead to an unusual outcome in cases where the spouse has no other income other then the negatively geared property loss.

There appears to be an inconsistency with the A New Tax System (Family Allowance) Act 1999 definition of the ‘adjusted taxable income’ which does not ensure tax losses are considered. Can the Tax Office please provide an explanation for the add back of the negatively geared rental property loss?

Tax Office response:

As per section 4-15(1) of the Income Tax Assessment Act 1997, if a person's deductions equal or exceed their assessable income, then that person does not have a taxable income. So in this particular case, the correct taxable income to be passed to the Family Assistance Office is zero.

However, adjusted taxable income (ATI), the income used for determining a family tax benefit entitlement, is defined by Schedule 3 of the A New Tax System (Family Assistance) Act 1999 (FAA). In determining a person's ATI, any net rental property losses are added to their taxable income (as well as any other components that make up ATI). In the example cited, the person does not have a taxable income, so the total of the net rental property losses is the person's ATI (assuming there are no other components of ATI).

It is the intent of the FAA that ATI should be calculated in this manner. As the FAA falls within the portfolio of the Department of Family and Community Services (FaCS), any concerns with the intent of this Act should be raised with that department.

 

[skater]

Hmphh! Only the ATO can turn a negative into a positive (for their benefit). We have been in that situation for years. I don't work, but I don't get ANY FTB, not even the basic part for where one partner stays home. Stupid thing is that if I doubled the rents, not only would I have more income, but I'd qualify for FTB.

 

[Les]

G'day Skater,

Stupid thing is that if I doubled the rents, not only would I have more income, but I'd qualify for FTB.

Can you expand on this, Skater? I'd like to double the rents (yeah, I know, in my dreams) and I have a wife who doesn't bring in income. Just wondering if something like this might apply to me (now THAT would be nice!!)

But I know nothing of this area of things. Care to share?

Regards,

 

[duncan_m]

But I know nothing of this area of things. Care to share?

What Skater is alluding to is this:

If she currently (for example) made a $45,000 loss per year on her portfolio (thanks to non-cash deductions etc) the government automatically deems her to have MADE $45,000 and thus she loses any access to Family Tax Benefits Part A and B.

Now, if she doubled her rents, she could potentially break even on her portfolio and the Government then determines she's made nothing.. and she could then be eligible for some family tax benefits.

Its bizarre.. truely bizarre legislation that deems Property Losses as Profits.. The actual wording the 'tards use is something like "property losses are added back onto the amended assessable income".. or words to that effect..

But in reality, they are merely deeming a loss as a profit.

 

[Les]

G'day Dunc,

Its bizarre.. truely bizarre legislation that deems Property Losses as Profits..

If that is right, then I'm lost for words ................

No wonder I didn't understand it,

Regards,

 

[duncan_m]

If that is right, then I'm lost for words ................

No wonder I didn't understand it,

Hey Les,

There might be some subtleties I glossed over but I'm pretty sure I've got the gist of it right.

 

[skater]

What Skater is alluding to is this:

If she currently (for example) made a $45,000 loss per year on her portfolio (thanks to non-cash deductions etc) the government automatically deems her to have MADE $45,000 and thus she loses any access to Family Tax Benefits Part A and B.

Now, if she doubled her rents, she could potentially break even on her portfolio and the Government then determines she's made nothing.. and she could then be eligible for some family tax benefits.

Its bizarre.. truely bizarre legislation that deems Property Losses as Profits.. The actual wording the 'tards use is something like "property losses are added back onto the amended assessable income".. or words to that effect..

But in reality, they are merely deeming a loss as a profit.

Yep! That's it in a nutshell!

 

[Les]

How DO they get away with this?

This is mind-blowing:-

Tax Office response:

As per section 4-15(1) of the Income Tax Assessment Act 1997, if a person's deductions equal or exceed their assessable income, then that person does not have a taxable income. So in this particular case, the correct taxable income to be passed to the Family Assistance Office is zero.

However, adjusted taxable income (ATI), the income used for determining a family tax benefit entitlement, is defined by Schedule 3 of the A New Tax System (Family Assistance) Act 1999 (FAA). In determining a person's ATI, any net rental property losses are added to their taxable income (as well as any other components that make up ATI). In the example cited, the person does not have a taxable income, so the total of the net rental property losses is the person's ATI (assuming there are no other components of ATI).

So, in essence, they accept a loss as JUST $0 (why do they not allow the negative amount?) and then ADD the loss as though it was Income? Talk about two bites at a cherry !! This is a travesty !!!


But, have I got it right? A non-working spouse owns 50% of a negative geared property. This spouse earns NOTHING per year (as a wage, or Income), but have recorded losses of (in Dunc's example) -$45,000. The ATO deems this as $0 Income (what about -$45k?) and then the ATO ADDs the negative as though it were a positive????
Say wha??? So the $0 earner is "deemed" to have earned $45k for that year? Am I anywhere near it, Coasty? THIS IS ABYSSMAL!!!!

Not only have they ignored the "negative income" ($0 Income AND a negative amount of $45k), but then they ADD BACK that $45k as though it was Income (completely ignoring the initial loss?). Sounds like double-dipping to me !!!

Has there been a petition raised on this? WHO MADE THIS LAW???

Sheesh, you wouldn't want to be a LARGE property owner then (with an $800k loss recorded as a $800k gain) - who knows where THAT may lead !!

Send me the petition - I'll sign it !!!

Regards,

 

[coastymike]

Les,

You got it mate. Unfortunately the FAO and ATO are two separate departments governed by two separate pieces of legislation.

It does disadvantage those who have structured in personal names, the wife stops working and she has losses from a rental property. In some cases could wipe out the Family Tax Benefit and Child Care Benefit. If the husband salary packages her interest component though the company pays no FBT and she won't have a loss. So the couple might get FTB and CCB. Ahh the joys of our system.

Added : Les just wanted to clarify the ATO doesn't consider your wife to have made a positive amount only the FAO (family assistance office).

 

[Les]

G'day Coasty,

just wanted to clarify the ATO doesn't consider your wife to have made a positive amount only the FAO (family assistance office).

OK, thanks for the clarification. I'd wondered why I'd never come across it before. But now I understand.

It still sucks, though !!! Is there a Family Assistance Ombudsman??

Regards,

 

[Apocalypse]

Timing of reimbursement of expenses via salary sacrifice?

Having completed all tax I am lucky that adding my share of property losses back on did not affect ftb part a, as it was int the 'base rate' zone either way...however my wife's 'share' did result in a reduction of ftb part b...

One thing that annoys me if that we were doing exactly the same thing with a parcel of shares that would be completely different, at least from the FAO's perspective...

Anyhow, one way around this is to salary sacrifice the cash expenses of the property - the net effect is still the same, tax-wise, but in the FAO's eyes it wont be seen as property losses...

What I am wondering is when these expenses should be submitted and reimbursed? Is it as they are incurred, or can it be done monthly/quarterly/etc in arrears?