Welcome to our December newsletter where we will be covering cryptocurrencies and changes to vacant land deductions for ‘Mum & dad’ property developers.
If you have any questions about our newsletter or anything to do with your taxation affairs, we’re here to help and would love to hear from you.
Ben, Emmanuel and Leo
Vacant land deduction changes hit Mum & Dad property developers
Legislation that passed through Parliament last month prevents taxpayers from claiming a deduction for expenses incurred for holding vacant land. The amendments are not only retrospective but go beyond purely vacant land.
Previously, if you bought vacant land with the intent to build a rental property on it, you may have been able to claim tax deductions for expenses incurred in holding the land such as loan interest, council rates and other ongoing holding costs.
AH Jackson & Co Partner Ben Odgers said the new laws, aimed predominantly at Mum & Dads prevent these deductions from being claimed.
“Since the new laws apply retrospectively to losses or outgoings incurred on or after 1 July 2019 regardless of whether the land was first held prior to this date, and with no grandfathering in place, the amendments will not only impact those intending to develop vacant land but those who have already acquired land to develop”, Ben said
This is the same target as previous tax changes that denied travel claims to visit residential rental properties and depreciation claims on plant and equipment in some residential rental properties.
The changes however, go beyond purely vacant land for residential purposes. Deductions could also be denied for land with a building on it, if that building is not ‘substantial’. The only problem is, the legislation does not clearly define what ‘substantial’ means. The Bill suggests that a silo or shearing shed would be substantial but a residential garage for example, would not meet the test.
If the new measures prevent holding costs from being claimed as a deduction, then they will generally be added to the cost base of the asset for capital gains tax (CGT) purposes. This means that they can potentially reduce any capital gain made when you dispose of the property in the future. However, holding costs for CGT assets acquired before 21 August 1991 cannot be added to the cost base and these costs cannot increase or create a capital loss on sale of a property.
“On the positive side, vacant land leased to third parties under an arm’s-length arrangement may continue to be eligible for deductions for holding costs after 1 July 2019 if the land is used in a business activity”, Ben said.
“Also, land used in a primary production business will generally be excluded from the new rules. However, deductions could still potentially be lost (at least to some extent) if there are residential premises on the land or that are being constructed on the land”.
“The amendments do not apply if you (or certain related parties) carry on a business on the land or where the land is owned by companies, superannuation funds (other than SMSFs), managed investment trusts or certain public trusts”.
The rise of cryptocurrencies have grown in popularity with Bitcoin trading just under US$7,400 – up from just US$1,000 at the beginning of 2017 which is why a number of rules and regulations have been introduced.
Cryptocurrencies have been with us for a while now and there are a number of rules and regulations that can impact you if you trade or invest in them.
If I hold cryptocurrencies, do I have to pay tax?
The first consideration on taxing cryptocurrencies is to determine if you are holding the investment in the cryptocurrency on capital account, which allows Capital Gains Tax (CGT) concessions or if you are holding it for a profit making intention which tends to be on revenue account and subject to ordinary income tax.
If you hold cryptocurrency for your own personal use and you paid $10,000 or less to acquire the digital currency, then there is generally no tax impact when you dispose of the currency. However, if the cryptocurrency is not held for your personal use and enjoyment then there are some tax issues that can arise.
If the cryptocurrency is held as an investment (i.e., not for personal use and enjoyment) or the cost is more than $10,000, then capital gains tax (CGT) might apply when you sell or exchange the currency. At the time of writing, the price of Bitcoin was just under US$7,400 – up from just under US$1,000 at the beginning of 2017 (and just over $13 at the start of 2013). The taxing point for CGT purposes is normally when a contract is entered into. If there is no contract (which is often the case with digital currencies) the taxing point is when ownership changes.
The line between personal use and investment can be very thin. It could be difficult to argue that you hold cryptocurrency for personal use if you don’t use it regularly to purchase goods and services and you make a large gain from holding and trading it.
What are the tax implications if my business uses cryptocurrencies?
If your business accepts cryptocurrency as payment for goods or services, these payments are treated in the same way as any other. That is, if your business is registered for GST, the price paid by the person paying in the digital currency should include GST. Likewise, if you purchase goods or services for use in your business then you should generally be able to claim GST credits on the transaction in your activity statement, even if you used digital currency to make the purchase.
If you are in the business of trading cryptocurrencies and your business is registered for GST, you charge GST on the exchange of the currency and claim the GST credits in your activity statement. The new legislation does not prevent GST from applying to the supply of cryptocurrencies in exchange for a payment of money or digital currency.
Can your SMSF invest in cryptocurrencies?
Arguably, an SMSF can invest in cryptocurrencies but there are several factors to take into account before investing.
AH Jackson and Co Partner Leo Manicaros said Cryptocurrencies are a high-risk product as they are blockchain driven and unregulated.
“While there have been numerous stories in the media about massive gains made on the currency by early investors, the price fluctuates, cryptocurrencies face new competitors, and hard forks occur—where the blockchain is split and forms a permanent divergence from the original. Bitcoin, for example, has broken into Bitcoin, Bitcoin Cash and now Bitcoin Gold. The danger is that you may end up on the wrong fork. There is also the danger of hackers breaching your fund’s digital wallet and stealing your investment”, Leo said.
Trustees of the fund need to ensure that any investment in cryptocurrency is in line with the investment strategy of the fund, the Trust Deed allows for it at the time the investment is made, and it is an appropriate investment. In particular, the sole purpose test in the Superannuation Industry (Supervision) Act 1993 requires that the fund is maintained for the sole purpose of providing retirement benefits to your members, or to their dependants if a member dies before retirement. Trustees need to ensure that the risk associated to these currencies is in the best interests of the fund. A minute documenting the decision to invest in the cryptocurrency would be beneficial.
For tax purposes, gains and losses in the fund are treated in the same way as other assets in the fund. That is, CGT may apply to any gains made on the sale or exchange of the currency.
If your fund invests in cryptocurrency, there are a few practical issues. Your SMSF auditor needs to confirm the ownership, existence, and value of the cryptocurrency. As a result, the digital wallet for your currency should be in the name of your fund or the corporate trustee. You need to ensure that your personal assets, and the assets of your fund, are kept separate at all times. Once money is deposited into your fund, it may not simply be a case of being able to withdraw these amounts, and they may be stuck in the fund until a condition of release is met, which usually means attaining retirement age. Additionally, you need to be able to trace your transactions to identify trades, the value of the trade, and the time and date they occurred.
For advice on the taxation implications of investing or using cryptocurrencies, contact your partner at AH Jackson & Co.