If you have received your tax return for the year 2000, you will
realise that the sections we`ve been talking about for the last three
weeks are exactly the same as those in the return for 1999.
Last week I dealt with the possible tax issues that could arise where
you rent a house or flat to earn income.
Two things that we did not touch on (and which are certainly not
clearly stated in the tax return) are the tax implications of
refundable deposits (we are only interested in refundable deposits
because non-refundable deposits will generally be taxed without any
discussions) paid to you by your tenants and the interest that you
receive from those deposits that you have banked.
This refers to deposits of all kinds - you could be charging your
customers a refundable deposit for, say, hiring your tools or any
other property.
For the Receiver gross income includesS ``the total amount, in cash or
otherwise, received by or accrued to or in favour of yourself``. There
is no doubt, you have received the deposit although you will have to
refund it at a later stage.
You might attempt to argue that the money you received is actually a
reserve (and not income) in your hands to protect yourself against
possible damage to your property by the person renting it.
But the
Receiver will include these refundable deposits in your taxable
income.
A simple way to avoid being taxed on these deposits is to keep them
separate from all your transactions in that business, for instance in
some sort of a trust fund.
If you mix up those deposits with your other business receipts, the
Receiver will be of the view that they are under your full control
and will see them as part of your normal business receipts. In
addition, make it very clear in your rental agreement that you are
obliged to return the deposit if certain conditions between you and
your tenant are met.
If you conclude that these deposits are not
taxable, then you simply include them in Part 15.3 dealing with
exempt income.
The interest earned on these deposits will generally follow suit.
If you conclude that the deposits are exempt in your hands, interest
on deposits will naturally be exempt as well but you should encourage
your tenants to include this interest in their income as it accrues
to them.
The converse also applies: if you are taxed on the deposits, so will
you be taxed on the resulting interest.