SJM Accountants Pty Ltd


Budget 2019-20: The pre-election announcements that are now law
April 29, 2019, 5:31 am
Filed under: Uncategorized

The Federal Budget announced a series of measures, some of which were legislated before the election was called.

Extension and increase to the instant asset write-off

The popular instant asset write-off for small business has been extended and increased. The new laws:

  • increase the threshold below which small business entities can access an immediate deduction for depreciating assets and certain related expenditure (instant asset write-off) from $25,000 to $30,000; and
  • enables businesses with aggregated turnover of $10 million or more but less than $50 million to access instant asset write-off for depreciating assets and certain related expenditure costing less than $30,000.

Assets will need to be used or installed ready for use from Budget night until by 30 June 2020 to qualify for the higher threshold. Anything previously purchased does not qualify for the higher rate but may qualify for the $20,000 or $25,000 threshold. Similarly, anything purchased but not installed ready for use by 30 June 2020 will not qualify.

The instant asset write-off only applies to certain depreciable assets.  There are some assets, like horticultural plants, capital works (building construction costs etc.), assets leased to another party on a depreciating asset lease, etc., that don’t qualify.

For assets costing $30,000 or more

For small businesses (aggregated turnover under $10m), assets costing $30,000 or more can be allocated to a pool and depreciated at a rate of 15% in the first year and 30% for each year thereafter. If the closing balance of the pool, adjusted for current year depreciation deductions (i.e., these are added back), is less than $30,000 at the end of the income year, then the remaining pool balance can be written off as well.

The ‘lock out’ laws for the simplified depreciation rules (these prevent small businesses from re-entering the simplified depreciation regime for five years if they opt-out) will continue to be suspended until 30 June 2020.

Pooling is not available for medium sized businesses which means that the normal depreciation rules based on the effective life of the asset will apply to assets that don’t qualify for an immediate deduction.

The amendments apply from 7.30 pm legal time in the Australian Capital Territory on 2 April 2019 until 30 June 2020

One-off energy assistance payments

A one-off energy assistance payment of $75 for singles and $62.50 for each eligible member of a couple, will be made to predominantly pension and social welfare recipients who were residing in Australia on 2 April 2019.  The payments are expected to be completed by 30 June 2019.

Medicare levy and surcharge income threshold increase

The Medicare levy low income thresholds for singles, families, and seniors and pensioners will increase from the 2018-19 income year, meaning more people will be excluded from paying the levy.

North QLD flood recovery

Grants are treated as non-assessable non-exempt income if they:

  • are Category C or D measure disaster recovery grants paid to small businesses, primary producers or non-profit organisations; and
  • relate to flooding that commenced in Australia in the period between 25 January 2019 and 28 February 2019 (inclusive).

As a result, Category C and D measure grants to small businesses, primary producers and non-profit organisations affected by floods in North Queensland in late January 2019 and that continued into February 2019 are non-assessable non-exempt income.

And, grants to primary producers are non-assessable non-exempt income if the grants are for repairing or replacing farm infrastructure, restocking or replanting, and they are provided for the purposes of an agreement between the Commonwealth and a State or Territory to assist primary producers affected by the flooding.

As a result, such grants to primary producers in North Queensland affected by floods in late January 2019 that continued into February 2019 are non-assessable non-exempt income.

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.



A Labor Government on Tax & Super
April 29, 2019, 5:30 am
Filed under: Uncategorized

Tax on investment property

In general, taxpayers are able to deduct from their assessible income any expenses they incur generating or producing that income. An investment is negatively geared when the cost of owning the asset is more than the return. Negative gearing is not limited to property but can apply to other assets such as shares. In 2016-17, Australians claimed $47.5 billion in rental deductions against gross rental income of around $44.1 billion.

A number of capital gains tax (CGT) exemptions potentially apply to investment property. For Australian resident individuals, a 50% CGT discount applies to net capital gains made on investments held for longer than 12 months.

In addition, a taxpayer’s main residence is exempt from CGT. As part of this exemption, a taxpayer can be absent from their main residence for up to 6 years and still claim the property as their main residence (assuming they do not treat any other property as their main residence). So, the property can be used as an investment property for 6 years but then sold as the taxpayer’s main residence.

Labor’s plan seeks to:

  • Limit negative gearing to new housing from 1 January 2020. All investments made prior to this date will not be affected by the changes and will be fully grandfathered. The ALP states that the grandfathering element of the policy applies to property and assets purchased prior to the start date of the policy. “This means, for example, that if you own a property prior to 1 January 2020, you are able to negatively gear it after that date. The changes to the CGT discount will not apply to superannuation funds or to the 50 per cent active asset reduction concession that applies to small businesses.”
  • Halve the capital gains tax discount for all assets purchased after 1 January 2020. This will reduce the CGT discount for assets held longer than 12 months from 50% to 25%. Once again, all investments made prior to the 1 January 2020 will be fully grandfathered.

There is no policy statement from the ALP on the main residence exemption.  The Morison Government had introduced legislation to remove access to the main residence CGT exemption for non-resident taxpayers, but this Bill stalled in the Senate. Chris Bowen told the Australian Financial Review that it will be up to the ALP to work through outstanding tax measures and “iron out any unintended consequences” including the impact on expats and retrospectivity.

More information

 

Dividend imputation and the impact on self-funded retirees

One of the more controversial measures announced by the ALP is the reforms to the dividend imputation credit system to remove refundable franking credits from shares. The measure, as announced, would apply to individuals and superannuation funds, and exclude Australian Government pension and allowance recipients, and tax-exempt bodies such as charities and universities. SMSFs with at least one pensioner or allowance recipient before 28 March 2018 will also be exempt from the changes. The policy is intended to apply from 1 July 2019.

How does the system currently work?

A dividend is a shareholder’s share of a company’s earnings (profits). When a dividend is paid from an Australian company’s after-tax profits, these are known as franked dividends and include a franking credit (imputation credit), which represents the amount of tax already paid by the company on the underlying profits that are being paid out in the form of a dividend.

An Australian resident shareholder pays tax on dividends they receive (as dividends are treated as income). If the dividend received is a franked dividend, the shareholder includes the franking credits in their income (i.e., a gross-up occurs) but they can then use the franking credit attached to the dividend to reduce their tax liability. If the credit exceeds their tax liability for the year then they receive a cash refund for the excess amount.

For example, an SMSF owns shares in a company. The company pays the SMSF a fully franked dividend of $7,000. The dividend statement says there is a franking credit of $3,000. The $3,000 represents the tax the company has already paid on its profits. This means the profit, before company tax was subtracted, would have been $10,000 ($7,000 + $3,000). The SMSF must declare $10,000 worth of income, and will receive the $3,000 as an offset.

The dividend imputation system was introduced in 1987 by the Hawke/Keating Government to remove the investment bias against shares which taxed interest income once but dividend income twice (once at the company level on profits and the second time at the taxpayer level on income). In 2001, the Howard Government amended the rules to enable franking credits to be paid as a cash refund where the taxpayer paid less tax than the company tax rate. In the absence of refundability, the taxpayer pays tax up to the company tax rate and any surplus franking credit is wasted.

The sensitivity of the issue

The sensitivity of this issue is how the dividend imputation system interacts with the way superannuation is taxed. Currently, income an SMSF earns from assets held to support retirement phase income streams (i.e., a pension), such as dividends from shares, is tax-free. That is, a self-funded retiree in some circumstances pays no tax on the income they earn from dividends. If they pay no tax, then any franking credits are paid as a cash refund.

If the ALP policy comes to fruition, these self-funded retirees lose this cash payment unless they are also Australian Government pension and allowance recipients. The policy effectively unwinds the Howard reforms and returns the imputation system to its original Hawke/Keating design.

Who will be impacted by the change?

Based on information from Treasury, 85% of the value of franking credit refunds go to individuals with a taxable income below $87,000. That is, 97% of taxpayers receiving refunds have a taxable income below $87,000. And, more than half of those receiving a franking credit refund have a taxable income below the tax-free threshold of $18,200. Around 40% of SMSFs receive a franking credit refund.

Around 1.1 million individuals received a franking credit refund in 2014-15 with more than half of these over the age of 65. And, more than two thirds of refunds to SMSFs are to those whose fund balance per member is greater than $1 million. However, this figure is likely to be diminished by the 1 July 2017 reforms that imposed a $1.6m cap on retirement phase superannuation accounts and tax earnings on accumulation accounts.

The Parliamentary Budget Office has also outlined what behavioural changes they expect to see in the market as a result of making franking credits non-refundable. These include:

  • Individuals – shifting from shares to alternative investment arrangements (including to investments within superannuation), and couples shifting the ownership of shares from the lower income earner to the higher income earner such that the higher income earner can utilise the franking credits as a non‐refundable tax offset.
  • Superannuation funds – rolling assets from a fund with negative net tax to a fund with positive net tax, changing funds’ asset portfolio allocations, or changing the membership structure of the fund, in order to maximise the utilisation of franking credits.
  • Companies – changing the amount of dividends distributed (and profits withheld) or the level of dividend franking due to the decrease in the value of franking credits for some shareholders.

The most significant behavioural change is expected to be from SMSF trustees: “The assumed behavioural response for SMSFs in 2019‐20 is equivalent to these funds, in aggregate, moving around a quarter of the value of their listed Australian shares into APRA‐regulated funds that are in a net tax‐paying position.” 

The alternative, of course, is for SMSFs to change their composition of Australian shares to reduce their holding. The Parliamentary Budget Office also notes that one potential outcome is that SMSFs will increase the number of taxpaying members. “For instance, a couple with an SMSF in the pension phase could invite two additional working‐aged children into their fund, allowing them to use their excess franking credits to offset the contributions and earnings tax payable on the assets owned by their children.”

More information

Minimum 30% tax on discretionary trust distributions

There are around more than 690,500 discretionary trusts, also known as family trusts, in Australia. Discretionary trusts are popular as the trustee has the discretion on how to pay the income or capital of the trust to the beneficiaries – beneficiaries do not have an interest in the trust. Income can be apportioned by the trust to the beneficiaries on a discretionary basis, for example, to beneficiaries on a lower income tax bracket. As a result, discretionary trusts are often used to protect assets within family groups, manage succession, and to distribute income tax effectively within that group.

From 1 July 1979, laws were introduced to ensure that distributions to minors were taxed at the top marginal tax rate to prevent trusts distributing funds to children at minimum tax rates.

The proposed reforms

The ALP reforms address the ability for distributions to be channelled to beneficiaries in low income tax brackets. Instead, a new standard minimum rate of tax for discretionary trust distributions to mature beneficiaries (aged over 18) of 30% will apply.

More information

Capping deductions for managing tax affairs

The ALP intends to cap the tax deduction available for the cost of managing tax affairs to $3,000. While clients can spend more than this, the portion above $3,000 will not be tax deductible.

No further details are available at present.

Tightening of superannuation framework

Mr Shorten told a media conference in April that the ALP had “no plans to increase taxes on superannuation.” However, ALP policy does make changes in a series of areas. These include:

  • Non-concessional contributions – the non-concessional contributions cap, the amount you can contribute to super from your after-tax income, is $100,000, will be reduced to $75,000.
  • Division 293 tax – High income earners pay an additional 15% tax on their concessional taxed contributions to superannuation. Currently, the threshold at which this tax applies is $250,000. The ALP intends to reduce this threshold to $200,000.
  • Remove the ability to catch up superannuation concessional contributions – Individuals with a total superannuation balance of less than $500,000 just before the start of the financial year are able to make additional concessional contributions in that financial year by using their unused concessional contribution cap amounts carried forward from the previous five years. This measure can only be applied to unused cap amounts from the 2018-19 year. The ALP intends to remove the ability to unused cap amounts.
  • Remove measures expanding tax deductibility for super contributions – Under the super reform measures, the ‘substantially self-employed test’ (‘10% test’) was removed. This enabled taxpayers, regardless of their work status (but otherwise eligible to contribute) to claim a tax deduction on their personal super contributions. The ALP intend to unwind these reforms.

Other tax and business policies

  • Deductions claimed by multi-nationals
    • “close a loophole that allows companies to deduct bad debt from related party financing arrangements.”
    • Make firms undertaking business in tax havens disclose that to shareholders and make significant tenderers disclose their country of tax domicile.
    • Automatically deny deductions from companies for travel to and from tax havens.
    • Prevent country shopping by requiring all individual Australian taxpayers to notify and declare to the ATO if they have residency or citizenship of any other jurisdiction and the name of that jurisdiction.
    • Incentivise and protect whistleblowers – Provide protection for whistleblowers who report on entities evading tax to the ATO and, where whistleblowers’ information results in more tax being paid, allow them to collect a share of the tax penalty (a reward of up to $250,000).
    • Introduce a publicly accessible registry of the beneficial ownership of Australian listed companies and trusts, allowing the public to find out who really owns our firms.
    • Introduce mandatory shareholder reporting of tax haven exposure, requiring companies to disclose to shareholders as a ‘Material Tax Risk’ if the company is doing business in a tax haven.
    • Require the ATO’s annual report to provide information on the number and size of tax settlements.
  • Reverse tax cuts for higher income brackets – Removes tax reduction for those above $126,000.
  • End the Medicare Freeze – bringing forward the scheduled end to the indexation freeze on Medicare to 1 July 2019. The freeze is currently in place until 1 July 2020.
  • Restore penalty rates and introduce a living wage – legislate to reverse penalty rate decision of the Fair Work Commission within first 100 days and move the minimum wage to a living wage (following consultation and recommendations from the Fair Work Commission.) The first living wage case to take place as part of the Annual Wage Review with wage increases phased in from 1 July. Plus, ensure labour hire companies provide workers with the same pay and conditions as those employed directly.

Cap private health insurance premiums – cap premiums at 2% for the first two years of an ALP

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.



Single Touch Payroll: what you need to know
March 27, 2018, 11:08 pm
Filed under: Uncategorized

Single Touch Payroll (STP) – the direct reporting of salary and wages, PAYG withholding and superannuation contribution information to the ATO – comes into effect from 1 July 2018.

For employers

Employers with 20 or more employees at 1 April 2018 must use standard business reporting-enabled software from 1 July 2018. The head count for ‘20 employees’ includes full-time, part-time, casuals (who worked any time during March), employees based overseas, or on paid or unpaid leave. Directors and independent contractors are excluded from the count. For businesses that are part of a wholly owned group, the total number of employees across the group is used (i.e., if the total number of employees employed by all member companies of the wholly-owned group is 20 or more, all group members must use STP).

 

STP is currently voluntary for businesses with less than 20 employees although proposed reforms seek to extend the reporting system to all employers by 1 July 2019, regardless of the number of employees.

What must be reported

STP requires PAYG withholding and superannuation contribution details to be reported to the ATO as payments are made to employees or superannuation funds.

 

When it comes to PAYG withholding, employers will report details of salary and wages paid to employees as well as the PAYG withholding amount at the time the payment is made to the employee. Employers have the option of paying the PAYG withholding liability at the same time, although this is not compulsory.

 

Payments that must be reported include:

  • Salary & wages
  • Director remuneration
  • Return to work payments to individuals
  • Employment termination payments (ETPs) – not compulsory if the employee has died
  • Unused leave payments
  • Parental leave pay
  • Payments to office holders
  • Payments to religious practitioners
  • Superannuation contributions (at the time the payment is made to the fund).

 

The Government intends to extend STP to salary sacrificed amounts in the near future although these reforms are not legislated.

An end to payment summaries?

While not compulsory, employers can choose to include reportable employer superannuation contributions and reportable fringe benefit amounts. These payments are reported either at the time the payment is made or through an update event. If these payments are included, the employer will not need to provide payment summaries as employees are able to access their live data through myGov.

 

If your business does not report through STP or does not finalise its reporting, payment summaries are still required.

New employees

If your business utilises STP, when a new employee joins they have the option to electronically complete a pre-filled Tax file number declaration and Superannuation standard choice form online instead of completing the form for you to lodge with the ATO.

Exemptions

Some exemptions exist for STP for rural employers that do not have access to a reliable internet connection, and employers that employed a group of people during the year for a short period of time, such as seasonal workers.

For employees

While the Government and ATO are promoting STP as a way to improve the efficiency of payroll processes and meeting reporting obligations (i.e., cutting down on duplication of work etc.,), there is also a clear benefit to the ATO and Government in implementing this system. One advantage is that the ATO will have early warning of businesses that are finding it difficult or simply failing to meet their PAYG withholding and superannuation guarantee obligations. This should have a flow on benefit to employees who might otherwise miss out on benefits to which they are entitled.

 

If you are registered with myGov and your employer reports using STP, you will be able to see your year-to-date tax and super information online.

 

Should you use the new super measures when you buy/sell your home?

From 1 July 2018, new laws come into effect allowing first home buyers to use their super to help buy a home, and at the other end of the spectrum, downsizers to contribute proceeds from the sale of their home to super without many of the normal restrictions.

The pros and cons of using your super to save for your first home

The First Home Super Saver Scheme (FHSS) enables first-home buyers to save for a deposit inside their superannuation account, attracting the tax incentives and some of the earnings benefits of superannuation.

 

Home savers can make voluntary concessional contributions (for example by salary sacrificing) or non-concessional contributions (voluntary after-tax contributions) of $15,000 a year within existing caps, up to a total of $30,000. You have been able to make contributions since 1 July 2017 (although the legislation did not pass Parliament until 7 December 2017), but withdrawals cannot be made until 1 July 2018. Note that mandated employer contributions cannot be withdrawn under this scheme, it is only additional voluntary contributions made from 1 July 2017 that can be withdrawn.

 

If you have a Self-Managed Superannuation Fund (SMSF), you will need to ensure that the trust deed allows for withdrawals under the FHSS to be made. The SMSF must also identify these contributions and report these to the ATO.

 

When you are ready to buy a house, you can withdraw the contributions along with any deemed earnings (90-day Bank Accepted Bill rate with an uplift factor of 3%), to help fund a deposit on your first home. To extract the money from super, home savers apply to the Commissioner of Taxation for a first home super saver determination. The Commissioner then determines the maximum amount that can be released from the fund. When the amount is released from super, it is taxed at your marginal tax rate less a 30% offset (non-concessional contributions are not taxed).

 

The upside of the FHSS is the tax benefit. For example, if you earn $70,000 a year and make salary sacrifice contributions of $10,000 per year, after 3 years of saving, approximately $25,892 will be available for a deposit under the scheme – $6,210 more than if the saving had occurred in a standard deposit account (you can estimate the impact of the scheme on you using the estimator).

 

Another upside is that the scheme applies to individuals. So, if you are a couple, you both could utilise the scheme for a deposit on the same home – effectively increasing your cap to a maximum of $60,000.

 

If you don’t end up entering into a contract to purchase or construct a home within 12 months of withdrawing the deposit from superannuation, you can recontribute the amount to super, or pay an additional tax to unwind the concessional tax treatment that applied on the release of the money.

 

Home savers also need to move into the property as soon as practicable and occupy it for at least 6 of the first 12 months that it is practicable to do so.

 

The home saver scheme can only be used once by you.

 

The cons of this scheme are mostly administrative. On the investment side of things, using the above example, $6,210 over three years is an upside but may not be a huge upside compared to other investment returns given the administrative requirements of the scheme. But, for many, it may be the best offer available.

Who can use the first home saver scheme?

You must:

  • Be 18 years of age or older (to make a withdrawal under the scheme – you can contribute before the age of 18);
  • Never had held taxable Australian real property (this includes residential, investment, and commercial property assets)

The pros and cons of contributing proceeds from the sale of your home to super

From 1 July 2018, if you are over 65, have held your home for 10 years or more and are looking to sell, you might be able to contribute some of the proceeds of the sale of your home to superannuation.

 

The benefit of this measure is that you can contribute a lump sum of up to $300,000 per person to superannuation without being restricted by the existing work test requirements, non-concessional contribution caps or total superannuation balance rules. It’s a way of building your superannuation quickly and taking advantage of superannuation’s concessional tax rates. The $1.6 million transfer balance cap will continue to apply so your pension interests cannot exceed this amount. And, the Age Pension means test will continue to apply. If you are considering using this initiative, it will be important to get advice to ensure that you are eligible to use this measure and the contribution does not adversely affect your overall financial position.

 

The downsizer initiative applies to the sale of any dwelling in Australia – other than a caravan, houseboat or mobile home – that you or your spouse have held continuously for at least 10 years. Over those 10 years, the dwelling had to have been your main residence for at least part of the time. As long as you qualify for at least a partial main residence exemption under the CGT rules (or you would qualify for the exemption if a capital gain arose) you may be able to access the downsizer concession. This means that you do not actually need to have lived in the property for the full 10-year period.

 

The rules also take into account changes of ownership between two spouses over the 10-year period prior to the sale. This could assist in situations where a spouse who owned the property has died and their interest is inherited by their surviving spouse. The surviving spouse can count the ownership period of their deceased spouse in determining whether the 10-year ownership period test is satisfied. This rule could also assist in situations where assets have been transferred as a result of marriage or de facto relationship breakdown.

 

In general, the maximum downsizer contribution is $300,000 per contributor (so, $600,000 for a couple). The contribution needs to be made within 90 days after your home changes ownership (generally, the date of settlement) but you can apply to the Tax Commissioner to extend this period. And, the initiative only applies once – you cannot use it again for future properties.

 

If you have a SMSF, contributions made under this scheme need to be reported to the ATO. You should also check the trust deed rules around the acceptance of contributions for members over the age of 65.

 

The eligibility requirements include:

  • The contribution from the sale is made to a complying superannuation fund
  • The contribution is equal to or less than the capital proceeds from the disposal of a main residence
  • The member or their spouse had an eligible interest in the main residence before the sale
  • The member, their spouse, their former spouse, or trustee of the deceased estate held an interest in the house during the prior 10 years
  • No prior downsizer contribution has been made

 

Tax Deductions: the danger zones

A recent Parliamentary Inquiry into Tax Deductions created some fairly sensational headlines about what and how deductions are being claimed – $22 billion worth to be exact. 

 

In Australia, tax deductions are available for expenses incurred in producing assessable income. These are generally work-related deductions or investment related deductions. And, unlike some other countries, these expenses can be offset against taxable income including wages (other countries only allow deductions relating to capital income against capital gains).

 

In a recent speech, the Tax Commissioner Chris Jordan highlighted that in 2014-15, more than $22 billion was claimed for work-related expenses. “While each of the individual amounts over-claimed is relatively small, the sum and overall revenue impact for the population involved could be significant – in the vicinity of, or even higher than the large market tax gap of $2.5 billion – and that’s just for this category of deductions, work-related expenses.”

 

He went on to say that in this same period around 6.3 million people made claims for clothing expenses totalling almost $1.8 billion. “That would mean that almost half of the individual taxpayer population was required to wear a uniform or protective clothing or had some special requirements for things like sunglasses and hats.” Clearly, that’s unlikely.

 

While the ATO is doing random audits of taxpayers making claims for work related expenses, the primary problem for the Commissioner is, as he says, that the individual amounts over-claimed are relatively small. The administrative cost of a crackdown is likely to be more than what would be gained. The likely ‘solution’ then is to change what taxpayers can claim.

 

If you want to see the likely ‘hit list’ of deductions with a potentially short future, then Treasury’s submission to the Inquiry is a starting point:

Investment expenses

Investment related expenses can include management fees for an investment, account-keeping fees, insurance, land tax, depreciation, maintenance expenses, and interest on borrowings used to purchase an income-producing asset.  While expenses can be claimed for a wide array of income producing assets, property is where most of the activity is centred.

 

$41.7 billion in rental expenses were claimed in 2012-13 against $36.5 billion of rental income. Two thirds of taxpayers with rental income in this same period made a loss (totalling net rental losses of $12 billion). Negative gearing is popular. As an investment strategy, negative gearing makes sense if the expected capital gain when the property is sold exceeds the rental losses over the life of the investment. However, there is little doubt that the ability to reduce personal income tax using investment property losses is an attractive and viable strategy for high income earners.

 

The Grattan Institute’s submission to the Inquiry flags two potential scenarios. First is quarantining losses against investment income only. That is, you would lose the ability to offset investment losses against salary and wages and instead could only offset these against capital profits or gains. Or, an alternative strategy is that taxes on gains and losses could be aligned so that if you were entitled to a 50% reduction on a capital gain, you would only be entitled to an equivalent deduction for expenses.

 

When it comes to convincing voters that cutting back on deductions is a good thing, investment related deductions are generally targeted as they are not as transparent and are generally attributed to more affluent members of the community (although this is not an accurate picture as many self-funded retirees and Mum & Dad property investors will tell you).

 

With the next election just around the corner, it’s unlikely we will see a major overhaul in the very near future. The path of least resistance is to reduce the discount on capital gains available to individuals, trusts, and superannuation funds. It’s more likely however that the regulators will continue to whittle away deductions rather than making wholesale changes – as we have already seen with the recent changes impacting residential investment property – while relying on the ATO to reign in excessive claims.

Work related expenses

At $19.7 billion, work-related expenses accounted for nearly two thirds of total deductions claimed by individuals in 2012-13. The most common claims were for car expenses ($8 billion or around 40%), followed by $7 billion in ‘other expenses’ comprising home office costs and tools, equipment and other assets. Work related travel expenses counted for $2 billion, uniforms $1.6 billion, and $1.1 billion for work related self-education expenses. Unsurprisingly, if you follow the money you can see that the pattern of expense claims closely follow the ATO’s compliance focus and activities.

 

By comparison, New Zealand does not allow work related deductions (but they have a top personal tax rate of 33%). In other countries, the range of deductions that can be claimed is much narrower. In the UK for example, only certain occupations can claim work related expenses and then generally this is at a flat rate. Taxpayers have the ability to claim outside of the flat rate but only after passing stringent tests. The tests require that the item must be ‘wholly, exclusively and necessarily in the performance of an employee’s duties’ and be an expense typical for the industry. That is, the item is only deductible if it is likely to be incurred by every holder of that form of employment (it is not enough that one employee, or a subset of employees, happens to incur the expense).

 

It would be a bold and confident Government that removed the ability for many taxpayers to claim a tax refund. As with investment expenses, it is more likely that deductions will be slowly whittled away.

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.

 



Budget 2016-17
May 10, 2016, 10:53 am
Filed under: Uncategorized

Below is some of the key budget changes affecting individuals and small business.

Personal tax cuts for middle income earners
Date of effect 1 July 2016

The 32.5% personal income tax threshold will increase from $80,000 to $87,000 from 1 July 2016. The new tax rates from 1 July 2016 would be as follows:

individual tax rates

These tax rates exclude the Medicare Levy and the 2% debt tax on high-income earners over $180,000 which will come to an end on 30 June 2017.

Reducing the company tax rate to 25%
Date of effect Progressively from 2016-17

The company tax rate will be reduced to 25% over 10 years. The reduction will initially target companies with a turnover less than $10 million, then gradually increase access:

business tax cuts

Franking credits will still be calculated with reference to the amount of tax paid by the company paying the dividends.

Small business entity threshold jumps to $10m
Date of effect 1 July 2016

In a significant win for business, the small business entity turnover threshold will increase from $2 million to $10 million from 1 July 2016. The reform will give a greater number of businesses access to a range of tax concessions such:

• The lower small business corporate tax rate (27.5%);
• Simplified depreciation rules including an immediate write-off for assets costing less than $20,000 that are acquired by 30 June 2017 and depreciation pooling provisions;
• Simplified trading stock rules;
• A different method of calculating PAYG instalments;
• The option of accounting for GST on a cash basis;
• FBT exemptions (this would start from 1 April 2017); and
• A trial system of using a simpler business activity statement.

The current $2 million turnover threshold will be retained for access to the small business CGT concessions and access to the unincorporated small business tax discount will be limited to entities with turnover less than $5 million.

Lifetime cap on non-concessional contributions
Date of effect 7.30 pm (AEST) on 3 May 2016
Applies to all non-concessional contributions made on or after 1 July 2007

A lifetime $500,000 non-concessional contributions cap will be introduced from Budget night.

The current system of annual non-concessional contributions of up to $180,000 per year (or $540,000 every three years for individuals aged under 65), will be replaced with this new lifetime cap.

The lifetime cap will take into account all non-concessional contributions made on or after 1 July 2007 and will commence at 7.30 pm (AEST) on 3 May 2016. Contributions made before commencement will not result in an excess. However, excess contributions made after commencement will need to be removed or will be subject to penalty tax. The cap will be indexed to average weekly ordinary time earnings.

After-tax contributions made into defined benefit accounts and constitutionally protected funds will be included in an individual’s lifetime non-concessional cap. If a member of a defined benefit fund exceeds their lifetime cap, ongoing contributions to the defined benefit account can continue but the member will be required to remove, on an annual basis, an equivalent amount (including proxy earnings) from any accumulation account they hold. The amount that could be removed from any accumulation accounts will be limited to the amount of non-concessional contributions made into those accounts since 1 July 2007. Contributions made to a defined benefit account will not be required to be removed.

The lifetime cap is available up to age 74.

 

Concessional contributions cap reduced
Date of effect 1 July 2017

The current concessional contributions cap will reduce to $25,000 from 1 July 2017.

concessional cap reduced

From 1 July 2017, the Government will include notional (estimated) and actual employer contributions in the concessional contributions cap for members of unfunded defined benefit schemes and constitutionally protected funds. Members of these funds will have opportunities to salary sacrifice commensurate with members of accumulation funds. For individuals who were members of a funded defined benefit scheme as at 12 May 2009, the existing grandfathering arrangements will continue.

Tax Exemption on Transition to Retirement Income Stream Earnings removed
Date of effect 1 July 2017

The tax exemption on the earnings of assets supporting Transition to Retirement Income Streams will be removed from 1 July 2017. The rule that allows individuals to treat certain superannuation income stream payments as lump sums for tax purposes will also be removed.

30% tax on super for high income earners
Date of effect 1 July 2017

At present, individuals with combined income and superannuation contributions of more than $300,000 pay an additional contributions tax of 15% on concessional contributions. From 1 July 2017, this income threshold will reduce to $250,000.

The lower Division 293 income threshold will also apply to members of defined benefit schemes and constitutionally protected funds currently covered by the tax. Existing exemptions (such as State higher level office holders and Commonwealth judges) for Division 293 tax will be maintained.

Tax free super balances capped at $1.6m
Date of effect 1 July 2017

A new $1.6 million cap will apply to how much can be transferred into a retirement phase account. Earnings on amounts within the account will continue to be tax-free. Transfers in excess of this $1.6 million cap (including earnings on these excess transferred amounts) will be taxed in a similar way to the tax treatment that applies to excess non-concessional contributions.

Where an individual accumulates amounts in excess of $1.6 million, they will be able to maintain this excess amount in an accumulation phase account (where earnings will be taxed at the concessional rate of 15%).

Members already in the retirement phase with balances above $1.6 million will be required to reduce their retirement balance to $1.6 million by 1 July 2017. Excess balances for these members may be converted to superannuation accumulation phase accounts.

The amount of cap space remaining for a member seeking to make more than one transfer into a retirement phase account will be determined by apportionment.

Commensurate treatment for members of defined benefit schemes will be achieved through changes to the tax arrangements for pension amounts over $100,000 from 1 July 2017.

Tax deductions on super contributions expanded
Date of effect 1 July 2017

All individuals up to age 75 will be able to claim an income tax deduction for personal superannuation contributions from 1 July 2017. This effectively allows all individuals, regardless of their employment circumstances, to make concessional superannuation contributions up to the concessional cap – partially self employed, employees whose employers don’t offer salary sacrifice arrangements, etc.

This is a sensible move which means that it will no longer be necessary for individuals to pass a 10% test in order to be able to claim a deduction for personal superannuation contributions. Currently, an individual can only claim a deduction for personal contributions where less than 10% of their adjusted income for the year relates to employment activities. The 10% test can make it difficult for people who have started their own business to make deductible superannuation contributions where they also have part-time work.

 

 

Notes
Please note there were many other tax changes announced on budget night. If you would like to discuss your individual circumstances in more detail please contact me.
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.

 

 

 



Xero Certified
October 30, 2015, 9:05 am
Filed under: Uncategorized

This certifies that “Steven Millar” has completed and passed the Xero Certified Program

 

Xero Certificate



Capital gains & property: The top questions and answers
September 29, 2015, 6:35 am
Filed under: Uncategorized

The thought of the Australian Tax Office (ATO) sharing up to 50% of any gain you make on an investment decision is enough to strike fear into the hearts of most people.  Given Australia’s love affair with property, it is little wonder that we are often asked about the impact of capital gains tax (CGT) on property.  This month, we explore the most frequently asked questions.

In general, CGT 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.

Most questions about CGT on property are based on the main residence exemption that exempts your home (your main residence) from any CGT exposure when you sell the property.

I jointly own an investment rental property with my elderly mother.  Neither of us has ever lived in the property.  We’ve recently updated our wills.  The lawyer says that if Mum’s will gifts her half of the property to me then this ‘gift’ will not attract capital gains tax.  Is this correct?

Kind of.  Tax law tends to work on the basis that if looks like a duck and walks like a duck then it’s a duck, not whatever your legal document calls it.  Exposure to capital gains tax is a matter of fact and substance.

If you inherit your mother’s share of the property, there would generally be no tax liability until you sell the property.  What is important here is how the CGT is calculated when you ultimately sell.

When the rental property transfers to you from your mother’s estate, the tax rules determine how CGT is calculated when you eventually sell. Basically, if the property was bought on or after 20 September 1985 then when you sell the property your taxable profit will be based on the original purchase price.  That is, you will end up being taxed on the increase in value of the property since it was acquired, including the portion that accrued while your mother was still alive.

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.  For example, in your case, it is 50% owned by your mother and 50% by you but different people can own different ownership interests.  If the property is owned as joint tenants then any CGT exposure is equally shared by the owners.

I bought a house in 2000, and lived in it until 2003.  I was posted overseas with my job between 2003 and 2011.  During that time my brother lived in the house rent free – he just paid for utilities.  In 2011 to 2012, I rented the house out (no one I knew).  I moved back into the property in 2012 and have just sold the house.  Do I have to pay capital gains tax on the property?

The capital gains tax rules are more understanding about how people live their lives than other laws and in some circumstances allow you to continue to treat your home as your main residence even if you are not actually living in it.

While you are away overseas, if you leave the property vacant or let a friend or relative live in the property rent-free, assuming you do not claim any other property as your main residence, then you can continue to treat the property as your main residence for CGT purposes indefinitely.

If you rent the property out while you are away, the tax laws allow you to still claim the property as your main residence as long as the period you rent it for is not more than a total of 6 years.  This 6 year period can actually be reset by moving back into the property again.

Effectively, you can move out and move back in as many times as you like and still claim the property as your main residence as long as it is your only main residence during that time and if you are renting it out, you do not rent it out for more than a total of 6 years across the period you are claiming the property as your main residence.

During the rental period you can also claim deductions against the rent, even though the property might still be exempt from CGT during this period.

I bought a property in 2008 and expected to move in straight away, but there were tenants still in the property and their lease still had 8 months to go.  I waited for the lease to expire and then moved in. I have lived there ever since and plan to sell later this year. Can you just confirm that I would still qualify for a full CGT exemption on the sale as the property has significantly increased in value?

This is a very common situation but is probably overlooked much of the time.  Unfortunately, you would not qualify for a full exemption in this case.

The main residence rules allow you to treat a property as if it has been your main residence since settlement date as long as you actually move into the property as soon as practicable after settlement.  This is intended to cover situations where there is some delay in moving into the property due to illness or some other “reasonable cause”.  The ATO’s view is that this rule cannot apply if you are waiting for existing tenants to vacate the property.

This means that you would only qualify for a partial exemption under the main residence rules.  We will need to calculate your gross capital gain and then apportion it to reflect the period of time when it was actually your main residence (i.e., from when you actually moved in). As long as you are a resident of Australia and have owned the property for more than 12 months we can also apply the 50% CGT discount to reduce the leftover capital gain.

It will be important in this case to gather as much evidence as possible of non-deductible costs that you have paid in relation to the property such as stamp duty, legal fees, commission paid to real estate agents, interest, rates, insurance, etc.  This will help to reduce the gross capital gain that is subject to tax.

 

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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.

 

 



Why using the 20k Budget tax deduction might be the wrong decision
June 27, 2015, 6:31 am
Filed under: Uncategorized

So, your business has a turnover under $2 million and you want to know how to use the $20,000 immediate tax deduction that’s been all over the news?

Before you start spending, there are a few things you need to know.

Does your business make a profit?

Deductions are only useful to offset against tax.  If your business makes a loss then a tax deduction is of limited benefit because you’re not paying any tax.  Losses can often be carried forward into future years but you lose the benefit of the immediate deduction.

Small businesses with a turnover of $2m or below make up 97.5% of all Australian businesses.  The latest Australian Taxation Office (ATO) statistics show that well under half of these businesses paid net tax.  That means that the $20,000 instant asset write-off is useful to less than half of the Australian small businesses targeted.

So, if your business makes a loss and you start spending to take advantage of the immediate deduction, all you are likely to do is to increase the size of your losses with no corresponding offset.

Immediate deduction not yet law

The $20,000 instant asset write-off is not yet law.  The ATO only has the capacity to assess on current law not announcements.  Don’t forget that many of last year’s Budget measures have not been enacted.  While we think it is highly unlikely that the other political Parties will block this measure, there is always a small risk that things will change.  So don’t spend more than your business can afford.

Cashflow first!

Cashflow is more important than an immediate deduction.  Assuming your business qualifies for the deduction, the most important consideration is your cashflow.  If there are purchases and equipment that your business needs, that equipment has an immediate benefit to the business, and your cashflow supports the purchase, then go ahead and spend the money.  The $20,000 immediate deduction applies as many times as you like so you can use it for multiple individual purchases.

But, your business still needs to fund the purchase for a period of time until you can claim the tax deduction and then, the deduction is only a portion of the purchase price.

Let’s take the example of a small bakery.  The bakery is in a company structure and has a taxable income for 2014/2015 of $49,545.  The owner purchases a new $13,750 oven on 2 June 2015 and installs it straight away.  The cost of the oven is claimed in the bakery’s 2014/2015 tax return resulting in a tax deduction of $13,750.  So, for the $13,750 spent on the oven, $4,125 is returned as a reduction of the company’s tax liability (i.e., 30% company tax rate in the 2015 income year).  For the bakery, they need the cashflow to support the $13,750 purchase until the businesses tax return is lodged after the end of the financial year.  With the $4,125 reduction of the company’s tax liability, the business has fully funded the remaining $9,625.

From 1 July 2015, the bakery would also receive the small business company tax cut of 1.5%. If the business also had taxable income of $49,545 in the 2016 income year, the tax cut would provide a reduction of $743.

It’s important not to rely on the advice of the person you are purchasing from.  There is a lot of misinformation out there in the market right now and it’s important to know how the concessions apply to you.

Is your business eligible

To use the instant asset write-off, your business needs to be eligible.  The first test is that you have to be a business – not just holding assets for investment purposes.

The second is the aggregated turnover of your business needs to be below $2m.  Aggregated turnover is the annual turnover of the business plus the annual turnover of any “affiliates” or “connected entities”. The aggregation rules are there to prevent businesses splitting their activities to access the concessions.  Another entity is connected with you if:

  • You control or are controlled by that entity; or
  • Both you and that entity are controlled by the same third entity.

What has changed?

In general, a deduction is available for purchases your business makes.  What has changed for small businesses under $2m turnover is the speed at which they can claim a deduction.  Before the Budget announcement, small business could immediately deduct business assets costing less than $1,000.  On Budget night, the Treasurer announced that the threshold for the immediate deduction will increase to $20,000 at 7.30pm, 12 May 2015 for small businesses with an aggregated turnover less than $2 million.  The increased threshold is intended to apply until 30 June 2017.

For small business, assets above $20,000 can be allocated to a pool and depreciated at a rate of 15% in the first year and 30% for each year thereafter.

If your business is registered for GST, the cost of the asset needs to be less $20,000 after the GST credits that can be claimed by the business have been subtracted from the purchase price.  If your business is not registered for GST, it is the GST inclusive amount.

How do I make the most of the immediate deduction?

There are a few tricks to applying the instant asset-write off:

Second hand goods are ok

It does not matter if the asset you are buying for your business is new or second hand.  So, you could still claim the deduction on say, second hand machinery you have bought.

What is not included

There are a number of assets that don’t qualify for the instant asset write off as they have their own set of rules.  These include horticultural plants, capital works (building construction costs etc.), assets leased to another party on a depreciating asset lease, etc.

Also, you need to be sure that there is a relationship between the asset purchased by the business and how the business generates income.  For example, four big screen televisions are unlikely to be deductible for a plumbing business.

Assets must be ready to use

If you use the $20,000 immediate deduction, you have to start using the asset in the financial year you purchased it (or have it installed ready for use).  This prevents business operators from stockpiling purchases and claiming tax deductions for goods they have no intention of using in the short term.

Business and personal use

Where you use an asset for mixed business and personal use, the tax deduction can only be claimed on the business percentage.  So, if you buy an $18,000 second hand car and use it 80% for business and 20% for personal use, only $14,400 of the $18,000 can be claimed.

What will change on 1 July 2015

For Business

  • Small business tax cut – 1.5% for companies and 5% tax discount for unincorporated small businesses under $2m (capped at $1,000)*
  • Employee share scheme rule changes to make the schemes more attractive particularly to start-ups (covered in our April update)*
  • ‘Fly in fly out’ and ‘drive in drive out’ (FIFO) workers will be excluded from the Zone Tax Offset (ZTO) where their normal residence is not within a ‘zone’*
  • Start-ups able to immediately deduct a range of professional expenses required to start up a business – such as professional, legal and accounting advice.*
  • The way work related deductions for car expenses are calculated will change. The ‘12% of original value method’ and the ‘one‑third of actual expenses method’ will be removed. The ‘cents per kilometre method’ will be modernised, replacing the three current engine size rates with one rate set at 66 cents per kilometre to apply for all cars.

Superannuation

  • The terminally ill will be able to access super earlier*
  • Employers with 20 employees or more must use SuperStream for employee contributions.

Individuals

  • Changes to family tax benefits – income test changes, add on child payment removed, and changes to large family supplement.

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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.




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