Blogs by Stewart, Tracy & Mylon

SMSF Non Arm’s Length Income

WHAT THE TAX?!! 

SMSF NALI rules to be strengthened

Legislation has been tabled into parliament which will strengthen the rules in which self-managed superannuation funds (SMSF) are being taxed for non-arm's length income (NALI) purposes.

In particular, the amendments to the current NALI provisions make it clearer that schemes as a whole are included in the Act. This includes schemes from both an income and expenditure perspective. If passed, the legislation is due to be applicable for the 2018/19 income year, and will include schemes that were entered into before 1 July 2018.

Current NALI rules

Currently, ITAA 1997 s 295-550 states that NALI applies if:

·         it is derived from a scheme where the parties involved in the transaction are not dealing with each other at arm's length

·         the amount received by the SMSF is more than what could have been earned if the parties were dealing at arm's length.

Where this section is clear in situations of overpaid income amounts into an SMSF, it creates a practical ambiguity with instances of underpaid expenses from the SMSF. In particular, situations may exist when an SMSF holds commercial property assets leased to a related party.

Currently, there are no legislative rules surrounding the in-house asset treatment for related party commercial properties under a limited recourse borrowing arrangement (LRBA). The ATO has previously released guidance surrounding "safe harbour" terms of an arm's length LRBA. However, this is the Commissioner's interpretation of arm's length and is not supported by legislative or judicial concurrence.

Also, an SMSF auditor cannot bring any NALI issues to the regulator due to wordings around SIS Act s 109. Specifically, s 109, which is a reportable contravention, relates only to the investment transaction, or whether the trustee was "required to deal" with another party during the financial year. Therefore, it is arguable that arrangements which are not on "safe harbour" terms are not a SIS breach. Only s 82 may be a breach if the under-reported interest (or accrued liability) is greater than 5% of the total value of assets.

Alternatively, an auditor could qualify the financial audit in the instance where the "Provision for Income Tax" is materially misstated. However, this qualification is also based on whether there was a specific breach of NALI rules. At any rate a financial audit qualification is not a reportable breach, either via contravention report or by the SMSF annual return.

Proposed strengthening of rules

The above pitfalls relating to NALI are proposed to be strengthened by specifically including a provision for NALI where expenses of the fund are understated. Also, NALI will exist where the fund does not incur an expense at all when it should have under normal circumstances.

Risk mitigation steps

Any SMSF currently operating outside the "safe harbour" guidelines based on their arguable position should be advised that new legislation is pending. If the proposed legislation passes through the parliamentary process, it is advised that any non-arm's length dealings are re-worked to be compliant with the Act.

SMSF internal arrangements

Despite the legislation, there are specific carve-outs where the new NALI rules will not apply in situations where SMSF "reduced expense" arrangements are purely internal. A couple of examples of this are listed in the explanatory memorandum are where an SMSF trustee:

·         undertakes bookkeeping activities for the SMSF in lieu of engaging a licensed bookkeeper

·         provides property management services for the SMSF in lieu of contracting a real estate agent.

 Information sourced using CCH iknow

 


 

2018 tax planning opportunities for small business

WHAT THE TAX?!! 
2018 tax planning for small businesses

As 30 June 2018 is fast approaching, we would like to advise you of some key tax planning opportunities that your business may be in a position to take advantage of before the end of the financial year.

Extension of instant asset write-off

It was announced, and expected to become law, that the instant asset write-off for small business will be extended 12 months to 30 June 2019. Entities with an aggregated annual turnover less than $10m will be able to immediately write-off an asset costing less than $20,000.

The change in the end date of 12 months reduces a potential cash-flow issue for small businesses.

Company tax cuts

Companies with annual aggregated turnover between $25m to $50m will have a reduced company tax rate of 27.5% from 1 July 2018. The change in tax rate will only apply to base rate entities.

Single touch payroll

Entities with 20 or more employees are required to report the following information to the ATO from 1 July 2018:

             • withholding amounts and associated withholding payments, on or before the day by which the amount is required to be withheld

             • salary or wages and ordinary time earnings information on or before the day on which the amount is paid, and

             • superannuation contribution information on or before the day on which the contribution is paid.

For the first 12 months, reporting entities will not be subject to administrative penalties, unless first notified by the ATO.

Division 7A

Although only due to commence from 1 July 2019, a change to Division 7A rules has been proposed where unpaid present entitlements will be included as a deemed dividend.

This announcement is perhaps part of a bigger regime of changes that may become law. The extension of the Division 7A regime was announced in the 2016 Federal Budget, as well as in the Board of Taxation review into Division 7A.

This may be the best opportunity to put systems in place to ensure a favourable position for Division 7A loan holders.

Trust distributions

Trust tax planning should be undertaken as soon as possible. The resolution appointing or distributing income to beneficiaries needs to be made on or before 30 June 2018, or earlier if required by the trust deed.

Capital gains

Capital losses realised before year's end can be used to offset capital gains of that year.

Deferral of income

Subject to cash-flow considerations and anti-avoidance rules, income could be deferred to the following year, particularly if:

             • income in the following year is likely to be lower, or

             • tax rates for the following year are expected to be lower.

Note: For cash businesses - deferral of income can be risky, especially when the deferral puts them outside the ATO small business benchmarks.

Prepayments

Subject to cash-flow considerations, deductible purchases could be made by year's end in order to accelerate deductions. This applies particularly if the income in the following year is expected to be lower than in the current year.

Trading stock

For obsolete stock, or in other special circumstances, a special lower valuation could be adopted. Also, no adjustment for closing stock is necessary when a reasonable estimate of closing stock is within $5,000 of opening stock.

Bad debts

A properly authorised resolution is required when writing off a bad debt and claiming a tax deduction. A GST adjustment may also be required on the original invoice.

Directors' fees

To claim a current year deduction for directors' fees, the company should have definitively committed itself to the payment, ie by passing a properly authorised resolution.

Superannuation

For the quarter ending 30 June 2018, employer superannuation contributions must be made before 30 June for a deduction to be available in the 2017/18 year.

For family businesses, it is important that annual caps for concessional and non-concessional superannuation contributions are not exceeded.

 Information sourced using CCH iknow


2018 tax changes for small business

WHAT THE TAX?!! 
2018 tax changes for small business

As 30 June 2018 is fast approaching, we would like to advise you of some key tax changes that your business may be in a position to take advantage of before the end of the financial year.

Company tax cuts from $25m to $50m

The 2017/18 corporate tax rate will be 27.5% for companies that carry on a business and have an aggregated turnover of less than $25m. This turnover threshold will be increased to $50m for the 2018/19 financial year.

Single touch payroll

Single touch payroll has been introduced into the Australian tax system to combat areas of taxpayer non-compliance of PAYG withholding and superannuation guarantee obligations. This new payroll system commences from 1 July 2018 and "substantial employers" are required to be compliant.

A "substantial employer" at 1 July 2018 is a business who has a headcount of 20 or more employee as at 1 April 2018.

Taxable payments reporting system for couriers and cleaners

The taxable payments reporting system for contractors will be extended to entities in the courier and cleaning industries from 1 July 2018.

Entities who engage contractors, or subcontractors, will need to provide additional reports to the ATO. This treatment has the same requirements as salary and wage employees.

GST on offshore suppliers of low value goods

The GST and customs duty exemption for imported low value goods less than $1,000 will end on 30 June 2018. From 1 July 2018, offshore suppliers of low value goods sold directly to consumers will be liable to pay GST on those supplies.

Company tax rate lower for "base rate entities" only (not yet law)

New legislation that restricts the lower company tax rate to base rate entities only is still under the parliamentary process. Pending approval, from the 2017/18 income year the 27.5% tax rate will apply to companies who are considered base rate entities. A base rate entity is a company who has less than 80% of assessable income from passive sources.

ATO debts now sent to credit reporting bureaus (not yet law)

Businesses with a tax debt greater than $10,000 may have that debt reported to credit reporting bureaus from 1 July 2018 by the ATO. This may affect a business' credit rating and their ability to obtain future finance in an attempt to increase the transparency of tax debts throughout business circles.

Similar business test (not yet law)

Legislation surrounding extending the same business test for company tax losses is yet to pass the parliamentary process. A company will be allowed to claim a prior year loss against business profits as long as it satisfies the similar business test from 1 July 2015. This test replaces the same business test, which was less flexible to pass.

The Bill has been blocked by the crossbench due to be similar business test being linked with the proposal for self-assessment of effective life of intangible assets.

R&D tax incentive proposed from 1 July 2018

The R&D tax incentive will be amended for income years commencing 1 July 2018. Under the announcement, the incentive will be based on uplift of the entity's corporate tax rate in the particular income year.

Also, changes will occur to companies that have an aggregated turnover of $20m or more. The rate of the R&D tax incentive will be determined by the company's "R&D intensity percentage". The intensity percentage is the rate of R&D expenditure compared to overall expenditure for the year, where a marginal rate of offset will be applied.

Budget announcements - but not due until 1 July 2019

The recent Federal Budget has plenty of announcements which may affect small businesses. However, these following Budget announcements are not due to commence until 1 July 2019.

– Individual's fame or image

All remuneration provided for the commercial exploitation of a person's fame or image will be included in the assessable income of that individual.

– Cash receipt limit for businesses

Cash receipts for a business will be limited to under $10,000.

– Director Penalty Notice regime

DPN regime to be extended to include GST, luxury car tax and wine equalisation tax, making directors personally liable for the company's debts.

– Australian government tenders

Businesses seeking to tender for large Australian government contracts will be required to provide information on the status of their tax obligations. Under the proposed arrangements, contracts over $4m (including GST) will be affected.

 Information sourced using CCH iknow

 


2018 tax planning opportunities for individuals

WHAT THE TAX?!! 
2018 planning opportunities for individuals

As 30 June 2018 is fast approaching, we would like to advise you of some key tax planning opportunities you may want to take advantage of before the end of the financial year.

Deferral of income

Subject to cash flow considerations and anti-avoidance rules, consider deferring income to the following year, particularly if:

             • income in the following year is likely to be lower, and

             • tax rates for the following year are expected to be lower.

Capital gains

Where appropriate, consider realising capital losses by year's end so that they may be offset against realised capital gains of that year.

Donations

Donations or gifts of $2 or more to a deductible gift recipient (DGR) are tax deductible. A deduction is also allowed for gifts of publicly-listed shares that have been held for at least 12 months and which are valued at $5,000 or less.

Where spouses are on different marginal rates, consider ensuring that all deductible gifts are made by the spouse in the higher tax bracket so as to maximise the benefit of the deduction.

Prepayments

Subject to cash flow considerations, consider making deductible purchases by year's end in order to accelerate deductions. This applies particularly if the income in the following year is expected to be lower than in the current year.

In certain circumstances, an immediate deduction can be available for prepaid expenditure (eg interest on a loan relating to a rental property).

Personal super contributions

From 1 July 2017, an individual is able to make a personal deductible superannuation contribution regardless of whether they are self-employed or not. Individuals at a lower tax rate would need to make sure what contributions they can make before claiming a deduction. They can review their superannuation accounts to see their employer contributions to date.

Individuals need to be reminded that the concessional contributions cap is $25,000 for the 2018 financial year.

Additionally, individuals earning over $250,000 in taxable income need to be aware that Division 293 tax will apply to concessional superannuation contributions.

Spouse superannuation contribution rebate

A $540 tax offset is available for after-tax contributions (up to $3,000) to a complying superannuation fund on behalf of a spouse (married or de facto) where the spouse's annual taxable income is less than $37,000. A reduction of the maximum offset is available where spouse's income is between $37,000 and $40,000.

Superannuation government co-contribution

For low income earners, subject to certain conditions, the government makes a co-contribution of up to $500 if a taxpayer makes after-tax contributions of at least $1,000. The co-contribution begins to phase-out at a taxable income of $36,813, and is not available for taxable income above $51,813.

Individuals could also take advantage on increasing the amount that can be withdrawn under the First Home Super Saver Scheme. However, the co-contribution itself would not be included.

Proposed changes to HELP repayments

The MYEFO report from December 2017 announced that new HELP repayments level may exist from 1 July 2018. As a result, students with a HELP debt may need to start repaying the debt on earning $45,000. Delaying some deductions where appropriate may remove the repayment in the next financial year.

Nearing retirement

A taxpayer who is considering retiring near year end may find it worthwhile to defer discretionary income until after 30 June. In that subsequent year, their income will normally be smaller and the marginal rate may therefore be less.

When considering the timing of retirement, keep in mind the restrictions on the concessional treatment of employment termination payments that apply.

Property development and vacant land deductions denial

Using lead-time rules for non-commercial losses, as well as property development interest deductions, may only be available for this and next financial year. An announcement to remove these deductions from 1 July 2019 was announced in the Federal Budget. The proposal will also remove these interest amounts from the cost base of the asset.

Therefore, property development clients may need to act quickly to get their operations started.

Additional CGT discount available for investors

An additional CGT discount of up to 10% is now available for investors who invest in affordable housing from 1 January 2018. Conditions apply to get the additional discount, including holding the asset in affordable housing for three years.

Information sourced using CCH iknow

 


2018 tax changes for individuals

WHAT THE TAX?!! 
2018 tax changes for individuals

As 30 June 2018 is fast approaching, we have briefly summarised the important tax changes to remember when collating your tax information.

Car claims to be closely examined by ATO

As part of a broader focus on work-related expenses, the ATO will be examining large car deductions claimed under D1 for the 2017/18 income year. They are particularly concerned with taxpayers making fraudulent claims which are reimbursed by an employer.

The ATO has stated that enhanced technology and data analytics will identify claims which are unusual, with an intention to increase audit activity.

Travel deductions for rental properties not allowed

2017/18 is the first year in which deductions for travelling to a residential rental property will no longer be allowable for certain taxpayers. A deduction is not allowable for travelling to collect rent, maintain the property or complete an inspection, and extends to individuals, partnerships and trustees of a trust.

This measure will not prevent investors from engaging third parties such as real estate agents for property management services. These expenses will remain deductible.

Plant and equipment depreciation changes for rental property in effect

Deductions for depreciation of residential property fixtures will only be allowable for expenses actually outlaid by an investor, effective 1 July 2017. Plant and equipment purchased by an investor as part of a real property asset can only form part of the cost base.

Special exclusions from this may apply for off-the-plan purchases, owner builders with substantial renovations, and entities who carry on a business of letting residential rental properties.

Change for low income tax offset and LAMITO

A low and middle income tax offset (LAMITO) will be introduced from 1 July 2018. The offset will run in conjunction with the low income tax offset as a targeted reduction of income tax for Australian residents.

The LAMITO will provide an additional offset of up to $200 for individuals on a taxable income of $37,000 or less. Taxpayers up to $48,000 will get an increased LAMITO up to the maximum amount of $530.

The maximum LAMITO will be available for incomes up to $90,000, and will phase out for individuals with a taxable income of $125,333.

The LAMITO will be available for four years, ending with the 2021/22 income year. At this point, further income tax reductions will absorb the LAMITO.

New child care subsidy commencing

Families will need to be aware of the changes associated with the implementation of the new Child Care Subsidy due to be law from 1 July 2018. The new subsidy will replace the Child Care Benefit and Child Care Rebate.

The Child Care Rebate is not income tested and allows a 50% out-of-pocket rebate up to $7,500 per child. The rebate may have been reduced by the Child Care Benefit, which reduced the fee based on a family's income.

CGT main residence denial for foreign residents still in transitional rules

Individuals who are foreign tax residents will no longer have access to the CGT main residence exemption from 9 May 2017. The exemption is removed if the owner is a foreign resident for tax purposes on the date of the event. However, grandfathering rules are still in existence up to 30 June 2019, where foreign residents who held property at the original date can still access the exemption.

"Catch-up" superannuation contributions to begin next year

Individuals with a total superannuation balance of less than $500,000 will be allowed to make additional concessional contributions where they have not reached their concessional contributions cap in previous years, with effect from 1 July 2018. Unused amounts will be carried forward on a rolling basis for a period of five consecutive years from 1 July 2018.

Individuals making extra superannuation contributions would be better off this year making the maximum contribution available to them.

Downsizer contributions available from 1 July 2018

An individual who is aged 65 or over may make "downsizer contributions" from the proceeds of the sale of a dwelling that was the person's main residence, applicable to the proceeds from contracts entered into on or after 1 July 2018.

Proceeds arising from an exchange of contracts occurring before 1 July 2018 cannot be made as a downsizer contribution, even if the settlement of the contracts occurs on or after 1 July 2018.

 Information sourced using CCH iknow


SMSF 2018 planning guide

WHAT THE SUPER?!! 
SMSF Planning for 2018

The end of the financial year is approaching. There have been significant changes to superannuation in the past two years. Here are key superannuation considerations that need to be made prior to 30 June 2018. 

Pensions

Ensure the minimum pension requirements are paid. If the minimum payment is not met, the pension will cease and the fund will lose its tax exemption on earnings.

Transition to retirement pension payments need to fall within the minimum and maximum amount. This information is provided to you annually with your compliance work. As the tax exemption on investment earnings have been removed, consideration needs to be given as to whether the TRIP continues.

Concessional (Tax Deductible) Contributions

The maximum concessional contribution cap for the 2018 financial year is $25,000. This applies to all members as transitional caps have been removed.

Fund members between the age of 65 – 74 need to pass the work test in order to make member concessional contributions.

The removal of the 10% rule means that if eligible, everyone is able to claim a deduction for personal contributions

Individuals with a superannuation balance less than $500,000 will be allowed to make additional catch-up concessional contributions where they have not reached their concessional contributions cap in previous years, with effect from 1 July 2018. Amounts are carried forward on a rolling basis for a period of five consecutive years, and only unused amounts accrued from 1 July 2017 can be carried forward.

Non-Concessional (Non-tax deductible) contributions

The maximum member non-contribution is $100,000. Members can bring forward three years' worth of contributions if under the age of 65. This means that up to $300,000 can be contributed in one year.   

Members are not permitted to make non-concessional contributions if their total superannuation balance exceeds $1.6M at 30 June 2017.

Property valuations

Funds are required to value property assets at the end of each financial year. Asset valuations are a key component in preparing accurate financial reports. Depending on the situation, a valuation maybe undertaken by a registered valuer or a person without formal qualifications but who has specific experience or knowledge in a particular area.

Contributors - Emma McNaught and Tyson Arentz (Authorised representatives of the SMSF Expert)

Unpaid present entitlements

WHAT THE TAX?!! 
Unpaid present entitlements to be included in Div 7A

The government has announced in the 2018/19 Federal Budget that unpaid present entitlements (UPE) will come within the scope of Div 7A from 1 July 2019. This changes the current guidance that the ATO does not see a provision of financial accommodation where a UPE is held in a sub-trust for a private company.

Background

An "unpaid present entitlement" for the purposes of Div 7A occurs where a closely-held trust (usually a family discretionary trust) distributes income to a "bucket company". The bucket company pays tax usually at 30%, instead of the higher marginal tax rates of the individual beneficiaries.

Division 7A will apply under Subdiv EA if the trust also has a debit loan to the individual beneficiaries. As the private company will also have a debit loan to the trust, it is assumed that a provision of financial accommodation has been granted.

Also of note is when private companies do not "call" the present entitlement from the trust who allocated it to them. It was determined by the ATO on 16 December 2009 that this situation is also a provision of financial accommodation which attracts Div 7A.

Current UPE loan agreements

Under the rules allowed by the ATO from TR2010/3, a UPE can be held on sub-trust for the sole benefit to the private company. In order for Div 7A to not apply, certain provisions must be adhered to, including putting the UPE on commercial terms.

The first option granted by the ATO is for UPE's at 30 June 2010 to be put into a 7-year interest-only loan at the benchmark interest rate by 30 June 2011. Interest would be charged and payable each year, meaning that the first year of UPE's principal amounts were due to be repaid at 30 June 2018. A further option exists for the principal amount to be moved into a complying loan

Budget announcement

The announcement is clear in that the government's intention is to put unpaid present entitlements on the same footing as a loan for Div 7A purposes. Hence, any trust distribution from a closely-held trust to a private company would commence accruing interest immediately following the distribution announcement, which is usually made on 30 June each year.

What we are unsure of at this stage is how far the measures intend to go. Also of note is the announcement to include 2016 Federal Budget measures along with this announcement as it goes through parliament. One of these measures was to simplify Div 7A loan arrangements, which may include one amalgamated loan to be paid off in 10 years.

Client opportunities

Clients have an opportunity to get their affairs in order prior to commencement of 1 July 2019, the intended start date of any legislation.

This may include getting current UPE's into an interest-only loan, and making sure any UPE loans about to expire are included in a new loan agreement compliant with s 109N.

However, be warned and informed that major change to Div 7A laws may apply from 1 July 2019. This may include widening the scope of Div 7A to include pre-December 1997 loans. Also, the amalgamation of all loans to be repaid by a certain date may introduce a need to make larger repayments to companies from directors.

Further information will be provided when available.

Information sourced using CCH iknow

 


SMSF audit cycle to change

WHAT THE TAX?!! 
SMSFs to move to three-year audit cycle

An announcement from the 2018 Federal Budget states that the government intends to change the SIS regulations which require an SMSF to be audited by an approved auditor every year. 

Currently, the trustee of a superannuation entity must ensure that an approved auditor is appointed to give the trustee a report in the approved form of the operations of the entity for that year.

In addition, the trustee of a superannuation entity must provide the auditor with any document (as may be requested in writing by the auditor) that is relevant to the preparation of the report within 14 days of the request being made.

The approved form of audit report must cover various areas of superannuation law, such as the fund's compliance with areas of the SIS Act 1993. Also, a financial audit must be completed and the auditor must be satisfied that the financials represent a true and fair view of the position of the fund for the year in question.

Proposed changes

The proposed change is that a self-managed superannuation fund may be eligible to get an audit report once every three years should they meet certain criteria.

The first criteria is that they have had three consecutive income years with an unqualified audit report.

The second criteria is that the SMSF must have lodged its annual returns on time in those same three consecutive years.

Risk mitigation steps

There appears to be no change in policy surrounding the stringent record-keeping obligations of SMSF trustees imposed under the SIS Act 1993. This includes:

·         keeping accurate and accessible accounting records that explain the transactions and financial position of the fund for a minimum of five years

·         preparing an annual operating statement and an annual statement of the financial position of the fund, and keep those records of a minimum of five years

·         keeping minutes of trustee meetings and decisions, including changes to trustees for a minimum of 10 years, and

·         keeping copies of all annual returns lodged and reports given to members for a minimum of 10 years.

Also, there is a strict penalties that apply to non-lodgement of various superannuation fund reports that are not part of this announcement. That includes events-based reporting, lodgement of annual return and reporting of contributions received to the regulator.

Information sourced using CCH iknow

 


Vacant land expenses

WHAT THE TAX?!! 
Vacant land expenses no longer deductible

From 1 July 2019, a tax deduction will not be allowed for expenses associated with holding vacant land. These denied deductions will not be allowed to carry forward for a later income year. Also, the expenses will not be allowed to be included in the cost base for capital gains tax purposes. 

Current treatment

The deductibility of interest expenses under the general deduction provision in ITAA 1997 s 8-1 has been the subject of much litigation. A majority of the High Court concluded in Steele v DFCT 99 ATC 4242 that interest incurred during the construction phase of a development when no income is being derived is of a revenue (not capital) nature, and so potentially deductible. This means that an income tax deduction may be allowable for interest borrowed to construct an income-producing asset, such as a block of flats or a factory, even where the interest is paid during the construction period when no income is being derived from the project.

Also, the third element of the cost base of an asset is the costs of owning the asset, as long as the asset was acquired after 20 August 1991.

Costs of owning an asset consist of any expenditure incurred by a taxpayer to the extent to which it is incurred in connection with the continuing ownership of the asset. These costs include interest on money borrowed to acquire an asset, costs of maintaining, repairing and insuring an asset, rates and land tax, interest on money borrowed to refinance the money borrowed to acquire an asset, and interest on any money borrowed to finance capital expenditure incurred to increase an asset's value.

Proposed new treatment

The 2018 Budget announcement states that any expenses relating to vacant land are not deductible and cannot be added to the asset's cost base. This measure will apply to land held for residential or commercial purposes. However, the "carrying on a business" test will generally exclude land held for commercial development.

Under the proposal, the expenses relating to holding costs will only become deductible where:

·         a property has been constructed on the land, it has received approval to be occupied and is available for rent, or

·         the land is being used by the owner to carrying on a business, including a business of primary production.

Risk mitigation steps

This announcement shows the intention of the government to stimulate the construction of buildings in a timely manner. Also, it significantly reduces the tax incentives for "land banking", which is an investment strategy to purchase and hold land until such time as it is re-zoned for construction purposes.

For clients who are holding land in this manner, or are preparing to commence a construction project, timing is of crucial importance. As the measure is only intended to commence from 1 July 2019, a window of 13 months exists for construction to get underway and completed.

Despite these future detriments to constructing buildings for rent or sale, it should not be a complete deterrent where large gains could be made. However, adjustments to investment calculations should be factored into future decision making.

Information sourced using CCH iknow


Work test exemption

WHAT THE TAX?!! 
Work test exemption coming for recent retirees

From 1 July 2019, an exemption from the work test will apply for the first year in which an individual would be required to pass it.

Under SIS Regulation, a superannuation fund is able to accept a contribution on behalf of a member so long as the member is under 65 years of age. However, if the member is over 65 years of age, varying rules apply. 

If the member is over the age of 65, but under the age of 75, a superannuation fund may accept any contribution that is a mandated employer contribution. A mandated employer contribution would include those that are necessary to be made under superannuation guarantee rules.

However, other contributions such as non-concessional contributions can only be accepted if they are in accordance with Part 3 of SIS regulation. It states that the member must have been gainfully employed for at least 40 hours in a 30 consecutive day period in that financial year.

Proposed changes

Under the proposal, an individual over 65 will be able to make contribution in the first year that they do not meet the work test requirements.

Practically, an individual who retires with an Employment Termination Payment does not have to make a quick decision about putting the money into superannuation. They are able to wait and see what their financial situation looks like after their retirement before making any final decisions relating to superannuation.

Example

Peter is 66 years of age and during the 2019/20 financial year, he ceased working from his employer after many years' service. He received a golden handshake, as well as payments for unused leave entitlements.

After finishing employment, Peter was unsure what to do with the final payment he received, as well as the next stage of his life in general. As a result, Peter went on a holiday for a number of months. Upon return, he decided that he would sell his main residence and move from the city to a coastal town elsewhere in the state.

After paying down his debt, transaction and moving costs, Peter had a fair surplus of funds left over.It is now the 2020/21 financial year.

Downsizer contribution - Peter is able to make a downsizer contribution as he is over 65 and has met the other requirements to make the contribution. It is excluded from being a non-concessional contribution.

Non-concessional contributions - Peter is able to make a further contribution to superannuation for the balance of his excess funds. He will be able to utilise an exception to the general rule that you cannot make a non-concessional contribution after age 65. This is because in the 2020/21 financial year, it is the first year he would be ineligible to contribute due to not passing the work test.

After the dust has settled, Peter is able to have all his retirement funds in one easy to understand and review financial product, which is his wishes.

Information sourced using CCH iknow


Personal income tax cuts

WHAT THE TAX?!!
Personal income tax proposed to 2022

A seven-year personal income tax plan will be implemented in three steps, to introduce a low and middle income tax offset, to provide relief from bracket creep and to remove the 37% tax bracket.

Low and middle income tax offset

A low and middle income tax offset (LAMITO) will be introduced as a non-refundable tax offset of up to $530 per annum to resident low and middle income taxpayers from 2018/19 to 2021/22.

The LAMITO will provide a benefit of up to $200 for taxpayers with taxable income of $37,000 or less. For taxable incomes between $37,000 and $48,000, the value of the offset will increase at a rate of three cents per dollar to the maximum benefit of $530. Taxpayers with taxable incomes from $48,000 to $90,000 will be eligible for the maximum benefit of $530. For taxpayers with taxable income from $90,001 to $125,333, the offset will phase out at a rate of 1.5 cents per dollar.

This offset will be received as a lump sum on assessment after an individual lodges their tax return. It will run in addition to the existing low income tax offset.

Middle income relief from bracket creep

From 1 July 2018, the top threshold of the 32.5% tax bracket will be increased from $87,000 to $90,000.

From 1 July 2022, the low income offset will be increased from $445 to $645 in accordance with the removal of LAMITO. The increased low income offset will be phased out at a rate of 6.5 cents per dollar for incomes between $37,000 and $41,000. The remaining $385 low income offset will then be phased out at 1.5 cents per dollar for income between $41,000 and $66,667.

The change in the low income tax offset will run in conjunction with a change in the middle income brackets. The top of the 19% tax bracket will increase from $37,000 to $41,000, and the top of the 32.5% tax bracket will increase again from $90,000 to $120,000. These brackets are due to change from 1 July 2022.

Removing the 37% tax bracket

The 37% income tax bracket will be removed from 1 July 2024.

From 1 July 2024, the top threshold for the 32.5% tax bracket will increase from $120,000 to $200,000. Taxpayers will pay the top marginal tax rate of 45% for taxable incomes exceeding $200,000, and the 32.5% bracket will apply from $41,000 to $200,000.

Information sourced using CCH iknow

 


Instant asset write-off extended

WHAT THE TAX?!! 
Instant asset write-off extended

A small business entity is classified as a business with an aggregated annual turnover (the total normal income of the business and of any associated businesses) of less than $10m. A small business entity can enjoy many income tax concessions, one of which being a simplified depreciation regime. 

Under simplified depreciation rules, assets costing less than the "instant asset write-off" threshold are written off in the year they are bought and used, or installed ready-for-use.

In the 2018/19 Federal Budget, the current "instant asset write-off" threshold of $20,000 was extended. Previously due to expire on 30 June 2018, the $20,000 immediate write-off is available for another 12 months to 30 June 2019.

The instant asset write-off applies where:

                • the entire cost, excluding GST, of the asset is less than the threshold

                • trade-in amounts are ignored

                • the asset may be new or second-hand.

Also, for the instant asset write-off to apply for small business, the amount written off must be in the same proportion of the business use percentage. That is, an asset costing $18,000 which is used 50% of the time for business purposes can only be written off immediately for a total of $9,000.

Clients who were looking to utilise the immediate deduction are not pushed into a cashflow issue prior to 30 June 2018 by having the write-off extended. In particular, there is no need for a "mad rush" to get assets installed prior to 30 June this year.

Another year extension means that certain small businesses may be eligible from 1 July 2018 to write-off the entire amount in their small business depreciation pool.

The entire balance of the pool can be deducted in an income year when the balance before the calculation of depreciation is less than $20,000. The depreciation calculation comes in after adding new additions that would have cost more than $20,000 in the 2018/19 income year.

Also noted in the 2018/19 Federal Budget is that the current suspension of small business depreciation "lock-out" rules will also continue for another 12 months to 30 June 2019.

Generally, a taxpayer who stops using (or opts-out of) simplified depreciation even though they are eligible to do so must stay out of the regime for five years. These lock-out rules currently do not apply as the $20,000 instant asset write-off is in place.

Information sourced using CCH iknow


Car claims to be closely examined

WHAT THE TAX?!! 
Car claims to be closely examined by ATO in 2017/18

Work-related car expenses will be closely scrutinised by the ATO for individuals claiming in the 2017/18 income year. A recent media release has highlighted the ATO's concerns that taxpayers are either over claiming or incorrectly calculating car expenses. This concern will be expressed by additional audit resources being used for the upcoming tax lodgment season.

It is the ATO's intention to utilise improved technological enhancements along with data analytics to target unusually high claims based on similar occupational and income models.

The focus of the upcoming ATO scrutiny will be based on three "golden rules" they have identified.

                (1) The taxpayer must have spent the money themselves and was not reimbursed.

                (2) The car claim must be directly related to earning assessable income.

                (3) There must a record to prove it.

This year it is important to ensure that your clients are fully aware of their substantiation requirements when making a car expense claim.

Cents per kilometres method

A deduction is calculated at a prescribed rate and is allowable for up to 5,000 km of income-producing use of the car. The maximum cents per kilometre claim can be made even if more than 5,000 business use kilometres. Under this method, full substantiation is not required, however, the deduction must be calculated based on a reasonable estimate of income-producing kilometres.

"Log book" method

A deduction for a percentage of the total car expenses is allowed as long as odometer records are kept. The odometer records must be kept every five years, and containing details of all business trips for a period of 12 weeks. For the 2017/18 income year, a log book will only be valid if it commences from 1 July 2013.

All expenses relating to the car must be kept in order to substantiate the log book claim, with the exception of fuel and oil costs. Fuel and oil costs can be substantiated by reference to odometer records, using a reliable estimate for distance and bowser price.

Information sourced using CCH iknow


WHAT THE TAX?!! 
Accessing CGT exemption for main residence previously owned solely by spouse

A private binding ruling demonstrates that a taxpayer maybe CGT exempt when disposing their share of a property that they did not own until after they ceased living in it, if their spouse nominates that property as their main residence for the relevant period.

The basic case is that a taxpayer's main residence maybe fully exempt from CGT when they dispose of their interest under ITAA 1997 s 118-110.

In this scenario, the taxpayer's spouse purchased a dwelling, Dwelling A. The taxpayer moved into Dwelling A with the spouse. After a few years, the couple moved out to travel around Australia and rented out Dwelling A to a tenant for less than six years.

On return from travelling, the taxpayer purchased land and built another house. The spouse transferred 50% ownership interest in Dwelling A to the taxpayer. The taxpayer and the spouse subsequently sold Dwelling A.

According to the ruling, there is nothing to prevent either spouse from nominating the other's dwelling as their main residence even though they did not have an ownership interest in that dwelling.

In the present situation, because Dwelling A was the spouse's main residence at relevant times, the taxpayer is entitled to nominate Dwelling A as their main residence for that period as well. This is so notwithstanding that the taxpayer did not acquire a legal ownership interest in the property until after the taxpayer ceased living in the property.

In addition, if the taxpayer nominates Dwelling A as their main residence, the absence choice in ITAA 1997 s 118-145 will also apply, such that the taxpayer will be entitled to a full main residence exemption on their share of the eventual sale of the property.

Consideration should be given as to ownership of main residence between spouses and their entitlement to CGT exemption.

Information sourced using CCH iknow


Bitcoins and CGT

WHAT THE TAX?!!

Bitcoins and CGT exemption for personal use assets

 

The ATO considers that digital currencies, including bitcoin, are CGT assets (Taxation Determination TD 2014/26). That determination refers to the detailed description of bitcoin contained in TD 2014/25, and concludes that bitcoin holding rights amount to property. As such, a person holding bitcoin is considered to hold a CGT asset.

 

A private binding ruling demonstrates that bitcoins (or other similar cryptocurrencies) a taxpayer purchased as a hobby during the very early stages of their existence could fall within the CGT exemption for personal use assets.

 

A capital gain made from a personal use asset (a CGT asset used or kept mainly for personal use or enjoyment) is disregarded if the first element of the cost base is $10,000 or less. Any capital loss made from a personal use asset is disregarded.

 

A private binding ruling shows that a taxpayer who is not carrying on a business of trading bitcoins were holding bitcoins on capital account and that the bitcoins fell within the CGT regime.

 

The ruling said that the taxpayer purchased bitcoins informally and/or mined them personally in the very early stages of their existence as a hobby, rather than to obtain a speculative profit. Accordingly, these bitcoins could fall within the CGT exemption for personal use assets.

 

However, bitcoins mined as part of a pool would not be personal use assets because:

•        at the time of acquiring the bitcoins, the taxpayer was no longer required to support the Bitcoin network, as evidenced by the higher difficulty which led to the need to use a pool, and

•        a pool involves cooperation in order to obtain something of value, which puts the activity closer to the commercial end of the spectrum rather than the personal.

 

Similarly, bitcoins purchased through an online exchange would not be personal use assets because:

•        at this stage, the bitcoin market and ecosystem was maturing, as evidenced by the existence of exchanges where bitcoins could be readily bought and sold, and

•        it is more difficult to characterise the taxpayer's purchase was part of a hobby; the taxpayer was more likely to have a substantial aspect of seeking an exchange gain or at least storing value, as opposed to personal use or enjoyment.

 

Information sourced using CCH iknow

 

 

Budgeting and cashflow forecasting

WHAT THE TAX?!!

Is budgeting and cashflow forecasting necessary for businesses?

 

It is recommended that every business prepares an annual Budget and Cashflow Forecast.

 

Analyse previous year's performance to prepare budgets

 

When preparing a budget, you should firstly analyse the previous financial year's performance. What you need to consider is whether you propose to increase turnover during the forthcoming 12 months, whether you will employ the same number of staff or increase your staff and what other events are likely to occur in the next 12 months.

 

Detailed consideration to all aspects of the business

 

This will require you to give detailed consideration to a number of separate areas, including:

• Sales

• Production Forecasts

• Labour Productivity Budgets

• Gross Profit Percentages that you believe are achievable Investments in Stock

• Investment in Debtors

• The payment of Creditors

• Key expenses such as advertising, wages and salaries, rents and superannuation contributions.

 

Cashflow forecast

 

In preparing the Cashflow Forecast you should have regard to:

• Loan Repayments

• Taxation Payments

• GST Payments

• Income tax instalments

• Any Capital Expenditure that you wish to undertake

• Any funds (dividends) that you wish to withdraw from the business.

 

Blueprint for the next twelve months

 

The whole concept of preparing a Budget and Cashflow Forecast is to prepare a blueprint for what you would like to see your business achieve during the next 12 months.

 

Budgeting should highlight potential troublespots

 

If you are realistic in your estimates, then the forecast should highlight any potential troublespots during the year, eg you may be going to experience a shortage of funds from the payment of income tax in March or from stock build-ups in November for Christmas trading. There could also be other times during the year when you anticipate problems due to seasonal conditions.

 

Measure actual performance against Budgets/Cashflow Forecast

 

You will then have Budgets and Cashflow Forecasts against which to measure your actual performance during the year, so as to determine whether you are on track in your business performance.

 

Budgets help you get a clear indication of where you are

 

No one expects you to be able to actually achieve budget estimates in every segment of the business. That is a virtual impossibility. What the budget does give you is a blueprint against which to measure your actual performance. This will give you a clear indication as to where you actually stand on current day-to-day trading as compared to your expectations at the beginning of the year when the budget was prepared.

 

Budgets give businesses a better chance of success

 

There is no doubt that the businesses which prepare Budgets and Cashflow Forecasts and compare this to their actual performance, give themselves a far greater chance of business survival.

 

Information sourced using CCH iknow

Moving overseas

WHAT THE TAX?!!

Moving overseas? You may have to pay more tax

 

A dual citizen has been declared a non-resident of Australia by the Commissioner of Taxation via a Private Binding Ruling request. As a result of this, the employer of the dual citizen is required to withhold tax on salary at the non-resident tax rate.

 

In order to be classified as a tax resident of Australia, an individual is required to meet the definition as defined in ITAA 1936 s 6(1). The definition offers four tests to use to ascertain whether an individual is a tax resident of Australia, and includes the:

• resides test

• domicile and permanent place of abode test

• 183-day test, and

• Commonwealth superannuation fund test.

 

The "resides test" is the primary test for residency. If this test is failed based on relevant factors, then the other three tests are applied.

 

Relevant facts and circumstances

 

The individual:

• was a dual citizen of Australia

• moved overseas with their spouse and children

• was employed by an Australian company to complete work serving Australian customers

• maintained an Australian bank account to receive their salary

• had no occupation in the foreign country

• was only renting in Australia before moving overseas

• shared a house with in-laws in the foreign country, and

• advised Medicare that the family had departed Australia

 

Decision

 

In the ordinary concepts (resides) test for residency, not one of the eight factors has greater weight to the others when making a determination. The weight usually becomes apparent when looking at everything as a whole.

The eight factors taken into account by the courts and tribunals are:

• physical presence in Australia

• nationality

• history of residence and movements

• habits and "mode of life"

• frequency, regularity and duration of visits to Australia

• purpose of visits to or absences from Australia

• family and business ties with Australia compared to the foreign country concerned, and

• maintenance of a place of abode.

 

Based on the relevant facts for the individual, residency pointed towards being a citizen of Australia and having all business ties related to Australia via employment. The individual had no other major income from employment or business purposes. The individual was being paid into an Australian bank account presumably in Australian dollars.

 

Non-residency pointed towards the individual's immediate family (ie spouse and children) living in the foreign country with extended family. While this could be considered usual and non-determinative because circumstances may have been fortuitous, the individual informed Medicare that they were leaving Australia indefinitely.

 

As noted, all signs generally pointed towards residency, due to all the work being Australian-sourced. Perhaps the individual was working remotely and was back in the foreign country with family for an unknown period for personal reasons.

 

The individual telling Medicare that the family was leaving indefinitely was the factor which tipped the scales to the individual being a non-resident. The individual also failed the other three tests.

 

Client application

 

As the individual is an employee non-resident, their salary is now taxed at the non-resident marginal rates. Also, this higher rate of tax is withheld from the individual's salary as part of the payroll process.

This could result in a few further issues, including:

• whether the individual is able to claim a rebate of Australian tax paid in the foreign country

• the individual no longer be eligible to receive superannuation guarantee, and

• the employer being aware that the PAYG withholding has to occur at the higher rate.

All these factors could considerably change the overall outcome for the individual salary package, including where superannuation guarantee amounts may be taxed at 37% or even higher.

 

Client opportunities

 

If applicable, the individual may look to a different structure and provide the Australian company with services under a contractor arrangement. However, this can be tricky in instances where the individual was previously employed as an employee. Payments for contracted services to a foreign contractor typically do not have withholding amounts applied.

 

The individual may want to review their options in this situation, particularly in the foreign country.

 

Information sourced using CCH iKnow

 

Fixing interest rates

To fix, or not to fix, that is the question.

 

With fixed rates as low as they are, and speculation of a rate rise in the later part of 2018, it is understandable why people may be considering fixing their loan.

If you are thinking about fixing the interest rate on part of, or your whole loan, remember that there are many things to think about before locking it in.

Here are some possible pros and cons when fixing a loan.

Pros

·         Certainty of monthly repayments for the term of the fixed-rate period

·         Insurance against rate rises, which will increase your loan repayments

·         The peace of mind that the above two outcomes provide

·         You can fix your whole loan or part of it – giving you greater flexibility

 

Cons

·         Additional repayments may attract penalties

·         If a loan is paid out during a fixed-rate term, penalties may be incurred

·         If interest rates fall, you will not receive the benefits of lower minimum repayments

·         Redraw and Offset accounts are commonly excluded from fixed rate offers

 

So ask yourself.

Are you likely to make additional repayments or sell the property in the short term?
Do you regularly use an offset or redraw facility?
Are you happy to pay a slightly higher rate to secure a stable loan repayment?
 
Deciding whether to fix or not depends upon your plans for the future.

Single Touch Payroll

WHAT THE TAX?!!

Single touch payroll for everyone?

 

Single Touch Payroll (STP) has been introduced into the Australian tax system to combat areas of taxpayer non-compliance of PAYG withholding and superannuation guarantee obligations. Past legislation has been enacted which brings this new payroll system into commencement from 1 July 2018.

Currently as it stands, only "substantial employers" will be necessary to implement STP (TAA 1953 s 389-5). However, new legislation has been tabled in parliament that will mean that every employer will be required to use and lodge STP software. On enactment, all employers will be required to use STP from 1 July 2019.

 

Headcount

 

A "substantial employer" is one who employs 20 or more employees, or is a member if a wholly-owned group, and the group has 20 or more employees in total. Contractors and other individuals that are employees under the extended meaning of "employee" in the Superannuation Guarantee (Administration) Act 1992 are excluded from the headcount if they do not meet the ordinary meaning of employee. A checklist on whether an individual is an employee is available here.

 

The headcount, which determines whether an employer is a "substantial employer", must be undertaken as at 1 April 2018.

 

Headcount, as defined by the ATO, is as follows as at 1 April 2018:

          • full-time employees

          • part-time employees

          • casual employees who are on the payroll at 1 April and worked at any time during March

          • employees based overseas

          • any employee absent or on leave (whether paid or unpaid), and

          • seasonal employees (if necessary).

 

Do not include any independent contractors or staff that is provided by a third party labour hire organisation. Also, company directors are not included unless they are also employees.

 

This reporting will continue indefinitely even if the employer goes below 20 employees during the 2018/19 income year.

 

Reporting requirements

 

Employers will need to report the following through their payroll system:

          • payments made to individuals and amounts withheld from those payments

          • payments of salary or wages and ordinary time earnings (OTE), and

          • employee superannuation contributions.

 

Also, pending the passing of new legislation, other amounts such as "sacrificed ordinary time earnings amounts" and "sacrificed salary and wages amounts" will be reportable. The objective of these additional reporting requirements ensures that superannuation guarantee is not reduced by amounts salary sacrificed. These amounts, along with ordinary time earnings and superannuation contributions can be reported either separately or combined. Either way, the ATO has stated that they will be aware of an employee's overall package from which they work out their superannuation guarantee.

 

Payments not made through the payroll system (eg contractor payments, payments of superannuation income, payments of dividends, interest and royalties, etc) are excluded.

 

Employers will not be subject to administrative penalties for the first 12 months, unless first notified by the Commissioner.

 

PAYG payment summaries

 

For employers who are required to use STP from 1 July 2018, there will no longer be a requirement to provide employees with PAYG payment summaries at year end.

Essentially, the employees will be able to see their payment summaries at year end online from myGov and also they will be available on the Tax Agent Portal.

 

Information sourced using CCH iknow

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