October 2024 Newsletter

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Making contributions later in life 

Superannuation laws have been simplified over recent years to allow older Australians more flexibility to top up their superannuation. Below is a summary of what you need to know when it comes to making superannuation contributions.

Adding to super

The two main types of contributions that can be made to superannuation are called concessional contributions and non-concessional contributions.

Concessional contributions are before-tax contributions and are generally taxed at 15% within your fund. This is the most common type of contribution individuals receive as it includes superannuation guarantee payments your employer makes into your fund on your behalf. Other types of concessional contributions include salary sacrifice contributions and tax-deductible personal contributions. The government sets limits on how much money you can add to your superannuation each year. Currently, the annual concessional contribution cap is $30,000 in 2024/25.

Non-concessional contributions are voluntary contributions you can make from your after-tax dollars. For example, you may wish to make extra contributions using funds from your bank account or other savings. As such, non-concessional contributions are an after-tax contribution because you have already paid tax on these funds. Currently, the annual non-concessional contribution cap is $120,000 in 2024/25.

Super contribution options for people under 75

If you’re under 75, you can make and receive various types of contributions to your superannuation, such as:

  • Compulsory superannuation guarantee contributions
  • Salary sacrifice contributions
  • Personal non-concessional (after-tax) contributions
  • Contributions from your spouse
  • Downsizer contributions from selling your home
  • Personal tax-deductible contributions

Work test rule relaxed

After age 67, you’ll need to meet the “work test” or qualify for a “work-test exemption” to make personal tax-deductible contributions. To satisfy the work test, you must work at least 40 hours during a consecutive 30-day period each financial year. Prior to 1 July 2022, the work test applied to most contributions made by individuals aged between 67 to 75, but now it only needs to be met for personal tax-deductible contributions. The good news is that you don’t need to meet the work test for other types of contributions, so being retired won’t stop you from contributing to superannuation.

If you don’t meet the work test condition, you can use the “work test exemption” on a one-off basis if your total superannuation balance on the previous 30 June was less than $300,000 and you satisfied the work test requirements last financial year. Meeting this requirement will allow you to also make personal tax-deductible contributions to superannuation.

Super contribution options for people over 75

Once you turn 75, most superannuation contributions are no longer allowed. The only exceptions are compulsory superannuation guarantee contributions from your employer (if you’re still working) and downsizer contributions from selling your home.

If you’re about to turn 75 or have just passed that milestone, you still have one final chance to make or receive other contributions. Superannuation funds can accept contributions for up to 28 days after the month you turn 75. For example, if you turn age 75 in October, the contribution must be received by your superannuation fund by 28 November.

Final word

Changes to the contribution rules now allow more flexibility for people in their 60s and 70s to add to their superannuation. So whether you are still working or retired, you can continue to make superannuation contributions to benefit you in retirement and beyond.

What is the right business structure? 

If you carry on a business – small or large – the question of which business structure to use always arises – and not just from when you start that business, but also during its operation when it may be beneficial to change from one structure to another.

Essentially, there are four major ways in which you can carry on a business: as a sole trader, in partnership, or through a company or trust – or even a combination of these (eg, in a partnership of companies and/or trusts).

Moreover, each has their own particular advantages and disadvantages – particularly when it comes to taxation consequences (and the benefits thereof).

By way of a simple example, if you operate a business in partnership you have the legal problem of being “jointly and severally” liable for any debts of the partnership (ie, you can be personally liable for all the debts of partnership even if they were “incurred” by the other partner).

On the other hand, there are not a lot of legal formalities to comply with (unlike a company) and, moreover, from a tax point of view you can generally split the income from the business with the other partner/s in the most tax advantaged manner.

Furthermore, and something that is often forgotten, any tax losses made by the partnership can be attributed to the partners – and can be used to reduce tax on their other income. This may be particularly useful in the early stage of a business when losses are more likely to be made.

This is unlike companies and trusts where the losses remain “locked” in the company or trust until such time that there is income against which they can be offset. And even then there are complex rules that prevent such losses being used in this way if, for example, there has not been underlying “continuity in ownership” of the company or trust.

On the other hand, family trusts at least do in effect allow flexible “splitting” of the income or profits made by the trust in a tax-effective way. And companies and unit trusts also allow the same – but in a somewhat more rigid manner.

However, the key point we seek to make is that you can change the structure of your business at any time in its operation – and in regards tax, you can do so usually without any adverse tax consequences because of the various concessions and roll-overs that allow you to do so.

For example, if you have been running your business as a sole practitioner or in partnership you can roll-over your business (ie, the assets that comprise it) into a company or trust without there being any adverse tax consequences.

Of course, this is subject to meeting certain eligibility requirements – the main one of which is that you remain the beneficial owner of the business in that you remain the controller of the business in the same way you were before the “roll-over”.

And this is just at the simple end of this type of roll-over. In fact, the roll-over provisions now allow you to even roll-over a small business from whatever structure into a discretionary trust structure (with all its tax benefits). But again this is in effect subject to the same “continuity of beneficial ownership” existing both before and after the roll-over.

Finally, and crucially, even in the event you trigger a capital gain on restructuring a small business, the CGT small business concessions should apply to allow you to eliminate or greatly reduce the assessable gain – and to roll-over the gain into buying assets for a new business.

If you are running a small business, and think it is time to do things a bit differently (at least from a tax perspective!) come and see us to discuss all the options and all the advantages and disadvantages of a particular structure.

Likewise, if you are thinking of starting a business for the first time, come and speak to us to work out what type of structure would best suit you at the start of your entrepreneurial adventure.

Selling a property with mixed rental and residential use 

Selling a property that may have been used for mixed rental and residence purposes has a lot of capital gain tax (CGT)  issues – and some of these also involve exercising good judgment as to how to best use the relevant CGT concessions.

By way of example, if you retain your original home and rent it after you have purchased your new home, you will have to make a decision about whether you want to retain a full CGT exemption on the original home (or maximise it, at least) or whether you want the full exemption to apply to the new home.

(But there are also ways that you can, in effect, have your cake and eat it too!)

On the other hand, where you rent a property first and then afterwards live in it, then various concessions that may help reduce your CGT liability may not be available.

Further, there are important CGT rules and concessions that apply to a home that has been used for such mixed use where the owner dies and then it is later sold by beneficiaries. These can be complex, but if applied with good planning can have (very) good outcomes.

And then, of course, there is the issue of how you actually calculate any partial capital gain (or loss) in respect of a property that has been used for both rental and as a residence in circumstances where it is not possible to get a full exemption on it.

And these calculation issues can involve determining whether you can use a market value cost at any time in the process and how you can account for any non-deductible mortgage interest (and other non-deductible costs).

There is also the issue of whether you need to write-off any amounts for which you have claimed a deduction (such as building write-off deductions). In this regard, there is also the issue of whether you have actually claimed write-off amounts and therefore whether you need to write the amounts back in in any way (and the result may surprise you).

And crucially, there is also the issue of whether any partial capital gain can qualify for the very generous 50% CGT discount. (And in this regard, interestingly the tax concession that costs the government the most in foregone revenue in most financial years is the CGT discount applying to a partial exemption on a home!)

Of course, there are a lot of planning issues surrounding a property that you purchase with mixed intentions of both wanting to live in it and rent it.

For example, if you live in it first on a genuine (bona-fide) basis then you can access a concession that allows you to retain its full CGT exemption for up to six years.

Furthermore, if you rent it for more than six years and have to calculate a partial CGT exemption you can usually get the benefit of a market value cost at the time you first rent it to calculate this partial gain.

As can be seen, there are an array of CGT issues surrounding the selling of a property used for mixed rental and residence use – including the need to determine how to best use (and choose) various concessions to minimise any potential CGT liability.

So, if you are in this position – or even thinking of buying a property that may be used for this mixed purpose – come and have a chat to us.

Comparing SMSFs with other super funds 

While all superannuation funds have a shared goal to provide retirement benefits to their members, there are many differences between SMSFs and other superannuation funds. So if you’re thinking about setting up an SMSF, it’s worthwhile comparing SMSFs with other funds before making your decision. Here, we highlight the main differences between SMSFs and other funds.

 

  SMSFs Other super funds
Members and trustees SMSFs can consist of up to six members, and all of them must act as either individual trustees or directors of a corporate trustee. This ensures that all members are actively involved in managing the fund. There is usually no cap on the number of members, and professional, licensed trustees are tasked with managing the fund.
Responsibility Trustees are expected to have knowledge of tax and super laws and must make sure their fund complies with those laws. The risk of non-compliance is borne by the SMSF trustees or the corporate trustee directors, who can be personally fined if their fund breaches the law. The compliance responsibility lies with the professional licensed trustee.
Investments Trustees create and implement the fund’s investment strategy and make all the decisions regarding investments. While most funds offer some control over the type and risk profile of investments, members generally cannot select specific assets in which their super is invested.
Insurance Trustees are required to consider whether to provide insurance for the fund’s members. Note that insurance premiums may be higher than in other super funds. Insurance cover is typically provided to members at a lower cost, as large funds can secure discounted premiums.
Regulation SMSFs are regulated by the ATO and trustees are required to engage with the ATO to manage their fund. These funds are regulated by the Australian Prudential Regulation Authority (APRA), with little to no direct member interaction required.
Complaints/disputes The ATO does not handle internal disputes among SMSF members. Disagreements must be settled through alternative dispute resolution methods or in court, at the members’ expense, and there is no government-backed compensation scheme. Members can lodge complaints with the Australian Financial Complaints Authority (AFCA) and may qualify for statutory compensation.
Fraudulent conduct or theft SMSFs do not receive government financial assistance if there is fraud or theft. Legal action may be possible under Corporations Law, but compensation is not guaranteed. Be cautious about sharing personal details. And if you are approached by a financial adviser, ensure they are listed with ASIC. Members of other funds may be eligible for government assistance in cases of fraud or theft.

The dangers of failing to declare income or lodge returns 

There are many adverse consequences associated with failing to lodge income tax returns or omitting income from those returns if the ATO finds out.

The ATO has increasingly sophisticated technology to track such matters and catch people out – including “data matching” programs where it compulsorily obtains masses of information from certain authorities (eg, banks, insurance companies, real estate bond boards etc).

And on top of this, the ATO does not even have to actually look at the information too closely – as a computer program does this for the Commissioner.

So, it now seems that there is a bigger risk of being caught for failing to lodge returns or declare income (and for wrongly claimed deductions).

Moreover, if the ATO does catch you out for this and raises amended assessments or default assessments and you decide to challenge the assessments, then you may well face an uphill battle in doing so.

This is because in any matter before the tribunals or courts, the onus will be on you to not only prove that the assessments are wrong (ie, “excessive”), but also what the correct amount of taxable income should be.

And in many cases, this will be an almost insurmountable task – if only because you may no longer have the relevant records to prove your claim. (And for the record, there have been very few cases in recent, or less recent history, where a taxpayer has succeeded in this task.)

For example, in a recent case where the tribunal found that the ATO had been “careless” in the way it arrived at the amount of the alleged omitted income (even to the extent that it considered sending the assessments back to the ATO to redo), the tribunal still said it was “duty bound” to find that the taxpayer had failed in its onus of proving the assessment was excessive.

Furthermore, the Commissioner has the power to impose harsh penalties for failing to lodge returns or declare income – and again, the onus would be on you, the taxpayer, to show that the penalties are excessive and should be reduced or remitted.

Likewise, the ATO has the power to issue amended or default assessments many years after the income year in which they were due or income was omitted if it believes there has been “fraud or evasion” on your part – and, once again, the onus would be on you to prove otherwise!

So, the moral of this story is make an appointment with us to make sure you do not omit assessable income or fail to lodge a return – and, moreover, seek our advice to help tidy up any instances where you may have done so (unwittingly or otherwise).

 

September 2024 Newsletter

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Who is a spouse under the tax laws, and why does it matter? 

While Australia doesn’t have a joint filing option for married couples, there are some aspects of your individual tax assessment that depend on your spouse’s income.

For example, your eligibility for the private health insurance rebate and your liability for the Medicare Levy Surcharge both take into account your spouse’s income. Other tax attributes affected by your spouse’s income include the senior and pensioner tax offset, the Medicare Levy reduction for families, the zone and overseas forces tax offsets, and the invalid and invalid carer offset.

Under Australian tax law, a spouse is a person (of any gender) with whom you were in a relationship that was registered under a prescribed State or Territory law, or not legally married, but who lived with you on a genuine domestic basis in a partnership as a couple.

So, spouses are either legally married or living in a de facto relationship under the same roof. Note the additional requirement for cohabitation for de facto couples, which is in itself evidence of the relationship.

Sounds simple enough, but here are some commonly asked questions about spouses:

What about overseas marriages?

Many marriages for Australian residents took place in other jurisdictions. The Marriages Act has reciprocal provisions and most overseas marriages are recognised in Australia.

What if my spouse is still a foreign resident?

Sometimes visa requirements prevent both spouses from entering Australia at the same time. Where this occurs and the parties are legally married, the foreign partner is regarded as a spouse. All their global income needs to be disclosed in the Australian tax return of the resident partner. Where the parties are in a de facto relationship they are not cohabiting and the foreign partner will not be treated as a spouse under the tax rules.

What if I don’t know my spouse’s income?

You might need to lodge by 31 October, but your partner runs a business and uses his tax agent’s extension to lodge by the following May. Or you and your partner may be going through a difficult separation and the communication process is far from ideal. Make your best estimate, based on what you know about their affairs. If you have acted in good faith you won’t be penalised for getting it wrong, although the Tax Office might adjust your return down the track.

What if my relationship lasted for less than a year?

Most people don’t start or finish relationships on 1st July. There is space on your tax return to indicate when you have started or finished a spousal relationship part way through the year of income. The Tax Office will pro-rate the various tax rebates or surcharges as necessary.

What if I am separated but not divorced?

Couples who are legally married but who subsequently separate continue to be spouses until their divorce is finalised. On the other hand, couples who were in a de facto relationship but who subsequently separate cease to be regarded as spouses from the time they are no longer cohabiting.

Does cohabiting need to be full-time for a couple to be regarded as being in a de facto relationship?

Some couples prefer to maintain their own respective households while engaging in a co-dependent intimate relationship with another person. They might spend a number of nights together at either one of their homes but also spend time apart, which gives them independence and makes their relationship work.

These things are a question of fact and degree. If the couple spend most nights together at one place or the other and conduct themselves as a couple they might be regarded as being in a de facto relationship.

If they were legally married this would not be an issue, as they would be regarded as each other’s spouse regardless of how much time they spend apart. Perhaps not the most romantic reason for popping the question, but marriage would sort out any tax uncertainty there might be.

Riding the market waves 

Don’t let share market volatility get you off course with your superannuation investment strategy.

Market volatility

Market downturns can make anyone nervous, but sticking to your investment strategy is key.

If you move your investments to cash or a more conservative option after the market has fallen, you’re effectively locking in your losses. Decisions driven by fear are rarely the right ones, and acting impulsively can be costly. It is also very difficult (if not impossible) to correctly time the market, so if you’re planning to switch back to growth assets before the market recovers, this might see you miss out on the rebound.

A more optimistic view of a falling market is that your regular superannuation contributions are buying assets at a lower price. When the market eventually recovers, those assets purchased during the downturn can significantly increase in value.

Don’t panic and stay the course

Riding the ups and downs of financial markets is an inherent aspect of investing.

Although market volatility can be stressful, particularly for those nearing or in retirement, it’s crucial to keep a long-term perspective and stick to your investment strategy (assuming it still meets your needs). Even those approaching retirement, or already retired, still have many years of investing ahead.

And if like most people your superannuation benefits are invested in a balanced or growth option, diversification plays a key role in shielding your balance from extreme market swings. That in turn allows you to have a diversified position and be confident that your superannuation can stay the course over time.

For those in a large APRA-regulated fund, most funds have pre-mixed diversified options for you to choose from. Otherwise if you have your own SMSF, you’ll need to ensure your investment strategy factors in a range of requirements such as diversification, the risk and return in making investments, and so on. As trustee or director of your fund, you will need to manage this yourself or seek advice from a licensed financial adviser who can assist you in developing a compliant strategy that is tailored to your fund and members’ circumstances.

But if market volatility continues to keep you up at night, it might be wise to check your investments and superannuation balance less often. By focusing on the long-term rather than daily fluctuations, you’ll have a clearer perspective on your financial progress without unnecessary worry.

The last word

As the investment saying goes, “it’s not about timing the market, it’s about time in the market”. The key takeaway is to stay patient, adhere to the fundamental principles of diversification and asset allocation, and as always, don’t hesitate to seek advice if you need it.

Take care if you sell your home after leaving Australia! 

If you have lived in Australia for many years and bought yourself a home here but decide to leave and go and live elsewhere, and you wish to sell your home, you should do so before you leave Australia.

Otherwise, if you sell your home after you have left Australia (and have become a foreign resident for tax purposes) you will not get ANY capital gains tax (CGT) exemption on your home (subject to some limited circumstances).

It’s a severe rule which can punish you harshly. And furthermore, you will be denied the full benefit of the 50% CGT discount on any assessable capital gain – broadly, to the extent that you have been a foreign resident during any period that you owned the home.

Furthermore, any capital gain will be taxed in your hands at the higher non-resident tax rates.

What about the case if you have signed the contract of sale while you are still in Australia, but the settlement does not take place until after you have left Australia?

In this case, you are off the hook. This is because the time at which you are judged to have sold the home for CGT purposes is the time at which you have “entered into the contract” of sale – and not at the time of settlement (or any other time).

So, if you are still a resident of Australia at this time, then you will not be denied a CGT exemption on the sale of your home – nor the CGT discount, as relevant (such as where a partial CGT main residence exemption may otherwise apply).

This rule has important practical implications – and offers various solutions to get around any potential problem. For example, you could offer a sufficient discount on the asking price to make sure the agreement is entered into before you cease to be a resident.

And no doubt there are more extreme steps that can be undertaken if necessary.

For example, you could return to Australia and become a resident again for tax purposes on a bona-fide basis – and then sell the home. But if the home is, say, jointly owned between spouses, then both spouses would need to return to Australia.

On the other hand, in the case that you may have a capital loss on the home, selling it while you are a foreign resident is a good way to realise it so that you can use it for other purposes.

Finally, the rule denying you a CGT main residence exemption on your home if you sell it while you are a foreign resident does not apply if you have been a foreign resident for less than 6 years and you are required to sell it because of divorce or separation or family illness or death, etc.

Suffice to say, the issue of losing your CGT exemption on your home is no small matter.

So, if you are thinking of leaving Australia and you wish to sell your home (or any other property) make an appointment to come and speak to us about the matter so you can avoid any unnecessary and unwanted liabilities down the track.

Separation and divorce: CGT consequences …. and relief 

With apparently at least one in three marriages ending in divorce – and with countless more defacto relationships breaking down – the capital gains tax (CGT) roll-over provisions for “marriage and relationship breakdowns” has assumed increasing relevance.

These rules provide for the “roll-over” of any capital gain on the transfer of assets between the separating parties so that there is not any immediate CGT liability in the circumstances.

However, they (like all CGT concessions) are subject to important conditions to be met and special rules that apply to certain categories of assets.

The first and foremost of these conditions is that the transfer of the asset must take place in accordance with one of the specific ways set out in the provisions – and these are essentially by way of a relevant court order or a defined financial or maintenance agreement.

And here’s the first big planning opportunity: if one of the parties wants to realise a capital loss on an asset that they propose to transfer to the other spouse, then don’t transfer it under any of the ways specified in the CGT rollover provisions – do it by way of a private agreement with the other party.

The second key rule is that the roll-over does not apply unless the asset is transferred to the other spouse. It cannot be transferred to the other spouse’s discretionary trust or private company. It cannot even be transferred to the estate of the other spouse if that spouse dies during the separation proceedings.

The only possible exception to this rule is if the asset is transferred to a “child maintenance trust” – and even then strict conditions would apply.

In addition, not all assets can get roll-over under these rules. For example, trading stock is excluded and would be subject to the normal rules that apply to the disposal of trading stock outside the ordinary course of business.

Of course, if the rollover applies it does not mean CGT is avoided; it just means that it is deferred until the spouse to whom the asset is transferred later sells the asset or it is subject to a CGT event in their hands.

However, in this case they would generally acquire the other party’s “cost base” for the purposes of calculating any capital gain or loss. And they would also generally be entitled to the CGT 50% discount if it was held for the required time.

Nevertheless, there is an important and tricky rule that applies where the asset that is transferred is a dwelling (eg, a rental property) which is used for another purpose in the hands of the other spouse (eg, their home).

In this case, the spouse who acquires the asset will be liable for CGT for the gain that accrued while it was a rental property – even though it became their home from the time they acquired it from the other spouse until they later sold it.

Suffice to say, this type of scenario requires some careful negotiations between the parties before such a transaction is undertaken to make sure everything is “fair” for all the parties.

There are also special rules that apply when, say, an asset that is held by a family company or trust is transferred out of that company or trust to the other party as part of a settlement agreement.

Again, these rules can be complex and require good advice to ensure that all the issues are managed effectively.

So, all in all, if you are facing any spousal separation issues come and speak to us first about the ins-and-outs of the rules that apply on any transfer of assets.

And perhaps some of the impact of divorce or separation can be alleviated by making sure that the CGT rollover is used most effectively – because like death, divorce affords certain tax planning opportunities.

Setting up an SMSF: Who can join the fund? 

A question that often gets asked is who can set up an SMSF together.

The rules

The answer is practically anyone can set up a SMSF together. You can have up to six people in an SMSF, and they’re often family members. The most common setup is you and your partner running the fund together, or just you if you’re single. But it doesn’t stop there. It is also common for business partners to set up an SMSF together, and in other cases, children may also join their parents’ SMSF. As can be seen, other setups are possible.

Business partners

As mentioned above, it is possible for business partners to set up an SMSF together. However there is a catch – that is, no fund member can be employed by another member unless they’re related. To be clear, the rules allow two people who are directors of a company which owns the business to set up a fund together, however it is not possible if one person is not a director – in this case, it’s only allowed if you are relatives.

Your children

It is also possible for your children, regardless of their age, to join your fund. However, if your child is under 18, they can’t be a trustee, so you as their parent would be the trustee on their behalf and handle that role for them. Once they’re over 18, they must be a trustee unless they give someone else the power to act on their behalf by granting them an enduring power of attorney.

The number one thing to keep in mind when sharing an SMSF

Shared responsibility! As a rule, all members are usually trustees, meaning you’ll share the obligations of managing the SMSF and making decisions. This means you generally won’t be able to act entirely on your own and will require everyone’s agreement when it comes to making decisions impacting your fund.

Change of mind and exit plan

If down the track you want to separate off into different funds, someone will have to exit the fund. This could involve selling assets or transferring them to a new fund, which might trigger capital gains tax or stamp duty issues.

When setting up your SMSF, it is important to also consider your exit plan as there will come a time when your benefit eventually needs to be paid out of the fund – this will usually happen when specific life events occur which may trigger an exit. As such, its best to plan well ahead and deal with this consideration upfront to avoid future disputes and tax implications later on.

“Debt recycling”…flavour of the month 

It seems that “debt recycling” is the favour of the month among financial advisors (and some financial institutions too). And if you do a Google search for the term you find that it is being quite heavily marketed.

It is being marketed as an easy way to convert non-deductible home loan interest into deductible investment interest and to thereby pay off your home quicker – while at the same time generating good investment income and/or an investment portfolio. (It sounds almost too good to be true!)

And with house prices being the way they are and with new and existing homeowners with large mortgages, “debt recycling” seems to be becoming increasingly popular.

Essentially, “debt recycling” involves paying down the non-tax-deductible home loan debt on your home in full or to some extent (and by some means!) and then borrowing against it (or any other equity in the home) to buy investment assets, such as a rental property or shares.

The income from this investment is then generally used to pay off any existing home loan where the interest is non-deductible, while a deduction is claimed for outstanding interest on the investment loan.

And if you invest in shares that give rise to franked dividend income then the benefit is even better with the franking credits reducing some or all of the tax on that dividend income – and even on other income (depending on your financial circumstances).

There are of course various versions of “debt recycling” with their different design features. These include arrangements where you draw down on existing equity in a home to acquire funds for investment purposes or where you just convert an existing offset account into an investment income account.

But either way, one of the effects of debt recycling is to, in effect, “convert” non-deductible home loan interest to deductible investment interest – or, in other words, to restructure your affairs to also generate investment income for which an interest deduction can be claimed.

So, if you are attracted to the idea of “debt recycling” (or have already entered into such an arrangement) then come and speak to us about it to make sure you understand how it works and understand its advantages and disadvantages.

Or, at least, we can point you in the right direction.

And by way of example, one big disadvantage seems to be that if the investment market goes down dramatically, your lender may require you to repay the loan which, in a worst case scenario, may require you having to sell your home to meet the loan call – or at least take out a larger mortgage.

We can also, of course, explain to you the tax consequences of “debt recycling” and their specific tax features – including those which may or may not attract the Commissioner’s attention.

So, again, if you are interested in the aspect of “debt recycling” then come and have a general chat to us about it first.

August 2024 Newsletter

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The importance of “Tax Residency”

Whether you are a resident of Australia or non-resident of Australia for tax purposes has significant consequences for you.

Primarily, if you are a resident of Australia for tax purposes you will be liable for tax in Australia on income you derive from all sources – including of course from overseas (eg, an overseas bank account, rental property, an interest in a foreign business etc).

On the other hand, if you are a non-resident of Australia for tax purposes, you will only be liable for tax on income that is sourced in Australia (including capital gains on certain property such as real estate in Australia).

And while there may be difficulty in determining the source of income in some cases, if you are a resident for tax purposes, the principle of liability for tax in Australia on income from all sources remains clear.

Resident of Australia for tax purposes

So, what does it mean to be a resident of Australia for tax purposes?

Well, broadly, it means you “reside” in Australia (as commonly understood), unless the Commissioner is satisfied that your permanent place of abode is outside Australia.

However, a recent decision of the Federal Court has shed some light on this matter – especially the often-misunderstood presumption that “connections with Australia” is all that counts.

“Connections with Australia”

The Federal Court case involved a mechanical engineer who was posted to Dubai for a period of six years, followed by a posting to Thailand, but who had continuous family ties to Australia (in that he financially supported his wife and daughters who were living in Perth).

Originally, the taxpayer was found to be a resident of Australia for tax purposes essentially because of his continuous ties to Australia and the fact that he did not establish personal ties overseas while he was living there (other than via his work commitments).

However, the Court found that “connections with Australia” was not the key test but rather the key matter was where one intended to treat as home for the time being, but not necessarily forever, ie, not necessarily “permanently”.

Likewise, it said that the matter of residency is worked out on income year by income year basis (ie, one particular year of income at a time) and it doesn’t mean a person has to have the intention of living in a particular location forever.

Among other things, the case may have implications for people who work overseas on a contract basis for periods of time, but still maintain family ties to Australia.

It may also mean that closer scrutiny will have to be paid to determine a person’s residency on a year-by-year basis and not just “locking” them into a residency or non-residency status from the beginning of any relevant change in their circumstances.

And of course, there is also the key issue of when in fact your residency status may change!

We are here to help

Suffice to say, if you find yourself in any such circumstances (eg, you undertake a foreign posting for a period or you decide to move overseas for some time but still maintain connections here), you will need to speak to us about your residency status – and the tax implications thereof.

Changes to preservation age

Since 1 July 2024, the age at which individuals can access their superannuation increased to age 60. So what does this mean for those planning on accessing their superannuation upon reaching this age?

What is preservation age?

Access to superannuation benefits is generally restricted to members who have reached ‘preservation age’ which is the minimum age at which you can access your superannuation benefits.

Prior to 1 July 2024, a person’s preservation age could range from 55 to 60 as it depends on their date of birth. Preservation age has been slowly increasing over the years and has finally reached its legislated maximum age limit of age 60, as shown in the table below:

 

Date of birth Preservation age
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
On or after 1 July 1964 60

 

This means anyone born on or after 1 July 1964 will have a preservation age of 60.

Tip – it’s important to note that preservation age is not the same as your Age Pension age. To get the Age Pension, you must be age 67 or over, depending on when you were born (and other rules you need to meet). So even if you reach preservation age, it could be some time before you are eligible to receive the Age Pension from Services Australia (ie, Centrelink). 

What does this change mean for me?

Once you have reached preservation age, you may receive your superannuation benefits as:

  • A lump sum or as an income stream once you have retired (or a combination of both), or
  • A transition to retirement income stream while you continue to work.

Furthermore, once you turn age 60 your superannuation benefits (ie, any lump sum withdrawals and/or pension payments) will generally be tax-free.

This change simplifies the tax rules as previously those between preservation age and age 60 were subject to tax on lump sum withdrawals and pension payments. Now, the tax treatment of superannuation benefits depends on whether you are above or below age 60 – there is no need to consider preservation age which is based on a person’s date of birth.

Need more information?

If you’re wondering what your superannuation withdrawal options are or how tax may apply to your superannuation benefits, transition to retirement or superannuation income streams, contact us today for a chat.

CGT & foreign residents: Complex rules apply!

A person who is not a resident of Australia for tax purposes is nevertheless liable for capital gains tax (CGT) on certain assets located in Australia. And these assets are assets which have a “fundamental” connection with Australia – and are broadly as follows:

  • real property (ie, land) located in Australia – including leases over such land;
  • certain interests in Australian “land rich” companies or unit trusts;
  • business assets used in carrying on a business in Australia through a “permanent establishment”; and
  • options or rights over such property.

This means that such assets will be subject to CGT in Australia regardless of the owner’s tax residency status.

Importantly, in relation to real property, this also includes a home that the foreign resident may have owned in Australia. And this home will not be entitled to the CGT exemption for a home if the owner is a foreign resident when they sell or otherwise dispose of it.

Furthermore, a purchaser of property from a foreign resident will be subject to a “withholding tax” requirement, whereby they have to remit a certain percentage of the purchase price to the ATO as an “advance payment” in respect of the foreign resident’s CGT liability. However, this requirement is subject to certain thresholds and variations.

Importantly, a foreign resident will generally not be entitled to the 50% CGT discount on any capital gain that is liable to CGT in Australia – subject to an adjustment for any periods when they owned the asset when they were a resident of Australia.

In relation to a foreign resident’s liability for CGT on certain interests in Australian “land rich” companies or unit trusts, this rule broadly requires the foreign resident to:

  • own at least 10% of the interest in the company or trust at the time of selling the interest (or at any time in the prior two years); and
  • at the time of sale, more than 50% of the assets of the company or trust (by market value) are attributable to land in Australia.

This means that interest owned by foreign residents in private companies and unit trusts can potentially be caught by these rules.

Moreover, the application of these rules can be very difficult, particularly as a foreign resident can be caught by them at certain times and not others.

It is also worth noting that if someone ceases to be an Australia resident and becomes a foreign resident for tax purposes, then they will generally be deemed to have sold such interests at that time and be liable for CGT on them. However, this is subject to the right to opt out of this deemed sale rule – but this “opt-out” has other important CGT consequences.

On the other hand, the rule that applies to make a deceased person liable for CGT in their final tax return for assets that are bequeathed to a foreign resident beneficiary does not apply to certain assets – and these assets are any of the above assets with a “fundamental” connection with Australia.

And this may be further complicated by the fact that, for example, at the time of making the will, the beneficiary may not have been a foreign resident.

The application of Australia’s CGT rules to foreign residents can be very complex – especially given the “variable” nature of some of the rules. Therefore, it is vital to speak to us if you have a “foreign residency” issue.

Selling a small business operated through a company:
Sell the shares or sell the assets?

If you run a small business through a company and you decide to sell it, you have the choice of either selling the business assets themselves (together with any goodwill) or selling your shares in the company.

Usually, such decisions are made on the basis of relevant commercial considerations (eg due diligence and future liability issues).

However, if you are seeking to access the CGT small business concessions on any sale – then you should also consider whether it is better to sell the business assets per se or the shares in the company.

While in principle, there should be no difference in terms of the CGT outcome in selling either, it may well be easier to access the concessions by adopting one approach over the other.

For example, if you sell the business assets at the company level you will need to find one or more controllers of the company (ie broadly someone with a 20% or more interest in it at the relevant time) in order to be able to access the concessions.

And, depending on the circumstances, this can be both easier and harder than it looks.

Furthermore, in case of the “retirement exemption”, it is necessary to actually pay any exempted capital gain to this controller in order to be able to use the concession (or to put it into their superannuation if they are under 55 at the relevant time).

On the other hand, if you can use the “15 year exemption”, it is enough that such a person exists – without the need to pay the exempted gain to them.

Most importantly however, if you choose to sell the shares in the company, the company itself must have certain attributes – the most important of which is that 80% or more of its assets (by market value) must be assets used in carrying on a business.

This, in turn, raises the thorny issue of how money in the bank is to be treated – and there is often a fine line between whether it is considered to be used in carrying on a business or not.

Furthermore, if the company has “controlling interests” in any other entity, then the assets of any such entity has to be also taken into account in determining if this test is met.

And, of course, as with the application of the CGT small business concessions in any circumstances, the “taxpayer’’ must satisfy either the $2m turnover test or the $6m maximum net asset value (MNAV) test.

And where shares or units are sold, the “taxpayer’’ is the individual who owns the shares and where the business assets are sold the “taxpayer” is the company or trust itself.

In either case, the tests can be difficult to apply because the “taxpayer’’ includes affiliates and connected entitled (ie related parties).

And by way of example, if you sell the business assets of a company and you use the $6m MNAV test, then any person who has a 40% or more shareholding in the company will be a connected entity and their assets (other than personal ones such as super and their home) will also have to be taken into account. Importantly, this can include investment properties and shares.

And then there is the difficult task of determining what liabilities relate to those assets for the purposes of this test – especially where the business assets are sold.

Suffice to say, the issues surrounding the question of whether you should sell the business assets of a company or the shares in them when seeking to apply the CGT small business concessions are complex.

Furthermore, the same issues arise in respect of deciding whether to sell the units in a unit trust that operates a small business or the assets of the business itself.

In any of these scenarios we are here to help – as this is a matter which clearly requires the expertise of a tax professional.

Spouse contributions splitting

Splitting superannuation contributions to your spouse can be a great way to boost your combined superannuation balances which can benefit you both in retirement.

What is contribution splitting?

Spouse contribution splitting allows a couple to optimise their superannuation balances by splitting up to 85% of concessional contributions (CCs) they made or received in one financial year (ie, 2023/24) into their spouse’s account the next financial year (ie, 2024/25).

Remember, CCs are before-tax contributions and are generally taxed at 15% within your fund. This is the most common type of contribution individuals receive as it includes superannuation guarantee (SG) payments your employer makes into your fund on your behalf. Other types of CCs include salary sacrifice contributions and tax-deductible personal contributions.

The maximum amount that can be split to your spouse is the lesser of:

  • 85% of CCs made in the previous financial year (ie, 2023/24), and
  • The CC cap for that financial year (ie, $27,500 in 2023/24).

Example

Alex and Kat are parents to three young children. Kat has taken time off work to care for their children and has much less superannuation than Alex.

After speaking to their financial adviser, they decide to split the $20,000 in SG contributions that Alex received from his employer last financial year (2023/24). In August 2024, Alex applies to his superannuation fund to transfer as much of his CCs as he can to Kat.

Alex is able to split 85% of his CCs which provides a much-needed boost of $17,000 to Kat’s retirement savings.

Rules for the receiving spouse

An individual can apply to split their CCs at any age, but the receiving spouse must be either:

  • Under preservation age (currently age 60 if born on 1 July 1964 or later), or
  • Aged between their preservation age and 65 years, and not retired at the time of the split request.

In other words, if the receiving spouse has reached their preservation age and is retired, or they are 65 years and over, the application to split your CCs will be invalid.

Benefits of contribution splitting

Contribution splitting is an effective way of building superannuation for your spouse and can manage your total superannuation balance (TSB) which can have several advantages, including:

  • Equalising your superannuation balances to make best use of both of your “transfer balance caps” (TBC) which can maximise the amount you both have invested in tax-free retirement phase pensions. Note, the TBC limits the amount that a person can transfer to retirement phase pensions in their lifetime – this limit is currently $1.9 million in 2024/25.
  • Optimising both of your TSBs to:
    • Access a higher non-concessional (after-tax) contribution cap (as the amount you can contribute to superannuation depends on your TSB)
    • Access the carry-forward CC rules and make larger CCs (note, the option to utilise these rules is restricted to those with a TSB below $500,000 on the prior 30 June)
    • Qualify for a government co-contribution
    • Qualify for a tax offset for spouse contributions
  • Boosting your Centrelink entitlements by transferring funds into a younger spouse’s accumulation account if your spouse is under Age Pension age.

Last word

As always, there are eligibility requirements that must be met and deciding what is best for you will depend on your personal circumstances. For this reason, you may want to seek personal financial advice to determine whether contribution splitting is right for you and your spouse.

Breaking up by text is hard to do

A recent decision by the Full Federal Court around a man’s tragic death by suicide clarified the standing of a de facto spouse in the context of a non-lapsing death benefit nomination on a life insurance policy made by the deceased person.

Just prior to C’s death in September 2019 the death benefit under his insurance policy was valued at $1.1 million, with the death benefit nomination in favour of his de facto spouse, N, having been made in December 2018.

On the night of his death, C sent a text message to his sister, purporting to be his last will and testament and indicating his wish that all his assets should pass to his family, with N receiving nothing. The text was not copied to N and it was later established that it was sent while C was under the influence of cocaine and alcohol.

The trustee of the policy took the view that the de facto relationship had continued right up to the time of C’s death and that N was therefore entitled to the death benefit. This decision was challenged by C’s family before the Australian Financial Complaints Authority (AFCA), arguing the text was evidence that the relationship between C and N had ended before C’s death. However, AFCA decided that relationships have their ups and downs and people say and write a lot of things they don’t mean all the time. This meant the trustee was right, the relationship remained ongoing just prior to C’s death and N was entitled to receive the death benefit.

The family then appealed to the Federal Court, where a single judge ruled that AFCA had erred in law in not construing the text message as proof that that C’s relationship with N had come to an end, meaning that N was not a valid beneficiary after all.

Finally (one would think), N appealed to the Full Federal Court, which held unanimously that in the absence of communication from C to N, there needed to be some other course of conduct, such as a refusal to cohabitate, which would clearly be inconsistent with a continuation of the relationship. Since there was no evidence about such conduct, the Full Court ruled in favour of N. The decision by AFCA was therefore upheld.

This case, with its own peculiar facts, highlights the importance of keeping things like binding death benefits nominations up to date and being clear about spousal relationships, especially when couples live apart.

Small business energy incentive

A little known tax incentive that is aimed at encouraging businesses to improve energy efficiency is the small business energy incentive (SBEI).

You will have to jump through a few hoops to qualify, but depending on what sort of depreciating assets you have acquired between 1 July 2023 and 30 June 2024 (the bonus period), you may be entitled to a bonus deduction of 20% of the cost of acquiring up to $100,000 of eligible equipment. This is over and above what you would ordinarily claim, so it’s bit like the old investment allowance, but with a $20,000 cap. That’s up to $9,400 extra in your pocket, which may make it worth a look.

The SBEI is available to businesses with an annual turnover of less than $50 million, where they have invested in certain eligible depreciating assets during the bonus period and where one or more of the following apply:

  • there is a new reasonably comparable asset that uses fossil fuel available in the market;
  • the new asset is more energy efficient than the one it is replacing;
  • if not a replacement asset, it is more energy efficient than a new reasonable comparable asset available in the market.

An asset can also be eligible if it is an energy storage, time-shifting or monitoring asset, or an asset that improves the energy efficiency of another asset.

The bonus deduction is available on second hand assets, although the comparable asset must be available in the market as new.

It only applies to businesses, so that replacing gas appliances with electric ones in a rental property would not qualify. The bonus deduction does not apply to solar panels or motor vehicles.

If you think you may have a claim, please feel free to contact us.

July 2024 Newsletter

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Division 293 tax – will you be caught? 

If you’re a high income earner, you may soon be asked to pay an extra 15% tax on the amount of concessional contributions that exceed the $250,000 threshold.

What is Division 293 tax?

Division 293 tax is an additional 15% tax that is payable when your income and concessional contributions exceed $250,000 in 2023/24.

To recap, concessional contributions are before-tax contributions and are generally taxed at 15% within your fund. This is the most common type of contribution individuals receive as it includes superannuation guarantee payments your employer makes into your fund on your behalf. Other types of concessional contributions include salary sacrifice contributions and tax-deductible personal contributions.

It’s worth noting that the extra 15% Division 293 tax is payable in addition to the standard 15% tax that is paid on concessional contributions.

How does Division 293 tax work?

You will be liable for Division 293 tax on either your concessional contributions, or the amount of income that is over the $250,000 threshold – whichever amount is lower.

Income for the purposes of Division 293 includes taxable income from a range of sources, such as:

  • Employment and business income
  • Reportable fringe benefits
  • Investment income
  • Net financial investment losses, such as negative gearing losses where deductions attributable to an investment property exceed rental income
  • Income you may receive due to a one-off event, such as making a capital gain, receiving a work bonus, or a redundancy or termination payment.

Purpose of Division 293 tax

The purpose of this extra tax is reduce the tax benefits that high income earners receive from the superannuation system and to level the tax playing field for average income earners.

Even though high income earners may pay tax on their concessional contributions at 30%, this is still less than the top marginal tax rate of 47% (including Medicare levy) that generally applies to high income earners who are liable for Division 293 tax. As such, making and receiving concessional contributions are still tax effective.

Liability to pay Division 293 tax

The ATO will determine if you need to pay Division 293 tax based on information in your tax return and data they receive from your superannuation fund(s). As a result, there is usually a delay between when the contribution is made and when Division 293 tax is payable.

The ATO will issue you with a notice of assessment stating the amount of tax payable and provide an authority to enable your superannuation fund to release the money. You also have the choice to pay the tax personally. Note that the tax is due within 21 days of the assessment being issued to you, and certain timeframes also apply if you elect to pay the amount from your superannuation fund.

Need more information?

Contact us today if you think you might be liable to pay Division 293 tax and want more information about your options.

A fine line between property development and “merely realising an asset” 

There can often be a fine line between whether a person is carrying on property development activities or is “merely realising an asset”.

For example, it may not be clear whether the extent of a person’s development activity in respect of, say, subdividing his or her backyard and building one or more units of accommodation and selling them either amounts to property development or merely realizing an asset – and one that has been used mainly for domestic purposes.

And a person may be considered to be carrying on property development activities if they are not in the business of property development and it is a one-off activity.

Suffice to say, the tax consequences between property development and “merely realising an asset” are entirely different.

In the case of carrying out property development activity, the gains are assessable as ordinary income (or as business income) – and, importantly, without the benefit of the capital gains tax (CGT) 50% discount which would otherwise reduce the assessable amount.

However, relevant expenditure incurred is generally deductible as it is incurred, ie, in the income year that it is incurred. And this may be of great benefit to the developer.

On the other hand, if a person is “merely realising an asset” then any gain is only accounted for under the concessionally taxed CGT regime (and with the benefit of the 50% CGT discount, if generally the land has been owned for more than 12 months).

Furthermore, in this case, if the property in question was acquired before 20 September 1985 then there will be no consequences (either CGT or ordinary income). And there are still quite a few pre-CGT properties around that are ripe for realisation.

So, how does the Tax Office tell the difference between the two when it is not abundantly clear from the nature of the activity itself?

Well, several factors are particularly important (among the many that can be taken into account).

These include the intention with which the person originally acquired the land. To develop it and on-sell it for a profit? Or merely for some other non-profit purpose? For example, to live in it as their home (although this distinction is getting harder to tell in the current property market!).

Another key factor is the extent to which the person gets involved in the activity. As a broad principle, where a person is less involved in the activity and merely acts passively it is generally considered to be “merely realising an asset”. But this is not a hard and fast rule.

There are also import GST consequences depending on the nature of the activity and the property involved.

Finally, it should be stressed that just because the nature of the activity is a one-off transaction it does not mean that the person is immune from being taxed on the profits as ordinary or business income.

So, if you are contemplating carrying out any such activity, come and have a chat to us first so we can help you do things with the best possible tax outcomes.

CGT main residence exemption concessions are very useful

Probably the most overlooked reason for the housing affordability crisis in Australia at the moment is the capital gains tax (CGT) exemption for a person’s home itself.

But not this alone.

Rather, it is probably the exemption in conjunction with all the various concessions a person can use to access the exemption.

And these concessions can be extraordinarily useful depending on a person’s particular circumstances.

So, let’s run through a few of the main concessions:

The concession for changing houses. This applies if you buy a new home before you sell the old one. It allows you to treat both homes as your CGT-exempt home for a period of up to six months while you sell the old home. But there are important conditions that must be met in order to use it.

The concession for moving into a house. This allows you to treat your new home as your main residence for the entire period you own it even though you may not have moved into it straight away. However, it is subject to important limits and restrictions – and generally requires you to move in “as soon as it is practicable” to do so.

The absence concession. This is an extraordinarily useful concession that allows you to treat your home as your “CGT exempt main residence” even though you may not be living in it for a lengthy period. In the case that you rent it in your absence this period lasts for six years, and if your home is not rented it lasts indefinitely. However, it is likewise subject to important conditions before you can use it – including that the residence must have been your home on a bona-fide basis. (And the ATO does track such matters!)

The building or renovation concession. This allows you to treat vacant land as your CGT exempt home for a period of up to four years where you build a new home on it and move in as soon as it is completed and live in it as your home for a period of at least three months. This concession can also be used where you leave your existing home to do major renovations – or even in a knock-down, re-build situation.

Again, these and other concessions are extremely useful depending on your particular circumstances – and can actually be used to allow you to access a full (or at least partial) CGT main residence exemption in a way that was probably never originally envisaged.

And in the case of the absence concession, for example, it even allows you to negatively gear the property during the six-year period of absence that you rent it!

On the other hand, there are also some CGT rules that can expose your home to a partial CGT exemption in a number of circumstances.

For example, there is a rule that spouses (including de-facto spouses and same sex spouses) cannot each have a CGT exempt main residence on different residences for the same period that they are spouses.  And this may apply in a variety of situations. However, it seems to be a rule that the ATO does not actively pursue – nevertheless it is there in the tax law.

Another rule that may limit your ability to claim a CGT exemption on your home is where you may subdivide some of it off and sell it or transfer it to another party (eg, typically on the subdivision and sale of part of a large backyard). And this rule may be highly relevant in the current housing market – especially given more flexible council regulations.

If you are considering buying or selling a home – or find yourself thinking that you may need to use any of these concessions – we can advise you on their applicability to your case and how you can use them most effectively.

The secret life of TFNs

Tax file numbers (TFNs) are so much an everyday element when dealing with tax and the ATO that many taxpayers won’t give it a second thought when tax return software responds with an “invalid” message when a TFN is entered.

The common thought will be that it’s human error, so naturally one’s first reaction will be to check the numbers you entered, followed by carefully re-entering them.

Most of the time the problem will be fixed and its business as usual, but here’s a passing thought — how does the tax return software know what is, and what is not, a valid TFN? Especially when you consider that its validity or otherwise is not dependant on matching those numbers with someone’s name and/or birthday and/or address and so on. These identifiers are used to cross-check a person’s identity of course, but the initial validity of a TFN is known via another factor — the “TFN algorithm”.

This verification algorithm, also known as a check digit algorithm, is embedded in each unique TFN. As with a lot of these things, this is best explained using an example. However, you need to keep a number in mind, which in this case is the number 11.

To make the algorithm work, a fixed weighting is applied to each number of the TFN. In order from the left, these weightings are 1, 4, 3, 7, 5, 8, 6, 9, 10.

Example: 123 456 782

TFN 1 2 3 4 5 6 7 8 2
Weight 1 4 3 7 5 8 6 9 10
Sum 1 8 9 28 25 48 42 72 20
Validation 1 + 8 + 9 + 28 + 25 + 48 + 42 + 72 + 20 = 253

As 253 is a multiple of 11 the TFN is valid.

To check for yourself, try the above with your own TFN.

Can I add to my super pension? 

A common question that is often asked is whether amounts can be added to a superannuation pension account once it has commenced.

The short answer

Unfortunately, the answer is no. Although your pension account can continue to increase due to investment earnings, such as interest and dividends, any further capital cannot be added to the current pension account. As such, once a pension (usually an “account-based pension”) has commenced, you cannot add any more contributions or money to that same pension account.

To recap, an account-based pension is a regular income stream bought with money from your superannuation when you retire. It is the most common type of superannuation pension as they offer regular, flexible and tax-effective income from your superannuation benefits.

The benefit of commencing an account-based pension is that investment earnings are tax free and once you turn 60, your pension payments will also be tax free. However the main trade-off for these tax concessions is that you have to withdraw a fixed amount of your pension balance each year based on your age.

The alternative solution

If you want to make additional contributions or consolidate an existing superannuation benefit with an account-based pension that you have already commenced, you will need to close your existing pension account and commence a new pension account.

Once you stop your pension, you can then add to it by making further contributions or combine it with any other existing superannuation benefits you may have in accumulation (ie, non-pension) phase. Once all amounts have been consolidated, you can then commence a new, larger account-based pension.

Alternatively, you can start another pension account with any new contributions that may come from your existing savings or from your existing account-based pension income that you haven’t spent. Taking this approach will ensure that no changes occur to your existing pension account.

Be aware of the transfer balance cap

As the name suggests, the transfer balance cap (TBC) limits the total amount of superannuation that can be transferred into a pension where there is no tax on investment earnings. The current TBC limit is $1.9 million as of 1 July 2024.

However, if you started your pension before 1 July 2023, your personal TBC will be somewhere between $1.6 to 1.9 million, depending on your circumstances. So if you are thinking about transferring more money into a pension account, note that this amount will towards your personal TBC.

It’s also worth noting that if you want to hold more than $1.9 million in your pension account, you will need to keep the remainder in accumulation phase. Penalties apply for exceeding your TBC and you will also be required to withdraw the excess amount from your pension account to bring it back within your TBC limit.

Last word

If you are considering adding more money to your pension account, or want to learn more about how to make the most of your pension account, let us know and we can help guide you in the right direction.

June 2024 Newsletter

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Making your super last in retirement

Superannuation is often a key source of income when you retire so it’s important to ensure your investment strategy makes your retirement savings last for as long as possible.

Shifting investment strategy objectives

As you approach retirement, your investment strategy objectives may start to shift. In your younger years, the main aim of superannuation is generally accumulation-focussed, which is all about growing as big a balance as possible, making regular contributions and investing for growth over the long-term.

As you enter retirement, investing for growth is still important however you will likely need to start drawing a pension or taking regular benefit payments to meet your living expenses. As you will have cashflows coming out of your fund and you will be drawing down on your assets, you’ll need to ensure you have enough liquidity in your fund to make those payments.

You also need to ensure you’re protected against drawing down on your assets at times of poor investment markets where you could end up locking in those losses. This timing impact is also known as ‘sequencing risk’. As such, the liquidity and sequencing risk impact on your fund’s investment strategy must be considered.

What investment strategy should I consider?

It is important that your superannuation portfolio has adequate exposure to growth assets. By the time most individuals reach 65 years of age, they are now expected to live for another two decades. This means a person retiring at say age 60 must stretch their finances for, on average, another 30+ years. It’s important to note this is merely an average; many will live far longer than two decades from their 65th birthday.

But assuming you aren’t drawing down excessive amounts and you will retain your funds in superannuation throughout your retirement, then taking a slightly more aggressive approach should result in you obtaining higher long-term returns and an increase in your portfolio value overtime.

That said, it does come down to your risk profile. The key message here is leaving all your retirement savings in a 100% conservative strategy (ie, cash and term deposits only) may mean that your nest egg may not last you very long.

How long will my super last?

Although investment market returns and inflation are uncertain and we don’t know how long we are going to live, retirement modelling can factor in these future uncertainties to help you determine the likelihood of achieving your objectives, which will also test whether your investment strategy is likely to be successful.

A financial adviser has access to such sophisticated financial modelling systems, however other simpler retirement calculators which can be found online (such as from the Moneysmart.gov.au website) can also give you an idea of how long your savings may last and how investment returns may affect your superannuation and/or pension balance.

The last word

There will be periods where the markets will be volatile which will see your retirement savings increase and decrease in value. During these times if you panic and switch back to a more conservative option, such as cash, you may do more harm to your superannuation balance. So if you’re approaching retirement and need help with your retirement investment strategy, it may be worthwhile obtaining advice from a financial adviser who can help you stress test your risk profile and help choose appropriate investments for your superannuation to make your savings last in retirement.

Personal services income explained 

The personal services income (PSI) rules apply to income that is earned mainly from the personal efforts or skills of a person.

It does not matter whether the income is earned by the individual in their own name or through an entity such as a business. The rules do not apply to income earned from being an employee.

A business structure

This can be a confusing concept. It does not mean that you conduct a business through an entity such as a company or a trust.

The term “business structure” is used to define a business (operated through any structure) that is large enough for it to be concluded that the income of the business is not being earned from the individuals in the business. Rather, the income is being earned by the “business structure”. This can still apply to quite small businesses.

The tests

The results test

This is an important test. If you pass the test, the PSI rules do not apply to you. An individual passes the results test if in relation to at least 75% of the individual’s PSI:

  1. it is for producing a result, and
  2. the individual is required to supply the equipment or tools of trade needed to perform the work, and
  3. the individual is liable for rectifying any defect in the work.

Unrelated clients test

This test is passed if:

  1. the PSI is gained from providing services to two or more entities that are not associates, and
  2. the work has been gained by making invitations to the public or a section of the public.

Employment test

Broadly, this test is passed if:

  1. one or more entities (other than associates) are engaged to perform work, and
  2. those entities perform at least 20% by market value of the principal work. The test is also passed if an apprentice is engaged for at least half the income year.

Business premises test

Broadly, this test is passed if business premises are maintained:

  1. at which the PSI is mainly gained, and
  2. of which there is exclusive use, and
  3. that are physically separate from premises the individual or associate uses for private purposes, and
  4. are physically separate from premises of customers or associates of customers.

Personal services determination

The ATO can give you a ruling that the PSI rules don’t apply to you in certain circumstances. For example, there could be “one-off” changes in your circumstances that cause you to fail the PSI tests. You can apply to the ATO to have the PSI rules ignored by the ATO. If the ATO rules in your favour, this is called a “personal services determination”.

What’s not considered “income” by the ATO?

It is possible to receive amounts that are not expected by the ATO to be included as income in your tax return. However some of these amounts may be used in other calculations and may therefore need to be included elsewhere in your tax return.

The ATO classifies the amounts that it doesn’t count as assessable into three different categories: exempt income; non-assessable non-exempt income; and other amounts that are not taxable.

Exempt income

As the name may suggest, exempt income doesn’t have tax levied on it. The thing to remember here however is that certain exempt income may be taken into account for other adjustments or calculations — for example, when calculating the tax losses of earlier income years that you can deduct, and perhaps “adjusted taxable income” of your dependants.

Exempt income includes:

  • certain government pensions, including the disability support pension paid by Centrelink to a person who is younger than age-pension age
  • certain government allowances and payments, including the carer allowance and the child care subsidy
  • certain overseas pay and allowances for Australian Defence Force and Federal Police personnel
  • government education payments, such as allowances for students under 16 years old
  • some scholarships, bursaries, grants and awards
  • a lump sum payment you received on surrender of an insurance policy where you are the original beneficial owner of the policy – generally these payments are not earned, expected, relied upon or occur regularly (examples include payments for mortgage protection, terminal illness, and permanent injury occurring at work).

Non-assessable, non-exempt income

Non-assessable, non-exempt income is income you don’t pay tax on and that also does not count towards other tax adjustments or calculations such as tax losses.

Non-assessable, non-exempt income includes:

  • the tax-free component of an employment termination payment (ETP)
  • genuine redundancy payments and early retirement scheme payments
  • super co-contributions
  • various disaster recovery assistance packages (although these need to assessed on a case-by-case basis).

 Other amounts that are not taxable

Generally, you don’t have to declare:

  • rewards or gifts received on special occasions, such as cash birthday presents and gifts from relatives given out of love (however, gifts may be taxable if you receive them as part of a business-like activity or in relation to your income-earning activities as an employee or contractor)
  • prizes you won in ordinary lotteries, such as lotto draws and raffles
  • prizes you won in game shows, unless you regularly receive appearance fees or game-show winnings
  • child support and spouse maintenance payments you receive.

Don’t lose your super to scammers 

Don’t be another victim – be on the lookout for scammers who call you about your superannuation!

ASIC on the lookout

The number of cold callers is on the rise. The Australian Securities and Investments Commission (ASIC) are urging people to hang up on cold callers and scroll past social media click bait that may be offering to help you compare and switch superannuation funds.

How cold callers operate

In many cases, cold callers will convince you to buy a product or sign up to a service. This could relate to any financial investment, product or service, but there has been a focus on scammers approaching people about their superannuation.

A typical superannuation cold calling experience includes:

  • A call from someone you don’t know to see if you ‘qualify’ for a free review of your superannuation.
  • Contact from a cold caller who convinces you your existing superannuation fund is not performing.
  • A statement of advice (SOA) prepared by a financial advice firm the cold caller has an existing arrangement with.
  • ‘Cookie cutter’ advice that is expensive, often unnecessary, doesn’t consider your individual needs, and may leave you in a worse position.

The cold caller may benefit by getting a cut of the financial advice fees, which are deducted from your superannuation balance. In the end, you could end up paying for advice that may not even be right for you.

What to do

If you receive a call from a number you don’t know, ignore it. Otherwise, if you are contacted by a cold caller and answer the call, just hang up. Similarly if you receive a SMS message from a number you don’t know, ignore it and do not click on any links.

If you have given personal information about your superannuation or banking details to a cold caller, contact your existing superannuation fund or bank immediately and ask them to not allow any withdrawals.

You can also block a cold caller’s number and limit the calls you receive by joining the Do Not Call register.

Avoid social media click bait

You may have also come across some posts on your social media feed which question whether your superannuation is performing or encouraging you to compare your superannuation fund. If so, take care as some businesses try to grab your attention on social media before they try to sell you their services.

Beware of other sophisticated scammers

There are also reports that many Australians have fallen victim to sophisticated scammers who use technologies that use your bank’s legitimate phone number and texts on the same thread as genuine messages. Often, people are losing their money through no fault of their own as scammers either hack or manipulate a bank or other institution’s systems which will often see victims inadvertently providing information, such as a passcode, to the scammer. Be vigilant and never provide personal information, passwords or pass codes to anyone over the phone.

Beware of scammers

As the saying goes, if it sounds too good to be true it probably is. Avoid pushy sales tactics such as cold calling or social media click bait that rushes your decision-making. If you’re thinking about making changes to your superannuation, you can always start by doing your own research, contact your existing superannuation fund, and consider using a licenced financial adviser to obtain quality financial advice about your superannuation.

On-boarding new employees 

When hiring new staff, there are certain steps you should follow to cover off on your tax, workplace, and superannuation obligations.

Confirm they are legally permitted to work in Australia

Australian citizens, permanent residents and New Zealand citizens are legally permitted to work in Australia. If the worker does not fall into these categories you must, before employing them, confirm they have a visa granting them permission to work here. For more information, visit the Department of Home Affairs website https://immi.homeaffairs.gov.au/visas

Employee or Contractor?

Establish the nature of the engagement – is the worker an employee or contractor? This matters from a tax perspective because employers will have PAYG withholding obligations to employees. By contrast, no PAYG withholding obligations are owed to contractors unless there is a PAYG voluntary withholding agreement in place. You and a contract worker (payee) can enter into a voluntary agreement to withhold an amount of tax from each payment you make to them. This is a good way to help independent contractors meet their tax obligations.

A voluntary agreement can cover a specific task or apply to successive arrangements between you and the worker. Either you or the contractor can end a voluntary agreement at any time by notifying the other in writing.

The employee/contractor distinction also matters for superannuation purposes. Employees are generally entitled to superannuation. From 1 July 2022, this also includes employees who earn less than $450 per month. On the other hand, contractors are not entitled to superannuation unless they work under a contract that is wholly or principally for their labour.

While in many cases, the status of a worker may be clear cut, if as an employer you are in any doubt about the character of the relationship, then you are encouraged by the ATO to use their Employee Contractor Decision Tool. The tool asks the user a series of questions, and then reaches a result depending on the answers provided. Print out the result and keep it on file. If you need further guidance or disagree with the result, speak to us.

Paperwork

Before commencing employment, employees should complete the following forms:

  • TFN declaration – this is so employers can work out how much tax to withhold from employees.
  • Standard super choice form – to offer eligible employees their choice of superannuation fund. Employers must fill in the details of their nominated super fund, also known as a default fund, before providing the form to an employee.

Employees can access and complete pre-filled commencement forms through ATO online services via myGov.

Request stapled super fund

If you take on a new employee and they don’t choose a super fund, employers will have an extra step to take to comply with the choice of fund rules. Employers may need to request an employee’s “stapled super fund” details from the ATO. A stapled super fund is an existing super account linked, or “stapled”, to an individual employee so it follows them as they change jobs. This aims to reduce account fees. Employers can request stapled super fund details from the ATO using ATO online services.

Confirm pay rates

An employee’s minimum wages, including penalty rates, overtime rates, and allowances will in most cases be set out in the relevant workplace Award. Additionally, some employees have special minimum wages rates in their Award, for instance juniors, apprentices, and trainees.

On the Fair Work front, employers are also generally required to provide new employees with a Fair Work Information Statement.

Contact Fair Work Australia on 13 13 94 for information about applicable rates.

State and Territory Obligations

Other issues may be in play when you take on a new employee, such a workers’ compensation coverage.

 

May 2024 Newsletter

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Selling your home? Beware of a partial Capital Gains Tax liability! 

With the temptation for homeowners to cash in on spiralling house prices around Australia, it is important to turn your mind to whether you may only have a partial CGT main residence exemption available to you, and not a full CGT exemption (because of the way you have used your home).

And while it seems that the ATO doesn’t actively chase up partial CGT main residence exemptions that may have been overlooked by homeowners themselves, there may come a time when the revenue lost from this source may pique the ATO’s interest.

But from the homeowner’s point of view, they may not even realise that they have a possible partial CGT liability in respect of their home.

So, what are some common ways that such a partial CGT liability may arise?

Didn’t move in “as soon as practicable

Firstly, when you bought your house you may not have been able to move into as “soon as practicable” (as required by the CGT main residence rules). And while in some cases this can be ignored, such as because of serious illness, in other cases it won’t be.

For example, if you bought your home subject to an existing lease that still has to run its course then you will be subject to a partial exemption because of the failure of your home to be your main residence throughout the entire period you owned it.

Likewise, the same rule will apply if for example you can’t move into your new home as “soon as practicable” because of commitment to, say, an interstate job.

In these types of cases the partial exemption will apply on a pro-rata basis to reflect the period of time during which you owned the home that you did not live in initially as your home (or were not able to treat it as your home under a relevant concession).

And this pro-rata rate will be calculated by reference to the amount you bought your home for – and not any larger subsequent market value.

Absent from home and rented it

Another way that you can lose your full CGT exemption on your home is if you are absent from it for a period (such as if you rent it while you live or work overseas or interstate) and you cannot use (or fully use) the “absence concession” to continue to treat it as your home.

This may happen, for example, if you rent it for more than six years or if you use the full main residence exemption in respect of another home you own while you are absent from your current home.

In such a case, the pro-rata calculation will usually be calculated by reference to your home’s market value when you first rent it – and thereby result in a lesser partial CGT liability.

However, the interaction of the “absence concession” rules and any rental use of your home can be complex (especially if you own another home at the time).

It therefore definitely requires good professional advice (if only to use the absence concession rules to the maximum effect, depending on your exact circumstances).

A partial exemption will also apply if you use part of your home to carry on a business (eg, consulting rooms or a shed for repair and maintenance works).

Two homes of spouses at same time

Finally, something that is often forgotten is the rule that prevents spouses (including de-facto and same sex spouses) from each being able to claim a separate main residence exemption on different homes they own and live in during a period when they are considered to be “spouses”.

In this case, the couple will have to either nominate one of the homes as their CGT-free main residence for that period or, in effect, claim a half exemption on each home for that period.

This rule can apply in a variety of situations such as where two young people become de-facto partners but each retain their own home and either each continue to live in their own home – or they live together while retaining a prior home (which they continue to treat as their main residence).

Suffice to say the CGT rules in this area are quite complex in their own right – but even more complex depending on the circumstances to which they are applied (especially given the “choices” that can be made as to how to apply them in the particular circumstances).

Again, while this area may not be one that the ATO looks at closely (and probably for good reason), it is still one that you should at least always raise with your adviser.

Conclusion

So, all in all, if you are thinking of selling your home to cash in on spiralling house prices, it is important to get advice about whether you may have a partial CGT exemption floating around – because, if nothing else, maybe one day the taxman may look more closely at such issues.

Take care with contribution timing this financial year 

Are you are planning to maximise your superannuation contribution caps this financial year? If so, it’s crucial to get the timing right so your contribution is received by your superannuation fund in the current financial year.

Lessons from a recent court case

A recent court case[1] has confirmed that contributions are made on the date they are received by a member’s superannuation fund, not when they are made. The member in this case had intended that his contributions be attributed in the year the payments were made (ie, in late June) rather than on the dates they were received (ie, in early July).

However the ATO and the Administrative Appeals Tribunal ruled that the contributions were made on the dates the funds were received by his superannuation fund, rather than the date of payment initiation. This meant that the member’s contributions were deemed to be made in the next financial year which placed the transactions into the next financial year with other contributions the member made that year, causing the member to exceed his contribution caps.

The ATO view on when a contribution is made

The timing of when a contribution is made is important for a number of reasons, particularly when this occurs close to 30 June. For example, the timing can impact when the contribution will count towards your contribution caps, whether your fund is able to accept your contribution(s) or whether a tax deduction may be claimed for your contribution(s).

The ATO’s Taxation Ruling[2] on superannuation contributions confirms that a contribution is made when the capital of the fund is increased. This occurs when an amount is received, or ownership of an asset is obtained, or a fund otherwise obtains the benefit of an amount.

For example, a contribution of money via an electronic transfer is made when the amount is credited to your superannuation fund’s bank account, not when you press the button to effect the payment.

The following table summarises some of the common ways in which funds are transferred and when the contribution is deemed to be made. Please note this list is not exhaustive:

 

 

How contribution is made When contribution is made
Electronic transfer When the funds are credited to the superannuation fund’s account.
Personal cheque The date the cheque is received by the superannuation fund provided it is promptly presented and not dishonoured (and not post-dated).Note – similar rules apply for promissory notes.
In specie[3] transfer of listed shares When the superannuation provider obtains a properly executed off-market share transfer in registrable form.
In specie transfer of real property When the superannuation provider acquires the beneficial ownership of real property, which is when the fund obtains possession of a properly executed transfer that is in registrable form, together with any title deeds and other documents necessary to procure registration of the superannuation provider as the legal owner of the land.

Timing is key

This year 30 June falls on a Sunday (a non-business day), so leaving it to the last minute and making a contribution over the weekend may not provide enough time for your contribution to reach your superannuation fund as transfers typically happen on business days.

If you are a member of a large APRA-regulated superannuation fund, make sure you know when the cut-off day is as this is the date your fund will accept contributions so that they will be allocated in that same financial year. Otherwise, there is no guarantee that contributions received after this date will be allocated before the end of the financial year. In the end, a contribution received by your fund on 1 July 2024 is a contribution that will be treated as belonging to the 2024-25 financial year.

On the other hand, if you have an SMSF, electronic transfers between accounts with the same bank generally happen immediately which means contributions will be made instantaneously and therefore count towards your contribution caps this financial year. This can be helpful if you end up making contributions last minute. However, a transfer between different banks is likely to take longer to clear which could see your SMSF receiving the transfer of funds after it was initiated by you as the contributor.

Superannuation clearing house delays

You should also take extra care if your employer makes contributions to your fund by using a superannuation clearing house as there can be a time delay from when your employer’s payment is made to the clearing house and when your superannuation fund receives the contribution. This is because contributions made by employers to a clearing house generally do not constitute the receipt of a contribution by a superannuation fund as a contribution cannot be recorded by the superannuation fund until it is received. This could see last minute 2023-24 superannuation contributions by employers not reach their employee’s fund in time to be recorded as a contribution in 2023-24 and may end up being recorded in the 2024-25 financial year. This could cause you to exceed your concessional contribution cap if you are also planning on making a personal superannuation contribution and claiming the amount as a tax deduction.

Key takeaway

The bottom line is to allow plenty of time to make your superannuation contributions well before 30 June in order for your contribution to be received by your superannuation fund this financial year because in the end, a contribution is deemed to be made at the time it is received by your superannuation fund, not when you process the transaction.

Rental properties – traps and pitfalls

Following the ATO’s claims that nine out of ten residential rental property investors who have been audited have been getting their returns wrong, it might be worth touching on some of the tax traps and pitfalls to be wary of. In no particular order, these include:

Apportionment of rental income and deductions

Where a rental property is jointly owned by two or more people, the income and deductions are split according to the owners’ respective shares of the legal ownership of the property. Joint tenancy between spouses is the most common situation, meaning a 50:50 split. In those situations there is no legal basis for the spouse with the higher marginal tax rate claiming a disproportionate share of the deductions for mortgage interest, rates, land tax, insurances, repairs and maintenance in their own return – even where they fund the payments from their own bank account.

Private use

Interest and other outgoings are not deductible to the extent the property was used for private purposes – eg. while you or a relative or friend lived in it for no or nominal consideration.

Interest deductions

Where the acquisition of a rental property has been funded by way of debt, the associated interest costs will be deductible. However, where a loan (or part of a loan) that is secured over a rental property is used for private purposes, such as buying a car or renovating the house you live in, interest can only be claimed on a pro rata basis.

Care needs to be taken when refinancing debt to ensure the tax deductibility of interest attributable to the rental property is not jeopardised.

Repairs vs improvements

The cost of genuine repairs to fix something that is broken or worn down due to wear and tear that happened while the property was tenanted is immediately deductible. Work that involves replacing the entirety of an asset would be a capital improvement and is deductible at 2½ %.

For example, your rental property might have an original 1960s bathroom, with leaky pipes and tiles that are broken or coming away. Fixing the leaks and replacing the tiles (even with something a little more modern) would fall on the repairs side of the line and be deductible outright. On the other hand, gutting the whole bathroom and replacing all the fittings with something out of Home Beautiful would be a capital upgrade and deductible at 2½ % per annum.

Initial repairs

Any deductions for repairs to your rental property have to be attributable to the time you were earning rental income from the property. If you buy a property that requires initial repairs before you can put tenants in, the cost of those repairs will not be deductible. You should still keep track of the amount you’ve spent on initial repairs as it will trigger off a capital loss when you sell the property down the track.

Certain initial repair works may be unavoidable, but defer non-urgent work if possible. So if your newly acquired rental property is in need of a coat of paint, maybe wait two or three years before contacting a painter.

Travel costs

The cost of traveling to visit your rental property to attend to things is no longer deductible. This matters especially to investors who have bought property interstate. There is an exception where an investor is in the business of letting rental properties – but very few are.

Depreciation

Second-hand depreciating assets acquired as part of the rental property can’t be written off against rental income, again unless you are in the business of letting rental properties. But the unclaimed depreciation can trigger off a capital loss on the eventual sale of the property. It’s important to keep track of these amounts in the meantime.

Cash jobs

It’s not unheard of for the tradesperson offering the best quote for a repair or maintenance job on your rental property to ask for payment in cash. Before rushing in to accept such a quote, just make sure they’re not keeping the job completely off the books and that you’ll still be getting an invoice that satisfies the substantiation rules. Otherwise you could end up blowing your cost savings (and maybe more) because you won’t be entitled to a tax deduction for the cash you’ve handed over.

What your tradie does in relation to his tax affairs is a matter between them and the Commissioner, but it shouldn’t cost you a tax deduction. Always insist on getting an invoice.

Holiday homes

Own a holiday home? Great for family holidays, but if the property is also offered for short-term rentals there are a few wrinkles you need to be aware of.

The main one is that the property needs to be genuinely available for rent, and not just at times when demand is seasonally low. So if you book the place out for yourself or family and friends for all or most of the school holidays and other peak times, the ATO will take the view that you’re not seriously trying to make a profit from any rental income you receive and will limit your deductions for mortgage interest, rates and land taxes, repairs and maintenance, insurance etc to the amount of your rental income. Likewise if you only charge mates’ rates when family and friends come to stay.

Some holiday house owners have even pretended to market their property by demanding excessive rents or imposing unrealistic conditions for short-term stays (eg. references, no pets, no kids). That is not likely to pass muster either.

Some limited personal use of the property is acceptable to the ATO, as long as you’re genuinely trying to turn a profit. Where this is the case, the deductions claimed need to be pro-rated to reflect the time the property was let or was genuinely available for rent.

Any disallowed deductions won’t be wasted entirely as they will create a capital loss on the sale of the property.

Please contact us if any of these issues raise concerns for you.

Succession planning for family businesses

For most family businesses as well as private groups, succession planning (sometimes known as transition planning) involves considerations around the eventual sale of your business, or the passing of control of it to other family members when you retire. Depending on your circumstances, this may include realising assets and making other changes to ownership, but is certainly tied up with retirement planning and estate planning.

Adopting a sound tax governance framework can help you manage tax issues around succession planning before they present a problem. Though succession planning may not have an immediate tax impact, it’s important to include tax considerations in your plan. This will avoid unexpected tax issues arising down the track when you implement your plan.

Transferring control of your business to family members may involve restructuring your business operations – changes to share structure, changes to the trustee and appointor of a trust, changes to partnership structures – or transferring assets to family members via the creation of trusts or other entities. Remember that these sorts of events can have legal and tax implications that need to be carefully considered. A common assumption with business owners is that the transaction being considered is a single “sale” — that of the business — whereas it is actually many sales of individual assets that need to be accounted for, possibly with different tax outcomes.

For example, when you dispose of or transfer your business assets there will likely be capital gains tax (CGT) consequences. The sale of a business can also trigger liabilities in relation to GST and, where applicable, wine equalisation tax, fuel tax credits and excise duty.

Where pre-CGT assets are involved, you should also understand and document the tax consequences for you and your beneficiaries. Issues for consideration include whether changes in the business operations may affect the pre-CGT status of the assets or shares and the availability of carried-forward losses.

Any significant changes to your business structures or operations (including any asset disposals) should be fully documented, along with their tax impact. Ensure information on your assets (such as acquisition dates and cost base) is properly documented. This will also ensure that any subsequent disposals of the assets can be treated correctly for tax purposes. Different strategies will have different tax consequences for the owner and beneficiaries. Consider each strategy and identify (and keep records of) significant transactions.

For example, say, as the owner of a successful family business, you prepared a basic succession plan many years ago, but since then your business has expanded and your children have grown up. One of them may work with you in the business and you would like to see them take over when you retire. The discussion you could have with this office would be how best to transfer the business and make the transition to retirement.

One option could be to restructure your business as a family trust, so you can still have some control of the business while reducing your involvement in the day-to-day operations. We can explain the tax consequences of this strategy, while also alerting you to other options and tax considerations. Once you decide on your strategy, you update your succession plan, which now includes a section detailing the tax treatment and tax payable on transfer.

Whatever strategies you use to transfer your business onto the next generation, make sure your plans are documented and you seek advice from professional advisers where needed. This will reduce the risk of incorrect tax treatment and outcomes, and possibly consequent penalties.

How myGov can help you track your super 

Keeping track of your superannuation balance is key as it impacts how much you can contribute to superannuation and whether you are entitled to other superannuation concessions and measures.

Introduction

Your total superannuation balance (TSB) is an important concept as it impacts your eligibility for up to six favourable superannuation-related measures, including the:

  • Bring forward non-concessional contribution (NCC) cap
  • Carry forward concessional contributions
  • Superannuation spouse tax offset
  • Government co-contribution, and more.

In a nutshell, your TSB includes:

  • Your superannuation accumulation account balance(s)
  • Your superannuation pension account(s), and
  • The outstanding limited recourse borrowing arrangement amount in your SMSF that you entered into from 1 July 2018 (in certain circumstances).

Your TSB for the current year is measured on 30 June of the previous financial year (ie, 30 June 2023) when determining your eligibility to make or receive certain types of superannuation contributions.

How to check your TSB

There are two main ways you can track your TSB.

Firstly, you can either contact your superannuation fund or refer to your fund’s statements and records for your TSB. When reviewing your annual statement, the TSB figure your fund reports to the ATO is generally referred to as ‘exit value’ or ‘withdrawal benefit’. This may be different to the 30 June ‘closing balance’.

The second way to check your TSB is by logging into your myGov account which will show your TSB for the previous 30 June as well as other helpful information, such as your:

  • Eligibility to use the NCC (after-tax contribution) bring forward arrangement
  • Concessional contribution cap
  • Unused carry forward concessional contribution cap amounts that have accrued since 1 July 2018
  • Employer contributions, and more.

Checking this information can be beneficial before you make any further contributions prior to 30 June 2024 as it can help you avoid exceeding your contribution caps.

The following steps should be taken to track your TSB (and other related superannuation information):

  1. Log into your myGov account by visiting my.gov.au. If you don’t have a myGov account you can create an account. Alternatively, if you have a myGov account but have not linked the ATO service to it, you can also link it here too.
  2. Select the super tab, then click on the information option and then click on ‘total superannuation balance’ (as shown in the image below). Here you will be able to see your current TSB as recorded by the ATO.
  1. You will be able to see your current TSB for each superannuation interest you hold, including your prior year’s 30 June TSB under the ‘History’ button.

Tip – check the information provided

You should take care when checking your TSB and other amounts displayed in myGov, as depending on the type of superannuation fund you have, your 30 June balance and contribution details may not have been reported to the ATO yet.

For example, SMSFs are not required to report their superannuation information to the ATO as regularly as large APRA-regulated funds so your contributions and your account balance may not be up to date in myGov. This is because the ATO obtains information about SMSFs from the annual return each year. This means any SMSF members will need to check their SMSF records to track their TSB and contribution caps if this information is not up to date in their myGov account.

Need help?

Please contact us if you need more information on how to check your TSB or if you require further information about your superannuation account.

 

[1] Mackie v Commissioner of Taxation [2024] AATA 619, 3 April 2024.

[2] Taxation Ruling TR 2010/1.

[3] An in specie contribution is a transfer of non-monetary assets in and out of a superannuation fund without the need to convert them into cash. In specie is a Latin phrase meaning ‘in the actual form’.

April 2024 Newsletter

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Six super strategies to consider before 30 June 

With the end of financial year fast approaching, now is a great time to boost your superannuation savings and potentially save on tax. Below are six superannuation strategies to consider before 30 June 2024.

Tip 1 – Use the carry forward concessional contribution rules

If you want to make up for lost time and make extra contributions to top up your superannuation, you may be able to use the carry forward concessional contribution (CC) rules (otherwise known as “catch-up concessional” rules) to make large CCs this year without exceeding your CC cap.

This strategy can allow you to carry forward any unused CC cap amounts that have accrued since 2018/19 for up to five financial years and use them to make CCs in excess of the general annual CC cap (currently $27,500 in 2023/24).

You can then make a CC using the unused carry forward amounts this financial year provided your total superannuation balance (TSB) at 30 June 2023 was below $500,000.

Tip 2 – Make a personal deductible contribution

Carry-forward contributions may also provide you with an opportunity to make higher amounts of personal deductible contributions in financial years where you may have a higher level of taxable income, for example, due to assessable capital gains.

But if you’re not eligible to use the carry forward rules to make a larger contribution, you can still boost your superannuation by making a personal deductible contribution up to the general CC cap.

It’s important to note that personal deductible contributions are only deductible if you meet all of the following conditions:

  • You make the contribution to a complying superannuation fund
  • You are at least age 18 when the contribution is made (unless you derived income from carrying on a business or from employment-related activities)
  • You make the contribution within 28 days after the month in which you turn 75
  • You notify your superannuation fund trustee in writing of your intention to claim the deduction
  • The notice must be given by the earlier of:
    • when you lodge your income tax return for the year the contributions were made, or
    • the end of the financial year following the year the contributions were made
  • The trustee of your superannuation fund must acknowledge receipt of the notice, and you cannot deduct more than the amount stated in the notice.

Tip 3 – Spouse contribution splitting

You can split up to 85% of your 2022/23 CCs before 30 June 2024 to your spouse’s superannuation if your spouse is:

  • Under preservation age, or
  • Aged between their preservation age and 65 years, and not retired at the time of the split request.

This is an effective way of building superannuation for your spouse and can manage your TSB which can have several advantages, such as:

  • Equalising your balances to maximise the amount you both have invested in tax-free retirement phase income streams, or
  • Optimising both of your TSBs to access a higher NCC cap[1], etc.

Tip 4 – Superannuation spouse tax offset

If your spouse is not working or earns a low income, you may want to consider making a NCC into their superannuation account. This strategy could benefit you both by boosting your spouse’s superannuation account and allowing you to qualify for a tax offset of up to $540.

You may be able to get the full offset if you contribute $3,000 and your spouse earns $37,000 or less pa (including their assessable income, reportable fringe benefits and reportable employer superannuation contributions).

A lower tax offset may be available if you contribute less than $3,000, or your spouse earns between $37,000 and $40,000 pa.

Tip 5 – Maximise non-concessional contributions

Another way to boost your superannuation is to make a NCC with some of your after-tax income or savings. The general NCC cap for 2023/24 is $110,000 and eligibility to utilise the cap depends on your TSB1.

Although NCCs don’t reduce your taxable income for the year, you can still benefit from the low tax rate of up to 15% that is paid on superannuation on investment earnings. This tax rate may be lower than what you might pay if you held the money in other investments outside superannuation.

Tip 6 – Receive the government co-contribution

If you’re a low or middle-income earner earning less than $58,445 in 2023/24 and at least 10% is from your job or a business, you may want to consider making a NCC to superannuation before 1 July 2024. If you do, the Government may make a ‘co-contribution’ of up to $500 into your superannuation account.

The maximum co-contribution is available if you contribute $1,000 and earn $43,445 pa or less. You may receive a lower amount if you contribute less than $1,000 and/or earn between $43,445 and $58,445 pa.

Like the superannuation spouse tax offset, the definition of total income for the purposes of the co-contribution includes assessable income, reportable fringe benefits and reportable employer superannuation contributions.

Need help?

You’ll need to meet certain eligibility conditions before benefitting from any of these strategies. Contact us before 30 June if you’re thinking about investing more in superannuation so we can help you decide which strategies are most appropriate to your circumstances.

Important tax residency issues to consider 

What happens from a tax point of view when a person leaves Australia part-way through the income year? How is the income they derived before that time taxed? And how is any income they derived after that time taxed (whether from Australian or foreign sources)?

Well, the answer will primarily depend on whether the person ceases to be a “resident of Australia” for tax purposes at the time they leave Australia.

This can be one of the most difficult issues in tax law to determine. Not only will it depend on the precise facts and the intention of the taxpayer, but it can also involve what often seems to be a “judgement-call” at the relevant time. This is especially the case as a taxpayer’s residency status is worked out on an income year basis, and this can change from one income year to another.

But putting aside all the issues involved in determining whether a person ceases to be a resident of Australia for tax purposes part-way through an income year, let us assume this is the case.

So, what are some of the general tax consequences associated with such part-year residency?

For a start, the person’s tax threshold for the relevant income year will be adjusted downwards (pro-rated) to reflect the fact that the person ceased to be a resident for tax purposes part-way through the income year. As a result, this pro-rated threshold will apply to the person’s assessable income:

  • from all sources both within and outside Australia for the period they are a resident of Australia, and
  • from sources within Australia while they are a foreign resident.

Importantly, this in effect means that the resident tax rates do not change on the basis of a person’s part-year residency – but only the relevant tax-free threshold.

It should also be noted that assessable income derived from sources outside Australia during the period in the income year that the person is a “foreign resident” will not be subject to tax in Australia as it will be outside the Australian taxing jurisdiction.

And, of course, for the following income years the person will be assessed as a foreign resident and therefore only pay tax in Australia on Australian-sourced assessable income at foreign resident rates.

Another consequence that is often overlooked is that a person ceasing to be a resident of Australia for tax purposes will be deemed to have disposed of all their Australian-sourced CGT assets for their market value at that time. However, this is subject to an exception for “taxable Australian property” (which always remain subject to CGT regardless of the taxpayer’s residency status) and any “pre-CGT” assets of the taxpayer.

Furthermore, a person can instead choose to opt out of this “deemed disposal” rule – in which case all their Australian-sourced CGT assets will be treated as taxable Australian property until they are actually disposed of or the taxpayer becomes a resident of Australia again for tax purposes.

So, these are some of the tax considerations to be taken into account on a person ceasing to be a resident of Australia.

But the key question of determining a person’s residency for tax purposes remains – and this is not always an easy issue.

For example, in a recent tax decision, the Administrative Appeals Tribunal held that a person was a resident of Australia for tax purposes even though they were working outside the country for substantially more than half the year and even though this occurred over a four-year period.

The AAT found that because the taxpayer’s wife and family remained in Australia and because he had other connections to Australia such as the ownership of property and motor vehicles here, then he was a resident for tax purposes – as he had no “plans to abandon Australia”.

The case illustrates something of the difficulty of determining a person’s residency for tax purposes. It is clearly a “case-by-case” matter.

And it is clearly something on which professional advice should always be sought.

Family companies and the many tax traps 

If you own a family company, then it is very important how you receive and treat any payments made from the company to you (or your associates – for example, your spouse).  And this is simply because any payment from a company (other than a return of the original capital) is, in most cases, prima-facie a dividend in the hands of the recipient – however it may otherwise be classified.

In particular, if you arrange for your company to provide you (or your associate) a loan, then it will be deemed to be a taxable dividend (and an unfranked one at that) – unless you comply with the requirements for it to be a “complying loan’’ (which includes imposing a market rate of interest on it). Likewise, any forgiveness by the company of the loan made to you will be treated as a deemed dividend in your hands also – again unless certain requirements are met.

This area of treating loans by the company to a shareholder (or associate) as a deemed “Div 7A dividend” is a fundamental issue in tax law – and has been for many, many years.

And it is a matter that you should always speak to your adviser about.

Importantly, it also extends to the case where your family trust makes a resolution to distribute trust income to a beneficiary company (usually a so-called “bucket company”) and  the amount is never actually paid to the company but is kept in the trust.

In this case, the ATO treats this as a deemed dividend made by the company to the trust – albeit, it is a hot button issue in tax at the moment as to whether the ATO is correct in its approach to this.

Again, this is a matter that you MUST always speak to your adviser about – especially with the current uncertainty and changes in the air in relation to Div 7A.

With family companies there is also the issue of loans made by shareholders or directors to the company and any subsequent forgiveness of them.

On the face of it a complete forgiveness of the debt owed without any repayment of the loan should trigger a capital loss in the hands of the shareholder or director.

However, the tax laws are more sophisticated than this – and a capital loss will only arise to the extent that the debt is incapable of being repaid by the company. There is also an argument as to whether any capital loss should be available at all even if the company could not repay the debt.

Likewise, there will be consequences for the company.

While no immediate taxable gain will arise to the company from the release of its obligation to repay the debt, there may be a restriction on its ability to claim tax deductions in the future for such things as carry forward tax losses and/or depreciation. While this may not be an issue if the company is winding up, it will be if it continues to operate.

So, the moral of the story is just because you own the company doesn’t mean you can treat it as your own private bank to make withdrawals from it as you please or make loans to it (and forgive them) – without considering the serious tax consequences of such actions.

There will always be tax consequences – and you will always need professional advice on this matter.

Selling your home to a developer? Beware the tax consequences! 

The NSW state Government is attempting to help with the housing affordability crisis by making areas around train stations and shopping centres eligible for rezoning for denser development. It will be important to see your tax adviser if you receive a generous offer from a property developer for your home (or rental property) as a result of this rezoning. And not just if you live in NSW.

This is because you will have to consider the capital gains tax (CGT) – or possible other income tax consequences – of selling your home or rental property in these circumstances – including where you may be forced to sell under some state compulsory acquisition rule (eg, in relation to strata units).

In relation to something that is your home you should be right as a home is exempt from CGT.

But if you have ever used your home to produce assessable income (eg, rented the whole or a part of it out or used it as a place of business) you will be subject to a partial CGT liability – and calculating the amount of this liability can be quite complex, depending on the exact situation.

For example, if you originally lived in the home and rented it for a period you will ordinarily be able to apply the “absence concession” to continue to treat it as your home and therefore sell it CGT-free. But if you can’t, you will have to reset its cost for CGT purposes by reference to its market value at the time you first rented it and then recalculated its precise cost for the calculation of the partial gain. This includes knowing what range of expenses can be included in this cost!

Likewise, if you use part of your home as a place of business you will have to reset its cost for CGT purposes on the same basis – but in this case you may (and it’s a big “may”) be entitled to the CGT concessions for carrying on a small business. But this is an area ripe with confusion – and controversy (unbeknown to many).

And then of course, there is the issue of whether you qualify for the generous 50% CGT discount to reduce any assessable capital gain – and this is often not as simple as it looks.

It may even be the case that you could be assessed on any gain you make on the sale of your property on the basis that it is like taxable business income (and not a concessionally taxed capital gain). And this can potentially happen if you carry out activities in a business-like manner to increase the value of your home in order to fetch a higher price from developers. There is even recent case law on this matter which confirms this view (albeit, this case law is only at a lower tribunal level).

So, if for better or worse, if you find yourself being approached by a developer to sell your home (or other real estate), go see your tax practitioner. Their advice will be invaluable in perhaps this one-off chance to make a significant gain on your main asset.

The tax treatment of compensation payments can be tricky 

If you have had a rental or commercial property damaged by recent summer storms (or bushfires or floods) you may have received an insurance payout to cover the damage. You may be surprised to know that this payout is subject to capital gains tax (CGT) on the basis that it arises from your right to seek compensation (being a CGT asset itself). However, the tax law and the ATO will treat it concessionally depending on what exactly the payout is for and how it will be used.

For example, if the payout is for the “destruction or loss” of the whole or part of the property, the payout won’t be subject to CGT at that time – but only if it is used to acquire a replacement asset within the required time (generally two years). This is because a “concessional roll-over” applies in the circumstances. However, there may be an immediate CGT liability (and/or other CGT consequences) if only some (or more) than the amount of the payout is used in acquiring a replacement asset.

On the other hand, if a payout is received for merely some “permanent damage” to the property then a different CGT concession will apply – namely, there will be a reduction in the cost base of the property for CGT purposes by the extent of the compensation received (and whether or not the proceeds are used to repair or restore the damaged property).

So, if you find yourself in this situation, it is vital to see your tax professional to help assess what situation you fall into – and furthermore how the compensation is exactly treated in that case.

In the different case where you receive compensation for wrongful dismissal from work and/or for injury suffered at work, it is also vital to seek professional advice. This is because such compensation can potentially be treated in one of several ways:

  • Firstly, it may be treated as assessable income to the extent it is a substitution for lost income – regardless of whether it is received in a lump sum form or not and however it is calculated.
  • Secondly, it can be treated as being exempt from being assessable income (and CGT) where it is received for injury, the loss of physical capacity, illness, pain, suffering or where it is paid under anti-discrimination legislation.

However, determining which category of compensation such a payment falls into is not always easy – especially where it may be an out-of-court settlement payment which comprises both types of payments. While generally such payments will not be taxable, if they are an out-of-court settlement and the whole or part of the payment can be identified as comprising compensation for lost income (by whatever means, such as the initial pleadings), then that component can be assessable.

So, suffice to say your professional adviser is invaluable in this situation – and in particular before agreeing on the receipt of any such settlement payment.

Mortgage vs super – where should I put my extra cash? 

Many of us wonder about the best vehicle to use for our extra savings. Is it better to direct extra savings to your mortgage or superannuation? As with most financial decisions, there is no one-size-fits-all approach as it depends on a number of factors for each individual.

Paying extra off the mortgage

The priority for most people is to pay extra off their mortgage. This is because extra repayments can reduce the amount of interest payable and will help you pay off your loan sooner, freeing you up from mortgage repayment commitments.

Furthermore, if your home loan has a redraw or offset facility, you can still access your money if your circumstances change. However paying extra off your mortgage involves using after-tax money which is less advantageous than using pre-tax income to invest into superannuation which will eventually be used to pay off your mortgage.

Paying extra into superannuation

Paying extra to superannuation will usually involve pre-tax money by making salary sacrifice contributions. An effective salary sacrifice agreement involves an employee agreeing in writing to forgo part of their future entitlement to salary or wages in return for the employer providing them with benefits of a similar value, such as increased employer superannuation contributions.

As salary sacrifice contributions are made with pre-tax dollars and do not form part of your assessable income, this means these contributions are not taxed at your marginal tax rate and will instead be taxed at a maximum of 15% when received by your superannuation fund.

It is also worth noting that making pre-tax contributions such as salary sacrifice contributions count towards the concessional contribution (CC) cap which is currently $27,500 pa in 2023/24 (or $30,000 in 2024/25). As your employer superannuation guarantee (SG) contributions also count towards this cap, you will need to determine how much room you have left within your cap before you start salary sacrificing to superannuation. As discussed in the ‘Six super strategies to consider before 30 June’ article in this Newsletter, there is the ability to make larger CCs by utilising the carry forward concessional contribution rules if you meet certain eligibility criteria.

In a nutshell, once the money is in superannuation it is invested and will grow. The power of compounding returns along with the concessional tax nature of superannuation means that even small contributions can boost your retirement savings in the future. When the time is right and you are ready to retire, you can either withdraw a tax-free lump sum to clear your remaining mortgage or commence a superannuation pension and draw tax-free pension payments to meet your mortgage repayments from the age of 60 onwards.

Example – pre vs post tax money

Bill earns $150,000 per year and has a savings capacity of around $1,000 – $1,500 per month. Bill can either:

  • Direct this amount to his mortgage, or
  • Salary sacrifice $1,587 into superannuation as this contribution occurs before tax (ie, the after tax cost of $1,000 is $1,587).

Bill decides to salary sacrifice to superannuation. Bill’s contribution is taxed at 15% when it is received by his fund so his end contribution is $1,349. For the same out-of-pocket cost to Bill, his superannuation fund receives an extra $349 each month.

This example shows the difference between Bill’s marginal tax rate (37%) and the tax rate on contributions (15%) constitutes the benefit of salary sacrifice contributions. As mentioned above, Bill will need to ensure he does not exceed his CC cap by making extra salary sacrifice contributions to superannuation.

Final thoughts

So which option is better? Well it depends. The answer boils down to a number of factors that need to be considered, such as your mortgage interest rate, your income and marginal tax rate, your superannuation investment strategy, and your age to retirement. If you need extra information or advice on what you should do, make sure you speak to a financial adviser before you make any financial decisions when it comes to your mortgage or superannuation.

 

 

 

 

 

[1] Refer to the ‘Super contribution caps to increase on 1 July’ article in last month’s Newsletter (March 2024) for more information

March 2024 Newsletter

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Stage 3 tax cuts – a tax saving opportunity?

Legislation giving effect to the government’s revised settings for the Stage 3 tax cuts has been passed by both houses of Parliament with the support of the Coalition.

The stage 3 tax cut changes:

  • Reduce the 19% tax rate to 16% for incomes between $18,200 and $45,000.
  • Reduce the 32.5% tax rate to 30% for incomes between $45,000 and the new $135,000 threshold.
  • Increase the threshold at which the 37% tax rate applies from $120,000 to $135,000.
  • Increase the threshold at which the 45% tax rate applies from $180,000 to $190,000.

A permanent tax saving

Many taxpayers and their advisers focus on timing issues around year-end by deferring income and bringing forward deductions. Legitimate steps can be taken to shift taxable income from one year to the next and most people would prefer to pay tax next year rather than this year. However, any benefit gained reverses in the following year when you have to do it all again just to stand still. It’s a lot of effort for a once off timing advantage.

The difference with the 1 July 2024 tax rate changes is that reducing your taxable income in 2023-24 and increasing it in 2024-25 (where it is taxed at a lower rate) produces a permanent saving over the two-year period – a saving you get to keep. That may make such timing issues worth another look.

How much can you save?

That depends on your where you sit on the income scales and how much taxable income is shifted. Very high income earners will have a marginal tax rate of 45% regardless of whether they shift income and deductions around, and those on lower incomes don’t pay much tax to begin with, so their potential savings are less.

But for anyone who expects to fall in the taxable income range of $120,000 to $135,000, for example, there is a permanent saving of 7% on up to $15,000 in taxable income that is shifted from 2023-24 into 2024-25.

Take someone in that income range who owns a rental property which is in need of a $15,000 paint job, and who was planning to get it done by Christmas. They could save themselves $1,050 by arranging to have the job done in May or June. Not a fortune, but not chickenfeed either.

So, how can you go about shifting taxable income into 2024-25?

Before looking at various options, it is necessary to point out that the tax laws include anti-avoidance rules that prevent tax planning strategies which have as their sole or dominant purpose the gaining of a tax advantage. However, if you are simply bringing forward ordinary business-related purchases that you would have made anyway, those rules are unlikely to be triggered. To make certain you stay on the right side of the tax rules you should check with us before taking any action.

Bringing deductions forward

Subject to that necessary reservation, and depending on your expected taxable income, bringing deductions forward into the 2023-24 income year offers the widest range of options for achieving a permanent tax saving. Bear in mind that bringing purchases forward does involve an earlier than planned cashflow impact that you would need to fund. Options include:

Rental properties

If you have a rental property that is in need of any sort of maintenance or repairs, why not get on to it now? You’ll be bringing the deduction into 2023-24 and keeping your tenants happy at the same time. There can sometimes be a fine line between repairs (deductible immediately) and improvements (deductible over time). We can help you sort out which is which.

Gifts and donations

If you have a tradition of gifting and donating, maybe to telethons and appeals that occur later in the year, consider making those donations to the charities before the end of June 2024. Charities are more than happy to receive donations at any time of the year, and if the taxman can give it an extra boost, why not? Double check that your chosen charity is a deductible gift recipient.

Superannuation

Consider making after-tax contributions into your super fund. But be mindful of contribution caps and the additional 15% tax on contributions made by high income earners. You should seek financial advice prior to taking any action.

Sole traders and partnerships

Do you have a small business which you operate through your own name or in partnership? Consider some of these possibilities:

  • Depreciation: Could you do with a new laptop or other tools and equipment? Or even a modest motor vehicle? Legislation that is expected to pass Parliament before 30 June 2024 will set the small business threshold for claiming an outright deduction for the cost of depreciating assets to $20,000. If you’re planning to make these purchases anyway, you would be better off with that sort of deduction falling into the 2023-24 year where the tax rate is higher. So consider paying a visit to JB Hi-fi, Bunnings or the nearest car yard and start looking around.
  • Bad debts: Have a receivable you know isn’t going to pay, but you just haven’t wanted to admit it? Consider writing it off and take the deduction now. But remember, the debt must be more than simply doubtful and there are certain other requirements which must be met. We can help you with those.
  • Obsolete stock: Is that box of polaroid cameras really going to move anywhere other than to a museum? Write it out of stock before 30 June 2024 and take the deduction.
  • Bring forward deductible expenses: Buying two boxes of printer paper? Buy three instead. Stock up on printer ink, you never know when you’re going to have that big print run you hadn’t anticipated. Consider what other consumables you use and stock up for your short term needs before 30 June 2024.
  • Prepay deductible expenditure: All taxpayers are entitled to claim deductible prepaid expenditure where the expenditure is below $1,000 (excluding GST) or the expenditure is required by law (e.g., car registration fees). Where the expenditure is $1,000 or more, small business entities can deduct the full amount of prepaid expenditure if it relates to a period of 12 months or less. Note that this is also available to non-business expenditure of individuals (e.g., work-related expenses or rental property expenses).
  • Employee bonuses: Confirm commitments to pay employee bonuses are made by 30 June 2024, and don’t forget that PAYG withholding must be withheld when the bonuses are paid.
  • Skills and training: Take advantage of the small business entity skills and training boost before it ends on 30 June 2024. The Boost enables small businesses to deduct an additional 20% of expenditure that is incurred for the provision of eligible external training courses to their employees by registered providers in Australia.
  • Energy incentive: Take advantage of the small business entity energy incentive which provides a bonus deduction of 20%. Eligible assets include heat pumps and electric heating or cooling systems, and demand management assets such as batteries or thermal energy storage. Eligible assets or upgrades will need to be first used or installed ready for use by 30 June 2024.
    Note: this incentive is provided for in the same Bill as the $20,000 instant asset write-off provisions, which is currently before Parliament and is expected to pass before 30 June 2024.

Deferring income

Options for shifting income into the 2024-25 year are more limited, but include:

Salary sacrifice

Consider salary sacrificing into super before 30 June 2024. As mentioned above, be mindful of the contribution caps, the additional tax for higher income earners and seek financial advice before taking any action.

Interest

Ensure term deposits mature after 30 June 2024.

Need help?

We are here to help you work through any of these options.

Don’t forget about the CGT small business rollover

For those who run a “small business” and decide to sell it, the various Capital Gain Tax (CGT) small business concessions are invaluable (as has been noted many times before).

Of course, it is great if you can qualify for the “15-year exemption” concession because this will mean that you won’t have to pay any CGT. But this requires, among other things, that you are 55 years or over and are “retiring in connection” with the sale, something that may just not be the case.

But if this is not the case, you may still be able to use the retirement exemption to eliminate up to $500,000 of capital gain.

However, if you are under 55 years of age at the time of the sale of the business then any qualifying capital gain must be paid into your super. You cannot take it directly. On the other hand, if you are 55 years or older you can take it directly without having to pay it into super and spend it as you wish.

But like the “15-year exemption” there are a number of hoops to jump through, especially if the capital gain has been made by a company or family trust you control. And these hoops require, among other things, that the exempt CGT amount is paid to you within the appropriate time limits.

As a last resort, you can use the roll-over in the CGT small business concessions to acquire a replacement asset. However, if a replacement asset is not acquired within two years, then the capital gain is reinstated and taxed at that time.

But this concession is far more than “a last resort”.

In fact, it is a significant (and acceptable) planning device in its own right. Furthermore, it can be used from the start in relation to the whole of the capital gain so that all its benefits can be fully utilised.

And these benefits include the ability to defer the assessment of the gain for up to two years to, say, allow time for you to turn 55 years of age so that you can then use the retirement exemption to take the capital gain CGT-free.

It can also be used to buy you time to meet other relevant conditions to qualify for the retirement exemption – so that when the rolled over gain is reinstated after two years you can then apply the retirement exemption to your benefit. This may be relevant where, for example, the capital gain was made by a family trust, and you need to find a “controller” of the trust in order to use the exemption.

And if nothing else the rollover can give you an extra two years just to think what you are going to do about things, including whether just to do the obvious and buy a replacement business asset (of any type) in the meantime.

So, once again, the advice of your accountant is invaluable in the matter of whether to buy a replacement asset or when (and how) it is best to realise your capital gain.

Super contribution caps to increase on 1 July

For the first time in three years, the superannuation contributions are set to increase from 1 July 2024.

Contribution caps to increase

Due to indexation, the contribution caps will increase on 1 July 2024 as follows:

  • Concessional contributions cap – from $27,000 to $30,000
  • Non-concessional contributions cap – from $110,000 to $120,000
  • The maximum non-concessional contributions cap under the bring forward rules – from $330,000 to $360,000

What are concessional contributions?

Concessional contributions (CC) are before-tax contributions and are generally taxed at 15%. This is the most common type of contribution individuals receive as it includes superannuation guarantee (SG) payments your employer makes into your fund on your behalf. Other types of CCs include salary sacrifice contributions and tax-deductible personal contributions.

The government sets limits on how much money you can add to your superannuation each year. Currently, the annual CC cap is $27,500 in 2023/24.

What are non-concessional contributions?

Non-concessional contributions (NCC) are voluntary contributions you can make from your after-tax dollars. For example, you may wish to make extra contributions using funds from your bank account or other savings.

As such, NCCs are an after-tax contribution because your employer has already taken out the tax you need to pay on your income. Currently, the annual NCC cap is $110,000 in 2023/24.

What are the bring forward rules?

The bring forward rules apply to NCCs and allow you to make up to three years of NCCs in a single financial year, if you’re eligible. This means you can put in up to three times the annual cap of $110,000, which means you may be able to top up your superannuation by $330,000 within the same financial year.

Using the bring forward rules can be beneficial for individuals who have a large amount of cash to invest which may have come from an inheritance or from the sale of an asset/property.

However, how much you can make as a NCC will depend on your total superannuation balance (TSB) as at 30 June of the previous financial year (see table below).

Bring forward NCC amounts will also increase

In addition to the contribution caps increasing, the maximum NCC cap under the bring forward rules will also increase on 1 July 2024.

The table below shows the TSB thresholds that apply to determine how much you can contribute under the bring forward rules:

 

Your TSB at 30 June 2024 Maximum NCC cap Bring forward period
< $1.66m $360,000 3 years
$1.66 to < $1.78m $240,000 2 years
$1.78m to < $1.9m $120,000 1 year
$1.9m + $0 $0

Take care before you contribute

The increase to the NCC cap under the bring forward rules will not apply to individuals who have already triggered the bring forward rule in either this year (2023/24) or last year (2022/23) and are still in their bring forward period. This is because the NCC cap that applies to an individual is calculated with reference to the standard NCC cap when they triggered the bring forward rule in their first year.

For example, if the NCC cap in the second and third year of a bring forward period changed to $120,000 due to indexation, your NCC cap will still be $330,000 ($110,000 x 3 years) and not $350,000 ($110,000 + $120,000 + $120,000).

For this reason, if you want to maximise your NCCs using the bring forward rule, you may wish to consider restricting your NCCs this year to $110,000 or less so you do not trigger the bring forward rule this year.

However, how much you can contribute and whether your fund is allowed to accept your contribution can depend on your age, your TSB and other eligibility criteria. The rules are complex and making contributions to superannuation that exceed the contribution caps can result in excess tax. Give us a call if you need any further information or would like to chat about your options.

Briefing a barrister

When you’re faced with a complex or high-risk question in tax or super, briefing a barrister can provide you with the expertise and perspective to help you move towards a solution with confidence.

Barristers (who are also referred to as “counsel”) are independent specialists in court work and legal advice. There are specialist barristers across Australia in tax, super and associated areas of law. This includes “King’s Counsel” or “Senior Counsel”, who are barristers of seniority and eminence. The barristers who practice in tax and super will particularly be familiar with the ATO, and also the decision-making approaches of the Administrative Appeals Tribunal (AAT) and the Federal Court of Australia.

Why brief a barrister?

Although barristers are best known for their courtroom advocacy, that’s only part of what they offer. Barristers, through their training, experience and networks, are intimately familiar with the decision-making processes and reasoning of courts and tribunals. When barristers address complex and high-risk legal questions, they provide precise advice and practical solutions guided by how laws are interpreted and applied by courts and tribunals in practice.

You may consider briefing a barrister to provide advice on high-risk or high-value matters, or when you have limited time to answer a complex question. In those situations, it’s prudent to obtain specialist advice to ensure you fulfill your duties. A barrister’s expertise and objectivity will provide you with confidence as to the best approach in the circumstances.

Who can brief a barrister?

Anyone can brief a barrister. There are broadly two ways you can do it:

  • directly (where you brief a barrister without engaging a solicitor), or
  • indirectly (where you engage a solicitor and instruct them to brief a barrister).

Directly briefing a barrister (which is also referred to as “direct access” briefing) can provide you with cost and efficiency benefits. Generally, barristers are less expensive than solicitors of equivalent experience.

Barristers are not obliged to take direct briefs, but many do. Barristers may directly give legal advice and may prepare and advise on certain legal documents (in addition to their dispute-related work). Importantly, barristers can be directly briefed to appear in the AAT.

There are slightly different rules in each Australian state and territory on the types of work that barristers can and can’t do, and the circumstances in which you can directly brief a barrister. Generally, barristers are not permitted to undertake work traditionally performed only by solicitors, such as conducting general correspondence or other administrative tasks in relation to the client’s legal affairs.

In some circumstances, barristers who have been directly briefed may later request that their client also engage a solicitor. This will occur where the absence of an instructing solicitor would seriously prejudice the client’s interests (for example, where a solicitor is needed to help the client gather large amounts of evidence).

Who should you brief?

As a starting point, the bar associations of each state and territory maintain a website where you can view and search the profiles of every barrister in that jurisdiction. On those websites, you’ll be able to identify the barristers who practice in tax and super and view their background, experience level and contact details. Just search for “bar association” in your state or territory.

If you’ve engaged a solicitor, they’ll be able to recommend a good barrister. If you want to brief directly, but you don’t know who to brief, you can obtain guidance from barristers’ clerks. The clerks act like an agent for a large group of barristers. The clerks have familiarity with the expertise, experience and availability of each barrister. The clerks’ contact details are also on the bar association websites.

Preparing a brief

Historically, a “brief” was a comprehensive set of papers given to a barrister to enable them to appear, advise, or draft or settle documents (as the case may be). Today, barristers are more versatile in what they receive from clients (and how they receive it).

If you’ve directly briefed a barrister, you should first speak to them about the nature and form of documents and information they require you to provide. For example, where you require tax advice on a legal question, your barrister may (depending on the circumstances) ask you to provide the following types of documents and information:

  • questions upon which you require legal advice
  • timeframes for the provision of that advice
  • identity of all parties involved in the subject matter of the advice
  • chronology of key events, and
  • key correspondence, contracts and other documents.

Barristers will also have their eye on ensuring their advice is commercially acceptable. For this reason, it is useful to also inform them about:

  • your purpose for engaging in relevant activities, and
  • any commercial issues likely to influence your preferred approach.

Some tips

If you’re going to brief a barrister, you should keep these tips in mind:

  • Brief early: This will give your barrister the opportunity to read the brief, understand your circumstances and seek out any further information.
  • Brief clearly: Precisely communicating what you want from your barrister (and when, how and why you want it) will provide you with the best outcome.
  • Brief orderly: Where you need to provide lots of documents, speak to your barrister about the form and categorisation in which they prefer to receive, store and use them.

Barristers offer you legal expertise from a practical perspective. You should visit the website for the bar association in your state or territory if you want further information about the role of barristers or if you want to find a barrister to help you.

 

February 2024

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Compensation from your bank or financial institution – is it taxable?

Unfortunately our financial institutions have not always acted as ethically as we consumers would like.

Whether you’ve received bad advice or paid for advice you didn’t receive at all, our supervisory and regulatory bodies have sought not only to improve the system so it won’t happen again, but also to ensure that if you are on the receiving end of such bad behaviour, you could be entitled to receive financial restitution.

If you’ve recently received a compensation payment, you might be wondering whether you need to pay tax on it.

The answer is – it depends!

It depends on how your investment was held1 and the type of compensation you received.

For example, if you’ve disposed of the investment and previously reported a capital gain in your income tax return, your compensation payment increases the capital gain (you may be able to claim the 50% discount too if you held the investment for more than 12 months).  You may need to amend your income tax return to include this additional capital gain.

If you haven’t yet disposed of the investment, and you hold it as a capital investment1, then the compensation payment reduces its cost for when you do dispose of it in the future (make sure keep details of the compensation payment with your tax records to provide to us later).

Where your compensation payment includes an amount that is a refund or reimbursement of adviser fees, and these fees were previously claimed a tax deduction by you, then the amount you received as a refund or reimbursement will generally be taxable to you in the income year you receive it.   Similarly, any part of the payment that represents interest should also be included in your tax return in the year you receive it.

If you’ve received an amount of compensation and not sure whether it is taxable, or if you need to amend a prior year tax return for a payment you received, please reach out to us.

1 Note the tax treatment described may be different if a compensation payment relates to an investment that is held on trust, as a revenue asset, or received by a business or superannuation fund.

Tax issues when dealing with volunteers

From bushfire relief groups, sporting clubs, environmental groups, charity associations and many more, volunteers are an indispensable workforce and support network for many organisations. For most, if not all, having volunteers ready to lend a hand is pivotal in them being able to function or survive.

Given that there are many hundreds of volunteers propping up all sorts of good works throughout the nation, and in the spirit of thorough tax planning, an important practical consideration for many may be if payments to volunteers constitute assessable income and whether their expenses are tax deductible.

What’s a volunteer?

There is no common law definition of “volunteer” for tax purposes, although it typically means someone who enters into any service of their own free will, or who offers to perform a service or undertaking. A genuine volunteer does not work under a contractual obligation for remuneration, and would not be an employee or an independent contractor.

Volunteers can be paid in cash, given non-cash benefits or a combination of both – payments include honorariums, reimbursements and allowances. Generally, receipts which are earned, expected, relied upon and have an element of periodicity, recurrence or regularity are treated as assessable income.

Conversely, where a person’s activities are a pastime or hobby – rather than income producing – money and other benefits received from those activities are generally not perceived as assessable income.

The examples below shed light on whether typical payments such as honorariums, reimbursements and allowances constitute assessable income.

Is an honorarium assessable income?

An honorarium is either an honorary reward for voluntary services, or a fee for professional services voluntarily rendered, and can be paid in money or property.

Example 1

  1. Alex works as a computer programmer at the local city council and volunteers as a referee for the local rugby union. This year he organised an accreditation course for new referees. He applied for a grant, arranged advertising, assembled course materials, and booked venues. Michael is awarded an honorarium of $100 for his efforts.
  2. No, the honorarium is not assessable income as honorary rewards for voluntary services are not assessable as income and related expenses are not deductible.

Example 2

  1. Mindy has an accounting practice and volunteers at the local art gallery. Mindy prepares the gallery’s annual report using her business’s software and equipment. At the gallery’s annual general meeting, Mindy is awarded an honorarium of $800 in appreciation of her services.
  2. Yes, this honorarium constitutes assessable income because it is a reward for services connected to her income-producing activities.

Is a reimbursement assessable income?

A reimbursement is precise compensation, in part or full, for an expense already incurred, even if the expense has not yet been paid. A payment is more likely to be a reimbursement where the recipient is required to substantiate expenses and/or refund unspent amounts.

Example 3

  1. Matthew is an electrical contractor. He volunteers to mow the yard of a local not-for-profit childcare centre. Matthew purchases a $15 spare part for the centre’s mower. The childcare centre reimburses Matthew for the cost of the spare part.
  2. No, the $15 reimbursement is not assessable income because Matthew has not made the payment in the course of his enterprise as an electrician.

Example 4

  1. Rose has a gardening business. She volunteers to prune the shrubs of a local nursing home and uses materials from her business’s trading stock.
  2. Yes, any reimbursement she receives for the cost of the materials is assessable income because the supplies were made in the course of her enterprise.

Is an allowance assessable income?

An allowance is a definite predetermined amount to cover an estimated expense. It is paid even if the recipient does not spend the full amount.

Example 5

  1. Andy volunteers as a telephone counsellor for a crisis centre. He is rostered on night shifts during the week and is occasionally called in on weekends. When Andy works weekends, the centre pays him an allowance of $150. The allowance is paid to acknowledge Andy’s extra efforts and to compensate him for additional costs incurred.

A: Yes, these payments to Andy are considered assessable income because he received the allowance with no regard to actual expenses and there is no requirement to repay unspent money.

Expenses incurred by volunteers

On the tax deductibility of volunteer expenses, a volunteer may be entitled to claim expenses incurred in gaining or producing assessable income – except where the expenses are of a capital, private or domestic nature.

For instance, expenditure on items such as travel, uniforms or safety equipment could be deductible, but expenses incurred for private and income-producing purposes must be apportioned – with only the income-producing portion of the expense being tax deductible.

Example 6

  1. Robert operates a commercial fishing trawler and uses navigational charts in his business. He also volunteers as an unpaid training officer at the volunteer coastguard. Robert purchases two identical sets of navigational charts – one for his business, the other as a training aid in coastguard courses.
  2. Yes, Robert can claim the part incurred in gaining or producing assessable income – in this case, half the total cost.

What about donations? Are these deductible?

It is also common for volunteers to donate money, goods and time to not-for-profit organisations. To be tax deductible, a gift must comply with relevant gift conditions, and:

  • be made voluntarily
  • be made to a deductible gift recipient, and
  • be in the form of money ($2 or more) or certain types of property.

Donors can claim deductions for most, but not all, gifts they make to registered deductible gift recipients. For instance, a gift of a service, including a volunteer’s time, is not deductible as no money or property is transferred to the deductible gift recipient. However, individuals may be entitled to a tax deduction for contributions made at fundraising events, including dinners and charity auctions.

Example 7

Mila buys a clock at a charity auction for $200. This is not a gift even if Mila has paid a lot more than the value of the clock. Payments that are not gifts include those to school building funds as an alternative to an increase in school fees and purchases of raffle or art union tickets, chocolates and pens.

Example 8

Clive receives a lapel badge for his donation to a deductible gift recipient. As the lapel badge is not a material benefit or an advantage, the donation is a gift.

Consult this office for more information on which volunteer payments are considered assessable income and which expenses are typically tax deductible.

Collectables – and inherited jewellery

Collectables

Capital gains tax does not just apply to “big ticket” items such as real estate, farms and shareholdings. It also applies to a special class of assets known as “personal use assets” and, in particular, those personal use assets known as “collectibles”.

“Collectables” are specifically defined under the tax law to mean the following items that are “used or kept mainly for your personal use or enjoyment”:

  • artwork, jewellery, an antique, or a coin or medallion; or
  • a rare folio, manuscript or book; or
  • a postage stamp or first day cover.

However, for an asset to be a collectable, it must have cost more than $500. Otherwise, collectables acquired for $500 or less are exempt from CGT (but subject to important rules to get around or avoid this threshold test).

However, the most important rule about a collectable is that if you make a capital loss on selling or disposing of a collectable, that capital loss can only be offset against capital gains from other collectibles. It cannot be offset against the capital gain from, say, shares or real estate, and nor can it be offset against your other income.

Furthermore, that jewellery you inherit from your mother will retain its “character” as a collectable (if it was acquired by her after 20 September 1985). So, this too is something to be aware of.

Personal use assets

As for “personal use assets” per se (ie assets used for personal use or enjoyment which are not “collectables” – such as furniture, clothing, pianos etc) they are only subject to CGT if they cost more than $10,000. More importantly, however, is that you cannot claim a capital loss made on a personal use asset.

But is it a business?

Finally, of course, it is often the case that a person who owns such collectibles does so for the purpose of trading in them. In this case, the CGT rules take a backseat to the fact that the profit from such activities is assessable in the same way as ordinary income, as if you were operating a business.

So, if you find yourself dealing with such items, it is necessary to get good tax advice on the matter.

Using super to pay the mortgage

Have you reached preservation age and still have a mortgage? If so, you may be able to use your super to deal with your rising mortgage repayments if you meet certain conditions.

Introduction

The constant increase to interest rates over the last two years have left some borrowers strapped for cash. Fortunately, those that have reached preservation age can access their superannuation via a special type of pension, known as a transition to retirement (TTR) pension, even if they haven’t retired.

What is preservation age?

Your preservation age is the earliest age you can access your superannuation. The preservation age that applies to you depends on your date of birth and ranges from age 55 to 60, as shown in the table below.

Date of birth Preservation age When preservation age is reached
Before 1 July 1960 55 1 July 2014 or earlier
1 July 1960 – 30 June 1961 56 1 July 2016
1 July 1961 – 30 June 1962 57 1 July 2018
1 July 1962 – 30 June 1963 58 1 July 2020
1 July 1963 – 30 June 1964 59 1 July 2022
On or after 1 July 1964 60 1 July 2024 or later

Alternatively, you will also reach preservation age when you reach age 65, even if you are still working.

What is a TTR pension?

A TTR pension allows you to supplement your income by allowing you to access some of your superannuation once you’ve reached your preservation age. You can start a TTR pension by transferring some of your superannuation to an account-based pension (ABP), which is a regular income stream bought with money from your superannuation fund.

Once you start a TTR pension, you need to withdraw payments between a minimum and maximum range each year. The minimum drawdown rate depends on your age and is 4% for those under 65 years old. The maximum amount you can withdraw is 10% of your account balance as at 1 July of each financial year (or 10% of the value from the date your TTR pension started in that financial year). This means you can choose pension payments anywhere between your minimum and maximum payment limit each year.

Tip – if you commence a TTR pension halfway through the year, the minimum payment percentage is pro-rated to reflect the number of days the pension is in place in that first financial year. The minimum will be recalculated at 1 July based on your TTR pension balance and your age at that time to factor in a whole year’s worth of pension payments.

But note that a TTR pension does not allow you to withdraw your superannuation as a lump sum. This can generally only be done once you’ve reached your preservation age and met certain conditions of release, such as retirement.

Example

Justine is 60 years old and has $650,000 in superannuation. Justine’s adviser recommends she commences a TTR pension with $600,000 to help ease her financial difficulties. Justine must draw a minimum of $24,000 (ie, 4% x $600,000) or up to a maximum of $60,000 (ie, 10% x $600,000) in pension payments in the 2023-24 financial year.

Justine can use the additional TTR pension payments to help supplement her employment income and meet her mortgage repayments. She could also use a TTR pension as a strategy to pay down her mortgage much quicker than planned even if she could easily afford her repayments.

Factors to consider

  • If you are 55 to 60, the taxable amount of your income from your TTR pension is taxed at your marginal tax rate, less a 15% tax offset.
  • Once you turn 60, your TTR pension payments are all tax free.
  • Any investment earnings generated from your TTR pension are subject to the same maximum 15% tax rate as superannuation accumulation funds.
  • Once you reach age 65 or retire, your TTR pension will automatically convert to an ABP. This means more flexibility as the 10% maximum pension limit will no longer apply.

Need help?

You should seek financial advice before deciding if a TTR pension is right for you as it could help you understand the possible benefits and implications for your particular circumstances.

Returning to work after retirement

Most people look forward to retirement as it is a chance to finally take time to relax, enjoy life and do things they never had time for when they were working. But sometimes things change and some people feel the urge to return to work. If a return to work is inevitable, it is important to understand the superannuation retirement rules when it comes to working and accessing your superannuation.

Introduction

Many new retirees find that after a few months the novelty of being on ‘permanent vacation’ starts to wear off. Some people may miss their sense of identity, meaning, and purpose that came with their job, the daily structure it brought to their days, or the social aspect of having co-workers.

In fact, figures from the Australian Bureau of Statistics (ABS) have revealed financial necessity and boredom are the most common factors prompting retirees back into full or part-time employment[1]. As such, it is not uncommon to want to return to work after retirement, even if only on a part-time or casual basis. Whatever your reasons or motivations might be, there are a range of factors to consider if you wish to return to work depending on your age.

There are three ways in which you can retire, access your superannuation and then return to work, which are summarised below.

  1. Retire on or after reaching preservation age

Individuals can retire after reaching their preservation age[2], ending gainful employment and declaring that they intend never to return to any ‘gainful employment’ for 10 hours or more each week.

It is illegal to access your superannuation with a false declaration of intention so your intention to retire must be genuine at the time. This is why your superannuation fund may require you to sign a declaration stating your intent.

That said, you can return to work while still accessing your superannuation as long as your intention to retire at the specific time was genuine and that you didn’t plan to return to work all along. Your intentions are allowed to change even though you may have retired and have already accessed your superannuation or are receiving age pension payments.

  1. Ceasing an employment arrangement after age 60

From age 60, you can stop an employment arrangement (ie, resign from a job) and obtain full access to your superannuation without having to make any declaration about your retirement or future employment intentions.

If you are in this situation, you can return to work without any issues because there was no requirement for you to declare your retirement permanently. For example, you could resign from a job with one employer and start work with a different employer and access your superannuation.

  1. Retire after age 65 or older

Once you turn age 65, you can access your superannuation regardless of your work status and do not need to make any declaration about your retirement status. You only need to be retired if you want to access your superannuation before you turn age 65.

Whether you are accessing your superannuation or not, you can return to work at any time.

Your super after returning to work

Regardless of what age category you fall into, you may have taken your superannuation as a lump sum, income stream or a combination of both. If your circumstances change and you return to work, any amounts in your superannuation fund, including any pension payments you may be receiving will remain accessible and can continue to be paid.

However upon recommencing any future employment, any future superannuation contributions and earnings from subsequent employment and any voluntary contributions will remain preserved until a further condition of release is met, such as retirement or reaching age 65.

Impact on age pension

If you are receiving the age pension and decide to return to work, your employment income will count towards Centrelink’s income test which may impact your age pension entitlements.

Having said that, Centrelink has a ‘Work Bonus’ scheme which reduces the amount of your employment income, or eligible self-employment income, which Centrelink applies to your rate of age pension entitlement under the income test. Fortunately, you don’t need to apply for the Work Bonus, rather Centrelink will apply the Work Bonus to your eligible income if you meet all the eligibility requirements. All you need to do is declare your income.

More information

If your intentions or circumstances have changed and you have decided that you would like to return to work, contact us if for a chat about your options.

Gifting and the age pension (bonus)

Many people gift assets to their family or friends to give them a helping hand. However care must be taken to ensure any gifting does not impact your current or future social security entitlements, such as the age pension.

What are the gifting rules?

For Centrelink purposes, gifting refers to selling or transferring income or assets for less than it’s worth or without receiving anything in return. If you receive adequate compensation, such as payment for an asset to the same value, it is not considered a gift.

Gifting limits

Although you can gift as much income or assets as you like, Centrelink imposes gifting limits to discourage retirees from giving away their wealth to qualify for more age pension income.

The gifting rules allow you to gift up to $10,000 each financial year or a maximum $30,000 over five financial years without this impacting your entitlement to government benefits.

When applying the gifting rules, they are first measured against the $10,000 per financial year rule (with the same limit applying to both singles and couples), then against the $30,000 limit over a rolling five financial year period.

If you exceed these limits, the excess amount will be treated as a ‘deprived asset’ and will count as an asset under Centrelink’s asset and income tests. When applying for a pension, the asset and income tests are both applied and the test that pays the lower rate of pension will apply.

Example

Kylie is 68 and receives the age pension. She decides to gift $50,000 to her son to help him buy his first property. Assuming Kylie has not gifted any amounts previously, the first $10,000 falls under the gifting free threshold. The remaining $40,000 will be treated as Kylie’s asset under the asset and income tests for the next five financial years, after which it won’t be counted.

If on the other hand Kylie decides to gift a lower amount of $20,000 to her son in the one go instead, she would still be impacted by the gifting rules. Even though she hasn’t used the entire $30,000 gifting limit over five financial years, $10,000 would be deemed a deprived asset (ie, $20,000 – $10,000) and count towards the asset and income test for five financial years because she gifted more than $10,000 in one financial year.

Timing is key

Centrelink looks retrospectively at any gifting amounts over the last five years. For example, if you gift your holiday house which is worth $1 million at the age of 61 to your kids, when you turn 67 and claim the age pension, that gift will not be assessed. This is because once the five year time period is up, any deprived assets are removed from the assessable assets used to calculate your entitlements.

As can be seen, this highlights a gifting strategy where you can gift large amounts that exceed the allowable gifting limits five years before you qualify for the age pension without the gifting rules applying against any age pension payments in the future. But remember, there are other financial implications of your gift that you should consider, such as missing out on investment income that your asset would have generated and any potential capital gains tax that may be payable if there is a change of ownership in the asset.

Obtain advice

If you are approaching age pension age and are considering gifting to help your family or friends, you should seek advice to assist with your specific situation as the gifting rules can be complex.

Damage or destruction of a rental property (bonus)

What happens if your property is damaged from the results of a natural disaster, or by tenants? Such a situation can affect the types of expenses you claim and the income you need to declare for your rental property.

Declaring income

If you receive a payout for damage to your rental property as a result of a disaster, you may need to include this amount as income on your tax return. This includes:

  • insurance payout for loss of rental income
  • insurance payout for repairs
  • insurance payout for replacements (even if they are capital assets)
  • money received from a relief fund.

Note however that money provided for immediate or urgent repairs may be exempt. If you receive a one-off payment as assistance from a charity or community group or even from a government arm, these are generally tax-free, as well as gifts from friends and/or family.

If your rental property is damaged or destroyed by a natural disaster, you may still be able to claim deductions for holding costs of the vacant land. Where you rented it out, or it was available for rent prior to the natural disaster, taxpayers can generally claim a deduction under the “exceptional circumstances” exemption. If the exemption applies to your circumstances, you can continue to claim deductions for three years from when the disaster occurred. This period can be extended if required by applying to the ATO.

Claiming deductions for repairs

Generally, repairs must relate directly to wear and tear or other damage that occurred as a result of you renting out the property. Examples of repairs include but are not limited to:

  • replacing broken windows
  • replacing part of a fence damaged by a bushfire
  • replacing the plaster board in a wall damaged by flood inundation
  • repairing electrical appliances or machinery.

Substantial changes, including improvement, modernisation, making additions or the replacement of an entire structure is not considered to be a repair.

Deduction for unoccupied property repairs

The ATO has used an example before of a rental property that was tenanted when it was severely damaged by a cyclone. Due to the damage, the tenants had to move out. The owner carried out repairs and then advertised the property for rent. Even though the property was not available for rent while being repaired, the owner was able to claim his repairs.

Capital expenditure which may be claimable over time

Capital allowances: For each asset where you may claim a deduction for decline in value (depreciation) you can choose to use either the effective life the ATO has determined for such assets or your own reasonable estimate of its effective life (although where you estimate an asset’s effective life, you must keep records to show how you worked it out).

Depreciating assets: Depreciable assets are those items that can be described as “plant”, which do not form part of the premises. They are usually not part of the main structure, and not likely to be permanent and expected to be replaced within a relatively short period.

Examples of depreciable assets include carpets, curtains, appliances (such as a dishwasher or fridge), and furniture. If you replace a depreciating asset costing up to $300 you can generally claim an immediate deduction. Note that a deduction is only available for new assets, and not for second-hand assets.

Capital works: Capital works is used to describe certain kinds of construction expenditure used to produce income. Examples include but are not limited to:

  • building construction costs
  • cost of altering a building
  • major renovations to a room
  • adding a fence.

The rate of deduction for these expenses is 2.5% per year for 40 years following the completion of the construction.

Capital gains tax implications

If an insurance payout is made on a dwelling that is not your main residence (eg a holiday home or rental property), it may need to be taken into account for capital gains tax purposes.

If you rebuild or replace your property, you may be entitled to roll over any capital gain you make. For the rollover to apply you must have incurred some of the expenditure to acquire another property within one year after the end of the income year in which the property was damaged or destroyed.

Where your property is destroyed and you do not rebuild, you will need to calculate your capital gain or loss. Any insurance payout received will be counted as capital proceeds when calculating your gain or loss. However, where you don’t receive any payouts the market value substitution rule does not apply and generally you can claim a capital loss.

Otherwise, a capital gain will arise if the insurance payout is more that the asset’s cost base. A capital loss will arise if the insurance payout is less that the asset’s reduced cost base. Note that calculating the cost base of a destroyed building on land can be complex. Where you have this situation, please call us to discuss.

[1] ABS – Retirement and Retirement Intentions, Australia, released 29/8/2023

[2] Refer to ‘Using super to pay the mortgage’ article for more information on preservation age

December 2023

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Give yourself a super gift this Christmas 

Give yourself the ultimate gift that doesn’t cost a thing – a super to-do list which is a gift that will benefit you now and in the future.

  1. Consolidate your super

With over 10 million unintended multiple superannuation accounts, these multiple accounts are costing Australians an extra $690 million in duplicated administration fees and $1.9 billion in insurance premiums per year, which is eroding many Australians’ hard earned superannuation benefits. If you are one of these individuals with multiple superannuation accounts, there may be benefits to rolling your accounts onto one superannuation fund.

Consolidating your superannuation is now easier than ever, using ATO online services or your myGov account. If you’re not sure whether you might have other superannuation accounts, you can search for lost or unclaimed super via the ATO or by logging into your myGov account linked to the ATO and clicking on Manage my super.

However before you consolidate your funds, there are a few things you should do, such as:

consider whether you have any insurance cover which may be lost when transferring benefits to a new fund, and

check on other details such as fees, insurance premiums, variety of investment options available, performance data, and tax implications from consolidating your superannuation to ensure the transfer provides you with better value and meets your needs.

  1. Review your investment strategy

Your superannuation fund trustee invests your money for you. Most funds allow you choose from a range of investment options, from conservative to growth. Take the time to check your investment options and decide what’s right for you. The options you choose can make a big difference to how your super grows between now and your retirement.

If you manage your own self-managed superannuation fund (SMSF), the super laws require you to prepare and implement an investment strategy for your SMSF and review the strategy regularly (ie, at least annually). Your investment strategy is effectively your plan for making, holding and realising assets consistent with your investment objectives and retirement goals. It also needs to set out why and how you’ve chosen to invest your retirement savings to meet the goals outlined in the strategy. Review your investment strategy to ensure it meets each member’s investment and retirement objectives.

  1. Make extra contributions

Making small financial sacrifices and contributing to super over the years is key to long-term wealth. This long-term growth is due to the power of compounding interest. Superannuation uses compounding interest to grow your balance which will help you in retirement. If you’re an employee, your employer will pay 11% of your salary/wages into superannuation in 2023/24 that will benefit from compounding interest and grow until you reach retirement.

To boost the amount you’ll have saved at retirement, you may want to consider making additional contributions through salary sacrificing or making personal after-tax contributions to superannuation. However contribution caps must be considered to avoid exceeding the caps and paying extra tax.

  1. Check your insurance

Insurance is another key aspect of your superannuation that you should review. Superannuation funds generally offer three types of insurance for their members, including life insurance, total and permanent disablement (TPD) insurance and income protection insurance, so it’s important to check whether you have any cover within your fund.

Some funds provide a default level of insurance as a standard inclusion when you open your account, but it’s worthwhile seeking advice to determine whether your current level of cover will adequately protect you and your family in the event of injury, illness or death.

  1. Check your beneficiary nominations

Despite what many people may think, superannuation is not an estate asset which means on death it does not automatically flow to your estate. This means that your Will does not typically deal with your superannuation benefits.

To make sure your superannuation is distributed to the right people, you should nominate a valid beneficiary. If you don’t nominate a beneficiary or you have an invalid nomination (ie, because your nominated beneficiary does not meet the definition of a superannuation law dependant at the time of your death), your superannuation fund may decide who receives your superannuation money, regardless of what you have in your Will. For this reason, it is important to regularly review your superannuation death benefit nominations* when your circumstances change to ensure it remains up to date and ends up in the hands of the right person(s).

Sleigh the super way

Superannuation is your money so it pays to take an active interest in your superannuation during your working years. Reviewing your current superannuation and making these simple changes can help boost the amount you have available for retirement over the long term.

Lost or destroyed tax records? Don’t panic!

Now and then, taxpayers may find themselves in a situation where they simply have no records to back up a tax claim. There can be many reasons for this, such as losing documents (either paper or electronic) when moving home, or technology failures that end up with the same result (or worse, destroyed records).

And with a hot summer predicted, let’s not forget the very real danger of natural disasters and the devastation these can have on people’s lives, not just their financial concerns.

It’s true that in these modern times the ATO’s systems are able to pre-fill quite a lot of data, and this is only going to increase over time, which can mean that taxpayers can relax a little more about having to stay on top of record keeping. But there can still be situations where essential back-up documents or other evidence is required that may be unavailable for one reason or another.

If your records are damaged or destroyed or simply missing, there are ways to a remedy, or at least an acceptable outcome. First of all, be assured that we will hold quite a substantial amount of required information, so your first and perhaps best inquiry could be to your friendly tax professional.

But the ATO can also help. It can re-issue or supply copies of tax documents, such as income tax returns, activity statements, or notices of assessment. We can help if you need to request copies of any tax documents.

If you have lost your TFN, we will most likely have that on our records. If for some reason you have not given that to us in the past, it is still possible to interact with the ATO using other information to verify your identity, such as your date of birth, address and bank account details. Your super fund will also have your TFN, but will also require identity verification.

Your employer or payer should have copies of your PAYG payment summaries, and your bank should be able to provide you with any bank records that have been destroyed. Note that if your bank charges a fee for replacing bank records and providing any other service to help you to reconstruct records or provide information due to a disaster, you can claim a deduction in the income year that those fees are charged.

If you are unable to substantiate claims made in your tax returns or activity statements because your records have been lost or destroyed, it is generally the case that the ATO is still able to accept the claim without substantiation — for example, where it is not reasonably possible to obtain the original documents.

If you have a self-managed super fund (SMSF), it is a requirement to maintain compliance as an SMSF to keep certain records. If you have lost these records in a disaster, the ATO will consider a request for additional time to meet your reporting obligations (call 13 10 20). Where possible, the ATO should make available information that was previously reported for your SMSF.

Taken goods for private use? Here’s the latest values

The ATO knows that many business owners naturally help themselves to their trading stock and use it for their own purposes. This common practice can occur in businesses such as butchers, bakers, corner stores, cafes and more.

The ATO regularly issues guidance for business owners on the value it expects will be allocated to goods taken from trading stock for private use. The table below shows these values for the 2023-24 income year.

The basis for determining values is the latest Household Expenditure Survey results issued by the Australian Bureau of Statistics, adjusted for CPI movements for each category.

Note that the ATO recognises that greater or lesser values may be appropriate in particular cases, and where you are able to provide evidence of a lower value, this should be used.

Type of business Amount ($) (ex GST) for adult/child >16 years Amount ($) (ex GST) for child 4-16 years
Bakery $1,520 $760
Butcher $1,030 $515
Restaurant/cafe (licensed) $5,160 $2,090
Restaurant/cafe(unlicensed) $4,180 $2,090
Caterer $4,410 $2,205
Delicatessen $4,180 $2,090
Fruiterer/ greengrocer $1,040 $520
Takeaway food shop $4,290 $2,145
Mixed business (incl milk bar, general store, convenience store) $5,200 $2,600

If you have any questions regarding this issue, please reach out to us for guidance.

Two “main residences” is possible

The CGT exemption for a person’s home is only available in respect of one home owned at any given time. In other words, you can’t get two main residence exemptions applying to two different homes at the same time.

However, there is one exception to this rule – and that exception applies where a person has bought a new home before selling the old one. In this case, both homes can be entitled to the main residence exemption for an “overlap” period of up to six months.

But if the homeowner takes longer than six months to sell or dispose of the original home, a partial exemption will apply to one or other of the homes for the period in excess of six months. Generally, this will be the home that wasn’t the person’s main residence during this “excess period”.

However, a number of important conditions must be met in order to be able to use this concession in the first place – and this is where the guidance of your tax adviser is needed.

There is another important “overlapping” area in which the principles of not having two CGT-exempt main residences at the same time applies, and that is where “spouses” may have different main residences at the same time. Typically, this maybe where one spouse lives in their country or coastal home, while the other lives in their apartment in the city or interstate for work purposes (on a weekly or monthly basis, say).

But it also importantly includes the case where a couple start living together in a married or de-facto relationship, while one of the spouses retains their existing home and rents it (and therefore can apply a CGT concession to continue to treat it as their home).

Where this type of situation occurs there is a special rule that applies. The spouses must either:

  • choose one of the homes to be the CGT-exempt main residence of both of them for this period; or
  • each must choose the respective homes in which they live as their main residence – in which case generally they will each only get a half exemption on the home they choose for that overlap period.

These rules are complex and depend on a range of matters including the legal interest each spouse holds in each home, the use of any CGT concessions and, in certain cases, the thorny issue of whether the parties are in fact “de-facto” partners. Suffice to say, professional advice is very much needed in this type of situation.

Don’t ignore those tax debts: the ATO won’t!

Whilst the ATO went out of its way to assist businesses doing it tough during the COVID lockdowns, a more robust approach to collecting outstanding tax debts now seems to be the order of the day.

Other people’s money

A major part of the tax debts of many businesses represents the temporary withholding of other people’s money – employees’ PAYG withholding and their superannuation guarantee amounts. And the GST the business charges on the taxable supplies it makes doesn’t belong to the business either.

Some clients avoid mixing their own money and other people’s money. They have opened a separate BAS bank account for the withheld amounts so that those funds will be available when required, regardless of what happens in the business.

Director Penalty Notices

The ATO is particularly focused on employee entitlements and will not hesitate to issue Director Penalty Notices (DPNs) where there has been serious non-compliance by corporate entities.

Under a DPN, the sins of the company are visited on the directors, who will each be personally liable for any unpaid amounts.

As DPNs are a complex and serious matter, please contact us urgently should you receive one.

Disclosure to Credit Reporting Bureaus

One relatively recent development is the disclosure by the ATO of outstanding tax debts exceeding $100,000 to the various Credit Reporting Bureaus, which in turn could have an adverse impact on a business’ future ability to obtain finance. The ATO will contact the business ahead of making such a disclosure to give them an opportunity to set things right.

Simplified debt restructuring

Another relatively recent option, effective from 1 January 2021, is a less formal restructuring option for small incorporated businesses experiencing financial stress. Simplified debt restructuring is open to businesses with total debts of up to $1 million where the business has not undergone a restructure or a simplified liquidation in the last seven years. To be eligible, their current employee entitlement obligations and tax lodgements all have to be up to date.

The process involves appointing a small business restructuring practitioner (SBRP) and devising a plan setting out how much creditors would be paid under the plan if implemented. Creditors then vote on the plan, which is implemented if approved. The ATO is often the major unsecured creditor in these matters, and we understand they have been quite open to approving many of the restructuring plans put forward.

The advantage of this method is that the directors continue to run the business throughout the restructuring process, subject to seeking the consent of the SBRP for any transactions falling outside the normal course of business.

In the meantime, there is a moratorium on the enforcement of debts by unsecured creditors and some secured creditors, while any personal guarantees given by a director or their spouse cannot be enforced except with leave from the court.

In order to qualify, a company has to be insolvent, or about to become insolvent. However, the core business has to be viable, or there would be little point in a restructure. This requires a realistic assessment of how the business is currently performing and what its future prospects are. If the core business is unviable due to industry changes, liquidation may be a more realistic option.

A number of small businesses have applied this option and successfully repaid debt on a compromised basis, emerging from an approved restructuring plan unburdened by unsustainable debt.

Although the economic environment remains challenging, businesses with tax debts they have trouble meeting need to approach the ATO to explain their problems and settle on a payment plan that is adhered to. If you wish, we can help you construct a payment plan to put to the ATO.

The taxation of super death benefits

Wondering if your beneficiaries will pay tax on your superannuation death benefits? The answer is it depends on a number of important factors.

Most people will have heard of Benjamin Franklin’s quote “in this world, nothing is certain except death and taxes”. He raises a valid point as the tax office will be ready to take their share of your death benefits when the time comes.

With that in mind, it is important to understand the tax rules that govern superannuation death benefits so you can ensure your benefits are distributed to your beneficiaries in the most tax-effective manner possible.

This article briefly summarises the three key factors that will determine whether your superannuation death benefits will be taxed when distributed to your beneficiaries.

  1. Will a tax dependant receive the benefit?

The concept of super and tax law dependants was covered in detail in November’s Newsletter. However, to recap, a tax dependant will not pay any tax on your super death benefits.

A tax dependant includes the following people:

  • A current spouse, including de facto and former spouse
  • Children under 18
  • A person who is financially dependent or in an interdependency relationship with the deceased.
  1. The underlying components of your benefit

Your current superannuation benefit may comprise of a taxable component and a tax-free component. As such, when you pass away, any death benefit payment made to your beneficiary(s) will reflect the proportions of the tax components of your member balance.

The taxable component of your superannuation benefit generally includes concessional contributions, such as superannuation guarantee and salary sacrifice contributions, and earnings made on your account balance.

However the taxable component of your superannuation benefit may also consist of an untaxed element if:

  • Your benefit is paid from an untaxed fund (ie, your fund does not pay 15% tax on contributions or earnings – this is common in public sector funds and constitutionally protected funds, however most Australians are in taxed superannuation funds), or
  • Your death benefit contains insurance proceeds and the fund has claimed a tax deduction for life insurance premiums.

TIp – the tax free component of your superannuation benefit will always be received tax-free by your beneficiaries, regardless of whether they are a tax dependant or not.

  1. How will the death benefit be paid – lump sum or income stream?

Lump sum death benefits

Lump sum superannuation death benefits paid to tax dependants directly or via your personal legal representative are not taxed.

However death benefits paid to non-tax dependants (ie, a financially independent adult child) are subject to tax on any taxable component of the lump sum superannuation benefit, which may include both a taxed and/or untaxed element.

Table 1 below summarises how the taxable component of a superannuation death benefit is taxed when it is paid as a lump sum in the event of a person’s death.

Table 1: Tax on super death benefit lump sum payments

Beneficiary
(includes when paid via the estate)
Tax component Maximum tax rate
Tax dependant Taxable – taxed and untaxed element Tax-free
Non-tax dependant Taxable – taxed element 15%*
Taxable – untaxed element 30%*

* Plus Medicare levy, unless paid to deceased’s estate

Tip – if your superannuation death benefit is paid into your estate, your executor is responsible for deducting the appropriate tax when the amount is distributed to your beneficiaries. As your estate is not an individual, no Medicare Levy is payable which means non-tax dependants can avoid paying the additional 2% Medicare levy!

Death benefit income streams

Table 2 below summarises the tax payable on tax components based on the age of the beneficiary (at the date of payment) and the age of deceased (at the date of death).

Table 2: Tax on super death benefit income stream payments

Age of deceased Age of beneficiary Taxable – taxed element Taxable – untaxed element
Under age 60 Under age 60 Marginal tax rate (MTR) with 15% tax offset MTR
Age 60 and over Tax-free MTR with 10% tax offset
Age 60 and over Any age Tax-free MTR with 10% tax offset

As can be seen, the tax treatment depends on the age you pass away, the age of your beneficiary, as well as the underlying tax components of the income stream.

Need help?

The tax treatment of superannuation can be complex so please contact us if you need help or more information regarding your specific circumstances.