Jemma Sanderson Nominated for Women in Finance Award

Women in Finance Award

Cooper Partners is proud to announce Jemma Sanderson and Cooper Partners Financial Services as having been nominated for the 2017 SMSF Advisor and SMSF Firm of the Year including a Women in Finance award.

Jemma is a Director and heads up Cooper Partners SMSF specialist superannuation services.

These awards acknowledge Jemma and Cooper Partners Financial Services as leading the charge as a professional firm with effective teams and strategies.

The judge’s criteria for SMSF Advisor of the Year include; client satisfaction, knowledge and experience in the finance and SMSF arenas. We congratulate Jemma in this unique opportunity to celebrate amongst the top performers in each state.

Cooper Partners is a boutique taxation and business advisory firm with a strong presence in the SMSF industry. We offer a fully complementary service from SMSF advice, including planning around transferring and ownership to the next generation. Through Jemma Sanderson our market leading advisor you will be ensured to receive the latest and up to date strategies to achieve your desired future outcomes. Visit http://cooperpartners.com.au for more information.

Superannuation – Pre 30 June Considerations


As 30 June 2017 approaches, it is important to attend to the usual requirements before 30 June, plus ensuring the relevant documentation is in place with regard to the new superannuation rules.

The areas for consideration include:

  1. Change in contribution caps from 1 July 2017;
  2. Ensuring minimum pension payments are made;
  3. Restructure of pension accounts;
  4. Tax exemption for transition to retirement income streams;
  5. CGT transitional provisions;
  6. Asset Valuations – Property and Unlisted Assets;
  7. Limited Recourse Borrowing Arrangements – Loan Repayments; and
  8. In-House Assets.

1. Change in contribution caps from 1 July 2017

Pursuant to the new superannuation legislation, there have been changes to the superannuation contribution limits.

Concessional Contributions

Concessional contributions include employer contributions, salary sacrifice contributions, and personal deductible contributions:

  • The current limit for concessional contributions for the 2016/2017 year is $30,000, and $35,000 for members over 49;
  • From 1 July 2017, the concessional contribution limit will be reduced to $25,000 for all taxpayers, regardless of their age. This will be indexed in line with wages growth.

Non-Concessional Contributions

Non-concessional contributions include any after-tax voluntary contributions made by members:

  • The non-concessional contributions cap for the 2016/2017 year is $180,000. Where a member was 64 or younger on 1 July 2016, they are able to bring forward up to two future years’ contributions. This “bring-forward” provision allows members to make a one-off non-concessional contribution of up to $540,000 in the 2016/2017 year. It is important to note that where a member has previously triggered the bring-forward provision in the either the 2014/2015 or 2015/2016 year, this will limit the contributions that can be made in the 2016/2017 year. Accordingly, prior to making any contributions the contribution history should be reviewed to ensure the non-concessional contributions cap is not exceeded.
  • From 1 July 2017, the non-concessional contribution limit will be reduced to $100,000 per annum. Where an individual’s total superannuation balance is above $1.6 million on 30 June of the previous financial year, the individual is no longer eligible to make further non-concessional contributions to superannuation. The $1.6 million threshold is indexed in $100,000 increments. As a result, the bring-forward provision has also reduced to $300,000 from 1 July 2017.

Pre 30 June 2017 considerations:

In order to maximise your contributions to superannuation prior to 30 June 2017, consider the following:

  • Are you able to make concessional contributions up to your cap? This might include the ability to salary sacrifice an amount from your employer, or perhaps make a personal contribution and claim a deduction (please note, eligibility criteria apply to personal deductible contributions);
  • Do you have the capacity and available funds to make non-concessional contributions into superannuation before the new rules come in from 1 July 2017? This is the last chance to make non-concessional contributions up to $540,000;
  • Where you intend to make contributions electronically, ensure that you have left sufficient time for the contribution to be cleared into the fund’s bank account.  It is the time that the fund receives the contribution that is the relevant date for the fund, not the time that it leaves your bank account.

2. Ensuring minimum pension payments are made

To satisfy the 2016/2017 annual pension requirements, all pension payments must be withdrawn from the fund and transferred to your personal bank account by 30 June 2017.

Failing to the meet the minimum pension requirements could lead to your fund losing the tax exemption with respect to the income and realised capital gains generated by the assets supporting the pension, and as a result the fund’s income will be subject to tax.

30 June 2017 considerations:

  • Ensure you have paid the minimum pension amount prior to 30 June 2017.  In this regard, where you intend to pay electronically, ensure that you leave plenty of time to provide instructions to your bank or investment adviser if required to realise assets in order to pay out the pension in cash;
  • Individuals that have Transition to Retirement Pensions in place are subject to a 10% maximum drawdown of the pension balance at 30 June 2017 or the date the pension commenced.

3. Restructure of pension accounts – Transfer Balance Cap;

The Transfer Balance Cap (TBC) is the limit from 1 July 2017 on the amount of superannuation which can be transferred to the “retirement phase”.  The retirement phase includes income streams where the individual has met a full condition of release, that is, it is not a transition to retirement pension.

The impact of these provisions is that where a member has superannuation balances in the retirement phase above $1.6 million, the excess is required to remain in accumulation, or be removed from the superannuation system. It is important to note that the excess is not required to be removed from the superannuation fund, it can remain in the Fund in accumulation phase.

30 June 2017 considerations:

  •  Where you have a retirement phase income stream above $1.6 million, ensure the appropriate documentation is in place by 30 June 2017 to rollback any excess above $1.6 million back to accumulation phase.

4. Tax exemption for transition to retirement income streams;

From 1 July 2017, Transition to Retirement Pensions (TRPs) will be ineligible to receive a tax exemption with respect to the assets supporting such pensions.  Accordingly, earnings will be taxed at the standard accumulation rate of 15% (an effective 10% tax rate on long term capital gains).  Such a change will apply irrespective of when the TRP commenced.

30 June 2017 considerations:

  • Given that the tax exemption on TRPs within the Fund will cease from 1 July 2017, consideration should be given as to whether or not the TRP should continue post 1 July 2017.
  • This will be last opportunity prior to 30 June 2017 to make an election that a payment from a TRP is taxed as a lump-sum, rather than a pension payment.

5. CGT transitional provisions

As a result of the TBC (point 3), or where the member held a TRP (point 4), the fund may be eligible to apply CGT relief. CGT relief is available to ensure that tax does not apply to unrealised capital gains that have accrued on assets that were used to support superannuation income streams prior to 1 July 2017.

A fund will be able to make an irrevocable election to reset the cost base on assets which were held to support pensions. The Fund’s Trustee is able to elect that there is a deemed disposal of such assets, with any capital gain that arises from that deemed disposal being subject to tax in the 2016/2017 year.  Please note, this election must be made in the approved form on or before the due date for lodgement of the Fund’s income tax return for 2016/2017.

6. Asset valuations – property and unlisted assets

Where a superannuation fund has unlisted assets (such as direct property, unlisted shares, and units in unlisted trusts), the fund Trustees are required to value their investments at market value as at 30 June.

June 2017 considerations:

  • Consideration should be given to whether a market appraisal/valuation is required to be obtained for the assets and whether or not the services of an independent valuer is required. It will also be important that formal valuations are obtained where the Fund is utilising the CGT relief provisions;
  • Where the fund holds property, additional consideration should be given to ensure the required lease payments are made prior to 30 June and the lease payments are based on a market rate. Where the market rate has changed, this may need to be reflected from 1 July 2017 and in accordance with the lease agreement.

 7. Limited recourse borrowing arrangements – loan repayments

Where a superannuation fund has a limited recourse borrowing arrangement (LRBA) where the lender to the fund is a related party, the Trustee should ensure any obligations under the loan terms are complied with.  Further, in April 2016, the ATO released Practical Compliance Guideline 2016/5 (PCG 2016/5) in relation to borrowing arrangements entered into with related parties. Where an LRBA is structured in accordance with PCG 2016/5, the arrangement will be considered to be maintained on an arm’s length basis.

June 2017 considerations:

  • Ensure that all interest and principal repayments have been made, and continue to be paid monthly in accordance with the loan agreement and PCG 2016/5.

8. In-house assets

Where a superannuation fund has an investment or loan with a related party that is captured under the in-house asset rules, the Trustee needs to ensure the arrangement complies with the relevant provisions.

June 2017 considerations:

  • Where an SMSF has in-house assets that exceeded the allowable limit of 5% at 30 June 2016, the excess over 5% may be required to be disposed of prior to 30 June 2017;
  • Where an SMSF has in-house assets that exceeded the allowable limit of 5% from 1 July 2016, consideration should be given to reduce the IHA to less than 5% prior to 30 June 2017.

The Next Steps

If you would like further details or assistance with respect to any of the above strategies, superannuation in general, or wish to have your position reviewed in light of the new superannuation changes, please contact Jemma Sanderson at jsanderson@cooperpartners.com.au or 08 6311 6900.

End of financial year planning

Understanding what the potential tax liability will be for your business and allowing time for tax planning can result in considerable tax savings and with the end of the financial year fast approaching, now is a critical time to assess your year-end tax planning and tax compliance considerations.

The purpose of this guide is to highlight some year-end tax planning opportunities as well as some year-end compliance requirements you should be considering.

Small business entity? 

From 1 July 2016, the small business entity (SBE) turnover threshold will be increased from $2 million to $10 million.  Importantly, all business entities (incorporated or otherwise) that meet the new $10 million aggregated turnover test will be able to access a range of tax concessions.

To qualify as a SBE, the business must have an aggregated turnover (that is, your annual turnover plus the annual turnover of any business connected / affiliated with you) of less than $10 million and be operating a business for all or part of the 2017 year.

Relevant year-end tax planning initiatives to which the increased $10 million threshold opens up for the 2017 tax year include:

  • immediate deductibility for small business start-up expenses;
  • simplified depreciation rules, including access to immediate deductions for some depreciable assets (see further below);
  • simplified trading stock rules, giving businesses the option to avoid an end of year stocktake if the value of the stock has changed by less than $5,000;
  • immediate deductions for certain prepaid business expenses (see further below);
  • the option to account for GST on a cash basis and pay GST instalments as calculated by the ATO; and
  • FBT car parking exemption.

Small business taxpayers can claim an immediate deduction for certain prepaid (up to 12 months) business expenses before 30 June 2017 and obtain a full tax deduction in the 2016/2017 financial year.

The prepaid expenditure concession provides SBEs with cash-flow relief by enabling them to bring forward deductions that would otherwise be apportioned over two income years.

Examples of business expenditure items that you may wish to prepay over the coming months before 1 July include: • Rent • Insurance • Advertising • Repairs to business assets • Subscriptions • Business trips • Deductible interest • Seminars and conference bookings • Contract payments

Immediate deduction for depreciable assets costing less than $20,000

This concession, which essentially provides an immediate deduction for most depreciating assets costing less than $20,000 has been a very popular measure for small business taxpayers since the rules came into effect from 12 May 2015.  The increased threshold was due to revert back to its original threshold of $1,000 from 1 July 2017, however the Government recently stated it will extend the availability of the $20,000 concession until 30 June 2018, giving SBEs another year to access the concession.

The popularity of this concession stems from the ability to bring forward tax deductions rather than having them spread out over more than one year. This can have significant benefits, however it is important to understand some of the practical and commercial issues regarding the application of the simplified depreciation rules for small business.  Such considerations may include the optimal timing of deductions (e.g. a tax deduction is of limited benefit if your business is not paying any tax, or could better make use of deductions in later years), the impact that asset purchases may have on cash flow, and how the choice to access the $20,000 immediate deduction automatically triggers pooling rules that may not be beneficial to your business.

Broadly, to claim a deduction in 2016/2017 income year, a SBE must acquire an asset and must first use it or have it installed ready for use in its business on or before 30 June 2017.

Please contact us to ensure your future acquisitions will qualify as intended.

Other depreciation concessions for SBEs

Other depreciation concessions for SBEs include a write off of low value pool balances of up to $20,000 on or before 30 June 2018.

Depreciating assets costing more than $20,000 can be pooled and depreciated at a rate of $15% in the first year and 30% in subsequent years.

Concessional company tax rates

From 1 July 2016, the corporate tax rate for small businesses (i.e. businesses with an aggregated turnover of less than $10 million) has been reduced further to 27.5%.   From 1 July 2017, this reduced corporate tax rate will apply to all business with an aggregated turnover of less than $25 million.

General tax planning tips

The following key points are helpful in terms of general tax planning.

  • Delay income – Where appropriate, and if it will not adversely affect your cash flow, consideration should be given to deferring the recognition of income until after 30 June 2017.
  • Prepaid expenses (see above) – A deduction for prepaid expenses will generally be allowed where the payment is made before 30 June 2017 for services to be rendered within a 12 month period.
  • Superannuation Guarantee Contributions (SGC) – The deadline for employers to pay their superannuation guarantee contributions for the 2016/17 financial year is 28 July 2017. However, if you want a tax deduction in the 2016/17 year the superannuation fund must receive the funds by 30 June 2017. The Tax Office deems a contribution made by electronic transfer is not paid until the amount is actually credited to a super fund’s bank account. As such, don’t leave the payment to the last minute.
    Please note that the failure to make the required SGC by the deadline of 28 July 2017 will mean you incur a non-deductible levy equal to the unpaid contributions together with a penalty.
    The SGC rate for the 2016/17 year is 9.5% of salaries. Note that there is no upper age limit for making super guarantee contributions for an employee. Removal of the limit is to encourage mature workers to stay in the workforce. This means you may need to make super guarantee payments for eligible employees aged 70 years or over.
  • Bad debts – Consider writing off any bad debts before 30 June 2017. For tax purposes a bad debt is an amount that is owed to you that you consider is uncollectable or it is not economically feasible to pursue collection. However, unless these debts are physically recorded as a bad debt in your debtor system before 30 June 2017, a deduction will not be allowable in the current financial year.
  • Repairs and maintenance – Are there any repairs and maintenance you should carry out prior to 30 June 2017?
  • Depreciation claims – further to the SBE depreciation concessions discussed above, a review of your depreciation schedule may give rise to a number of opportunities, including the ability to scrap and write off amounts, self-assessing effective lives, or allocating assets to a low value pool.

FBT exemptions for certain work related items

The purchase of Tools of Trade and other FBT exempt items for business owners and employees can be an effective way to buy equipment with a tax benefit.

Items that can be packaged include Handheld/Portable Tools of Trade, Computer Software, Notebook Computers, Personal Electronic Organisers, Digital Cameras, Briefcases, Protective Clothing, and Mobile Phones.

If structured correctly, the employer will be entitled to a tax deduction for the reimbursement payment to the employee (for the equipment cost), claim any GST input credit, and the employee’s salary package will only be reduced by the GST-exclusive cost of the items purchased.

You should buy these items before 30 June 2017.

Trading stock

Businesses that are required to conduct a stocktake of all trading stock should do so as close as possible to the end of each income year. Note: simplified trading stock rules for SBEs (discussed above).

You can choose to value trading stock via one of the following methods;

  • cost,
  • market selling value; or
  • replacement value.

Whilst the opening balance of trading stock has to reconcile to the closing stock balance of the previous year, there is an option in regards to the method that the taxpayer may choose for the current financial year.

A lower trading stock valuation may result in lower taxable income. A review of all trading stock will identify any obsolete stock (which can be valued at nil) and help minimise your taxable income.

Websites

You may be able to claim the expenses you incur in creating or maintaining a website for your business as a deduction.  Such costs include the costs of software, website development, domain name registration and server hosting.

Generally, you can deduction these costs in the year you incur them.  You can also depreciate the costs of a website over time.  You do this by various depreciation methods, including putting the expenses in to a pool.

Directors’ fees

If your company is planning on paying directors fees prior to 1 July 2017, you may want to consider putting a resolution in place by this date and pay the fees in the following financial year.

The benefit in such a strategy is that while the company claims a tax deduction for the director’s fees in the year that it makes the resolution, it doesn’t actually make the payment until the following financial year.

For tax purposes, accrued director’s fees are only deductible at the point in time that a company is definitely committed to making the payment. Consequently, it’s essential that your company, via an appropriately worded minute, makes an unconditional resolution in a shareholders’ meeting making the company “definitely committed” to making the payment. The resolution must not be conditional; it must not be subject to cash-flow considerations etc.

Please note also that directors fees are subject to PAYGW and superannuation requirements.

Private companies and deemed dividends

It is critical that all transactions between private companies and related trusts and individuals be identified and reviewed prior to 30 June 2017.

Business owners who have borrowed funds from their company in previous years must ensure that the appropriate principal and interest repayments are made by 30 June 2017. Current year loans must be either paid back in full or have a loan agreement entered in before the due date of lodgement for the company return or risk having it counted as an unfranked dividend in the return of the individual.

Watch out for any unpaid distributions owing to corporate beneficiaries as they similarly will need action and documentation before 30 June.

Discretionary trust resolutions

Income distribution resolutions must be drafted by the 30 June 2017 or earlier if required by the trust deed in order to avoid the trustee (or any default beneficiaries) being subject to tax (49% in the trustee’s case).

Whilst considering who the beneficiaries will be for the 2017 year, consideration needs to be provided to the Trust Deed which defines whom qualifies as an eligible beneficiary. Beneficiaries such as related companies, trusts and de facto spouses may not be covered by this definition.

Trustees may decide to distribute its profit to beneficiaries with low tax thresholds. However, whilst it may seem like a positive tax saving strategy, the unpaid distribution can be called upon at any time from the beneficiary.

Furthermore, the trustee may consider distributing to company beneficiaries. Such distributions will be taxed at the corporate tax rate, being 27.5% for entities under the $10 million threshold and 30% for all other corporate entities.

There are many other critical areas of trust compliance.  We recommend you contact us to ensure that these matters are properly attended to prior to year-end.

Deficit Levy

The abolition of the Deficit Levy from 1 July 2017 presents a tax-planning opportunity for high-income taxpayers. By way of background, the Deficit Levy was introduced on 1 July 2014. It is a 2% levy which applies on that part of an individual’s taxable income which exceeds $180,000. If you are on track to earn over this amount in 2016/2017, then consider deferring income where possible until after 30 June 2017 and enjoy a 2% tax saving.

Income deferral and expense acceleration

Similar principles apply for those individuals earning below $180,000 who are not impacted by the Deficit Levy as follows:

If you will be earning more money this financial year (2016/2017) than next year (2017/2018) then consider deferring income until after 30 June 2017 where possible. This may involve for example deferring taxable capital gains by simply delaying the sale of the asset. Or it may involve delaying your retirement slightly and thus receiving any payout in 2017/2018 when you will likely be earning less income than when you were working.

Or if you have made a capital gain, and are holding a loss making CGT asset, you may wish to consider crystallising that loss – however, in pursuing this strategy, we recommend you speak us before any sale.

If you are looking to minimise your taxable income in 2016/2017 (perhaps you will be earning more money this financial year than next year, or you just need some cash-flow relief) consider bringing forward some planned deductible expenditure to before 1 July.

Individual taxpayers have access to a variety of different deductions and offsets which they may be able to claim against their assessable income.  However, given increased ATO scrutiny on work related expenses and rental property deductions, we recommend that you claim only what you are legally entitled to claim and ensure that you have all necessary receipts or credit card statements to back-up your claims.

Maximise motor vehicle deductions

If you use your motor vehicle for work-related travel, there are two choices for how you can claim work related travel. If your annual claim for kilometres travelled exceeds 5,000 kilometres, you will need to ensure that you have kept an accurate and complete log book for at least a 12-week period. The start date for the 12-week period must be on or before 30 June 2017. You should make a record of your odometer reading as at 30 June 2017, and keep all receipts/invoices for motor vehicle expenses.

Alternatively, if your annual claim for kilometres travelled does not exceed 5,000 kilometres, you can claim a deduction for your vehicle expenses on a 66 cents per kilometre basis (regardless of engine type) based on a reasonable estimate.

Rental property owners

Investors in residential rental properties should be aware of proposed changes (as announced in the recent Federal Budget) to certain tax deductions available to residential rental property owners.

From 1 July 2017, investors will no longer be able to claim tax deductions for travel expenses related to inspecting, maintaining or collecting rent on a residential rental property.  Investors who engage third party property managers to manage their property, including carrying out inspections, can continue to claim tax deductions for the fees paid.

Also from 1 July 2017, depreciation deductions on plant and equipment will be limited to expenses actually incurred by investors in residential rental properties (i.e. the investor must purchase the depreciable plant themselves in order to claim the depreciation).  This means that when a subsequent investor purchases residential property which includes items of depreciable plant and equipment, they will not be able to claim depreciation deductions for those pre-existing items that they inherit with the property. Going forward it is now proposed that the value or cost of items of existing plant and equipment will be reflected in the cost base of the property for CGT purposes.

This proposed measure will not, however affect existing investments held at 9 May 2017, with plant and equipment forming part of residential rental properties continuing to give rise to deductions for depreciation until either the investor no longer owns the asset, or the asset reaches the end of its effective life.

It is noted that these measures are intended to apply solely to residential properties.  Investors who own commercial rental properties will not be affected by these measures.

Maximise tax offsets

Tax offsets directly reduce your tax payable and can add up to a sizeable amount. Eligibility for tax offsets generally depends on your income, family circumstances and conditions for particular offsets. Taxpayers should check their eligibility for tax offsets which include, amongst others, the low-income tax offset, senior Australians and pensioners offset and the offset for superannuation contributions on behalf of a low-income spouse.

As you can see there are many factors that need to be considered before the end of the financial year.  If you wish to discuss any of the above in further detail, please contact our office on (08) 6311 6900.

2017 Federal Budget – Cooper Partners breaks it down for you

 

The centrepiece in the Government’s 2017 Budget is around housing affordability. This includes the introduction of various measures to attract sophisticated investors and managed investment trusts to invest in affordable housing for the benefit of low income earners by providing new tax incentives. Unfortunately, the Government did not take the opportunity to reduce red tape or bring genuine simplification to the tax system for businesses. It was pleasing that the Government has refrained from further changes to superannuation.

The key tax measures announced in the Budget included:

  • Reaffirming a commitment to previously announced company tax cuts to cover all companies
  • A raft of tax and superannuation measures intended to relieve pressure on housing affordability
  • An increase to the Medicare Levy by 0.5% to 2.5% from 1 July 2019
  • An extension of the instant asset write-off to 30 June 2018 for small business
  • A major bank levy to be introduced from 1 July 2017
  • A tightening of the ability of non-residents to obtain various benefits from owning Australian real property.

Information regarding these measures are provided in more detail below.

1. Key personal tax measures

  • Income tax rates – No changes were announced in the federal Budget in relation to personal income rates.
  • Temporary Budget Repair levy – From 1 July 2017, this levy of 2% of taxable income in excess of $180,000 will no longer apply. Therefore, excluding the impact of the Medicare levy, from 1 July 2017, the top marginal tax income tax rate will be 45 per cent. However, the Leader of the Opposition is calling for this levy to continue past 30 June 2017.
  • Medicare levy increase – From 1 July 2019, the Medicare levy will increase from 2% to 2.5 %. Other tax rates that are linked to the top personal tax rate, such as the fringe benefits tax rate, will also increase. The Leader of the Opposition however wants the 0.5% increase only to apply to taxpayers earning more than $87,000.
  • Medicare levy low-income thresholds – the thresholds for singles, families, and seniors and pensioners will increase from the 2016/17 income year.
  • Higher education loan program (HELP) – A new set of repayment thresholds and rates under the HELP program will be introduced from 1 July 2018. The minimum repayment income for the 2018-19 income year will be $51,956, up from the presently stated $41,999. Maximum student contributions will rise by 1.8% for 4 years from 2018, resulting in a total 7.5% increase from 2021. The first increase will take effect from 1 January 2018 and will apply to all students including those who are currently enrolled.

2. Extension of immediate $20,000 write-off for small business

 Affected clients:  Businesses with an aggregated annual turnover of up to $10 million.
Impact: The increase in the accelerated depreciation write-off threshold to $20,000 will be of great assistance to businesses matching the timing of cashflow to tax obligations. Business owners should be pleased with this outcome; it allows businesses the ability to buy new equipment and in doing so reinvest in their operations tax effectively. This combined with increasing the eligibility from a turnover of $2M to $10M extends the offer to a larger number of businesses.
Effective date: Availability of concession to be extended until 30 June 2018
In brief: Small businesses will be able to immediately deduct purchases of eligible depreciating assets costing less than $20,000 provided they are first used, or installed ready for use, by 30 June 2018.

Depreciating assets valued at $20,000 or more (which cannot be immediately deducted) must be placed into the general small business pool (the pool) and depreciated at 15% in the first income year, and 30% for each income year thereafter. The pool can also be immediately deducted if the balance is less than $20,000 over this period (including existing pools).

The current “lock out” laws from the simplified depreciation rules will continue to be suspended until 30 June 2018. These rules prevent small businesses from re-entering the simplified depreciation regime for five years if they opt out.

From 1 July 2018, the immediate deductibility threshold, and the balance at which the pool can be immediately deducted, will revert to the previous $1,000 limit.

We welcome this extension, given the lengthy delays in the prior year announcements still being experienced before being passed as law, leaving little time before 30 June 2017 to act with absolute certainty.

3. Residential rental properties

Affected clients:  Investors in residential rental properties
Impact: There was no amendment to deny negative gearing. However, there will now be no deductions available for certain travel expenses incurred in respect to a residential rental property and plant and equipment depreciation deductions limited to outlays actually incurred by investors
Effective date: 1 July 2017
In brief: Investors will no longer be able to claim tax deductions for travel expenses related to inspecting, maintaining or collecting rent on a residential rental property. This measure will affect all taxpayers, resident and non-residents who receive rental income form residential rental properties. Investors who engage third party property managers to manage their property, including carrying out inspections, can continue to claim tax deductions for the fees paid.

Depreciation deductions on plant and equipment will be limited to expenses actually incurred by investors in residential rental properties, so the investor must purchase the depreciable plant themselves.  This means that when a subsequent investor purchases residential property which includes items of depreciable plant and equipment, they will not be able to claim depreciation deductions for those pre-existing items that they inherit with the property.

Typically this was currently being achieved by the purchaser engaging a qualified expert to survey the property and provide a formal report outlining the depreciable value attributable to the plant acquired together with the property. Alternatively, where the purchaser allocated part of the purchase price of the property to the plant as part of the contract of sale, this cost was depreciated.

Going forward it is now proposed that the value or cost of items of existing plant and equipment will be reflected in the cost base of the property for CGT purposes.  For existing investments at 9 May 2017 (including contracts already entered into at 7:30PM (AEST) on 9 May 2017), plant and equipment forming part of residential rental properties will continue to give rise to deductions for depreciation until either the investor no longer owns the asset, or the asset reaches the end of its effective life.

These measures are intended to apply solely to residential properties.  Investors who own commercial rental properties will not be affected by these measures.

4. Super incentives for downsizing

Affected clients: Australians aged 65 or above who are looking to ‘downsize’ their home
Impact: A higher super cap for downsizers
Effective date: 1 July 2018
In brief: A person aged 65 or over can make a non-concessional contribution into superannuation of up to $300,000 from the proceeds of selling their principal residence. They must have owned their principal residence for at least 10 years. This measure will apply from 1 July 2018 and is available to both members of a couple for the same home (i.e. up to $600,000 per couple).

These contributions are in addition to existing rules and caps and are exempt from the age test, work test and the $1.6m total superannuation balance test for making non-concessional contributions.

This is a welcome announcement following the unprecedented tightening of contribution limits in last year’s Budget, which seemed to contradict the intent of the super regime and erode people’s ability to provide for their own retirement.

5. First home super saver scheme

Affected clients: Individuals saving to buy their first home
Impact: First home deposit savings boosted at least 30% (compared to a standard deposit account)
Effective date: 1 July 2017
In brief: This scheme is intended to provide an incentive to enable first home buyers to build savings faster for a home deposit, by accessing the tax advantages of superannuation.

Up to $15,000 per year and $30,000 in total can be contributed, within existing caps. Both members of a couple can take advantage of this measure to buy their first home together.

From 1 July 2018 onwards, an individual will be able to withdraw these contributions and their associated deemed earnings for a first home deposit. The withdrawals will be taxed at an individual’s marginal tax rate, less a 30% tax offset.

The First Home Super Saver Scheme on first reading appears to be an attractive measure but upon closer inspection, the relative saving of only paying tax at the super fund rate on the relevant contributions has marginal savings to first home buyers who are likely to be on lower income tax rates in any event.

6. Expansion of the foreign resident CGT withholding regime – impact for Australian vendors of property

Affected clients:  Australian resident and foreign resident vendors
Impact All transactions involving Australian real property with a market value of $750,000 or above will need the vendor and purchaser to consider if a clearance certificate is required.
Effective date: 1 July 2017
In brief: Where a foreign resident disposes of certain taxable Australian property (for example, real estate, or shares in land rich companies), the purchaser is required to withhold an amount from the purchase price and pay that amount to the ATO. Under this announcement, the applicable foreign resident CGT withholding rate will be increased from 10% to 12.5%. A clearance certificate is required to be provided by Australian resident vendors to satisfy the purchaser that no withholding is required.

Currently, the foreign resident CGT withholding obligation applies to Australian real property and related interests valued at $2 million or more. This threshold will be reduced to $750,000 from 1 July 2017, greatly increasing the range of properties and interests that will come within this obligation.

The impact for Australian residents is that a larger number of Australian resident vendors (i.e. anyone selling property with a market value of $750,000 or more) will need to apply for a clearance certificate from the ATO to ensure amounts are not required to be withheld from the sale proceeds.  Where a valid clearance certificate is not provided by settlement, the purchaser is required to withhold 12.5% of the purchase price and pay this to the ATO.

7. Non-residents and Australian housing

Affected clients: Non-residents buying, holding and selling Australian real estate
Effective date: From 7.30pm (AEST) on 9 May 2017
Summary of key measures:

  • The CGT main residence exemption will be removed for foreign and temporary residents.
    Existing properties held before this date will be grandfathered until 30 June 2019.
  • Foreign owners of vacant residential property, or property that is not genuinely available on the rental market for at least six months per year, will be charged an annual levy. The annual levy will be equivalent to the relevant foreign investment application fee imposed on the property when it was acquired.
  • A 50% cap on foreign ownership in new developments will be introduced through a condition on new dwelling exemption certificates.
    New dwelling exemption certificates are granted to property developers and act as a pre-approval allowing the sale of new dwellings in a specified development to foreign persons (without each foreign purchaser seeking their own foreign investment approval). The current certificates do not limit the amount of sales that may be made to foreign purchasers.
  • An integrity measure for foreign resident CGT regime will be applied intended to ensure that foreign tax residents cannot avoid a CGT liability by disaggregating indirect interests in Australian real property.
    The principal asset test, which is relevant in determining whether a foreign resident’s asset is a taxable Australian property will now be applied on an associate inclusive basis for foreign tax residents with indirect interests in Australian real property.

8. Access to small business CGT concessions to be refined and limited

Affected clients:  Small business taxpayers with aggregated turnover of less than $2 million or business assets of less than $6 million.
Impact: Business owners will have to be more careful than ever when declaring assets for CGT concessions
Effective date: 1 July 2017
In brief: Access to small business CGT concessions will be limited to deny eligibility for assets which are unrelated to the small business.

The concessions currently assist owners of small businesses by providing relief from CGT on assets related to their business which helps them to re-invest and grow, as well as contribute to their retirement savings through the sale of the business. However, some taxpayers are able to access these concessions for assets which are unrelated to their small business, for instance through arranging their affairs so that their ownership interests in larger businesses do not count towards the tests for determining eligibility for the concessions.

Limited information is currently available in relation to this measure however it appears to be targeted at the application of the maximum net asset value test and the small business entity eligibility requirements.

While the definition of small business for many measures has been lifted for those with an aggregated turnover of less than $10 million, the Government has left the turnover threshold for the small business CGT concessions at less than $2 million. This will lead to confusion by business owners as to what concessions they have access to.

9. LRBAs included in super balance and transfer balance cap

Affected clients:  Members who use new limited recourse borrowing arrangements (LRBA) within their super fund from 1 July 2017
Impact:  A reduction in the ability for a member to obtain an advantage by using a LRBA within their super account.
Effective date: 1 July 2017
In brief: The Government is concerned that LRBAs may be used to circumvent contribution caps, as well as transfer assets from the accumulation phase to the retirement phase when repayments are  made, that are not captured by the transfer balance cap. As an integrity measure, the balance of an outstanding loan in respect to an LRBAs by a super fund will be included in a member’s total superannuation balance, and any repayment of the principal and interest of an LRBA from a member’s accumulation account that increases the amount in the retirement phase for a member, will be a credit in the member’s transfer balance account for the purposes of the $1.6 million transfer balance cap.

10. Related party transactions SMSF integrity measures announced

Affected clients:  Members who have related party transactions in their SMSFs
Impact:  Reduced opportunities for members to use related party transactions on non-commercial terms to increase superannuation savings.
Effective date: 1 July 2018
In brief: Currently the rules essentially provide that income derived by a super fund must be generated on an arm’s length basis. The non-arm’s length income provisions will be amended to ensure expenses associated with generating that revenue must also be calculated on an arm’s length basis. A super fund’s non-arm’s length income (also known as “special income”) is taxed at 47% instead of the 15% concessional rate.

The Government has said this measure is aimed at ensuring the 2016-17 superannuation reform package operates as intended, accordingly any non-commercial transactions, particularly in light of restructuring for the super reforms, will need to properly considered.

11. Increased CGT discount for the provision of affordable housing

Affected clients:  Resident individual taxpayers investing in affordable housing
Impact: An additional 10 per cent CGT discount (i.e. 60%), however this benefit somewhat negated by reduced rental returns during course of ownership of investment.
Effective date:  1 January 2018
In brief: The CGT discount will be increased from 50% to 60% for Australian resident individuals investing in qualifying affordable housing.

The conditions to access the 60% discount are:

  • the housing must be provided to low to moderate income tenants;
  • rent must be charged at a discount below the private rental market rate;
  • the affordable housing must be managed through a registered community housing provider; and
  • the investment must be held for a minimum period of three years.

The 60% discount will flow through to resident individuals investing in affordable housing via managed investment trusts as part of the tax measure enabling such trusts to invest in affordable housing (see below).

This initiative could be a very attractive proposition, with the overall effect of this measure increasing the effect of negative gearing as rental income will be limited but investment costs will likely stay the same with a reduced taxable capital gain on disposal.

12. Affordable housing incentives for MITS

Affected clients: Private sector and foreign investors in managed investment trusts (MITs) that invest in affordable housing
Impact: Concessional tax treatment for investors
Effective date: 1 July 2017
In brief: Investors in MITs that invest in affordable housing will receive concessional tax treatment, provided certain conditions are met, including that the properties are let as affordable housing for at least 10 years and that at least 80% of the income is derived from affordable housing in an income year.

A concessional 15% final withholding tax rate on investment returns, (including income from capital gains) is available for non-resident investors (from countries with which Australia has a recognised exchange of information arrangement) who invest in these MITs.

Resident investors in these MITs will continue to be taxed on investment returns at their marginal tax rates. Income from capital gains will be eligible for the increased CGT discount of 60 per cent, where applicable.

13. Purchasers of new residential properties to remit GST

Affected clients: Purchasers and developers of new residential properties
Impact: Administration burden imposed on purchasers, and vendors will need to consider cashflow and financing.
Effective date: 1 July 2018
In brief: Purchasers of newly constructed residential properties or new subdivisions will be required to remit the GST directly to the ATO at settlement.  This is a significant change from current practice, whereby the vendor remits the GST as part of their ordinary business reporting, and typically purchasers (being primarily private consumers) of newly constructed residential premises do not report or pay GST in their own right.

The Government are concerned as to the number of developers that have collapsed and been wound up, prior to setting liabilities owed to creditors and the ATO.

It appears that the Government expects that settlement agents will manage this payment as part of the settlement process.  However, this view may be somewhat over simplified given that developers may choose to use the margin scheme to calculate the GST liability and this underlying calculation and detail would not be known to purchasers or settlement agents.

Furthermore, builders and developers will need to consider the impact that this announcement will have on their cash flow and financing arrangements.

14. Major bank levy

A major bank levy will be introduced from 1 July 2017, however the full impact of the Government’s projected $6.2 billion levy on the big four banks and Macquarie at this stage is largely unknown.

It is likely the levy will affect the entire banking system and a major levy on bank liabilities may ultimately be covered by consumers, whether through interest rates and account fees, however that being said, the banks will be under close scrutiny from ACCC not to pass on the levy to consumers. At this stage and as demonstrated by the recent drop in the banking sector, shareholders (and super funds) will most likely feel the effect through reduced share prices and profits.

15. Other measures announced

  • Extension of Contractor taxable payments reports (TPRS) to the courier and cleaning industries with effect from 1 July 2018.
  • From 1 July 2017, the GST treatment of digital currency (such as Bitcoin) will be aligned with that of money to remove the double taxation that arises on the purchase and exchange of the digital currency.
  • An annual foreign worker levy is to be introduced, with the amount of the levy ranging from $1,200 to $1,800 per worker per year for temporary visas, and a once-off $3,000 to $5,000 per worker for permanent skilled visas. The levies are used to support skills training by way of a new Commonwealth Fund.

If you would like to discuss the budget changes and how they may affect you, please do not hesitate to contact Michelle Saunders, Marissa Bechta, and Jemma Sanderson on (08) 6311 6900.

Company tax rates reduction and increase to Small Business Entity threshold

TAX UPDATE

Company tax rates reduction and increase to Small Business Entity threshold

In brief:

Following the release of the 2016/17 Federal Budget, a number of measures were announced that offered tax concessions to small business and corporate taxpayers.

However, the ensuing Federal Election opened up a debate as to whether or not such measures would be introduced as announced, causing much uncertainty amongst the business community.

On Friday 31 March 2017, the amended Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 (the Bill) was finally passedby the Senate (with 6 Government amendments to be referred back to the House of Representatives for approval) subject to further approval when Parliament returns on 9 May 2017 before it is granted royal assent.

The key points arising from the Bill are:

  • With effect from 1 July 2016, companies with an annual turnover of less than $10 million will pay 2.5% less tax at the new corporate rate of 27.5%. At present, small businesses corporate taxpayers with turnover less than $2M have a tax rate of 28.5%, compared to a rate of 30% for turnover greater than $2M.
  • From 1 July 2017, companies with a turnover of up to $25 million will get the 2.5% reduction to 27.5%, with the drop then applying to businesses under $50 million in the 2018-2019 financial year.
  • The corporate tax rate will then progressively reduce to a rate of 25% by the 2026-2027 financial year, for those businesses with a turnover of less than $50M.
  • The unincorporated businesses tax discount has been extended to those businesses with an annual turnover of less than $5 million, and will be increased to a rate of 8% with effect from 1 July 2016 (increasing to a rate of 16% by the 2026-27 financial year), up to a maximum discount value of $1,000.
  • The small business entity aggregated turnover threshold is increased from $2 million to $10 million with effect from 1 July 2016.
  • The aggregated turnover threshold for access to the small business income tax offset will be limited to $5 million, and the current aggregated turnover threshold of $2 million will be retained for the small business capital gains tax concessions.
  • It remains to be seen whether the Government will be able to introduce tax cuts for larger businesses as proposed in the Budget, although they have indicated an intention to continue to support this.

 Small business entity threshold

The Bill has extended access to a number of small business tax concessions by increasing the threshold for these concessions to $10 million, up from the current $2 million threshold.

From 1 July 2016, all businesses with aggregated annual turnover of less than $10 million will have access to the following concessions:

  • immediate deductibility for small business start-up expenses;
  • simplified depreciation rules, including access to immediate deductions for some depreciable assets (see further below);
  • simplified trading stock rules, giving businesses the option to avoid an end of year stocktake if the value of the stock has changed by less than $5,000;
  • roll-over for restructures of small businesses;
  • immediate deductions for certain prepaid business expenses;
  • a simplified method of paying PAYG instalments calculated by the ATO, rather than the PAYGI rate method which can be more time consuming to determine;
  • the option to account for GST on a cash basis and pay GST instalments as calculated by the ATO;
  • annual apportionment of input tax credits for acquisitions and importations that are partly creditable; and
  • FBT car parking exemption.

Immediate deductibility of depreciable assets- action required by 30 June 2017.

With effect from May 2015, small business taxpayers are eligible to claim an immediate deduction for asset purchases costing less than $20,000 up to 30 June 2017. From 1 July 2017, the asset cost threshold will reduce to $1,000 for an immediate deduction.

For these small businesses whose income exceeded $2M but was less than $10M, there was uncertainty as to whether they would in fact be able to access this concession during the 2017 income year, whilst awaiting the passing of law to increase the small business entity income threshold, thereby potentially delaying business and commercial decisions. The passing of this Bill through senate will now give such businesses the certainty they need, in order to proceed with the purchase of assets that qualify for the immediate deduction, or otherwise provide comfort that such a deduction will be available for assets purchased in the past 9 months.

We remind that in order to qualify for the immediate deduction, such asset purchases must not only be committed to and held by the business, but the asset must also be installed ready for use prior to 30 June 2017.

Small business entity definition – Same Same but Different

As stated above, the new legislation will amend the current definition of a ‘small business entity’ in the Income tax Assessment Act 1997 to increase the aggregated turnover threshold for eligibility as a small business entity from $2 million to $10 million.

For the purposes of the small business income tax offset, an entity is required to work out whether it is a small business entity for the income year as if each reference to a small business entity  (which imposes the aggregated turnover threshold) to $10 million were a reference to $5 million.

The new legislation also retains the current aggregated turnover threshold of $2 million for the purposes of the small business CGT concessions. It achieves this by replacing references to ‘small business entity’ with the new defined term ‘CGT small business entity’.

An entity will be a CGT small business entity for an income year if that entity is a small business entity for the income year, and would still be a small business entity for the income year if each reference to a small business entity (which imposes the aggregated turnover threshold) to $10 million were a reference to $2 million.

This change does not affect the operation of the small business CGT concessions.

Franking of dividends

Whilst the standard corporate tax rate remains at 30% for companies with large turnover, they will continue to frank dividends at 30%. Companies with turnover less than $10M will also be able to frank dividends at the 30% rate. Notwithstanding they pay company tax at a lower rate.

Further, considerations should be given to the impact on franking accounts due to the change in corporate tax rate, which may be relevant in considering a company’s dividend policy.

Get in touch with us

The passing of this bill through Parliament now offers businesses more comfort when considering proposed transactions in light of the 2016/17 budget announcements, and will now enable them to consider the opportunities that may be available to them.

We welcome the passing of the Bill to increase the small business entity turnover threshold, as this will now give more businesses access to tax concessions which were previously not available to businesses with a turnover of more than $2 million.

However, the complexities in the differing thresholds require those entities wishing to access the small business tax concessions and incentives to carefully consider carefully their eligibility to the new rules.

Should you wish to discuss this further, please do not hesitate to contact our office.

Fringe Benefits Tax – Our top 10 to keep you in the know this FBT season

The 2016/17 FBT year is coming to a close on 31 March and in order to get you ready for FBT reporting, we present our top 10 tips, changes and reminders to keep you up to date this season.

1. Key 2017 rates, dates and thresholds

For the second year in a row, the FBT rate will remain at 49% for the year ending 31 March 2017 to reflect the Temporary Budget Repair Levy. However, the 2017/18 FBT year will see the FBT rate and associated type 1 and type 2 gross up rates fall as follows:

 

The 2017 FBT lodgement date is 21 May 2017. However, employers on a tax agent list by 21 May will be eligible for a lodgement extension date to 25 June 2017. Any FBT liability is payable on 28 May 2017, regardless of whether an employer is on a tax agent list.

Other key rates and thresholds include:

  • Car parking threshold: $8.48
  • Statutory benchmark interest rate: $5.65%
  • Reasonable food and drink amounts for employees living away from home (per week)
    • $242 for one adult;
    • $363 for two adults; and
    • $485 for two adults and two children
  • Reportable fringe benefits threshold: Taxable value exceeding $2,000 (i.e. grossed-up value of $3,921).

2. Handy exemption for small businesses providing multiple electronic devices

From 1 April 2016, small businesses with an aggregated annual turnover of less than $2 million will enjoy an extended concession on all the qualifying work-related portable electronic devices provided to employees (such as laptops, tablets, GPS navigation devices or mobile phones), even when the devices may have overlapping functions. To access this concession, it is important that the device be primarily used for use in the employee’s employment.

All other employers are limited to the FBT exemption only applying to one device per employee where a device of each kind has a substantially similar function.

3. Restrictions on reducing FBT on car expense payments

From 1 April 2016, the “otherwise deductible” rule has changed for car expense payment fringe benefits (i.e. where an employer meets or reimburses an employee for fuel or other running expenses).

Previously, employers could elect to reduce the taxable value of car expense benefits under one of three methods. The new rules now limit the calculation of the work-related use percentage of the expenses to either the logbook method or the business use method.

Under the business use method, the work-related use percentage of the car expenses is taken to be the lower of 33.33% and the estimated work-related use percentage. The estimated work-related use percentage is determined by forming a reasonable estimate based on the employee’s odometer records maintained throughout the FBT year and the patterns of use of the car during the FBT year.

Under the logbook method, the work-related use percentage is determined by maintaining records of the car’s use in a logbook for a minimum of 12 consecutive weeks.

Basically, where no logbook is kept, the work-related use percentage will be limited to 33.33%. In order to reduce FBT exposure on car expenses, the onus is on employers more than ever to ensure that staff are keeping accurate records of their personal car usage.

Note that these changes have no impact on car fringe benefits and are applicable only to the provision or reimbursement of car expenses.

4. New changes to salary packaged entertainment

From 1 April 2016, all employers providing salary packaged meal entertainment or entertainment facility leasing expenses (EFLE) benefits to employees will be unable to use the 50/50 split method and 12 week register method for valuing the salary packaged benefits. Only the actual method can be used to determine the FBT on these benefits. This has created an extra burden on employers who usually apply the 50/50 split method for non-salary packaged entertainment benefits provided to employees, increasing the amount of record keeping required. However in our experience, employers that are not FBT exempt or FBT rebatable do not typically provide salary packaging to employees for entertainment expenses, so this recent change is not likely to impact many taxable employers.

Salary packaged meal entertainment or EFLE benefits provided to employees of FBT exempt and FBT rebatable employers are now subject to a separate single grossed-up cap of $5,000. This means that these employers now have to include salary packaged entertainment in their capping thresholds to determine whether they are subject to FBT on any excess of the cap.

5. Good news for employers with fleet vehicles

The ATO released Practical Compliance Guidelines in late 2016 which provides a concession for FBT record keeping in relation to logbooks held by employees driving fleet vehicles. Under the new Guidelines, the ATO have accepted that employers may use an ‘average business use percentage’ by taking the average of the valid logbook percentages for each car in the fleet, provided that at least 75% of the cars in the fleet have a valid logbook.

The average business use percentage can be used for a period of five years in respect of the fleet – including replacement and new cars, provided that the fleet remains at 20 cars or more. The Guidelines may also be used as a basis for determining each relevant employee’s reportable fringe benefits amount.

There are a number of requirements in order to access this FBT concession however:

  • The cars are ‘tool of trade cars’ – e.g. cars used for a predominant business purpose. The position of the employee is also relevant as key executives are unlikely to be considered to have a tool of trade car;
  • The employees are mandated to maintain logbooks in a logbook year;
  • At least 75% of the cars have valid logbook maintained by the employer;
  • The cars are of a make and model chosen by the employer, rather than the employee (or the employee has a choice of a limited range of cars);
  • Each car in the fleet has a GST-inclusive value less than the luxury car limit applicable at the time the car was acquired (currently $64,132); and
  • The cars are not provided as part of the employee’s remuneration package (i.e. not salary packaged).

Employers should consider whether they can qualify for the simplified record keeping concession in light of the above requirements and do comparisons to actual logbook work-related percentages recorded by employees to determine whether an average percentage is more favourable.

6. Luxury cars create issues for senior executives

FBT reporting on car fringe benefits is always a focus area for the ATO, however employers providing luxury vehicles to employees (often business principals and executives) will attract particular attention. The provision of company cars to senior executives will always be a common remuneration incentive, however there are a number of issues which may arise when providing a luxury vehicle to an employee.  

  • Whether the vehicle is an exempt vehicle for FBT purposes: FBT can be avoided where the vehicle falls within the definition of an exempt vehicle. That is, it is broadly not a ‘car’ with the principle purpose of carrying passengers – i.e. a workhorse vehicle with a carrying capacity of over one tonne. There is a wide misconception that any SUV or vehicle with the employer’s logo or signage would qualify as an exempt vehicle, however the specifications of each vehicle provided to employees should be considered to determine whether it qualifies;
  • Whether private use of the vehicle is limited: The provision of a workhorse vehicle is only FBT exempt if the private use of the vehicle during the year is limited to ‘minor, infrequent or irregular’ use (other than travel or and from work). Use on the weekends is therefore likely to attract FBT. Employers should review their employee handbook and policies relating to private use of company cars.

7. New safe harbours for private use of workhorse vehicles on the horizon

The ATO is currently drafting guidelines which may provide a safe harbour for certain private use of workhorse vehicles. As noted above, the FBT exemption for private use of these vehicles is extremely strict. The purpose of the guidelines is to develop safe harbours that align the tax treatment with commercial realities and provide appropriate risk mitigation to employers. As this is at proposal stage only, it is not known to what extent the ATO is willing to accept private use by employees of these vehicles however any relaxing of the current rules will be a welcome change.

8. Salary packaging still tax effective

With many households feeling the squeeze of financial pressure, employers may find that their staff are enquiring about their salary packaging options. Salary packaging is still a tax effective option for both employees and their employers, however caution must be had as to the types of benefits that are packaged. The packaging of FBT exempt benefits, such as laptops, mobile phones, briefcases and other portable tools of trade will still provide a benefit to both parties.

Salary packaging superannuation is not considered a fringe benefit and will not attract any FBT, however care should be taken in relation to the employee’s contribution limits.

Salary packaged cars continue to remain popular, with employees on income of $87,000 or more receiving the most benefit. When structuring the employee’s salary package, employee contributions are still popular as they usually provide the greatest cash benefit to the employee. It is important that employee contributions to reduce any FBT are reviewed by employers, as often the salary packaging provider may not appreciate the FBT risks involved where contributions are not paid on time, or where there is a deficit or excess in contributions made by the employee compared with the FBT liability.

9. ATO areas of focus – employers and benefits in the spotlight

In 2017, the ATO will be paying particular attention to:

  • Public Benevolent Institutions (PBI) and FBT-rebatable employers: Charities, not-for-profit organisations, religious institutions and sporting clubs claiming FBT exemptions or rebates are all in the spotlight in the 2017 FBT year. The ATO will be actively checking whether these entities are in fact eligible to claim the concessions which significantly reduce or eliminate their FBT bill.
  • LAFHA benefits: The ATO is concerned that employers are incorrectly providing living away from home allowances to employees who are not ‘living away from home’ but are instead travelling for work or have permanently relocated. Broadly, LAFHAs (which also includes reimbursed accommodation expenses) are taxed under the FBT regime – often at concessional rates due to a number of reductions available, such as the 12 month rule. However allowances paid to employees who are not living away from home temporarily, but are instead travelling or who have permanently relocated, are not taxed as fringe benefits but are generally taxed to the employee personally at their marginal tax rate. LAFHAs have historically been used by employers as a remuneration incentive to attract key staff to move for work as the allowance was usually tax-free. While there have been significant measures to restrict the concessions, the ATO believes that too many employers are accessing the LAFHA concessions for situations not intended under the FBT rules.

10. Manage your risk – data matching still capturing non-lodgers

Data matching in the following areas is being conducted by the ATO to identify employers not lodging FBT returns. The ATO is now regularly imposing Failure to Lodge on Time penalties and interest charges on employers.

  • Motor vehicle purchases and registrations: The ATO is continuing to undertake data matching to identify employers who have purchased cars, but have not disclosed car fringe benefits in their FBT return, or appropriate employee contributions in their income tax return. Where the FBT on a car fringe benefit is reduced in full by employee contributions, while there is no obligation to lodge an FBT return, employers should still weigh up whether a nil return is lodged in order to reduce future compliance risks. This is because the amendment period is three years from the lodgement date of a return. Where no return is lodged, this exposes the employer to an unlimited time period of review;
  • Year end PAYG payment summaries: The ATO is actively checking situations where reportable fringe benefits are disclosed on an employee’s group certificate at 30 June but no FBT return has been lodged, in assessing which employers are possible targets for further review or audit;
  • Tax return – employee contribution disclosures: Where employer companies or trusts file tax returns with employee contributions disclosed, but no FBT return has been lodged, this is will raise the risk of the employer entity being considered for ATO audit or review.

Are all employee share options now taxed at the time of exercise of the options?

When the Employee Share Scheme (ESS) rules were amended from 1 July 2015, one of the reasons behind the amendments was to provide more concessional tax treatment for options. Previously, many taxpayers were either taxed at the time of acquisition of the options (‘taxed upfront’) or at the time of vesting of the options, despite the fact that the options were ‘underwater’ and could not be exercised.

Many employers and taxpayers believe that as a result of the 2015 amendments, all options are now taxed at the time of exercise of the options. However, in order for options (and rights) to be taxed on exercise, there are certain conditions that must be satisfied.

Firstly, the options must be acquired by the employee at a discount and therefore, the options must fall within the ESS rules.

Secondly, the options must be acquired on or after 1 July 2015. If the options are acquired before this date, the previous ESS rules apply and the time of exercise was not generally one of the taxing points under those rules.

Thirdly, the options must not be taxable on an ‘upfront’ basis and must therefore satisfy the conditions for tax deferral to be available. Broadly, these conditions include:

  • The employee is employed by the company (or a subsidiary of the company) issuing the options;
  • The options are to acquire ordinary shares in the company;
  • The employee must not hold a beneficial interest or voting rights in the company of more than 10%, after the options are acquired (including any shares that may be acquired as a result of exercising the options); and
  • Either a or b applies:
    • a. there is a real risk of forfeiting or losing the options or resulting shares, other than by disposing of the options, exercising them or letting the options lapse (e.g. time or performance based conditions are applied under the scheme); or
    • b. at the time the options were acquired, the scheme genuinely restricted the employee from immediately disposing of the options (or rights) and the governing rules of the scheme expressly state that Subdivision 83A-C of the Income Tax Assessment Act 1997 applies.

Where these deferral conditions are satisfied, the options may be taxable at the time of exercise subject to there being genuine disposal restrictions imposed on the options at the time of acquisition. There can also be an earlier taxing point such as where employment is ceased. The taxable amount is the market value of the options at the time of the taxing point determined in accordance with the ESS rules.

It is important that employers carefully consider and seek advice regarding the tax implications of issuing options, rights or shares to employees before the ESS interests are issued. If the details of the employee share or option scheme are not considered carefully, there may be adverse tax implications for employees which have the effect of negating the benefits of granting ESS interests as an employee incentive.

We Have Law – How the new Superannuation Law affects you

On 23 November 2016 the bulk of the legislation with respect to the substantial superannuation changes announced in the 2016/2017 federal Budget passed through both Houses of Parliament.

Since the federal Budget, the Government updated their policy regarding several of the proposed changes, most of which were positive.

Now that the legislation has been passed, we are in a position to provide you with an update, as well as undertake any appropriate planning to ensure that you are optimising your superannuation in 2016/2017 and are ready for the changes that will come into effect on 1 July 2017.

Outlined below is a summary of the final changes to superannuation that were legislated, and how those changes will impact your super or SMSF:

1. Concessional Contributions Cap Reduced

From 1 July 2017, the concessional contribution limit will be reduced to $25,000 for all taxpayers, regardless of their age.  This will be indexed in line with wages growth.

Table

This is a substantial reduction to the deductible contribution limit that applied prior to 1 July 2007, which was $105,113 for taxpayers over age 50.

The current provisions that are in place with respect to refunding excess contributions will remain, whereby any excess is added back to the individual’s assessable income and taxed at their marginal tax rate.

Further, changes to the treatment of contributions to constitutionally protected funds have been introduced (such as GESB WestState and GoldState), such that the notional contributions to such funds impact concessional contributions to other superannuation accounts.

2. Non-Concessional Contributions

The current system of annual non-concessional contributions of up to $180,000 per year (or $540,000 every 3 years) will be replaced with a new non-concessional cap of $100,000 per annum (or $300,000 every 3 years).  However, in addition to the reduced cap, those members who have more than $1.6M in superannuation will be unable to make any further non-concessional contributions to superannuation.

This will apply from 1 July 2017, and transitional rules will be in place for those who triggered the three year period in either 2015/2016 or 2016/2017 but who didn’t fully utilise their relevant three year cap by 30 June 2017.

This new provision does not affect contributions made in 2016/2017.  Accordingly, it will be important to review contribution histories and ascertain whether any further contributions can be made to superannuation prior to 30 June 2017.  From that time, the ability to make non-concessional contributions will depend upon the individual’s total superannuation as at 30 June of the previous financial year.

This may create some timing issues, particularly for SMSFs where the annual balances are often unknown until well into the following financial year.

3. 30% Tax on Deductible Contribution for High Income Earners

From 1 July 2017 the threshold for the imposition of an additional 15% tax on concessional superannuation contributions will be reduced from $300,000 to $250,000.

What this means is that the current mechanism for the additional 15% tax payable on contributions will now apply to a wider group of taxpayers.

Although this may result in an additional 15% tax applying to superannuation contributions, this is still a tax effective strategy where the effective tax rate of 30% is lower than the highest marginal tax rate of 49%.

4. Changes to Transition to Retirement Pensions

From 1 July 2017, Transition to Retirement Pensions (TRP) will be ineligible to receive a tax exemption with respect to the assets supporting such pensions.  Accordingly, earnings will be taxed at the standard accumulation rate of 15% (an effective 10% tax rate on long term capital gains).  Such a change will apply irrespective of when the TRP commenced.

5. A Tax Exempt Pension Balance Capped at $1.6M

Several of the above reductions in limits fit into the context of the introduction of a $1.6M cap on how much can be held within the retirement phase of superannuation for members.  This will apply from 1 July 2017, and will apply regardless of when a pension commenced.

Where you have accumulation benefits in excess of the $1.6M cap and have reached retirement age:

  • You can convert $1.6M to a pension account and receive the tax exemption with respect to those assets, plus any earnings on those assets;
  • Your balance in superannuation above the $1.6M would remain in the accumulation phase with the assets taxed at 15% on income, 10% on realised long term capital gains.

If you convert more than the $1.6M to a pension account, the amount above $1.6M will be subject to tax on the deemed earnings on the excess.  In most circumstances the separation of the $1.6M and the accumulation account will be preferable to the tax outcome where there is an excess.

For those who are already in pension phase, where your pension benefits are greater than $1.6M, by 1 July 2017 you will have to review your pension accounts and either rollback the amount that is in excess of the $1.6M threshold back to the accumulation phase of superannuation, to be subject to tax at the accumulation rates above, or take it out of the superannuation environment as a lump sum.

Once the $1.6M transfer balance cap has been triggered, any earnings and capital growth with respect to that account will not be subject to a new cap each year and will remain exempt.

The $1.6M threshold will be indexed each year in $100,000 increments in line with CPI.

With the above, certain modifications will be in place:

  • Those members who have legacy pensions such as market linked pensions or complying pensions (in SMSFs) with more than $1.6M in those accounts. As such pensions are unable to be commuted or rolled back to accumulation phase, different rules apply.  The cap for members in this scenario depends on the annual pension amount and the term of the pension – some members may be in an advantageous position, and others detrimentally impacted.  The deemed value of these pensions will also impact the amount of other pension accounts the individual can have in the retirement phase.

Further, such pensions will be subject to a pension income cap.  This will operate so that if such a pension payable each year exceeds $100,000, the 50% of the excess to that will be included in the individual’s assessable income.

Accordingly it will be important that such pensions are reviewed in detail.

  • Where one member of a couple passes away, the $1.6M cap of the deceased will not be able to continue to apply to the beneficiary. Also, the beneficiary will be unable to rollback the deceased’s pension account to accumulation.  A 12 month grace period will apply to enable reversionary pensioners to put their affairs in order to address any cap excess.

Further, where a deceased member has accumulation accounts, where the spouse has already used their own $1.6M cap the accumulation account will need to be paid out of superannuation.

The Government is intent on ensuring that superannuation is not used as a vehicle for estate planning purposes.  Accordingly, it will be important to review any estate planning arrangements within superannuation to achieve the optimal outcome upon your passing, particularly when considering that a deceased member’s benefits will be required to all be paid out

of superannuation (unless the spouse hasn’t used their own $1.6M cap.

6. CGT Relief

Following on from the new $1.6M cap on the tax exemption on assets supporting pensions, to ensure that there is no disadvantage for existing pension accounts that will need to be rolled back to accumulation, capital gains tax (CGT) relief will be available.  This relief will operate such that funds will be able to make an irrevocable election that there is a deemed disposal with respect to particular assets in the 2016/2017 financial year.

These arrangements will replicate the consequences for a fund as if they had triggered a CGT event on these assets prior to 1 July 2017, and ensure that, when these assets are sold after 1 July 2017, tax is only paid on capital gains accrued after this date.

It is important to note that for this relief to apply, elections need to be made, with different treatment for segregated and unsegregated assets.  Further, funds where a member has more than $1.6M in total superannuation will no longer be able to segregate assets within that fund.

7. Catch Up Concessional Contributions for Super Balances <$500,000

If your super balance is less than $500,000, from 1 July 2018 you will have the opportunity to boost your superannuation savings by carrying forward unused concessional contribution limits over a rolling five-year period.  This will enable additional concessional contributions to be made where the cap was not fully utilised in previous years (from 1 July 2018).

The $500,000 balance will be measured as at 30 June of the year prior to the contribution.  As with non-concessional contributions, this may create some timing issues, particularly for SMSFs where the annual balances are often unknown until well into the following financial year.

8. Removal of the 10% Rule for Personal Deductible Contributions

An area of much lobbying to the Government and Treasury since 2007 has been the removal of the 10% test.  Finally, from 1 July 2017 all individuals up to age 75 will be able to claim a tax deduction for personal contributions up to the limit of $25,000 p.a, regardless of their employment status.

The current 10% rule prohibits many people from optimising their superannuation contributions where their income from a small amount of employment would preclude them from being able to claim a personal tax deduction.

Given the concessional contribution limit is to be reduced to $25,000 per person per annum, the source of the contributions is irrelevant, which is a good outcome.

9. Anti-Detriment Deductions Removed

The ability for a superannuation fund to claim a tax deduction for the payment of member’s death benefits (with certain criteria attached) has been removed from 1 July 2017.

Actions

We haven’t seen so many changes in super since Howard and Costello’s Simpler Super back in 2006.

As the law has now been released and passed, anyone who has superannuation in pension phase, or looking to make contributions to superannuation needs to review their position and ensure that the new rules have been considered.  There are a number of conversations that we will need to held with you as to how you are impacted. These discussions may include:

  • High balance pension funds – revisit and make necessary adjustments
  • For those aged between 65 and 75 – revisit your superannuation contribution strategy
  • For those with high account balances – consider spouse contributions
  • For those with super balances less than $500,000 – consider whether you could take advantage of catch-ups in concessional contributions
  • Review all TRP –revisit the tax effectiveness of these
  • Review superannuation contributions strategies splitting for those with greater than $250,000 income

If you would like to speak to us about how these changes may impact you, please call us on 08 6311 6900.

It’s starting to look like Christmas – a time for tax-effective giving

Christmas is traditionally a time for giving including showing your team and clients a token of your appreciation.

It is also a time of festivities and lots of dining. With the right approach it is possible to provide these with no FBT.

However, this area of law if complex. So we provide our gift to you – a quick ready reckoner as to the tax treatment of Christmas giving.

Notes:

  1.  The above implications are relevant only when the “actual method” is used for valuing entertainment benefits for FBT purposes. The minor benefit and in-house property exemptions do not apply where the 50/50 method is used.
  2. The minor benefit threshold of less than $300 (incl. GST) applies to each benefit provided. We note for completeness that in order for a benefit to qualify as an exempt minor benefit, the benefits provided must also be infrequent and irregular in nature.
  3. Where an employer is travelling for business purposes and attends Christmas functions, the FBT implications may differ from the above table.
  4. The above table is a summary of the FBT implications and is not intended to be used as professional tax advice. We recommend you seek professional advice specific to your situation.

It’s Okay, It’s Covered in my Will…

stratford-disputed-wills1

These could well be the last words of the late Michael Wright if questioned about the passing of the assets of his estate to all of his children.  In reality, what is outlined in your Will may not be the end result with respect to the distribution of your assets to your beneficiaries.  It is important that you consider your estate planning and the passing of your assets comprehensively to ensure that your intentions are met, layering that with the requirements under the law.

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