The power of re-contributing

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The power of re-contributing

Re-contribution strategies can reduce the tax liability of an SMSF and its beneficiaries as well as allow members to qualify for Centrelink benefits. Karen Dezdjek illustrates how.

A re-contribution strategy for SMSFs is easy to implement. It has the potential to deliver significant tax savings to both the member and their beneficiaries when a member dies, not to mention potential access to Centrelink benefits they may have otherwise forgone.

So what exactly is it?

As its name suggests, a re-contribution strategy is where money is withdrawn out of the SMSF from a member’s entitlement and then deposited back, allocated to the same member or even the member’s spouse.

A member’s balance typically consists of two components – a taxable and tax-free component. A taxable component is derived from employer or member contributions where they have claimed a tax deduction. The tax-free component results from a contribution into the fund where no one is claiming the amount as a tax deduction. The idea behind the strategy is to convert a member’s balance that is predominantly taxable into a balance that is predominantly, or entirely, tax-free.

Sounds easy. So what’s the catch? In order to use this strategy a member will need to meet a condition of release to be able to access their benefits and then be in a position to re-contribute the money back into the fund either for themselves or their spouse.

What are the benefits?

Like most strategies the main aim is to save on tax. This strategy has potential benefits for anyone who has a taxable component and is able to access their entitlement.

Members up to age 60

Those who are under the age of 60, have permanently retired, have a high taxable component in their member balance and wish to begin a pension to have the ability to save some tax can benefit from the strategy.

As we know, drawing a pension from the fund up until age 60 will mean there will be tax payable at the member’s marginal rate less the 15 per cent tax offset. However, if a condition of release, such as retirement, has been satisfied, a member can use their tax-free lifetime cap by withdrawing up to $195,000 (2015/16 rates) and then re-contribute this amount back into the fund as a non-concessional contribution. The non-concessional cap is currently set at $180,000 a year with the ability to bring forward an additional two years of non­ – concessional contributions. It is important a member checks they haven’t previously triggered the bring-forward provision before using this strategy, otherwise an excess contributions assessment will be issued.

Members aged between 60 and 65

As previously discussed, when a member turns 60 the pension is no longer included in their personal tax return. Many would argue there is no longer a need to use a re­contribution strategy and, from a personal tax perspective, they are correct (assuming the government continues not to tax pensions). However, there are still potential benefits that will arise from an estate planning perspective and, potentially, access to Centrelink benefits.

Many people are under the impression death taxes don’t exist in Australia. Unfortunately, there is a form of death taxes that are levied when non-dependants receive a death benefit that contains a taxable component. Members over 60 who anticipate there will be a benefit remaining after they die can potentially save their non-dependent beneficiaries (adult children) a significant amount of tax, ensuring the maximum entitlement possible is received.

Members aged 65 and over

Let’s consider Jim who has a super balance of $850,000. He is married to Sally who is 61. Jim will turn 65 in six months and would like to be eligible to receive Centrelink entitlements. In his current situation he will not be entitled to any Centrelink benefits as he has too much in his own name. Jim decides to withdraw $540,000 from his superannuation entitlement as a pension and re-contribute this back into the fund in Sally’s name. Doing this will allow Jim’s superannuation entitlement to drop below the cap and he will be eligible to receive a part pension. The good news is that by contributing to Sally’s balance, and if she remains in accumulation mode, her entitlement is not counted by Centrelink. Jim and Sally will enjoy some form of Centrelink benefits for at least the next few years until Sally turns 65.

Are there any disadvantages of using a re-contribution strategy?

While there are a number of advantages, like all strategies there are always a few points to consider. Fora re-contribution strategy to work, a member must physically withdraw the cash from the fund. If the fund is heavily invested in assets such as shares, there may be a need to sell down assets and incur costs such as brokerage.

Some of the assets may be held in investments that take time to liquidate and therefore there is the opportunity cost of not being fully invested.

If a member is currently receiving an entitlement from Centrelink, the amount withdrawn may affect the member’s ability to continue to receive the entitlement in the short term. This could mean loss of the pension, as well as the valuable health benefits card that could prove quite disastrous financially.

Finally, if a re-contribution strategy is used, the fund will lose the ability to use the anti-detriment provisions. This should be considered if the entitlement is to go to a dependant, as they will lose the ability to claim an anti-detriment payment.

 

Within this article, there are two case studies (not included in this posting) to provide a clearer understanding. If you would like further information, please contact our office on 02 9954 3843.

Please note that this article is not professional advice however only general information only. Please do not act on this article without further advice.

 

‘The power of re-contributing’ Self-Managed Super Magazine written by Karen Dezdjek (Quarter 1, 2016, Issue 013): 48-50. Print

Seven steps to better forecasting

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Seven steps to better forecasting

Business leaders make judgement calls every day. Philip Tetlock says there are ways to improve the chances of getting them right. Below are the seven steps to better forecasting.

  1. Break seemingly intractable problems into tractable sub-problems.Superforecasters split problems into knowable and unknowable parts. They flush ignorance into the open. “Expose and examine your assumptions,” says Tetlock. “Dare to be wrong by making your best guess. Better to discover errors quickly than to hide them behind vague verbiage.”
  2. Strike the right balance between inside and outside views.Superforecasters know there is nothing new under the sun. “Uniqueness is a matter of degree,” says Tetlock. Superforecasters conduct creative searches for comparisons even for seemingly unique events, such as the stand-off between a new socialist government in Athens and Greece’s creditors. “Superforecasters are in the habit of posing the outside view question – ‘How often do things of this sort happen in situations of this sort?’.”
  3. Strive to distinguish as many degrees of doubt as the problem permits – but no more.While few things are either certain or impossible, “maybe” is not an informative response. Tetlock says nuance matters. “The more degrees of uncertainty you can distinguish, the better a forecaster you are likely to be,” he explains. “Translating vague-verbiage hunches into numeric probabilities feels unnatural at first, but it can be done. It just requires patience and practice. The superforecasters have shown what is possible.”
  4. Strike the right balance between underreacting and overreacting to evidence.Tetlock says updating your beliefs is as important to good forecasting as brushing and flossing is to good dental hygiene. It can be boring, occasionally uncomfortable, but it pays off in the long term. “Skilful updating requires teasing subtle signals from noisy news flows, all the while resisting the lure of wishful thinking.” Tetlock adds that superforecasters tend to update their beliefs in small increments, often moving from probabilities of, say, 0.4 to 0.35. These distinctions are too subtle to capture with vague verbiage such as “might” or “maybe”, but in the long run, Tetlock says these distinctions define the difference between good and great forecasters.
  5. Look for the errors behind your mistakes but beware of rear-view mirror hindsight biases.Rather than trying to excuse your failures, you should own them and conduct unflinching post-mortems on where you went wrong. “Remember that although the more common error is to learn too little from failure and to overlook flaws in your basic assumptions, it is also possible to learn too much,” says Tetlock. “You may have been basically on the right track but made a minor technical mistake that had big ramifications.” He suggests examining your successes, too. “Not ail successes imply that your reasoning was right,” he says. “You may have lucked out by making offsetting errors. If you keep reasoning along the same lines, you are setting yourself up for a nasty surprise.”
  6. Bring out the best in others and let others bring out the best in you.Master the fine art of team management. This includes understanding the arguments of the other side, precision questioning so you can help others clarify their arguments, and learning to disagree without being disagreeable. “Wise leaders know how fine the line can be between helpful suggestions and micro-managerial meddling… or between a scatterbrained group and an open-minded one,” says Tetlock.
  7. Focus on questions where your hard work is likely to pay off.Certain classes of outcomes, such as oil prices and currency markets, are hard to predict. Tetlock says we usually don’t know how unpredictable outcomes are until we’ve spun our wheels trying to gain analytical traction. “There are two basic errors it is possible to make here,” he says. “We could fail to try to predict the potentially predictable or we could waste our time trying to predict the unpredictable. Which error would be worse in your situation?”

 

‘Seven steps to better forecasting’ In The Black (March 2016): 47. Print

 

Client Alert Explanatory Memorandum (March 2016)

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CURRENCY:

This issue of Client Alert takes into account all developments up to and including 17 February 2016.

Tax relief for small businesses that restructure on the way

The Tax Laws Amendment (Small Business Restructure Rollover) Bill 2016 was introduced in the House of Representatives on 4 February 2016. It amends the ITAA 1997 by inserting new Subdiv 328-G, to provide an optional rollover for small business owners who change the legal structure of their business on the transfer of business assets from one entity to another. The effect of the rollover is that the tax cost/s of the transferred asset/s roll over from the transferor to the transferee.

The rollover is in addition to existing rollovers where an individual, trustee, or partner transfers assets to, or creates assets in, a company in the course of incorporating their business.

Eligibility

The optional rollover will be available where a small business entity transfers an active asset of the business to another small business entity as part of a genuine business restructure, without changing the ultimate economic ownership of the asset.

The rollover will apply to gains and losses arising from the transfer of active assets that are CGT assets, depreciating assets, trading stock or revenue assets between entities as part of a genuine restructure of an ongoing business.

Genuine restructure

The transfer of the asset/s must be part of a “genuine” restructure of an ongoing business (as opposed to “inappropriately tax-driven schemes”).

Whether a restructure is “genuine” is a question of fact determined with regard to all of the facts and circumstances. Relevant matters include whether it is a bona fide commercial arrangement undertaken to enhance business efficiency, whether the transferred assets continue to be used in the business and whether it is a preliminary step to facilitate the economic realisation of assets.

Also, a “safe harbour” rule provides that the restructure is “genuine” for three years after the rollover if:

  • there is no change in the ultimate economic ownership of any of the business’s significant assets (other than trading stock);
  • those significant assets continue to be active assets; and
  • there is no significant or material use of the significant assets for private purposes.

Entities that can access the rollover

To be eligible for the rollover, each party to the transfer must be either:

  • a “small business entity” for the income year during which the transfer occurred;
  • an entity that has an “affiliate” that is a small business entity for that income year;
  • “connected” with an entity that is a small business entity for that income year; or
  • a partner in a partnership that is a small business entity for that income year.

(“Small business entity” takes its usual meaning, as defined in Subdiv 328-C.)

Likewise, the rollover applies to “passively held” assets of a small business that may, for example, be held in an entity other than the one carrying on the business (eg an “affiliate” or a “connected entity” that is a small business entity).

Ultimate economic ownership

The transfer must not have the effect of changing the ultimate economic ownership of transferred assets in a material way. The ultimate economic owners of an asset are the individuals who, directly or indirectly, beneficially own an asset. Ultimate economic ownership of an asset can only be held by natural persons. Therefore, where a company, partnership or fixed trust owns an asset, the natural person owners of the interests in these interposed entities will ultimately benefit economically from that asset.

If more than one individual is an ultimate economic owner of an asset, there is an additional requirement that each of the individuals’ shares of that ultimate economic ownership be materially unchanged, maintaining the same proportionate ownership in the asset.

Discretionary trusts may be able to meet the requirements for ultimate economic ownership “on their facts” (eg where there is no practical change in which individuals economically benefit from the assets before and after the rollover, there will not have been a change in ultimate economic ownership on the facts).

Otherwise, a discretionary trust may meet an alternative ultimate economic ownership test, whereby every individual who had ultimate economic ownership of the transferred asset before the transfer and every individual who has ultimate economic ownership of the transferred asset after the transfer must be members of the family group relating to the family trust.

Eligible assets

Where a party to the transfer is itself a small business entity, the asset being transferred must be a CGT asset that is an “active asset” (as defined in s 152-40).

Where a party to the transaction is an affiliate or connected entity with a small business entity, the asset must be an active asset that satisfies s 152-10(1A), which, among other things, requires that the relevant small business entity carries on business in relation to the asset.

Where a party to the transaction is not a small business entity, but is a partner in a partnership that is a small business entity, the asset must be an active asset and an interest in the asset of the partnership.

Other

Both the transferor and the transferee of the assets must be residents of Australia. The transferor and transferee must both choose to apply the rollover. The rollover will not apply to a transfer to or from an exempt entity or complying superannuation entity.

Effect of the rollover

The rollover provides tax neutral consequences for a transfer by “switching off” the application of the existing income tax law – but only for the purpose of the transfer, and not for the purposes of GST, FBT or stamp duty.

The rollover provides that the transfer takes place for the asset’s “rollover cost” – which is the transferor’s cost of the asset for income tax purposes, such that the transfer would result in no gain or loss for the transferor. The transferee will be taken to have acquired each asset for an amount equal to the transferor’s cost just before the transfer.

CGT assets

For the transfer of a CGT asset, the tax law will apply under the rollover as if the asset had been transferred for an amount equal to the cost base of the asset. Further, pre-CGT assets transferred under the rollover will retain their pre-CGT status in the hands of the transferee.

Note that in respect of the availability of the CGT discount to the transferee, the time period for eligibility for the CGT discount will recommence from the time of the transfer.

Trading stock

Assets that are trading stock of the transferor will be held as trading stock by the transferee. The transferee will inherit the transferor’s cost and other attributes of the assets as the transferor just before the transfer.

To the extent that the asset is trading stock of the transferor, the rollover cost will be the cost of the item for the transferor at the time of the transfer; or if the transferor held the item as trading stock at the start of the income year, the value of the item for the transferor at that time.

Revenue assets

The rollover cost is the amount that would result in the transferor not making a profit or loss on the transfer. The transferee will inherit the same cost attributes as the transferor just before the transfer.

Depreciating assets

Rollover relief will be available for depreciating assets (under s 40-340) where a rollover under the new measures would be available in relation to the asset if the asset were not a depreciating asset. As a result, the transferee can deduct the decline in value of the depreciating asset using the same method and effective life as the transferor used.

Membership interests

Where membership interests are issued in consideration for the transfer of an asset/s, the cost base of those new membership interests is worked out based on the sum of the rollover costs and adjustable values of the rollover assets, less any liabilities that the transferee undertakes to discharge in respect of those assets, divided by the number of new membership interests.

The rollover does not require that market value consideration, or any consideration, be given in exchange for the transferred assets.

However, an integrity rule ensures that a capital loss on any direct or indirect membership interest in the transferor or transferee that is made subsequent to the rollover will be disregarded, except to the extent that the taxpayer can demonstrate that the loss is reasonably attributable to something other than the rollover transaction. This rule also applies where a transfer of value from an entity results in the creation of tax losses on later disposal of the membership interests.

Note that restructuring to obtain timing advantages or other significant tax benefits in relation to membership interests and other interests in the entities involved in the transaction may, in particular cases, mean that the “genuine” restructure requirement is failed.

Small business concessions

Where the transferor has previously chosen to apply a small business rollover under Subdiv 152-E, and a replacement asset is transferred under this rollover, the transferee is taken to have made the choice for the purposes of CGT events J2, J5 and J6.

For the purpose of determining eligibility for the 15-year CGT exemption for small businesses, the transferee will be taken as having acquired the asset when the transferor acquired it.

Date of effect

The amendments apply to:

  • transfers of depreciating assets, where the balancing adjustment event arising from the transfer occurs on or after 1 July 2016;
  • transfers of trading stock or revenue assets, where the transfer occurs on or after 1 July 2016; and
  • transfers of CGT assets, where the CGT event arising from the transfer occurs on or after 1 July 2016.

Source: Tax Laws Amendment (Small Business Restructure Rollover) Bill 2016, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=BillId%3Ar5606%20Recstruct%3Abillhome, still before the Senate at the time of writing.

Trust ABNs to be cancelled if no longer carrying on business

The ATO has advised that the Registrar of the Australian Business Register (ABR) will begin cancelling the ABNs of approximately 220,000 trusts, where there is evidence they are no longer carrying on an enterprise.

Trust ABNs will be cancelled in February 2016, where information available indicates that for the last two years the trust has not lodged BASs and/or trust income tax returns. Exclusions to these ABN cancellations apply for trusts that are registered with the Australian Charities and Not-for-profits Commission or are non-reporting members of a GST or income tax group.

The ATO says entities will receive a letter if their ABN has been cancelled. The letter will include the reason for the cancellation, and a phone number to ring to have the ABN reinstated immediately if the entity does not agree with the decision. The ATO also notes that if an entity’s ABN is cancelled and neither the entity nor its tax representative receives a letter, it could mean the entity’s contact details are not up to date on its ABN record.

Source: ATO website, “Cancellation of trust ABNs”, 22 January 2016, https://www.ato.gov.au/Tax-professionals/Newsroom/Your-practice/Cancellation-of-trust-ABNs/.

Car expense deduction changes

The Government has simplified car expense deductions for individuals from 1 July 2015.

Prior to 1 July 2015, there were four methods for claiming car expenses:

  • cents per kilometre – capped at 5,000 km;
  • logbook – unlimited kilometres;
  • 12% of original value; and
  • one-third of actual expenses.

To simplify the rules, from 1 July 2015 the Government has abolished the 12% of original value and one-third of actual expenses methods. The cents per kilometre method (with the existing 5,000 km cap) and the logbook method (with unlimited kilometres) remain.

The cents per kilometre method has been simplified to use a standard rate of 66 cents per kilometre for the 2015–2016 income year, rather than a rate based on the engine size of the car. The Commissioner of Taxation will set the rate for future income years.

Withholding tax for car allowances

Employers should be aware that the ATO has set the approved pay as you go (PAYG) withholding rate for cents per kilometre car allowances at 66 cents per kilometre from 1 July 2015.

Employers should withhold from any amount above 66 cents for all future payments of a car allowance. Failure to do so may result in employees having a tax liability when they lodge their tax returns.

Employees who have been paid a car allowance from 1 July 2015 at a rate higher than the new approved amount should consider whether they need to increase their withholding to avoid any tax liability at the end of the year.

Source: ATO, “Car expense substantiation methods simplified”, 17 December 2015, https://www.ato.gov.au/general/new-legislation/in-detail/direct-taxes/income-tax-for-individuals/car-expense-substantiation-methods-simplified/.

Travellers with student debts need to update contact details

Australians with a Higher Education Loan Programme (HELP) debt and/or a Trade Support Loans (TSL) debt who are moving overseas for longer than six months need to provide the ATO with their overseas contact details within seven days of leaving the country. This requirement follows recent legislative changes.

ATO Assistant Commissioner Graham Whyte said that affected people can provide the ATO with international contact details using online services (eg an ATO account linked to myGov).

“Don’t worry if you don’t know your new international residential address yet. Just provide us with your best contact address while you’re away, like your parents’, and update your contact details when you’re settled. The most important thing is that you’re still able to receive correspondence from us while you’re overseas”, Mr Whyte said.

From 1 July 2017, anyone living overseas and earning above the minimum repayment threshold will be required to make loan repayments, just as they would if they were living in Australia.

“We will be in touch closer to the time with more information about how to report income and make loan repayments”, Mr Whyte said. “For now, all travellers with a HELP and/or TSL debt need to do is update their details and factor in potentially making repayments from 1 July 2017”, he added.

Further information is available on the ATO website at https://www.ato.gov.au/Individuals/Study-and-training-support-loans/Overseas-repayments/.

Source: ATO, “Square away with the ATO before you ship off overseas”, 9 February 2016, https://www.ato.gov.au/Media-centre/Media-releases/Square-away-with-the-ATO-before-you-ship-off-overseas/.

Small business tax concession refused as threshold test failed

The Federal Court has confirmed that the face value of a debt of $1.1 million owed to a taxpayer had to be taken into account, under the maximum net asset value test, for the purposes of determining if the taxpayer qualified for the CGT small business concessions. This was despite the taxpayer’s claim that the debt was statute-barred from recovery under relevant state legislation and therefore had a nil value. As a result of the Court’s confirmation, the debt amount was included in the test and the taxpayer failed to qualify for the concessions.

Background

The taxpayer was both a beneficiary and the trustee of a family trust that held units in a unit trust which operated a finance broking business. The unit trust sold the business in the 2008 income year for a capital gain of $500,000, to which the taxpayer was entitled. The taxpayer argued that in determining whether the “maximum net asset value” (MNAV) test was satisfied, a debt of $1.1 million owed to the family trust (a connected entity), resulting from a loan it made to him, had a nil value and was not to be taken into account under the MNAV test. He argued this on the basis that the debt was “statute-barred” from recovery under the six-year statute of limitations in s 35(a) or 42(1) of the Limitation of Actions Act 1936 (SA) (the Act).

However, in Re Breakwell and FCT [2015] AATA 628, the AAT found that this was not the case, on the basis that the debt had been legally acknowledged by the trustee of the family trust as being recoverable (by way of signing the relevant balance sheets) and was legally in existence at the relevant time. Therefore, the AAT found that the face value of the debt was to be included in the MNAV test, and that the taxpayer failed to qualify for the concessions.

Before the Federal Court, the taxpayer first argued that the AAT wrongly determined the debt was recoverable and had wrongly found there was no acknowledgement contained in writing signed by the taxpayer or by his agent, as required by s 42(1) of the Act, to find that the debt was still in existence and not statute-barred from recovery. Alternatively, the taxpayer argued if this issue was not an appealable question of law, then the signing of the balance sheet could not amount to an acknowledgement of a debt for the purposes of s 42 of the Act, as it was at best an acknowledgement of an asset, and not of “a debt owing”.

Decision

In dismissing the taxpayer’s appeal and confirming that the amount of $1.1 million was to be included in the MNAV test (and therefore that the taxpayer failed to qualify for the concessions), the Federal Court first found that the statutory time limit in s 35(a) of the Act did not, by itself, have the effect of extinguishing the trust’s claim in contract for repayment of the loan after six years. The Court found that while the section may “bar the remedy”, it did not bar “the cause of action”. Instead, the Court said s 35(a) (and similar legislation) acted to create a defence which could be raised by a debtor or defendant in an action against them and which, moreover, could be waived by a debtor or defendant.

The Court also found that s 48 of the Act allowed a court to extend such a limitation period – and that it was possible that an arm’s-length trustee in this case would seek such an extension. The Court noted that it would be difficult to see how the taxpayer in this case, as a debtor-beneficiary of the trust, would raise the statute of limitation defence when, in his capacity as trustee of the trust, he also had fiduciary duties to act in the best interest of the trust.

Accordingly, the Court ruled that the family trust’s claim against the taxpayer could not be regarded as statute-barred under s 35(a) of the Act (nor under s 38 of the Act) and that the debt owed to it could not be regarded as having no value. In addition, the Court found that the present case was an action by a trust to recover trust property, and that there was no limitation period in this case in accordance with s 32(1) of the Act.

Breakwell v FCT [2015] FCA 1471, Federal Court, White J, 22 December 2015, http://www.austlii.edu.au/au/cases/cth/FCA/2015/1471.html.

“Wildly excessive” tax deduction claims refused

A professional sales commission agent has been largely unsuccessful before the AAT in claiming deductions for work-related expenses, including home office expenses, various grocery items and overtime meal allowances.

Background

The taxpayer was a professional sales commission agent. His employer did not provide him with a dedicated office or workspace. In his 2010 to 2012 income tax returns, he claimed large deductions for home office expenses and work-related travel. Originally, the taxpayer claimed that 31.6% of his house (including the family living room, which he called the “meeting room”, and a roof storage area) was being used solely for work purposes.

The taxpayer was audited on his 2010 tax return (where he claimed over $97,000 worth of expenses to reduce his taxable income to $21,000). When the matter came before the AAT in 2014, it disallowed numerous home office deductions and rejected his claim that his living room was a “meeting room”, but allowed a home office percentage of 11.7% (see Re Ogden and FCT [2014] AATA 385).

The current case concerned the taxpayer’s deduction claims in his 2011 and 2012 tax returns. His original claims (which changed throughout the course of the audit and AAT proceeding), totalled over $63,000 for 2010–2011 and over $53,000 for 2011–2012, which represented at least 30% of his employment income. The Commissioner disallowed various deductions and applied a 25% shortfall penalty for failing to take reasonable care.

When the matter came before the AAT, the claims that were still in dispute included the amount of the home office expenses, overtime meal allowances, “staff and client amenities” (including toilet paper, pocket tissues, Bega Stringers Cheese, Tiny Teddies and Weight Watchers Lamingtons), “business meals” for his accountant, a desk in his son’s bedroom, sunscreen, sunglasses and $383 on a pair of RM Williams rubber-soled shoes, which the taxpayer claimed prevented his computer being damaged by static electricity. The taxpayer also claimed expenses spent on a Dora the Explorer pencil case, heart and star shaped stickers, depreciation on an outdoor patio setting and a $5,388 payment to his seven-year-old son for “secretarial assistance” (a claim which the taxpayer abandoned during the proceedings).

Decision

The AAT found that the taxpayer’s home office claims were “wildly excessive”, and that the taxpayer and his representatives failed to critically analyse how these claims helped produce the taxpayer’s assessable income. In particular, the AAT said that the claim that the family living room was being used solely for work meetings “should never have been made”, noting that the taxpayer’s approach had been to find “some relationship, no matter how remote” to his work in order to claim deductions. In relation to an initial claim for 31.6% of his home loan interest expenses, the AAT said it was “difficult to understand how a registered tax agent could allow such a claim to be made”. The AAT found that the taxpayer’s home office represented around 1.8% of the family home.

The AAT rejected everything claimed under “staff and client amenities”, as it considered the products were overwhelmingly consumed by the taxpayer’s family, thereby making the claims “outrageous and utterly unacceptable”. The claimed meal allowances were also rejected in their entirety. Regarding expenses on the rubber-soled shoes, the AAT commented that it appeared to be yet another example of the taxpayer’s evidence ranging from “the exaggerated to the implausible”, and accordingly rejected the claim. The AAT did not seek to disturb heating and lighting expenses that the Commissioner had allowed, but noted that the taxpayer was “fortunate” to have been allowed these.

Considering the various deductions claimed, the AAT said a 25% administrative penalty appeared “somewhat generous” to the taxpayer. The AAT gave leave to the Commissioner to reconsider the penalty issues, and to consider whether to apply a 20% uplift, given the numerous statements made by the taxpayer and how they changed over time. It also noted that different levels of culpability may apply to different statements.

Re Ogden and FCT [2016] AATA 32, AAT, File Nos 2014/5943; 2014/5957; 2014/6763; 2014/6764, Frost DP, 29 January 2016, www.austlii.edu.au/au/cases/cth/AATA/2016/32.html.

GST credits not available for payments on behalf of super funds

The ATO has issued GST Determination GSTD 2016/1 on whether employers can claim input tax credits for expenses paid on behalf of superannuation funds. The Determination notes that an employer may, for “administrative convenience”, pay expenses on behalf of a fund, with the payment being reclassified as a superannuation contribution in the employer’s accounts. However, the ATO’s preferred approach is for all superannuation fund expenses to be paid directly out of the fund itself, and for superannuation contributions to be made directly to the fund.

GSTD 2016/1 provides that an employer is not entitled to an input tax credit if a superannuation fund makes an acquisition and the employer pays the expense on the fund’s behalf. This is because the supply is made to the fund and not to the employer. However, the ATO notes that the fund may be entitled to claim a reduced input tax credit under the financial supply rules (Div 70 of the GST Act), provided the requirements of those rules are satisfied.

GSTD 2016/1 includes an example (reproduced below) where a superannuation fund engages a solicitor to provide legal advice and the employer sponsor pays the legal fees. As the supply (the legal advice) is provided to the fund, the employer cannot claim an input tax credit for the payment.

Example

Lazy Days Pty Ltd is the employer sponsor of the Lazy Days Superannuation Fund. Lazy Days Pty Ltd is registered for GST and employs 15 staff. The Lazy Days Superannuation Fund is registered for GST purposes.

The Lazy Days Superannuation Fund engaged a legal firm to provide advice about its activities. Lazy Days Pty Ltd pays the legal fees associated with this advice.

Lazy Days Pty Ltd is not entitled to an input tax credit as a result of paying for the advice provided to the Lazy Days Superannuation Fund. This is because the supply of the advice was made by the legal firm to the Lazy Days Superannuation Fund, which is a separate entity from Lazy Days Pty Ltd. Lazy Days Pty Ltd has not acquired anything for the payment and therefore has not satisfied the requirements in s 11-5 for making a creditable acquisition.

The Lazy Days Superannuation Fund may be entitled to a reduced input tax credit in relation to the payment if the requirements in Div 70 are otherwise satisfied.

The GST Determination applies both on and after its date of issue (27 January 2016).

MT 2005/1 and GSTA TPP 003 withdrawn

The GST Determination was not previously released as a draft. It replaces the previous ATO rulings on the topic, MT 2005/1 and GSTA TPP 003, both of which were withdrawn on and with effect from 27 January 2016. The Commissioner’s views in GSTD 2016/1 are the same as those expressed in the withdrawn Miscellaneous Tax Ruling and GST Advice.

Source: ATO, GST Determination GSTD 2016/1, https://www.ato.gov.au/law/view/pdf/pbr/gstd2016-001.pdf.

Client Alert (March 2016)

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Tax relief for small businesses that restructure on the way

Small businesses are important to the Australian economy, as they facilitate growth and innovation. However, as a small business develops over time, its initial legal structure may no longer be suitable for the business. Where a business has to restructure to accommodate growth, the transfer of assets from one legal structure to another could give rise to unwanted tax liabilities, even though the underlying economic ownership remains the same.

With this in mind, the Government has proposed amendments to the law to provide tax relief for small businesses that restructure on a genuine basis. If the legislative amendments are enacted as proposed, the changes would apply for restructures occurring on or after 1 July 2016. In introducing the Bill, the Assistant Treasurer said that this legislation completes the Government’s $5.5 billion Growing Jobs and Small Business package. Ms O’Dwyer said the Bill will reduce risk and complexity, and will make it easier for businesses to grow.

Trusts’ ABNs to be cancelled if no longer carrying on business

The ATO has advised that the Registrar of the Australian Business Register (ABR) will begin cancelling the Australian Business Numbers (ABNs) of approximately 220,000 trusts, where there is evidence they are no longer carrying on an enterprise.

A trust’s ABN will be cancelled where available information indicates that the trust has not lodged business activity statements and/or trust income tax returns for the last two years. Exclusions to these ABN

cancellations apply for trusts that are registered with the Australian Charities and Not-for-profits Commission (ACNC) or are non-reporting members of a GST or income tax group.

The ATO said entities will receive a letter if their ABNs had been cancelled. This letter will include the reason for the cancellation, and a phone number to ring to have the ABN reinstated immediately if the entity does not agree with the decision.

Withholding tax for car allowances

Car expense deductions for individuals were simplified from 1 July 2015. Employers who pay their employees a car allowance need to withhold tax on the amount they pay over 66c per kilometre. If employers have not been doing this, the ATO notes they should start now to avoid their employees having a tax debt.

TIP: Employers should consider having a discussion with affected employees about whether to increase the withholding amount for the remainder of the financial year to cover the shortfall.

If you have any questions, please contact our office.

Travellers with student debts need to update contact details

Australians with a Higher Education Loan Programme (HELP) debt and/or a Trade Support Loans (TSL) debt who are moving overseas for longer than six months will need to provide the ATO with their overseas contact details within seven days of leaving the country. International contact details can be provided to the ATO using its online services (eg an ATO account linked to myGov).

From the 2016–2017 income year, anyone who has a HELP or TSL debt and earns above the minimum repayment threshold will be required to make repayments regardless of where they live.

TIP: Students’ debt will be indexed each year until it is paid off. You can make additional voluntary repayments at any time, including from overseas, to reduce the balance of your debt.

Small business tax concession refused as threshold test failed

The small business capital gains tax (CGT) concessions contained in the tax law allow eligible small businesses to access tax concessions on capital gains made from the sale of certain CGT assets.

There are threshold tests for accessing the concessions outlined in the tax law. Importantly, the taxpayer must be a small business entity, or a partner in a partnership that is a small business entity, or the taxpayer’s net assets, together with certain associated entities’, must not exceed $6 million. This is the Maximum Net Asset Value (MNAV) test.

A recent case before the Federal Court examined whether a taxpayer was entitled to the tax concessions. In particular, the Court looked at whether the taxpayer had correctly excluded a debt (a pre-1998 loan) from the MNAV test calculation. The taxpayer had not included the pre-1998 loan on the basis that it had no value, being “statute-barred” under the relevant state legislation, in this instance the Limitation of Actions Act 1936 (SA).

However, the Court dismissed the taxpayer’s appeal. The Court confirmed that the pre-1998 loan could not be regarded as having no value, and that the loan amount of $1.1 million should be included in the MNAV test calculation. The inclusion of the amount meant that the sum of the net values of the relevant CGT assets exceeded the $6 million MNAV threshold. As a result, the small business CGT concessions were not available to the taxpayer.

TIP: This case highlights the importance of satisfying the basic conditions to access the small business CGT concessions, in particular when an asset originally excluded from the MNAV test is subsequently included in the test calculation and results in the breach of the MNAV threshold.

“Wildly excessive” tax deduction claims refused

A professional sales commission agent has been largely unsuccessful before the Administrative Appeals Tribunal (AAT) in claiming tax deductions for work-

related expenses, including home office expenses, various grocery items and overtime meal allowances.

The case concerned the taxpayer’s deduction claims in his 2011 and 2012 tax returns. The taxpayer worked as a professional sales commission agent and his employer did not provide him with a dedicated office or workspace. His original claims (which changed throughout the course of the AAT proceeding) totalled over $63,000 for 2010–2011 and over $53,000 for 2011–12, representing at least 30% of his employment income. During the proceedings, the taxpayer abandoned a claim for a $5,388 payment to his seven-year-old son for his “secretarial assistance”.

The AAT found that the taxpayer’s home office claims were “wildly excessive”, and that the taxpayer and his representatives failed to critically analyse how these claims helped produce the taxpayer’s assessable income. The AAT rejected everything claimed under “staff and client amenities”, as it considered the products were overwhelmingly consumed by the taxpayer’s family, making the claims “outrageous and utterly unacceptable”. The claimed meal allowances were also rejected in their entirety. However, the AAT did not disturb heating and lighting expenses allowed by the Commissioner.

GST credits not available for payments on behalf of super funds

The ATO has issued GST Determination GSTD 2016/1, which provides the Commissioner’s view on whether employers can claim input tax credits for expenses paid on behalf of superannuation funds.

The Determination notes that employers may pay expenses on behalf of superannuation funds for administrative convenience. It provides that an employer is not entitled to an input tax credit if a superannuation fund makes an acquisition and the employer pays the expense on the fund’s behalf
(eg the super fund obtains legal advice but the employer pays the legal adviser). This is because the advice is supplied to the fund and not to the employer. However, the Determination notes that the fund may be entitled to claim a reduced input tax credit under the financial supply rules (contained in the GST Act), provided the requirements of those rules are satisfied.

MYOB Incite 2016

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This morning some of our team members went to the Sydney Luna Park for the MYOB INCITE 2016. What we learned from the MYOB Roadshow today is that how the MYOB solutions will define what we do in business tomorrow.

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The topics include;

  • When accounting is more that just punching the numbers
  • Solving a cash flow conundrum
  • Transaction Processing – The new Partner Dashboard and Portal Demo
  • Transaction Processing – MYOB PayDirect Online Demo
  • Compliance – Client Accounting Demo
  • Advisory – budgeting Demo
  • Introducing dashboard
  • Get started with dashboard
  • Dashboard help
  • Easier Client Accounting with MYOB
  • MYOB Connected Practice
  • MYOB Migration Services
  • MYOB Portal
  • MYOB PayDirect
  • MYOB AccountRight
  • MYOB Essentials Accounting
  • MYOB Essentials Cashbook
  • Get the latest BankLink version
  • Client collaboration with BankLink

Please stay tuned as we will give you more details about the topics above.

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#myobincite

MYOB Dragged Bookkeeping into The Modern, Computerised Era

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MYOB Dragged Bookkeeping into The Modern, Computerised Era

‘Relentless innovation’ Acuity (February 2016): 23-26. Print

MYOB have published an article in Acuity Magazine outlaying their future strategy. There are of the opinion that R & D is essential and they will be part of Innovation and are spending 13-16% of their annual revenue on R & D.

When it launched in 1991, MYOB was the ultimate industry disruptor. Before then, bookkeeping had meant scratching away at ledgers with pencils and paper.

Now an established ASX-listed company with market capitalisation of A$2b, MYOB now faces the prospect of disruption itself from hungry new competitors.

But under chief executive and former Silicon Valley executive Tim Reed, MYOB has shifted into a relentless, ongoing culture of innovation that has seen it successfully remain ahead of its own industry’s disruption curve – cloud, or online, accounting.

This innovative excellence was recognised when the company was named Australia’s Most Innovative Large Company 2015 by Business Review Weekly, and ranked second in the magazine’s overall list of 50 most innovative companies.

It’s easy to think that innovation involves quick wins and new ideas. But MYOB’s innovation is grounded in years of hard work and the embedding of cultural practices across every aspect of the company.

“We believe innovation is a path to our success,” Reed says. “But innovation isn’t something that is done in a lab. It’s done by the entire team. It’s about never resting, never settling, and continually questioning.”

Reed himself has worked in the epicentre of innovation and disruption. After completing a Harvard MBA, he spent ten years in Silicon Valley at the likes of Internet Profiles Corp, the first company to measure internet traffic, and online services marketplace Elance.

Reed was attracted to the Valley’s model of extreme start-up capitalism, where 70% of start-ups failed. “Failure is the norm,” he says. ‘So you don’t get scared of failure. You’re not caught in mediocrity and nothing is explained – by definition it hasn’t been done before, so you’re out there on the extreme.”

He arrived in the Valley in 1996, a year after web browser pioneer Netscape’s wildly successful IPO that helped trigger the internet boom.

It was a very exciting time,” he says. Reed took over as MYOB chief executive in 2008. He found a company that, despite its strong history of innovation, had taken a confidence hit after “a few big misses”.

The company had moved ahead of the competition and launched an online accounting system in the early 2000s but Reed says they were too early and it didn’t get critical mass.

So MYOB pivoted and switched its focus from innovation to international expansion.

But when Reed joined MYOB, global expansion had turned to retreat. The company had shut its Canadian and UK operations. Reed closed other international markets and began channeling money back into online accounting where both a threat and opportunity was emerging.

 

Cloud busting

MYOB’s traditional business provided software packages that had earned the company lucrative licence fees. But those services could now be offered over the internet.

Online accounting was a boon for SMEs and their accountants. It allowed them to connect and share data over the internet, which reduced manual data entry and saved time. But it attracted aggressive new competitors such as Xero, which meant MYOB had to adapt quickly to maintain its strong market position.

And under Reed’s direction it has. The company’s relentless innovation has seen MYOB position itself remarkably successfully in the haze of cloud disruption. It has signed up more than 150,000 subscribers to its cloud- based SME solutions. Reed says MYOB’s innovation is different to the Silicon Valley start-up model. “In our model, we’re maintaining and driving innovation as opposed to just creating something new,” he says.

MYOB splits innovation into three types: hops, steps and jumps. Hops are ongoing innovation to existing processes that improve outcomes for customers and colleagues. Steps are bigger changes that require multiple divisions to start changing something. Jumps are new things that MYOB delivers to clients.

Around five years ago, MYOB launched bank feeds to clients. Every night a secure transmission of all their transactions pre-populated their accounting software. But the banks needed original signatures before they would provide transaction information to MYOB users.

MYOB became the first accounting software provider to strike agreements with all the major banks to allow MYOB customers to use their online banking signup, rather than signatures, to gain access to their transactions data for MYOB.

The introduction of bank feeds was an original innovation jump, Reed says, but four to five hops and steps followed. Hops, steps and jumps aren’t linear and innovation begets innovation.

The company also invests heavily. It has spent more than A$100m on research and development in the past three years alone.

 

Innovation never sleeps

Reed says there are two keys to relentless innovation: embedding innovation in a company’s culture and patience.

“What you’re doing is changing culture,” he says. “It’s not the responsibility of one part of the company. You need to tackle it throughout the organisation.”

MYOB embeds innovation in all aspects of its business including training and company awards. Its internal Purple Awards programme includes a hotly contested Purple Innovation Award. The engineering and experience team regularly holds “hack days” where everyone associated with product development takes a couple of days out to work on a new solution. Staff pitch ideas, then groups are formed to work on a viable product to be presented at the end of two days.

“Many of the solutions developed during hack days have been introduced into the product roadmap,” Reed says.

Innovation is also part of performance conversations for all staff: when an employee applies for an internal promotion, they’re asked about innovations they have delivered in their current role.

Reed says innovation is one of MYOB’s “fixed core values’” ‘which he reviews at every team meeting.

“I emphasise that if we’re not finding new ways, someone else will.”

The second key is patience.

“When you have culture change, you can’t jump from where you are to your destination,” he says.

One of the myths of the disruption era is that innovative companies emerge overnight. Yet Reed notes that MYOB won the BRW award after a six-to-eight-year journey. And he points to local enterprise software group Atlassian as another example of hard-won success. “Most people hadn’t heard of them until this year, but they actually started over a decade ago in 2002,” he says.

 

No limits

Reed says the financial services industry is in a “pretty exciting space right now” with the merging of financial tools.

“Boundaries are being redefined in and around finance,” he says.

And MYOB’s own boundaries have been blurring. To provide clients with mobile invoicing capabilities, it has entered the bank-dominated payments space.

Reed says it’s still important for companies to maintain a core focus. “But around the fringe what we should all be doing is collaborating as much as possible. That’s much better than us becoming a bank; and that’s much better than banks creating accounting software.

He says disruption and accelerating change are the new normal. “We have lots of great software engineers in Australia, great digital designers, and lots of smart people; there is no reason why we shouldn’t be in what’s a growth sector globally.”

MYOB will keep innovating. It plans to spend 13-16% of its annual A$300 million-plus revenue on research and development and Reed says MYOB is now focused on developing a fully integrated single digital platform that links everyone from regulators to accountants and suppliers.

And he warns that disruption is “coming to parts of industry and parts of the supply chain never dreamed about in the past”.

Through relentless innovation, MYOB, an original disruptor, has successfully adapted to change in the accounting services industry. Reed says the only way for companies to survive and thrive in such a volatile environment is to recognise and confront disruption head on.

Otherwise it [disruption] happens to you and that’s not nearly as much fun. Ultimately, if you stand still you die.”

 

Please call our office on 9954 3843 to ask about which online accounting software is most suitable for you.

 

Superannuation Strategies 2016

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Thomson Reuters in their recent newsletter have published a checklist regarding superannuation strategies for 2016 financial year. We believe it provides a very useful reference tool for the coming year.

The new calendar year is a good time to conduct a superannuation health check and set some new goals to help boost superannuation savings. Although there have been no seismic shifts in the superannuation landscape of late, it may be prudent to reacquaint yourself with the rules. The following are some considerations:

  • Check your employer super contributions – for the 2015–2016 financial year, the super guarantee rate is 9.5%. You may want to check that your pay slips reflect this rate. The rate will stay at 9.5% until 1 July 2021, when it will start to gradually increase to 12% by 1 July 2025. Note that Norfolk Island has been brought into the superannuation guarantee fold. A transitional rate starting at 1% will apply from 1 July 2016 for the 2016–2017 financial year.
  • Monitor the concessional contributions caps – the general concessional contributions cap is $30,000 for the 2015–2016 financial year (the same as for 2014–2015). A higher concessional contributions cap of $35,000 applies for 2015–2016 for people aged 59 years or over on 30 June 2013. For the 2015–2016 financial year, this temporary concessional cap of $35,000 also applies for those aged 49 years or over on 30 June 2014 and for those aged 49 years or over on 30 June 2015. This temporary $35,000 concessional cap (not indexed) will cease when the general cap reaches $35,000 through indexation (expected to be 1 July 2018).
  • Monitor non-concessional contributions cap – this has increased to $180,000 (or $540,000 every three years for those under age 65) for the 2015–2016 financial year (same as for 2014–2015).
  • Consider salary sacrificing superannuation – if you make superannuation contributions through a salary sacrifice agreement, these contributions are taxed in the superannuation fund at a maximum rate of 15%. Generally, this tax rate is less than your marginal tax rate. You may want to inquire about salary sacrificing superannuation or consider reviewing an existing arrangement with your employer.
  • Check the government co-contribution – a 50% matching applies whereby the Government will pay a co-contribution up to a maximum of $500 for a $1,000 eligible personal contribution for individuals with total incomes up to $35,454 for 2015–2016 (phasing down for incomes up to $50,454).
  • Check superannuation savings – check your superannuation balance regularly. In addition to getting to know your superannuation better, you may also want to protect your superannuation from identity crime. For example, you may want to change passwords for accounts that can be viewed online.
  • Look for small lost super accounts – the threshold below which small lost super accounts will be required to be transferred to the Commissioner of Taxation has increased. The account balance threshold has gone from $2,000 to $4,000 from 31 December 2015, and will go from $4,000 to $6,000 from 31 December 2016. You may want to consider identifying whether you have any small accounts that meet the threshold.
  • Consolidate multiple superannuation fund accounts – consider consolidating multiple superannuation fund accounts. This may help avoid paying multiple superannuation fund fees, reduce paper work, and make it easier to keep track of your superannuation. Keep all your statements in a safe place, especially if you need to maintain multiple accounts. There may be legitimate reasons for keeping multiple accounts. Now is the time to reassess those reasons and to contact your super fund if you need to keep the accounts active.
  • Think about life expectancy – people are generally healthier and living longer than previous generations. Retired men can expect to live to 86, retired women to 90. This means if you stop working at 60, you are likely to need retirement income for at least 26 to 30 years, if not more.
  • Check insurance and investment options – review insurance and investment options to see if they still meet your needs.