ATO warns on minimum pension payments

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The Australian Taxation Office has issued a warning to trustees of self-managed super funds that lump sums, or partial commutations, no longer count towards a minimum annual pension payment.

The ATO says that if the minimum pension standards are not met in a financial year, none of the payments made during the year can be treated as super income stream benefits.

“Failing to meet the minimum pension payment standards now not only means that fund loses exempt current pension income for the year, there are also transfer balance account consequences,” the ATO says in an SMSF alert issued last week.

Under the account-based pension rules, trustees must meet minimum pension payment requirements. Income equivalent to a percentage of the account balance must be paid out each year, with the percentage changing with age.

The percentage factors are:

  • Under age 65, the minimum pension payment is 4 per cent a year;
  • Between 65 and 74, the minimum is 5 per cent a year;
  • Between 75 and 79, the minimum is 6 per cent;
  • Between 80 and 84, the minimum of 7 per cent;
  • Between 85 and 89, the minimum of 9 per cent;
  • Between 90 and 94, the minimum of 11 percent; and
  • For people aged 95 and over, the minimum is 14 per cent.

The SMSF Association’s technical director Peter Hogan says the ATO is concerned that trustees may not have caught up with all the changes to the system that occurred in July 2017.

Hogan says a lump sum used to count towards the minimum pension payment but no longer does.

Speaking at a recent Morningstar Investor Conference, Hogan says: “A pension can only be paid in cash. Cash payments plus commutations used to count towards the minimum but that does not apply anymore.”

If the minimum payment has not been made, the ATO can rule that the pension has ceased. It would then be ruled to have been in accumulation for that period and even before, with tax payments due.

Hogan says there are number of things SMSF trustees must get right when they start a pension.

“To start a pension, all the terms and conditions must be put in writing. For example, this is the time to nominate a reversionary pension recipient. It is difficult to add someone once the pension has started.”

The market value of the account must be reported to the ATO. Hogan says: “You have to be careful about how you do this. For an asset like property, you may need an independent valuation.”

Hogan says this is an appropriate time to review the fund’s investment strategy. “Because you have to make pension payments, it may be suitable to change the investment strategy to hold more cash. You would not want to be in a position where you have to sell assets to pay make pension payments.

“I recommend having 24 months of pension payments in cash, and top that up after each payment.

“Many trustees think they have to report to the ATO each time they make a pension payment, but you don’t.”

Hogan says one common misunderstanding is that the size of the pension balance must always be under the $1.6 million limit. “Pensions can grow. You are not penalised for good investment performance,” he says.

Source : http://www.shedconnect.com

 

Increasing Penalties For White-Collar Crime

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As the Royal Commission into the misconduct in the banking, superannuation and financial services industry rolls on and uncovers more unscrupulous behaviour by the corporate and financial sector, the government is attempting to get on the front foot by addressing the perceived persistent misconduct by proposing to strengthen the penalty framework and enforcement regime available to ASIC to restore community confidence.

The proposal actually stemmed from a review commissioned in 2016 which identified a number of options to strengthen ASIC’s power and regulatory tools which the government has now acted on. Broadly, the government is proposing to:

  • increase maximum imprisonment penalties for certain criminal offences to reflect the seriousness of misconduct;
  • introduce a formula for the calculation of maximum financial penalties;
  • remove imprisonment as a penalty and increasing the financial penalties for all strict and absolute liability offences;
  • modernise and expand the civil penalty regime by increasing financial penalties for contraventions and making a wider range of offences subject to civil penalties;
  • harmonise and expand the infringement notices regime;
  • introduce a new test that applies to all dishonesty offences under the Corporations Act;
  • clarify that the courts are to give priority to compensating victims over ordering the payment of financial penalties.

The proposed changes would apply to individuals, AFSL licence holders, and body corporates. 

For example, the imprisonment penalty for AFSL holders failing to provide assistance to ASIC if requested will increase from 6 months to 2 years and AFSL holders that are aware of a defective financial services guide but do not rectify the defect could be jailed for 5 years (up from 2 years). Similar increases in imprisonment penalty applies to individuals involved in the contravention of certain corporate law.

The other interesting thing about the proposal is that it attempts to ensure that victims who suffer damage as a result of a contravention of a civil penalty provision in the Corporations Act will be compensated before the payment of financial penalties. Currently, only the ASIC Act and Credit Act provide for the compensation of victims in situations where the defendant does not have sufficient financial resources to pay both a financial penalty and compensation.

Under this new proposal, the court can make any order it sees fit to ensure an amount remains available for compensation. Compensation proceedings need not have been commenced for the court to consider the amount that might reasonable be likely to be payable and to make an appropriate amount for compensation available.

Want to find out more?

If you’re a director of a company, these changes could potentially apply to you. To find out more details about the penalties and what could be caught under the new proposal, contact us today.

 

 Can’t Buy Me Love: Conscientious Coupling and Binding Financial Agreements

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The breakdown of a relationship is frequently ranked second, after the death of a loved one, as one of life’s most stressful events. With a third of all Australian marriages ending in divorce, and similar statistics in other countries, it’s little wonder that “conscious uncoupling” has become the ideal divorce strategy (and not just for celebrities). But the reality for many of us is quite different. So, what if there were ways of limiting the emotional and financial fallout of a relationship split?

In fact, there is: by having a financial agreement in place before getting married or moving into together.

Romantic? Not really. It’s true that a discussion about the relationship’s possible end isn’t exactly at the top of any couple’s list when planning a life together. But there are many pluses to having an agreement, and it’s unarguably a pragmatic move.

Love tops the charts as the most popular song theme, but money ranks a close second – and of course the two are intrinsically linked, in pop culture and in life.

A prenuptial (prenup) or cohabitation agreement can benefit you both, fostering better upfront communication about financial matters and helping you to budget and plan a financial future as a couple.

It can also provide a hefty ballast for your future financial stability as individuals.

In 2016, the Senate Economics Committee undertook a study of gender disparity in financial security and concluded that “a husband is not a retirement plan”. Clearly, a relationship breakdown can leave either party, or both – regardless of their genders – poorer than their married or single counterparts.

So, how can we help you to plan for a “conscientious coupling”?

What does this type of agreement include?

A prenup or cohabitation agreement typically covers:

  • assets – what will be treated as marital or defacto assets, such as jointly owned real estate, and what will be treated as non-marital assets (for example, this could be an asset that one party owned before the marriage or cohabitation);
  • division of assets – which assets each person would be entitled to, and in what proportion, if the relationship ended;
  • financial arrangements on the death of one spouse – this can be useful for blended families and where, for example, you want an inheritance to go to a person or an entity other than your relationship partner;
  • Future changes – whether the terms will change, for example, if children are involved; whether they are to inherit assets, etc.

Traditionally, these types of agreements are popular where one partner has significantly more assets than the other, or where the partners or their parents have businesses or an inheritance that they wish to retain if the relationship ends. An agreement can help ensure these important things are protected.

How do you make the agreement legal?

A prenup needs to be approved by the Family Court of Australia and both parties must have sought independent legal advice. For defacto agreements, we suggest you speak to a lawyer about the possibility of registering your agreement with the Family Courts in the form of consent orders.

What about tax?

We recommend that you and your partner each engage lawyers in the drafting of your agreement, but we can help with financial and tax strategy, particularly in more complex areas of tax law, which require some flexibility and skillful forward-planning. Here’s a snapshot of some of the areas to consider.

Stamp duties

If property ownership transfer is part of an agreement, then no stamp duty is payable if the property is transferred from one partner to another or sold.

Superannuation

Superannuation held by each partner, whether you are entering a marriage or defacto relationship, can also be split by agreement. Self-managed superannuation funds (SMSFs) have more flexibility for restructuring than funds regulated by the Australian Prudential Regulation Authority (APRA).

Capital gains tax roll-over relief

Capital gains tax (CGT) roll-over relief may also apply. As a general rule, CGT is payable on all changes of asset ownership occurring on or after 20 September 1985. However, if you transfer an asset to your partner as a result of the breakdown of your relationship, there is automatic roll-over relief from CGT in certain cases. This can include transferring assets into or out of a family trust as part of a settlement, as seen most recently in the case of Sandini Pty Ltd v FCT [2017] FCA 287 (22 March 2017).

Future and estate planning

Binding financial agreements provide another way to ensure your long-term financial planning goals are not destroyed by a failed relationship, helping to protect your business or inherited family assets. They can be useful in estate planning, too, as they can help achieve some security for people in second marriages or who have children from previous relationships. Provisions for children can be written into an agreement.

Need to talk it over?

While it might be an unwelcome topic to think about before it happens, the end of a relationship often forces people into making financial decisions at the worst time. We can help you minimize the possible negative consequences by helping you to plan your agreement with a solicitor and the ongoing management of your tax affairs

Client Alert: November 2018

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Transfer balance cap: ATO highlights admin issues

On 30 August 2018, ATO Assistant Commissioner Superannuation Tara McLachlan gave a speech on “Administration issues under the transfer balance cap” at the Tax Institute Sixth National Superannuation Conference.

Ms McLachlan highlighted several issues regarding common superannuation events that will need to be reported to the ATO (such as the start of new pensions that began to be in retirement phase on or after 1 July 2017), multiple transfer balance events, excess transfer balance determinations and more.

Australian Small Business White Paper: tax reform a key

After more than 18 months of extensive research and consultation, the Institute of Public Accountants (IPA) and the IPA Deakin SME Research Centre have released the second edition of the Australian Small Business White Paper.

“Numerous policy recommendations have been adopted from the first edition which was launched in 2015. However, we recognize that the state of our economy is reliant on the productivity, growth and prosperity of the small business sector, so this work must be ongoing”, said IPA CEO Professor Andrew Conway.

The Paper covers a range of topics, including productivity, regulation and workplace relations, and makes several tax reform recommendations relevant to small businesses and personal income tax.

ATO expects 200,000 to miss out on refunds by failing to lodge

The ATO expects that 200,000 people could miss out on a tax refund this year because they haven’t lodged a tax return.

Assistant Commissioner Kath Anderson has said that many salary and wage earners end up with a tax refund, but some are missing out because they fail to lodge on time.

Taxpayers had until 31 October to either lodge their own return, or ensure they are on an agent’s books, Ms Anderson said. Failing to lodge by the deadline can attract a penalty of $210 for every 28 days that the return is overdue, up to a maximum of $1,050.

Black economy: electronic sales suppression tools now banned

Activities involving electronic sales suppression tools (ESSTs) and that relate to people or businesses with Australian tax obligations are now legally banned under recent changes to the law.

ESSTs come in many forms, such as:

  • an external device connected to a point of sale (POS) system;
  • additional software installed into otherwise-compliant software; or
  • a feature or modification, like a script or code, that’s part of a POS system or software.

These tools generally misrepresent or hide income by deleting or changing electronic transaction information, and falsifying sales or POS records.

People and businesses may face penalties of up to $1 million if they produce, supply, possess or use an ESST or knowingly assist others to do so.

Super work test exemption for recent retirees

The Government has released draft legislation and regulations to provide a one-year exemption from the work test for superannuation contributions by recent retirees aged 65–74 who have a total superannuation balance of less than $300,000. This proposal was announced in the 2018–2019 Budget.

Currently, people aged 65–74 must pass the “work test” – working at least 40 hours in any 30-day period during the financial year – in order to make voluntary super contributions.

Bringing forward small business tax cuts by five years

The Prime Minister has announced that the Government will bring forward its planned tax cuts for small business by five years. The Labor Party has also indicated it supports bringing forward the tax cuts.

This means businesses with a turnover below $50 million will pay a tax rate of 25% in 2021–2022, rather than from 2026–2027 as currently legislated.

Corporate tax rates and small business tax offset changes

The Bill to accelerate the reduced tax rates for base rate entities has passed through Parliament and will soon become law. Under the new law, the corporate tax rate will reduce from 27.5% to 26% in 2020–2021, before being cut to 25% for 2021–2022 and later income years.

The new law also increases the small business income tax offset rate to 13% for 2020–2021. The offset will then increase to 16% for 2021–2022 and later income years.

Residential rental property travel expenses: ATO guidance

Since 1 July 2017, people, self managed super funds (SMSFs), “private” trusts and partnerships have not been permitted to claim non-business travel costs connected to residential rental properties as tax deductible. These costs also cannot form part of the cost base or reduced cost base of a capital gains tax (CGT) asset.

The ATO has released new guidance about this, including details about the legal meanings of “residential premises” and “carrying on a business”.

Tax on compensation received for inappropriate advice

On the heels of the banking and financial services Royal Commission, the ATO has published information about how tax applies for people who receive compensation from a financial institution that provided inappropriate advice and/or did not provide advice it should have. This can include compensation for the loss of an investment, or a refund of fees or interest.

Capital gains tax comes into play, and the compensation amount may count as part of your assessable income if it’s a refund of adviser fees that you’ve already claimed as a tax deduction.

ATO set to issue excess super contribution determinations

The ATO has started issuing excess concessional contributions (ECC) determinations for the 2017–2018 financial year. Superannuation fund members will receive these ECC determinations if they have made super contributions above the concessional cap amount for 2017–2018.

Fund members may also receive an amended income tax return assessment together with the ECC determination, and may need to pay additional amounts to the ATO. This is because any super contributions you make over the concessional cap need to be included in your assessable income for the financial year, and an interest charge applies.

 

Explanatory Memorandum November 2018

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Transfer balance cap: ATO highlights admin issues

On 30 August 2018, ATO Assistant Commissioner Superannuation Tara McLachlan gave a speech on Administration issues under the transfer balance cap at the Tax Institute Sixth National Superannuation Conference. She highlighted the following:

  • Common events that will need to be reported include:
  • the start of new pensions which began to be in retirement phase on or after 1 July 2017; and
  • full and partial commutation of pensions on or after 1 July 2017, regardless of whether or the commutation was paid out as a lump sum, retained in accumulation phase or rolled over to another super fund.
  • Self-managed superannuation funds (SMSFs) do not need to report:
  • pension payments made on or after 1 July 2017;
  • investment earnings and losses that occurred on or after 1 July 2017;
  • when an income stream ceases because the capital has been exhausted; or
  • the death of a member – although if the member’s pension was reversionary, reporting of the pension may be required.
  • Individuals can use myGov online to see what amounts have been credited to their transfer balance account.
  • As multiple transfer balance events occur when individuals have multiple pensions paid from the same fund, it’s important to cancel incorrect events before reporting the correct information, otherwise a duplication can occur.

Other issues mentioned during the speech concerned the treatment of excess transfer balance (ETB) determinations, commutation authorities, partial commutations and minimum pension requirements.

Source: www.ato.gov.au/Media-centre/Speeches/Other/Administration-issues-under-the-transfer-balance-cap/.

Australian Small Business White Paper: tax reform a key

After more than 18 months of extensive research and consultation, the Institute of Public Accountants (IPA) and the IPA Deakin SME Research Centre have released the second edition of the Australian Small Business White Paper.

“Numerous policy recommendations have been adopted from the first edition which was launched in 2015. However, we recognise that the state of our economy is reliant on the productivity, growth and prosperity of the small business sector so this work must be ongoing”, said IPA chief executive officer Professor Andrew Conway.

The White Paper covers a range of topics, including productivity, regulation, taxation, SME financial markets and workplace relations. On taxation, it makes several recommendations:

  • Broaden the base and lift the rate of GST (subject to appropriate equity measures).
  • Cut direct taxes.
  • Undertake a zero-base design of a thoroughly modern taxation system.
  • Reform and simplify the personal income tax scale.
  • Standardise the company tax rate at 25%.

It also poses a number of thought-provoking questions, including:

  • What would it look like if Australia’s GST rate rose to 15% and personal income taxes were slashed or removed for a new entrepreneur’s first five years in business?
  • What does a tax system look like that rewards rather than punishes people under the age of 50 for saving for their retirement?
  • Why do we have excess contributions taxes for those wanting to remove the burden from the state in their retirement?
  • What about a tax rate that applied a tax-free threshold at $30,000 per annum and 15% for minimum wage earners?

Source: www.publicaccountants.org.au/news-advocacy/media-releases/australian-small-business-white-paper-released.

ATO expects 200,000 to miss out on refunds by failing to lodge

The ATO expects that 200,000 individuals could miss out on a tax refund this year by failing to lodge a return.

So far this tax time, the ATO says over 2.7 million taxpayers have already lodged their income tax returns via myTax, while another 4.3 million taxpayers have lodged via a tax agent. Assistant Commissioner Kath Anderson says many salary and wage earners end up with a tax refund but some are missing out because they haven’t lodged.

Taxpayers have until 31 October to either lodge their own return, or ensure they are on an agent’s books, Ms Anderson said. Failing to lodge by the deadline can attract a penalty of $210 for every 28 days that the return is overdue, up to a maximum of $1,050.

The ATO believes that some taxpayers may not lodge a return, even if they are due a refund, because they don’t realise they need to. For example, where they are on a low income or haven’t worked recently. Ms Anderson said others might be worried about lodging because they haven’t lodged for several years and suspect that they may have a debt, which often causes them stress and anxiety. For self-preparers, the payment is due on 21 November whether or not a return is lodged. Ms Anderson said the ATO will help people who may have difficulties paying a tax debt, and tailor a payment plan to the taxpayer’s circumstances. The ATO is also alert to some people who are deliberately not lodging in an attempt to avoid their child support obligations.

The ATO also reminds that taxpayers who have already lodged, but realise that they have made a mistake, should make an amendment using myTax or by contacting their tax agent. Not correcting errors may mean the ATO has to contact the taxpayer, which may cause unnecessary processing delays. More information on making an amendment is available on the ATO’s website at www.ato.gov.au/fixamistake.

Source: www.ato.gov.au/Media-centre/Media-releases/Are-you-missing-out-on-a-tax-refund-/.

Black economy: electronic sales suppression tools now banned

Activities involving electronic sales suppression tools (ESST) and that relate to people or businesses with Australian tax obligations are now legally banned, effective from 4 October 2018. This is part of the measures under the recently passed Treasury Laws Amendment (Black Economy Taskforce Measures No 1) Bill 2018. People or entities may be liable for criminal and administrative penalties if they produce, supply, possess or use an ESST or knowingly assist others to do so.

The ATO has noted that ESSTs can come in different forms and are constantly evolving. For example, an ESST can be:

  • an external device connected to a point of sale (POS) system;
  • additional software installed into otherwise-compliant software; or
  • a feature or modification, like a script or code, that is a part of a POS system or software.

An ESST may allow income to be misrepresented and under-reported by:

  • deleting transactions from electronic record-keeping systems;
  • changing transactions to reduce the amount of a sale;
  • misrepresenting a sales record, for example by allowing GST taxable sales to be re-categorised as GST non-taxable sales; or
  • falsifying POS records.

It is now an offence to produce or supply an ESST, possess an ESST or incorrectly keep records using an ESST. A court may impose a criminal penalty up to a maximum of 5,000 penalty units (currently $1,050,000). Otherwise, the ATO may impose an administrative penalty of 60 penalty units (currently $12,600).

The ATO has found cases of taxpayers using such software to deliberately not report all their cash income, falsely report regular losses and/or manipulate their employee obligations.

However, businesses may have inadvertently purchased software with a suppression function. The ATO has advised there will be a transitional grace period for these businesses – if the software was purchased before 9 May 2017 (the date the measures were announced), the business has until 3 April 2019 to advise the ATO and apply for the transitional arrangements.

The ATO has reiterated the need for taxpayers to keep detailed records of every transaction.

Source: www.ato.gov.au/General/Other-languages/In-detail/Information-in-other-languages/Ban-on-electronic-sales-suppression-tools/.

Super work test exemption for recent retiree contributions

The Government has released draft legislation and regulations to give effect to its 2018–2019 Federal Budget measure to provide a one-year exemption from the work test for superannuation contributions made by recent retirees aged 65–74 who have total superannuation balances less than $300,000. Currently, individuals aged 65–74 must work at least 40 hours in any 30-day period in the financial year in which the contributions are made (the work test) in order to make voluntary contributions.

The draft regulation proposes to amend reg 7.04 of the Superannuation Industry (Supervision) Regulations 1994 to allow these recent retirees to make voluntary contributions to their superannuation for 12 months from the end of the previous financial year in which they last met the work test.

The member’s total superannuation balance will be assessed for eligibility against the $300,000 threshold at the end of the previous financial year. Once eligible, there will be no requirement for individuals to remain below the $300,000 balance cap for the duration of the 12-month period.

The existing annual caps for concessional contributions and non-concessional contributions ($25,000 and $100,000 respectively) will continue to apply to contributions made under the proposed one-year exemption from the work test. However, the proposal would allow individuals to access the first year of the bring-forward arrangements in a particular financial year if their non-concessional contributions exceed their general non-concessional contributions cap ($100,000). Individuals would also be able to access unused concessional cap space to contribute more than $25,000 under existing concessional cap carry-forward rules during the 12 months.

The amendments would apply to eligible contributions made from 1 July 2019.

Source: https://treasury.gov.au/consultation/c2018-t331580/.

Bringing forward small business tax cuts by five years

Prime Minister Scott Morrison has announced that the Government will bring forward its planned tax cuts for small business by five years. He said the Government would introduce the necessary legislation in Parliament during mid-October 2018. Labor has indicated it will support the bring-forward of the tax cuts, thereby ensuring quick passage of the legislation through Parliament.

As shown in the following tables, this means businesses with a turnover below $50 million will have a tax rate of 25% in 2021–2022 rather than from 2026–2027 as currently legislated. Similar timing changes will apply to the roll-out of the 16% tax discount for unincorporated businesses.

Mr Morrison said this means that a small business that makes $500,000 profit will have an additional $7,500 in 2020–2021 and $12,500 in 2021–2022.

Company tax rates
2018–2019 2019–2020 2020–2021 2021–2022 2022–2023 2023–2024 2024–2025 2025–2026 2026–2027
Corporate (%) (%) (%) (%) (%) (%) (%) (%) (%)
Existing legislated rates 27.5 27.5 27.5 27.5 27.5 27.5 27 26 25
Fast-tracked rates 27.5 27.5 26 25 25 25 25 25 25

 

2018–2019 2019–2020 2020–2021 2021–2022 2022–2023 2023–2024 2024–2025 2025–2026 2026–2027
Unincorporated (%) (%) (%) (%) (%) (%) (%) (%) (%)
Existing legislated rates 8 8 8 8 8 8 10 13 16
Fast-tracked rates 8 8 13 16 16 16 16 16 16

Source: www.pm.gov.au/media/fast-tracking-tax-relief-small-and-medium-businesses.

Business tax rates and small business tax offset changes

The Treasury Laws Amendment (Lower Taxes for Small and Medium Businesses) Bill 2018 was introduced into and passed by the House of Representatives on 16 October 2018 and passed by the Senate on 18 October 2018. The Bill implements the proposal to accelerate reduction of the tax rate for base rate entities (ie corporate tax entities that derive no more than 80% of their income in passive forms and have an aggregated turnover of less than $50 million).

Corporate tax rate

Under the measures, the corporate tax rate for base rate entities will reduce from 27.5% to 26% in 2020–2021, before being cut to 25% for 2021–2022 and later income years. This means eligible taxpayers will have a tax rate of 25% in 2021–2022, rather than from 2026–2027 as previously legislated. This is summarised in the following table.

Year Revised rate Previously legislated
(%) (%)
2018–2019 27.5 27.5
2019–2020 27.5 27.5
2020–2021 26 27.5
2021–2022 25 27.5
2022–2023 25 27.5
2023–2024 25 27.5
2024–2025 25 27
2025–2026 25 26
2026–2027 on 25 25

Note that the tax rate for corporate tax entities which do not qualify as base rate entities remains unchanged at 30%.

Unincorporated businesses’ tax offset

In addition, the Bill increases the small business income tax offset rate to 13% of an eligible individual’s basic income tax liability that relates to their total net small business income (ie unincorporated businesses) for 2020–2021. This offset rate will then increase to 16% for 2021–2022 and later income years. This is summarised in the following table.

Year Revised rate Previously legislated
(%) (%)
2018–2019 8 8
2019–2020 8 8
2020–2021 13 8
2021–2022 16 8
2022–2023 16 8
2023–2024 16 8
2024–2025 16 10
2025–2026 16 13
2026–2027 on 16 16

Note that the small business income tax offset continues to be capped at $1,000 per individual per year.

The changes will commence in 2020–2021. The measure was previously announced by the Government on 11 October 2018. The speedy passage demonstrates that tax legislation can in fact pass through Parliament promptly, if it is deemed politically expedient.

 

Residential rental property travel expenses: ATO guidance

From 1 July 2017, non-business travel costs incurred by individuals, self managed super funds (SMSFs) and “private” trusts and partnerships in relation to residential rental properties are not deductible (s 26-31 of the Income Tax Assessment Act 1997). Such expenditure is also excluded from forming part of the cost base or reduced cost base of a CGT asset.

Law Companion Ruling LCR 2018/7, issued by the ATO on 10 October 2018, provides guidance on the following matters:

  • the meaning of the term “residential premises” in s 26-31;
  • the meaning of “carrying on a business” for the purposes of the business exclusion in s 26-31(1)(b), and
  • the application of s 26-31 to travel expenditure that serves more than one purpose.

LCR 2018/7 applies from 1 July 2017. It finalises Draft LCR 2018/D2 and contains the same views as the draft.

Residential premises

Section 26-31 of the ITAA 1997 refers to the “use of residential premises as residential accommodation”. The expression “residential premises” takes its meaning from the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act), which defines it as land or a building that is occupied, or is intended to be and is capable of being occupied, as a residence or for residential accommodation. The ATO’s views on what constitutes “residential premises” for GST purposes are set out in GST Ruling GSTR 2012/5.

LCR 2018/7 mirrors the GST ruling by providing that:

  • the premises must be fit for human habitation, providing shelter and basic living facilities;
  • the actual use of the premises as a residence or for residential accommodation is relevant to satisfying the first limb of the definition (concerning actual occupation);
  • the second limb of the definition (concerning intended occupation) refers to premises that are designed, built or modified so as to be suitable to be occupied, and capable of being occupied, as a residence or for residential accommodation;
  • the term of occupation or intended occupation is not determinative; and
  • the premises may be in any of a number of forms, including single rooms or suites of rooms within larger premises.

Carrying on a business of property investing

A deduction is not denied under s 26-31 for travel expenditure necessarily incurred in carrying on a business. This exclusion covers taxpayers carrying on a business of property investing or a business of providing retirement living, aged care, student accommodation or property management services. The ATO may take the following matters into account in determining whether a business of letting residential properties is being carried out:

  • the number of residential properties being rented out;
  • the hours per week spent actively engaged in managing the properties;
  • the skill and expertise exercised in undertaking these activities; and
  • whether professional records are kept and maintained in a business-like manner.

It is generally harder for individuals to demonstrate that they are carrying on a business of property investing than it is for companies (which are specifically exempt from s 26-31 anyway). In the ATO’s view, “the receipt of income by an individual from the letting of property to a tenant, or multiple tenants, will not typically amount to the carrying on of a business as such activities are generally considered a form of investment rather than a business”.

Apportionment if travel expense serves mixed income-producing purposes

The expenditure made non-deductible by s 26-31 is a loss or outgoing “insofar as it is related to travel”. The ATO says that the use of the word “insofar” means that an apportionment is required if there are mixed income-producing purposes for the travel costs. If a single outlay of travel expenditure is incurred partly for producing income from the use of residential premises as residential accommodation and partly for other income-producing purposes (eg business or employment), the ATO expects the taxpayer to fairly and reasonably assess how much of the amount relates to each purpose. Factors to take into account include floor-area ratio, rental income and travel time spent attending to each income-producing purpose.

Source: www.ato.gov.au/law/view/view.htm?docid=%22COG%2FLCR20187%2FNAT%2FATO%2F00001%22.

Tax on compensation received for inappropriate advice

The ATO has recently provided information about how the tax system applies for someone who receives compensation from a financial institution that provided inappropriate advice and/or did not provide advice it should have. This can include compensation for the loss of an investment, or a refund of fees or interest.

Capital gains tax comes into play, because CGT event A1 happens when an individual, disposes off an investment. The capital gain or loss made from a CGT event is to be reported in the same financial year as the event occurs.

Compensation may be paid to a person in connection with an investment they have already disposed of. This type of compensation payment can be treated as additional capital proceeds associated with the disposal. If more than one investment is associated with a compensation payment, the ATO says the additional capital proceeds need to be apportioned among the disposed-of investments.

If a person has been compensated for investments they still own, they need to reduce either the cost base or the reduced cost base by the compensation amount they receive, depending on whether they make a loss or gain when they later dispose of the investments. Again, the compensation amount needs to be apportioned if it relates to more than one investment.

A compensation payment may also include an amount that is a refund or reimbursement of adviser fees. If the compensated person claimed a deduction for the adviser fees in a tax return, the amount they receive as a refund or reimbursement will form part of their assessable income in the year they receive it. If they did not claim a deduction for the adviser fees, the refund or reimbursement does not form part of their assessable income. However, where the adviser fees were included in the cost base or reduced cost base of any investments, the cost base and reduced cost base must be reduced by the amount of the refund or reimbursement. When the person later disposes of the investment, these reductions will be used to calculate the capital gain or loss they make.

Source: www.ato.gov.au/Individuals/Income-and-deductions/In-detail/Compensation-paid-from-financial-institutions/.

ATO set to issue excess super contribution determinations

From mid-October 2018, the ATO has started issuing excess concessional contributions (ECC) determinations for the 2017–2018 financial year. At the Superannuation Administration Stakeholders Group (SASG) meeting on 12 September 2018, the ATO said super funds should prepare for an influx of engagement and queries from members who receive these ECC determinations in relation to contributions above the $25,000 concessional cap for 2017–2018.

A taxpayer may also receive an amended income tax return assessment together with the ECC determination. This is because any excess concessional contributions are included in the taxpayer’s assessable income for the corresponding financial year (and subject to an interest charge). The taxpayer is also entitled to a 15% tax offset for the tax already paid by the super fund.

A taxpayer has 60 days from receiving an ECC determination to elect to release up to 85% of their excess concessional contributions from their super fund. However, they should first ensure that their super fund has correctly reported their contributions to the ATO before making an irrevocable election to withdraw any excess contributions.

Upon receipt of a valid election to release, the ATO will provide a release authority to the taxpayer’s relevant super fund requiring the amount specified to be paid to the ATO. The taxpayer will receive a credit equal to the amount released to the ATO. The ATO will use any money released from the individual’s super funds to first pay any tax or government debts before refunding any remaining balance to the individual. Accordingly, most taxpayers (below the top marginal rate) should have no tax debt on the released excess concessional contributions included in their assessable income.

Non-concessional contributions determinations

The ATO also started issuing excess non-concessional contributions (ENCC) determinations for 2017–2018 from mid-to-late October 2018. The non-concessional cap from 2017–2018 is $100,000 (or $300,000 over three years for those under 65), provided that they have a total superannuation balance of less than $1.6 million at 30 June of the prior year.

Taxpayers who exceed the non-concessional cap for the year and receive an ENCC determination can elect within 60 days to withdraw the excess non-concessional contributions (plus 85% of the associated earnings) from their super fund. The full amount of the earnings (100%) are then included in the taxpayer’s assessable income (and subject to a 15% tax offset). If an individual does not withdraw the excess contributions, they will be taxed at the top marginal tax rate (plus Medicare levy).

 

The ATO has previously suggested that for “most people” who exceed the non-concessional cap it is “easiest to do nothing”. If a taxpayer does not make an irrevocable election within 60 days of receiving an ENCC determination, the ATO says it will ask the taxpayer’s super funds to release and send excess amounts to the ATO. It will also amend the taxpayer’s income tax assessment to include the associated earnings, which will be taxed at the individual’s marginal tax rate (plus Medicare levy). While the ATO suggests that it is “easiest to do nothing” for “most people” who exceed the non-concessional cap, each taxpayer needs to consider the tax implications for their own circumstances.

Source: www.ato.gov.au/General/Consultation/Consultation-groups/Stakeholder-relationship-groups/Superannuation-Administration-Stakeholder-Group/.

Top mistakes Aussies make when setting up an SMSF

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In a speech given earlier this month, ATO assistant commissioner Dana Fleming highlighted seven key mistakes SMSF trustees make when establishing their funds.

Despite the continued growth in SMSF membership, key mistakes are still being made when it comes to the set-up of funds, the ATO has revealed.

Ms Fleming said that common errors include inaccurate registration; failing to meet sole-purpose testing; prohibited loans; lending, leasing or investing more than 5 per cent of in-house assets; separating assets; borrowing money and administration issues.

In her speech, Ms. Fleming said the two most common mistakes made during the registration phase are: failure to properly establish the SMSF trust before applying for an ABN and the omission of member, trustee or director details.

Another area where trustees are experiencing problems is around sole-purpose testing. Ms. Fleming emphasized that any investment that issues current-day benefits to members or parties related to the fund violates the sole-purpose test.

SMSF trustees have also been found to breach rules barring the loaning of fund monies or assets to members of the SMSF or their relatives, while others lent, invested or leased more than the allowed 5 per cent of the fund’s total assets to related parties of the SMSF. In fact, some failed to ensure bank accounts and other such assets where actually held in the fund’s name.

Trustees were also discovered to have borrowed money, despite this being prohibited, and a number struggled in administrative areas. This included mistakes in drafting and updating the trust deed, an inability to maintain the investment strategy or meet lodgement obligations, not possessing a valid bank account or electronic service address, and failing to manage the annual audit process.

Such mistakes reflect relevant findings, with ASIC’s report 576 Member Experiences with Self-Managed Superannuation Funds, released in June this year, uncovering many members lack a basic understanding of their SMSF and their legal requirements as trustees.

Despite most respondents opting to set up SMSF accounts in order to gain control of their investments and superannuation, many admitted to relying on “financial experts” to file their paperwork, offer advice on investments and control the day-to-day running of their SMSFs.

This is particularly perplexing, as it was also found that some surveyed members did not check the credentials of their trusted “financial experts” and relied heavily on “gut feel” or the personal recommendation of a family member, friend or colleague when choosing financial advice.

In spite of such lack of understanding, there were more than 1.1 million SMSF members by March 2018, accounting for 595,840 accounts. This is up from 1.07 million members as of June 2016.

In light of this, the ATO has again asserted the importance of ensuring the fund is set up correctly. This is necessary to ensure the trustee is eligible for tax concessions, can receive contributions and can easily manage the fund’s operations.

 

Catch-up Concessional Contribution Caps

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The ATO has released details of Catch-up concessional contribution caps to the effect from 1 July 2018.

New concessional contribution ‘catch-up’ measure

From 1 July 2017,  the maximum amount of concessional contributions you can put into your account each year will be $25,000 per annum for all age groups. Then commencing 1 July 2018, there is a new catch-up provision available for members with a superannuation balance of less than $500,000 just before the start of the financial year.

If your total superannuation balance is less than $500,000 amounts not paid up to the $25,000 cap each year will be able to be paid over the following five years. You can start catching up any unused concessional contributions from 1 July 2018. For example:

2018/19 2019/20 2020/21 2021/22 2022/23 2023/24
Concessional Contributions $10,000 $10,000 $10,000 $70,000 $10,000 $10,000
Available unused cap $15,000 $15,000 $15,000 – $15,000 $15,000
Cumulative available unused cap $15,000 $30,000 $45,000 – $15,000 $30,000

 

What it means for you

If your superannuation balance is less than $500,000 you may want to seek financial advice on your future contribution options.

 

 

Setting Up Your SMSF

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If you’re thinking of setting up your own self-managed super fund (SMSF), to take charge of your retirement and be able to make investment decisions, there are some important steps you have to take before you seek registration with the ATO such as choosing between individual trustees or a corporate trustee, creating the trust and trust deed appointing trustees or directors, setting up a bank account, obtaining an electronic service address, and preparing a windup strategy.

Itis a complex process with the ATO as the gatekeeper ensuring that only genuine trustees are allowed into the SMSF sector. This is achieved by conducting pre-registration checks on newly registered SMSFs and new members added to existing SMSFs, as well as maintaining the Super Fund Lookup (SFLU) which is a public register of super funds that third-party funds and employers can use to determine if they can pay rollovers or contributions to an SMSF.

The ATO uses analytical risk models that look at a number of factors and data related to new SMSFs or new members to determine the risk of illegal early release of funds or non-compliance.

This consists of the trustees’ financial history and behaviour including: bankruptcy; debts owed to the ATO; outstanding lodgements; poor lodgement or payment compliance history; ability to maintain an ongoing super fund; and whether the individual has been linked to any other SMSFs of concern.

When a risk is identified during the pre-compliance check, the ATO will usually undertake further checks and interviews with the trustees involved to ensure that they are genuine in wanting to establish an SMSF and understand all the obligations and consequences of failing to comply with super laws, as well as having received adequate professional advice or have had appropriate education.

Where there are still concerns with the registration of the SMSF even after speaking to the trustees, the ATO will withhold registration and trustees will need to seek a review of the decision and address any concerns raised during the new registration check. In the 2017-18 income year, there were around 26,000 SMSF registrations and approximately 2,100 were subject to further review. Of those reviewed, 29% had their ABN cancelled and a further 16% had their registration details withheld from SFLU.

Therefore, it is important that the SMSF be set up correctly for the sole purpose of providing retirement benefits for its members. Even at the set-up stage, it is important to look ahead for life events such as marriage, divorce, or death which may impact on an SMSF. While some of these issues may be unpleasant and a conversation involving them unwelcome, it is important to note that an SMSF is a long-term retirement vehicle and it is prudent to ensure from the beginning that there is a strategy to deal with unexpected events and wind up the SMSF if necessary.

Need professional help?

We can advise you on various aspects of setting up an SMSF. We can cast our experienced accounting and taxation eye over your current fund.

Improvements To GST Risk Assessment

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The Inspector-General of Taxation (IGT) has recently released his review into the verification of GST refunds by the ATO. The review was initially conducted as a response to concerns raised by taxpayers which had their GST refunds delayed as a part of the ATO risk assessment program to verify certain details before refunds are issued.

Broadly, the ATO’s risk assessment system uses BASs as input data and automatically selects a number of cases where retention of refund and further checking should be considered. The selection is then further refined by manual intervention. The review conducted by the IGT examined the end-to-end process involved in refund verification including from initial case selection through to the review and audit activities.

Overall, the IGT found that the ATO’s administration of GST refunds operated efficiently with the vast majority of refunds released without being stopped for verification, while those refunds that were stopped were processed and released within 14 or 28 days. 

Even though that was the case, the IGT identified an opportunity to enhance ATO’s automated risk assessment tools which have only been achieving a strike rate of 26.7% (approximately 1 in 4 cases), which may be no better than random selection.

In addition to the opportunities to improvement, the IGT also made 5 recommendations aimed at the ATO to:

  1. develop a framework for continuous improvement of its automated risk assessment tools;
  2. streamline guidance to staff and implementing tools to assist them in complying with their statutory obligations;
  3. enhance its information requests to taxpayers and providing a channel for pre-emptive provision of such information;
  4. improve notification of when taxpayers’ objection rights to the retention of refunds has been triggered and assisting them to lodge such objections effectively; and
  5. raise awareness of staff and taxpayers about financial hardship issues, appropriately considering them and enabling automated partial release of refunds.

The ATO has agreed to the majority of the recommendations. Although it notes that activity statements are processed through a system which does not allow for automatic alerts to notify ATO officers whether retention of a refund has been made within the statutory period. However, the ATO said it is looking to migrate activity statement processing to another internal system which may provide opportunities for alerts.

In addition, the ATO partially disagreed with recommendation 3 as it says taxpayers and Tax Agents who lodge electronically already have the option to supply supporting information through various portals and allowing taxpayers to send additional information may cause additional compliance costs, particularly where the refund is not subject to verification activities.

Perhaps the most interesting recommendation that the ATO partially disagreed with is 5. According to the ATO, system limitations prevent the automated partial release of refunds in certain situations. It notes that the manual process which is currently in place is considered to be adequate.

So, what does it mean for your business?

The review has raised several issues which may mean improvements in service for business owners seeking refunds going forward. With the enhancement of the ATO’s risk assessment model, businesses may no longer need to be inconvenienced by an unnecessary delay in obtaining their GST refund. If you’re having issues with your activity statements or a GST issue in general, contact us today.

 

Tax Return Lodgement Due Soon

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With the 31 October fast approaching, so is the deadline for lodging your tax returns. If you’re making the last-minute scramble to gather all your tax documentation, keep in mind there are some changes in this year’s tax return particularly in relation to rental properties and superannuation.

If you own rental property, you should be aware that you are no longer able to claim a deduction for depreciation of second-hand assets in relation to the property in this year’s tax return. The denial of deduction applies to second hand assets acquired at or after 7.30pm on 9 May 2017 (unless it was acquired under a contract entered into before this time), and second-hand assets acquired before 1 July 2017 but not used to earn income in the 2016-17 income year. In addition, travel expenses related to residential investment properties are no longer deductible.

In relation to superannuation, from 1 July 2017, the spouse income threshold for the tax offset has increased, meaning that more people will be able to claim the offset in this year’s tax return. You may be able to claim an offset of $540 if you made a contribution to your spouse’s super fund in the income year and your spouse’s income is less than $37,000. If your spouse’s income is between $37,000 and $40,000, a part offset may be available.

In addition to the changes in the tax return, the ATO has also outlined 5 of the most common mistakes that they have seen, which are:

  • leaving out income from temp jobs or money earned from sharing economy;
  • claiming deductions for personal expenses, such as home to work travel, normal clothes, or personal phone calls;
  • no records or receipts kept of expenses;
  • claiming for something that wasn’t paid for or was reimbursed;
  • claiming personal expenses for rental properties including deductions for the private use of property or interest on loans used to buy personal assets.

Assistant Commissioner Kath Anderson said: “[t]his time we will be paying close attention to claims for private expenses like home to work travel, plain clothes, and private phone calls. We will also be paying attention to people who are claiming standard deductions for expenses they never paid for.”

According to the ATO, around half of the adjustments they make to tax returns are due to the taxpayer having no records or poor-quality records. For those taxpayers who are putting in claims, especially work claims without any evidence, the ATO says it will be checking all the data, either by data-matching against other taxpayers in similar industries to find discrepancies or by contacting the taxpayer’s employer when a “red flag” is raised.

Need help with your return?

If you’re just getting started on your return now and need some help maximising the deduction you’re entitled to or untangling complex tax affairs, we can help. If you don’t think you will make the 31 October deadline, you may be able to get a concessional lodgement date if you lodge your return with us. Alternatively, we can help you apply for a deferral and give you more time to sort out your affairs.