Director Identification Numbers Coming Soon

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Being a director of a company comes with many responsibilities, this could soon increase with a government proposal to introduce a “director identification number” (DIN), a unique identifier for each person who consents to being a director. The DIN will permanently be associated with a particular individual even if the directorship with a particular company ceases. Regulators will use the DIN to trace a director’s relationships across companies which will make investigating a director’s potential involvement in repeated unlawful activity easier.

Although this initiative was conceived as a part of the anti-phoenixing measures, the introduction of the DIN will also provide other benefits. For example, under the current system, only directors’ details are required to be lodged with ASIC and no verification of identify of directors are carried out. The DIN will improve data integrity and security, as well as improving efficiency in any insolvency process.

At this stage, it is proposed that any individual appointed as a director of a registered body (i.e. a company, registered foreign company, registered Australian body, or an Aboriginal and Torres Strait Islander corporation) under the Corporations Act (or the CATSI Act) must apply to the registrar for a DIN within 28 days from the date they are appointed.

Existing directors have 15 months to apply for DINs from the date the new requirement starts. Directors that fail to apply for a DIN within the applicable time frame will be liable for civil and criminal penalties.

In addition to the penalties for failing to apply for a DIN, there are also civil and criminal penalties which apply to conduct that undermines the requirement. For example, criminal penalties apply for deliberately providing false identity information to the registrar, intentionally providing a false DIN to a government body or relevant body corporate, or internationally applying for multiple DINs.

The proposal initially applies only to appointed directors and acting alternate directors, it does not extend to de facto or shadow directors. However, the definition of “eligible officer” may be extended by regulation to any other officers of a registered body as appropriate. This will provide the flexibility to ensure the DIN’s effectiveness going forward. Just as the definition of eligible officer may be extended, the registrar also has the power to exempt an individual from being an eligible officer to avoid unintended consequences.

Recently, there have been cases in the media where individuals have unknowingly or unwittingly become directors of sham companies for various nefarious purposes. The DIN proposal inserts a defence for directors appointed without their knowledge, due to either identify theft or forgery. However, it notes that the defendant will carry the evidential burden to adduce or point to evidence that suggests a reasonable possibility that the defence exists, and once that’s done the prosecution bears the burden of proof. The government notes that the evidential burden has been reversed because it is significantly more costly for the prosecution to disprove than for the defence to establish.

Where to now?

Apart from ensuring that your identity is safe, we can help if you think you may inadvertently be a director of a company and no longer wish to be. Otherwise, if you’re the director and want to understand more about this potential change including the timeline, contact us today.

 

World Congress of Accountants – Audit

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The World Congress of Accountants was a chance for leading experts to respond to thought-provoking and stimulating questions from tax regulations to tech disruption and provide some much-needed clarity on their future impact.

A significant area that was explored over the course of the four days was what exactly the term ‘audit’ means in today’s modern business environment and how auditors can continue to meet stakeholder expectations.

Stakeholder expectations on audit are based on the fact that a range of detailed audit procedures be applied by skilled individuals and the auditor be independent of financial statement preparers.

Little of an auditor’s work is directly visible to investors. It is the audit committee, as shareholder representatives and independent directors, who see and assess the behaviour and professional scepticism of the auditors. A recent Financial Reporting Council survey found that Audit Committee Chairs have been very satisfied with the quality of their external auditor with 92 per cent rating them excellent or above average.

Australia in particular has a strong foundation of stakeholder confidence in our businesses, based on open accountability, transparency and fair presentation of business results. These in turn rely on the judgement of management and directors on how they apply accounting standards.

The role of an auditor is to judge whether appropriate accounting standards have been applied by management and directors, and whether the view presented as a whole is consistent with auditor’s knowledge of the business.

This role is one in a series of measures that contribute to stakeholder confidence, including:

  • a work culture that instills the importance of independent thought and professional skepticism with partners and staff;
  • skilled and competent people;
  • effective audit processes and methodologies;
  • support from management and audit committees and others in the reporting framework; and
  • commitment and structures to support partners and staff undertaking robust work.

A key measure that is often forgotten from this list is courage.

Courage from the board to speak honestly to their investors, courage from investors to make informed decisions based on the information available to them, courage from government, regulators and standard setters to keep the focus on maintaining a strong capital market; and courage of auditors to have candid and open communication with management and audit committees.

The global profession needs to continue the discussion on the purpose of audit so we can continually evolve to meet modern stakeholder expectations.

 

Tax Consequences Of Compensation From Financial Institutions

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The Royal Commission into misconduct tin the banking, superannuation and financial services industry has revealed some major deficiencies in terms of financial advice provided to consumers. Even though the Commission itself cannot fix or award compensation or make orders to require parties to a dispute to take or not take any action, the media exposure from the hearings have spurred many financial institutions to compensate their customers who received less than stellar treatment.

The tax treatment of this compensation depends on what the compensation is being paid for and how the investment was held. 

A compensation amount from a financial institution could include a combination of loss on an investment, refund or reimbursement of fees, and/or interest.  Compensation may also relate to multiple investments, with different amounts granted against each one. Therefore, if you receive compensation in this form, the tax consequences of each amount must be carefully considered.

If you receive compensation for loss on an investment (i.e. the value of your investments is lower than it would have been if you had received appropriate advice) and you have subsequently disposed of the relevant investment. The compensation received will most likely be treated as additional capital proceeds related to disposing the investments if you held the investment on capital account.

For example, if you dispose of an investment, CGT event A1 occurs and any capital gains or losses are reported in the financial year you disposed of the asset. If you’re an Australian resident and have held the investment for at least 12 months, remember you may be entitled to the 50% CGT discount if you disposed of your investments for a capital gain. Where the compensation amount relates to more than one investment, you will need to apportion the additional capital proceeds to each disposal. An amendment to a prior year tax return may need to be requested where the disposal of investment and receipt of compensation happens in different financial years.

In relation to compensation for existing investments that you have not sold, you may need to reduce the cost base of the investment by the compensation amount you receive (for investments held on capital account). Again, apportionment is required where the compensation relates to more than one investment.

The compensation payment received may include an amount that is a refund or reimbursement of adviser fees, the tax treatment of which depends on whether you claimed a deduction for the adviser fees in your tax return. If you claimed a deduction for adviser fees, the refund or reimbursement will be assessable income in the year you receive it. If you did not claim a deduction for the adviser fees, you do not need to include the amount as your assessable income. However, if you included the adviser fees in the cost base of the investment, that must be reduced accordingly.

If you receive compensation which has an interest component, it is assessable as ordinary income and should be included in your tax return in the financial year it is received. Note that the tax treatment of compensation may differ if you held investments on revenue account, on trust, or the compensation relates to a superannuation account or a SMSF account.

Need more guidance?

Have you received a compensation amount and don’t know how to dissect it into the relevant parts? Or perhaps the compensation amount received relates to investments that were not held on capital account (i.e. revenue, on trust, or superannuation related)? Whatever your issue may be, we have the expertise to help, contact us today.

 

Government Debts And Your Travel Plans

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Departure Prohibition Orders (DPOs) have long been used as a tool by the government as a way to stop those who owe debts from leaving the country before they pay their debts, even if they are just going on a holiday. It has been used successfully for more than a decade in the enforcement of child support payments, and by the ATO as well.

Now the government has started applying DPOs to prevent former welfare recipients from leaving the country over debts as small as $10,000.

So far, more than 20 DPOs have been issued and the Department of Human Services is looking to increase the use of DPOs to help recover more than $800m owed by more than 150,000 who are no longer in the welfare system. Those that are currently receiving a welfare benefit will not be caught under this measure and those that are experiencing genuine hardship can have their repayments deferred.

The Department has made it clear that they will only issue DPOs in cases where the individual has consistently refused to repay their debts and have ignored multiple warnings. In addition, those who are subject to a DPO will also continue to have interest charged on their debt until they take action to repay the money they owe. The real question is whether this increased used of DPOs as a way to exert pressure on individuals to pay their debts will spread to other areas such as ATO debts.

The ATO guidelines on DPO indicate that the Commissioner can issue a DPO where an individual has a tax liability and the Commissioner believes on reasonable grounds that it is desirable to issue a DPO to ensure that the individual does not depart Australia without wholly discharging the tax liability or making arrangements for the tax liability to be discharged. This is regardless of whether the individual intends to return. In addition, DPOs can apply to both Australian citizens and foreign nationals who are liable to pay Australian tax.

In deciding whether to issue a DPO, the ATO will take into account all relevant facts and circumstances, including whether: the debt can be recovered; disposal of assets had occurred; information to suggest concealment of assets exists (e.g. AUSTRAC reports); the individual has sufficient assets overseas to maintain a comfortable lifestyle; transfer of any assets overseas; the actual need for travel; recovery proceedings or audit activity in progress; and involvement in criminal activity.

It should be noted that the issuing of DPOs will only be pursued after initial collection activity which involves issuing a notice calling for payment and then having the debt referred for collection activity. While the ATO acknowledges that a DPO imposes significant restrictions on normal rights of individuals and deprives them of their liberty, it needs to be balanced with the protection of revenue.

Therefore, the Commissioner already has a wide remit to issue DPOs in circumstances he considers to be appropriate. Data from past years indicate that the majority of DPOs were issued in relation to tax fraud/evasion on an international scale, related to wealthy or high-net-worth individuals or their related entities. Even then, the fact that the ATO has issued relatively few DPOs in the past few years may be an indication that it will not be applying this method to pressure individuals with smaller tax debts.

Need help with a tax debt?

Even though the ATO is unlikely to stop you from going on holidays because you have a tax debt, it may still be prudent to take care of any debt you may have outstanding with the ATO, even if it’s a small one. We can save you money in interest charges and potentially get penalties remitted. Contact us today.

 

Super Transfer Balance Cap: Reporting Events

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With the introduction of the transfer balance cap of $1.6m designed to limit the amount of capital that can be transferred into the tax-exempt retirement phase, certain events that track the movement of capital in and out of retirement phase, as well as other events now must be reported to the ATO to ensure the correct amount is in the transfer balance account.

Pre-existing pensions that members were receiving before 1 July 2017 that they have continued to receive and which are in retirement phase on or after 1 July 2017 should have already been reported to the ATO. In addition, the following common events must now also be reported:

  • start of new pensions, which began to be in retirement phase on or after 1 July 2017;
  • full and partial commutation of a pension on or after 1 July 2017 regardless of whether or not the commutation was paid out as a lump sum, retained in accumulation phase or rolled over to another super fund;
  • certain limited recourse borrowing arrangement (LRBA) payments that result in an increase in value of the interest that supports a member’s pension where the LRBA was entered into on or after 1 July 2017;
  • commutations in compliance with a commutation authority issued by the Commissioner; and
  • structured settlement contributions.

For those who are beneficiaries of capped defined-benefit income streams, a different approach is taken for reporting commutations and new pensions. If an individual had a capped defined-benefit income stream before 1 July 2017, commuted it in full and started a new market-linked pension, they may exceed their transfer balance cap unintentionally. Therefore, the ATO will not be taking any compliance action if a fund doesn’t report the commutation of the original pension or the start of a new market-linked pension for a limited time. However, the fund is still required to report the pre-existing capped defined-benefit income stream.

So now that you know what needs to be reported, the next question is when or how often you need to report these events to the ATO. This depends on whether your SMSF is on an annual or quarterly cycle and is determined by when the SMSF first starts to have a pension in the retirement phase.

Where each member’s total super balance is under $1m, the SMSF must report transfer balance events annually, usually when the SMSF annual return is due.

If any member has a total super balance of $1m or more, the SMSF must report transfer balance events 28 days after the end of the quarter in which the event occurs by lodging a transfer balance account report. Note, the report only needs to be lodged if there is an event to report, if there isn’t an event, the SMSF isn’t required to lodge a transfer balance account report.

However, if a member has exceeded their transfer balance cap, the trustee must report any commutations earlier (either 10 business days after the end of the month or by a specific date denoted on the commutation authority). In addition, if you’re rolling your pension from an SMSF to an APRA fund, the commutation should be reported as soon as possible to prevent duplication due to different reporting times between APRA and SMSFs.

Do you need a hand?

Running your own SMSF can be a tricky exercise particularly with these new reporting rules. If you are confused or you need someone to help you look over your fund and make sure everything is above board, contact us today.

 

 

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

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.