Client Alert – October 2018

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Claiming work-related expenses: ATO guides and toolkits

This year, the ATO has launched its biggest ever education campaign to help taxpayers get their tax returns right. The ATO says the campaign, which is running throughout tax time, includes direct contact with over three million selected taxpayers, as well as specialised guides and toolkits for taxpayers, agents, employers and industry bodies. A key component of the campaign is simple, plain English guidance for people with the most common occupations, like teachers, nurses, police officers and hospitality workers.

ATO Assistant Commissioner Kath Anderson says that last year work-related expenses totalled a record $21.3 billion, “and we have already flagged that over-claiming of deductions is a big issue”. The most popular topics this year include car, clothing, travel, working from home, and self-education expenses, and the guides for tradies, doctors, teachers, office workers and IT professionals have been popular.

Illegal phoenix activity: public examinations in Federal Court matter

The ATO has announced that public examinations started in a Federal Court matter on 27 August 2018 in relation to a group of entities connected to a pre-insolvency advisor. The examinations will focus on the suspected promotion and facilitation of phoenix activities and tax schemes.

More than 45 service providers, clients and employees of pre-insolvency advisors, as well as alleged “dummy directors” of phoenix companies, will be examined.

Banking Royal Commission: possible super contraventions

On 24 August 2018, the Royal Commission into banking, superannuation and financial services misconduct released the closing submissions, totalling over 200 pages, that set out possible contraventions by certain superannuation entities. The evidence surrounding these alleged breaches was revealed during the fifth round of public hearings, when high-level executives of some of the largest superannuation funds were grilled about practices that may involve misconduct or fall below community expectations.

The Commission heard evidence about fees-for-no-service conduct and conflicts of interests which affect the ability of some super fund trustees to ensure that they always act in the best interests of members. Questioning during the hearings focused particularly on how trustees supervise the activities of a fund and respond to queries from the regulators. Executives were also quizzed about expenditure on advertisements and sporting sponsorships, and finally, the Commission turned its attention to the effectiveness of the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) as regulators.

What’s next?

The Royal Commission’s interim report is now due, and the sixth round of public hearings (10–21 September 2018) is investigating conduct in the insurance industry. The Royal Commission has released four background papers covering life insurance, group life insurance, reforms to general and life insurance (Treasury) and features of the general and life insurance industries.

SMSF issues update: ATO speech

ATO Assistant Commissioners, Superannuation, Tara McLachlan and Dana Fleming recently spoke at the SMSF Association Technical Days in various capital cities. The speech was mainly about practical considerations to be taken into account when setting up a new self-managed superannuation fund (SMSF) and during the first year of its operation. Other issues raised included SMSF registrations, annual return lodgements, SuperStream SMSFs and exempt current pension income and actuarial certificates.

ATO data analytics and prefilling help tax return processing

The ATO reports that a record number of tax returns have been finalised in the first two months of this year’s “tax time” period, thanks to prefilling of tax return data and the ATO’s correction of mistakes using analytics and data-matching. Over $11.9 billion has been refunded to taxpayers, and errors worth more than $53 million were detected and corrected before refunds were issued.

The ATO has prefilled over 80 million pieces of data from banks, employers, health funds and government agencies to make tax returns easier for taxpayers and agents. The ATO’s advanced analytics allow it to scrutinise more returns than ever before, and make immediate adjustments where taxpayers have made a mistake.

Parliamentary committee recommends standard tax deduction, “push return” system

The House of Representatives Standing Committee on Tax and Revenue has tabled its 242-page report on taxpayer engagement with the tax system. This significant report covers issues that have also been canvassed in previous tax reform reviews such as the Australia’s Future Tax System Review and the Henry Review.

In its inquiry, the Committee examined the ATO’s points of engagement with taxpayers and other stakeholders, and reviewed the ATO’s performance against advances made by revenue agencies in comparable nations. The inquiry asked what taxpayers should now expect from a modern tax service that is largely or partly automated.

Australia’s complex system for claiming work-related tax deductions, for example, was highlighted during the inquiry as being out of step with approaches in most other advanced nations, which have almost universally standardised their approach. The Committee concluded that under Australia’s self-assessment model, more should be done to make tax obligations easier for taxpayers to understand and simpler to comply with. The report includes 13 recommendations to help achieve this goal.

12-month extension of $20,000 instant asset write-off

The Treasury Laws Amendment (Accelerated Depreciation for Small Business Entities) Bill 2018 has now passed through Parliament without amendment.

The Bill makes changes to the tax law to extend by 12 months the period during which small businesses can access expanded accelerated depreciation rules for assets that cost less than $20,000. The threshold amount was due to revert to $1,000 on 1 July 2018, but will now remain at $20,000 until 30 June 2019.

Australian Small Business and Family Enterprise Ombudsman Kate Carnell has welcomed the extension, but reminded small businesses and family enterprises that the instant asset write-off is a tax deduction, not a rebate – your small business needs to make a profit to be eligible to claim the benefit.

Cyptocurrency and tax: updated guidelines

The ATO says that for taxpayers carrying on businesses that involve transacting with cryptocurrency, the trading stock rules apply, rather than the capital gains tax (CGT) rules.

The ATO’s guidelines on the tax treatment of cryptocurrencies have recently been updated, following feedback from community consultation earlier this year. The ATO received about 800 pieces of individual feedback and submissions, and has now provided additional guidance on the practical issues of exchanging one cryptocurrency for another, and the related recordkeeping requirements.

The ATO as SMSF regulator: observations

In the opening address to the Chartered Accountants Australia and New Zealand National SMSF Conference in Melbourne on 18 September 2018, James O’Halloran, ATO Deputy Commissioner, Superannuation, shared some observations and advice from the ATO’s perspective as regulator for the SMSF sector. He spoke about matters including the crucial role of fund trustees, the ATO’s activities to address behaviour that seeks to take advantage of SMSFs, what sort of SMSF events attract close ATO scrutiny, and issues relating to the use of multiple SMSFs to manipulate tax outcomes.

 

Taxable SMSF Assets Double: Is Your Fund Affected?

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It’s been a little over a year since the dual changes of the pension transfer balance cap and the reduction of tax concessions for transition to retirement pensions were implemented by the government. Recent research has indicated that these changes has achieved their policy outcome by making almost 25% of previously tax-free SMSF assets lose their status and become taxable.

To recap, a pension transfer balance cap of $1.6m applied from 1 July 2017 to limit the total amount of accumulated superannuation that can be transferred to the retirement phase, where the earnings on assets are tax-exempt. The transfer balance cap is indexed but adjustments are unlikely to occur until at least 2023-24.

The ATO uses the concept of a transfer balance account to track each person’s net pension amounts against their transfer balance cap. Where an individual’s transfer balance accounts exceed their transfer balance cap, the ATO will issue a determination requiring the excess amount to be removed from retirement phase.

In addition, these excess transfer balance amounts are subject to tax, initially at 15% but increasing to 30% for breaches in subsequent years.

Similarly, the tax exemption on earnings for pension assets supporting Transition to Retirement Income Streams (TRISs), also known as transition to retirement pensions (TTRs) was removed from 1 July 2017. From that date, earnings from assets supporting TRISs were taxed at 15% instead of 0%. TRISs have traditionally been used by individuals who have reached their preservation age but do not want to retire.

According to recent research, at June 2018, one year after the sweeping superannuation changes came in, SMSF asset value in accumulation phase was approximately $422bn. This was a 90% increase from March 2017 (before the changes) when asset value in accumulation was around $222bn.

Based on simple modelling (not taking into account contributions tax, deductible expenses, and rebates), assuming a modest return of 5% on assets for the 2018 income year, this increase of SMSF asset value in accumulation phase would result in $3.2bn worth of tax on SMSF earnings. This equates to a $1.5bn increase from the 2017 year.

However, it’s not all doom and gloom for the SMSF sector after the changes, one ray of sunshine in the research is that the changes have led to new strategies being implemented which significantly improved gender imbalance in SMSF assets and balances. Two of the most notable strategies used include:

  • contributions splitting which involve a member of an accumulation fund splitting superannuation contributions with his or her spouse to equalise their total superannuation balances to counter the $1.6m transfer balance cap.
  • re-contributions strategy which involve withdrawal and re-contributions to a spouse’s superannuation account to equalise total superannuation balances up to $1.6m each (subject to the non-concessional contributions limits).

Are you affected?

Is your fund affected by this? Talk to us today, we may have a strategy to help you reduce the taxable proportion of your SMSF assets. Alternatively, if you’re thinking of commencing a TRIS we can help you navigate the tricky laws around this area and make sure you get the maximum benefit from your hard-earned superannuation.

 

ATO holds millions in unclaimed refunds after 200k skipped lodgement

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With the deadline of 31 October for self-preparers edging closer, the ATO is looking to drive lodgement compliance, with about 7 million completed returns lodged so far this tax time.

Broken down, about 4.3 million taxpayers have lodged via a tax agent, with just over 2.7 million taxpayers having lodged their own returns through myTax.

“We estimate there are 200,000 individual salary and wage earners who are likely to have been either due a refund or owed a small amount of tax, but who had not lodged a tax return. Collectively, these clients have millions of dollars of unclaimed refunds,” said ATO Assistant Commissioner Kath Anderson.

“There are a few reasons why Australians might not lodge even if they are due a refund. Some might not lodge because they don’t realize they need to – maybe they are on a low income or haven’t worked recently. Others might be worried about lodging because they haven’t lodged for several years, which often causes them stress and anxiety.”

“We know some people put off lodging because they think they’ll owe money, but for self-preparers the payment is due on 21 November whether or not a return is lodged.”

According to the Tax Office, over 98 per cent of refunds have been issued within 12 business days this year.

However, it has warned against making some common errors, including not declaring all income streams and over-claiming deductions, with over 112,000 tax returns corrected over the first two months of tax time 2018, totalling more than $53 million.

 

Source: Article from Accountantsdaily.com.au

Are You An Australian Resident?

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In this global interconnected world, many Australians will no doubt leave Australia to work in many different countries in a vast array of professions. However, just because you leave Australia for a period time, that doesn’t mean that your Australian tax obligations are no longer relevant. Australian tax is based on the concept of “residency”. If you’re considered to be a resident of Australia then you will be taxed on your worldwide income with a tax offset available for any foreign tax paid.

To work out whether or not you’re a tax resident of Australia, there are several tests. The main test is the “resides” test under common law. This test is generally applied by considering your circumstances over the whole relevant year.

Rather than simply looking at the time spent in Australia, the question is whether your behaviour over a considerable period of time (6 months according to the ATO) has the degree of continuity, routine, or habit that is consistent with residing in Australia.

Some of the factors considered to be relevant in determining residency under this primary test include: your living arrangements (i.e. whether your usual place of abode is in Australia and whether you have family here, or whether any children are enrolled in school etc); the purpose, frequency and duration of visits to Australia; extent of any business/employment ties with Australia; extent of family/social ties with Australia; ownership of real estate in Australia; location of other assets and personal effects; where bank accounts are maintained; and nationality and citizenship.

As you can see, this primary test is entirely dependent on the individual circumstances of each case, and one change could sway the residency test one way or the other. It is also wholistic in that it encompasses almost every aspect of a person’s life and thus very complex to apply especially when you have to weigh certain factors against others.

If it is clear that you don’t satisfy the “resides” test, you will still be considered to be an Australian resident if you satisfy one of the following three statutory tests:

  • Domicile and permanent place of abode – you will be considered to be an Australian resident if Australia is your permanent home (note permanent doesn’t mean everlasting or eternal but is rather contrasted with temporary).
  • 183-day test – if you’re present in Australia for more than half of the income year, whether continuously or with breaks, then you will have constructive residence in Australia unless it can be established your usual place of abode is outside of Australia and you have no intention of taking up residence here.
  • Commonwealth superannuation test – If you’re a member of a Commonwealth government superannuation scheme or have a relationship to a member of such a scheme then you will be considered to be a resident of Australia.

A person’s residency is determined on a year-by-year basis and the Commissioner may treat an individual to be a resident of Australia until it can be clearly established that they have cut all relevant ties with Australia. Residency is a complex area, if you’re unsure or you think you’re on the borderline of being an Australian resident, a tax professional should be consulted before you make any decisions with tax consequences.

Are you going to work overseas or thinking of working overseas?

Before you head overseas to work or start a business, come and see us, we can help you figure out if your individual circumstance would make you an Australian resident once you leave. Or if you no longer wish to be an Australian resident and would like to start overseas with a clean slate, we can help you with that, too.

 

Garnishee Orders May Bring Home The Bacon

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Issuing a garnishee order is a cheap and easy way to claw back some of your debt, but there are a few matters to consider first.

Bypass your debtor and go straight to the source of their funds

Once the court has given you a judgment against your judgment debtor, and they have failed to satisfy the judgment, you can apply to the court for a garnishee order. This allows you to bypass the recalcitrant debtor and it sets up a relationship in the form of a triangle between you as creditor, the debtor and the third party.

This third-party garnishee acts as a kind of proxy for the debtor and the order will require them to pay the debt to you in a lump sum or in instalments.

A garnishee order can be directed straight to the debtor’s bank or their employer. In the latter case, you will be able to access the debtor’s pay packet before they do. You do not have to tell the debtor you have applied for a garnishee order and they may only find out when they see their bank statement or pay slip. However, the local and district courts instruct that the amounts claimed in total under the garnishee orders must not reduce the judgment debtor’s net weekly wage or salary received to less than $500.60.

This is known as the weekly compensation amount and is adjusted in April and October each year. When issuing a garnishee order, it must include an instruction to the garnishee about the amount that a judgment debtor is entitled to keep.

Garnishee orders can also be made against those who owe money to the debtor, for example a real estate agent who is collecting the rent from the debtor’s tenanted property.

Benefits galore of a garnishee order

One of the benefits of a garnishee order is that there is no filing fee, although a service fee may be payable. There is also no extensive research on the debtor required before the order is issued, the debtor’s name may be enough. And if the order fails to recover all or some of the money, the order can be reissued on the same garnishee several times.

There is also little the garnishee can do to stop the order unless they apply to the court or they repay the debt.

Guidance on garnishing

If you have received a judgment and have an outstanding debt you are trying to recover from your judgment debtor, we can help take the lead on it for you and take you straight to the debtor’s funds.

 

Age Pension Eligibility Rule

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The Government has announced that the Age Pension eligibility age will not go up to 70, as planned. But it is still going up, as is the superannuation preservation age.

The move to take the Age Pension eligibility age up to 67 was legislated by the last Labor Government. The process started in July last year, when Age Pension age went up from 65 to 65 and six months. It is scheduled to go up by six months every two years until 2023, when it will be 67.

The proposal to take Age Pension age up from 67 to 70 was announced in the 2014 Federal Budget. The plan was that from July 2025 the eligibility age would start increasing above 67 until it reached age 70 by July 2035.

The move up to age 70 was included in a bill that was never passed. This means that the decision announced by the Prime Minister last week does not require any legislative amendment.

The move up to age 67 will continue as planned.

The Government also introduced changes to the assets and income tests last year, which have a bearing on Age Pension recipients. Once you get to Age Pension age, the Department of Human Services, will apply a couple of tests to see whether you are entitled to a full or part pension.

Assets test. A single home owner can hold assets worth $258,500 before having the full age pension entitlement reduced. For a single non-home owner, the limit is $465,500.

A home owning couple can hold assets worth $387,500 before having their full age pension entitlement reduced. For a couple who do not own a home the limit is $594,500.

Assets included in the test include superannuation accounts, shares and other financial assets, investment property, business assets, motor vehicles, boats and caravans, collectibles. The family home is exempt.

The Department of Human Services updates these limits in January, March, July and September each year.

For each $1000 of assets over the threshold pension payments are reduced by $3.

Applying this taper rate, a single home-owner’s part pension runs out when asset value reaches $561,250. For a single non-home owner, the part pension runs out when assets reach $768,250.

A home owning couple’s part pension runs out when their asset value reaches $844,000. A non-homeowner couple’s part pension runs out when their assets reach $1.05 million.

Income test. A single person can earn up to $172 a fortnight ($4472 a year) without any reduction in their pension. The pension is reduced by 50 cents for each dollar of earnings over $172. When earnings reach $1987.20 a fortnight the pension cuts out altogether.

A couple can have combined income of up to $304 a fortnight ($7904 a year) without any reduction in pension entitlements. The pension is reduced by 50 cents for each dollar of earnings over $304. When earnings reach $3040.40 a fortnight the pension cuts out altogether.

Preservation age. While the eligibility age for the Age Pension will stop increasing at age 67, the age at which people can get access to their superannuation is still going up

The age at which people can get access to super, under normal circumstances, is called the preservation age. It used to be 55 for everyone but the rules have changed. Here is how it works now:

  • If before July 1, 1960 your preservation age is 55.
  • If date of birth is between July 1, 1960 and June 30, 1961, your preservation age is 56.
  • If date of birth is between July 1, 1961 and June 30, 1962, your preservation age is 57.
  • If date of birth is between July 1, 1962 and June 30, 1963, your preservation age is 58.
  • If date of birth is between July 1, 1963 and June 30, 1964, your preservation age is 59.
  • If date of birth is after July 1, 1964 your preservation age is 60.

There are some circumstances where you can get your super out early but they are very limited and relate mostly to serious medical conditions and severe financial hardship.

To get access to your super you must satisfy what is called a “condition of release”. In addition to reaching the preservation age you need to retire from full time work.

Once you reach age 65 you can take your super, even if you are still working.

Meaning Of Independent: Financial Advisers

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With all the media coverage around the negative behaviour of many large financial advisory firms and their affiliates, you may be forgiven for wanting to deal with a smaller, perhaps more independent financial adviser in the future, but what exactly does “independent” mean in in terms of financial services?

Under the Corporations Act, a person who carries on a financial services business or provides financial advice is prohibited from using the terms “independent”, “impartial”, or “unbiased” or any other term “of like import” in relation to the business or service, except where the person meets certain conditions. This condition is continually monitored by ASIC and it does take steps to intervene when it discovers false claims.

In one recent example, ASIC required four financial advice companies to cease and amend false claims of independence that could mislead consumers. The claims were made on websites and in some cases, in the marketing materials of the companies.

ASIC said it “will continue to publicly name advisers who do not comply with their obligations…and where appropriate, take action to enforce the obligations…and to ensure consumers are not mislead about the nature of the service they are receiving”.

So, what are the conditions that a financial services business have to satisfy to use terms such as “independent”? Basically, these restricted terms can only be used if the business does not:

  • receive commissions (other than commissions that are rebated in full);
  • volume-based payments (ie forms of remuneration calculated on the basis of the volume of business placed by the person with an issuer of a financial product); and
  • other gifts and benefits from product issuers which may reasonably be expected to have influence.

In addition, the business is expected to operate without any direct or indirect restrictions relating to the financial product and be free from conflicts of interest that may arise from relationships with product issuers (which might reasonably be expected to influence the person). It is ASIC’s view that words such as “independently owned”, “non-aligned”, “non-institutionally owned”, and other similar expressions must also satisfy those conditions.

If you go to a financial adviser that holds themselves out to the “independent” or the like, you can expect them to not receive commissions, volume-based payments or have conflicts of interest. However, “independent” financial advisers are still able to receive asset-based fees without affecting their ability to use restricted terms.

Independent financial advisers would also be more likely to have an open list of products in their approved product list (APL) and have an easy process to recommend a product that is not on the (APL) should you wish to invest in those particular products. Any restrictions whereby an off-APL process is not easy to access would be considered to be a restriction and therefore, the financial services business would not be permitted to use a restricted term such as independent.

Looking for a financial adviser?

The independence of financial advisers is an important issue and may sway decisions about investments as well as choice of advisers. If you’re looking for a financial adviser that’s independent, remember to look out for the use of restricted terms. If you’re after some simple financial advice around your super fund or just some general advice, an accountant with a limited AFSL licence may be able to help. Contact us today to find out more.

 

Reform Of The ABN System

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In Australia, there are currently around 7.7m ABNs with over 860,000 new ABNs issued in 2017-18. The ABN system was originally introduced in 2000 as a way to provide businesses with a unique identifier when dealing with the government and to support the introduction and administration of GST. Over the years, the ABN has become a de facto licence to do business and a key business credential used by other businesses and consumers in general.

Despite this expanded role, the ABN system has not changed substantially since 2000, ABNs can still be obtained easily and quickly using intentionally simple processes to facilitate small businesses. There is concern that this ease of application has led the ABN system to being used for nefarious purposes by operators in the black economy.

This view was affirmed by Black Economy Taskforce which found that ABNs were being used to provide a false sense of legitimacy to dodgy businesses with the potential to deceive consumers and other businesses. 

As a way to tackle this issue, the government has proposed changes to the ABN system to ensure that it remains fit to support the expanded range of purposes it is used for. It is currently consulting on changes including adjusting ABN entitlement rules, imposing conditions on ABN holders, and introducing a renewal process including a renewal fee.

The potential changes to ABN entitlement rules stem from the Taskforce finding that not everyone obtaining an ABN is entitled. This includes: inappropriate use of ABNs in phoenixing schemes; individuals working as employees but applying for ABNs as independent contractors; individuals incorrectly obtaining ABNs to avoid “no ABN withholding”, and individuals fraudulently claiming GST input tax credits.

In response, the taskforce recommended that certain groups (such as apprentices and individuals on tourist visas, as well as workers in certain industries) be excluded from obtaining an ABN. Another avenue to restricting ABNs that is currently being developed by the ABR and ATO include an application experience based on the applicant’s risk profile which may involve stronger entitlement checks before an ABN can be obtained.

In terms of potentially imposing conditions on ABN holders, the Taskforce had initially recommended that ABN holders should only be allowed to continue to hold their ABN if they comply with government obligations (ie tax obligations). Which would allow businesses and individuals to better identify compliant businesses and act as a deterrent to those wanting to engage in black economy behaviour. However, the government emphasised that the design of the ABN cancellation process would need to be fair and transparent and only occur where the business had not taken appropriate steps of rectify issues.

Finally, the government is also consulting on the proposal to make ABNs subject to periodic renewal for a fee as recommended by the Taskforce. While a renewal process would not directly address those who use the ABN system to engage in fraudulent behaviour, it would indirectly address fraudulent behaviour by prompting ABN holders to have a closer engagement with the ABN system. The fee would also assist the ABR to better support data needs and discourage people from holding an ABN when they do not need one or are not entitled to one.

 

Superannuation Payout upon Death

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Do you ever wonder what happens to your superannuation after you die? This is particularly important if you have a Self-Managed Superannuation Fund (SMSF).

To assist SMSF members to understand the requirements of the superannuation and taxation laws, the article – by Monica Rule (an SMSF expert) has provided answers to common questions asked by SMSF clients.

Can my superannuation savings remain in my SMSF after my death?

Death is a compulsory payment situation under the superannuation law.   It means, the deceased’s superannuation cannot remain in their accumulation and/or pension account.  It must be paid out of their SMSF either to their dependants or their legal personal representative.

In what form does the deceased’s superannuation need to be paid?

The form of payment will depend on what is allowed by the deceased’s SMSF trust deed.  However, the law allows the deceased’s superannuation to be paid either as a pension and/or a lump sum death benefit.  Under the superannuation law, only the deceased’s dependants such as a spouse, a child under the age of 18, a child up to age 24 who was financially dependent on the deceased prior to their death, and a child of any age with a disability can receive the deceased’s superannuation as a pension. Other dependents such as an adult child and the legal personal representative can only receive the death benefit as a lump sum.

What happens to the deceased’s retirement pension upon death?

If the deceased’s pension is a reversionary pension, then it can continue to be paid to the nominated beneficiary, such as their spouse. If it is a non-reversionary pension, then the pension will cease upon their death, and can be paid out to the surviving spouse either as a new death benefit pension and/or a lump sum death benefit.  Paying the deceased’s pension to their spouse will satisfy the compulsory payment situation as it is no longer in the deceased’s superannuation account.

Is it only the reversionary pension that can be “reverted” to my spouse? What about Transition to Retirement Income Streams (TRIS)?

A reversionary pension can revert to your spouse and continue to be paid.  However, under the current law, a transition to retirement income stream (TRIS) cannot revert to your spouse unless your spouse has met a condition of release such as having reached the age of 65 or reached their preservation age and retired.  This does not mean, however, that a new death benefit pension cannot commence from the SMSF and be paid to your spouse.  In addition money in the deceased’s accumulation account can be paid as a death benefit pension to the surviving spouse. The surviving spouse needs to ensure that all their pension accounts (i.e. their own retirement pension plus the death benefit pension) do not exceed the current transfer balance cap of $1.6 million.

Is there a time period in which the deceased’s superannuation must be paid?

The deceased’s superannuation must be paid “as soon as practicable”.  The Tax Office will normally allow up to six months for payment. If it takes more than six months, then the SMSF trustee may need to explain the reason for the delay.  The Tax Office may accept reasons such as the death benefit nomination being challenged by beneficiaries, or the uncertainty of eligible beneficiaries.  But if the trustee just took their time to pay out the death benefit without good reason, then the Tax Office may take compliance action against the SMSF.

Can assets be used to pay a death benefit?

A lump sum death benefit can be paid using assets.  However, a pension cannot be paid using assets.  If a pension is either partially or fully commuted, then the commutation amount can be paid as a lump sum death benefit using assets.  The pension recipient needs to ensure that the minimum pension payment requirements are met prior to the commutation.

Under the individual trustee structure, how long does the surviving spouse have before the second trustee needs to be appointed?

Once an SMSF becomes a single member SMSF, it has six months to restructure.  This means, if the surviving spouse wants the SMSF to remain under an individual trustee structure, a second trustee will need to be appointed prior to the expiration of the six-month time period.

Is the remaining trustee able to make decisions for the SMSF prior to the appointment of the second trustee?

The remaining trustee can make decisions for the SMSF during the six-month period, which includes paying the deceased’s superannuation to their dependants or legal personal representative.

Is the deceased’s transfer balance cap transferable to the surviving spouse?

The deceased’s transfer balance cap (currently $1.6 million) is not transferable to their spouse upon their death.  If their spouse is accessing a retirement pension from the SMSF and will also receive the deceased’s pension, then they need to ensure that the total of both pensions does not exceed the transfer balance cap (currently $1.6 million).  They can do this by either reducing their pension by putting money back into their accumulation account or paying out some of their pension as a lump sum superannuation benefit prior to receiving the deceased’s pension.  The spouse cannot put the deceased’s superannuation into their accumulation account.

When does the deceased’s pension count towards the surviving spouse’s transfer balance cap?

If the deceased’s pension is reversionary, then the amount counted towards the spouse’s transfer balance cap is the amount in the deceased’s retirement pension account on the date of death. This is counted towards the spouse’s transfer balance cap twelve months from the date of death.  If the pension is non-reversionary then the amount paid to the spouse will count on the date it is paid.

It is important for SMSF members to take an interest in the superannuation law.  By understanding the law, members can ensure their superannuation is passed onto their loved ones with a minimum of fuss.

Please note this not an advice. It is merely outlining the current tax laws in related to SMSFs. Clients should seek their own advice.

 

It Follows: Higher Education Debts

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It might seem like a horror movie cliché, a monster that follows you wherever you go, but did you know that your higher education debts under the Higher Education Loan program (HELP), Trade Support Loan (TSL) or the Higher Education Contribution Scheme (HECS) debts follow you wherever you go in the world?

Prior to 2017, individuals could incur these higher education debts and move overseas with no repayment obligations. However, these debts are now required to be repaid regardless of where you are in the world, as long as your worldwide income is over a certain threshold. This applies regardless of whether your debt was incurred before or after 2017. As long as you have a higher education debt to the Commonwealth of Australia, you are required to repay the debt regardless of where you reside

If you have a higher education debt and plan on going overseas, you will need to update your contact details and submit an “overseas travel notification” if you intend to go overseas for 183 days or more in any 12 months. 

This includes for any reason such as holiday, study or work. The 183 days is counted cumulatively and does not have to be taken all at the same time. For example, you could go on a holiday for a few months in one country, come back to Australia for a few months and then travel to another country. As long as it exceeds 183 days in total in any 12 months period you will have to submit an “overseas travel notification”.

Once you’ve submitted the notification and have moved overseas, or if you’re already living overseas and have a HELP, HECS or TSL debt, the next step is to report your worldwide income to ATO every year through an Australian tax return. Lodgments are usually due by 31 October each year, but it may be extended if you use a tax agent. For the 2018-19 year, your worldwide income will need to exceed $51,957 before the ATO will raise a compulsory repayment (overseas levy) in relation to your higher education debt. The repayment rate depends on how much worldwide income you earn and range from 4% to 8%.

For the 2018-19 year, if your worldwide income is at or below $12,989 you do not have to report your worldwide income but you will need to lodge a “non-lodgment advice form” to notify the ATO of your situation. If you find yourself in financial hardship while overseas and cannot afford the compulsory repayment even though you earn above the minimum repayment threshold, you can apply to the ATO to defer the payment.

Remember, you have options when you report your worldwide income to the ATO, you can choose between one of three assessment methods that work the best with your situation, the self-assessment method, the overseas assessment method, or the comprehensive tax-based assessment method. If it all seems too complicated you can always reduce your debt before you head overseas by making voluntary repayments.

Need guidance?

If you’re going overseas and you have a higher education debt, we can help you get your house in order and lodge your returns with the ATO while you’re away. We can also help you work out which assessment method is the best for your situation if you’re already overseas and you’re not sure what the best method is.