The Government has delivered tax cuts. So how much will you get?

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The Government’s income tax cuts have been passed by the Senate.

It is the second major tax cut in two years.

This is what that means for you.

This year: Modest cuts for most Australians

Modest tax cuts are available to millions of Australians almost immediately.

People earning between about $21,000 and up to $126,000 in the 2018-19 financial year will receive a boost.

But the laws apply unevenly across this group.

Income in 2018-19 Tax cut
$25,000 $255
$40,000 $580
$60,000 $1,080
$90,000 $1,215
$120,000 $315

There will be no increase for those on Newstart.

In four years: Boost for wealthier Australians

In 2022-23, a second phase of tax cuts arrive.

Ultimately, wealthier Australians will pay less due to a combination of changes to tax offsets and income thresholds.

Although this group mostly missed out on the benefits of stage one, in four years’ time they will be the big winners.

Those earning $120,000 or more will be $2,565 better off each year.

In six years: Boon for wealthiest Australians

Two years further down the track, the most controversial component of the package kicks in.

One whole tax threshold will be removed, leaving just four, and the tax rate for another threshold will be cut.

It will mean that once someone earns $45,000 in one year, every additional dollar they bring in that year will be taxed at the same rate — 32 per cent — up to $200,000.

This delivers massive cuts for those with an income close to $200,000.

For example, someone on $180,000 will be $8,640 better off.

  Stage 1 Stage 2 Stage 3
Income Tax Cut from 2018-19 Tax Cut from 2022-23 Tax Cut from 2024-25
$ 30,000 $ 255 per year $ 255 per year $ 255 per year
$ 60,000 $ 1,080 per year $ 1,080 per year $ 1,455 per year
$ 90,000 $ 1,215 per year $ 1,215 per year $ 2,340 per year
$ 120,000 $ 315 per year $ 2,565 per year $ 4,440 per year
$ 150,000 $ 135 per year $ 2,565 per year $ 4,440 per year
$ 180,000 $ 135 per year $ 2,565 per year $ 8,640 per year

 

Source: Extracted from www.abc.net.au

Tax Tips for Small Business

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PRE-1 JULY 2019 TO-DO LIST
  • Make trust resolutions
  • Document the streaming of trust capital gains and franked dividends
  • Review private company loans
  • Consider deferring certain income, and bringing forward certain deductible expenses
  • Write-off bad debts
  • Pay employee bonuses and employee superannuation entitlements
RECORD-KEEPING TIPS
  • Record cash income and expenses
  • Account for personal drawings
  • Record goods for your own use
  • Separate private expenses from business expenses
  • Keep valid tax invoices for creditable acquisitions when registered for the goods and services tax (GST)
  • Keep adequate stock records
  • Keep adequate records to substantiate motor vehicle claims
MAXIMISE DEPRECIATION DEDUCTIONS

A key feature for small business in the 2019-20 Federal Budget on 2 April 2019 was the announcement that a small business entity (SBE) may potentially qualify for an asset write-off one under one of three varying caps during the year ended 30 June 2019.

A medium sized business entity (MSBE) will also be able to claim the instant asset write-off in respect of a depreciating asset that is both first acquired for a cost of less than $30,000 on or after 7.30pm on 2 April 2019 which is used or installed ready for use by 30 June 2020.

The write-off amount will depend on the date the asset is first used or installed ready for use for a taxable purpose. For businesses registered for GST, the threshold is calculated on a GST-exclusive basis, but for businesses not registered for GST, the threshold is calculated on a GST-inclusive basis.

Entity type   Data acquired Time depreciating asset first used or installed ready for use for a taxable purpose  Asset cost threshold 
Small business entity From 7.30pm 12 May 2015 1 July 2018 – 28 January 2019 $20,000
Small business entity From 7.30pm 12 May 2015 29 January 2019 – 7.30pm 2 April 2019 $25,000
Small business entity From 7.30pm 12 May 2015 7.30pm 2 April 2019 – 30 June 2020 $30,000

Where the cost of the asset is not available for the instant asset write-off deduction, it will be allocated to the general small business pool and depreciated at a rate of 15 per cent regardless of the date of acquisition during the 2019 year, provided the asset starts to be used or is installed ready for use during the year ended 30 June 2019.

For assets included in the pool at the start of the 2019 year, the opening pool balance will be depreciated at the rate of 30 per cent. Where a balancing adjustment occurs during the year, the asset’s termination value must be deducted from the pool.

However, where the closing balance of the SBE’s general small business pool is less than $30,000 as at 30 June 2019, the SBE will be entitled to a full deduction for the amount of the pool’s closing balance.

MAKE SURE YOU PAY THE CORRECT COMPANY TAX RATE AND APPLY THE CORRECT RATE FOR IMPUTATION

Most companies with an aggregated annual turnover of less than $50 million will pay tax at 27.5 per cent in 2018-19. However, some companies with a turnover below $50 million will continue to pay tax at 30 per cent, especially companies that earn nearly all their income from passive investments such as rental income or interest income.

To qualify for the lower tax rate in 2018-19:

  • a company must have an aggregated turnover of less than $50 million, where aggregated turnover is the sum of the company’s ordinary income and the ordinary income of any connected affiliate or entity
  • no more than 80 per cent of their assessable income is base rate entity passive income (replacing the requirement to be carrying on a business).

The full company tax rate of 30 per cent applies to all companies that are not eligible for the lower company tax rate.

As a corollary to the base rate passive entity income rules in determining the tax rate of a company, there have also been changes to the dividend imputation rules that apply to the franking of dividends by a company.

The company tax rate for franking distributions needs to assume that the aggregated turnover, assessable income, and base rate entity passive income is the same as 2017-18.
Where the company did not exist in the previous year, its corporate tax rate for imputation purposes will be deemed to be at the lower corporate tax rate of 27.5 per cent for that initial year.

These differential rates create a number of complexities for companies, especially companies holding investments, as well as for the owners of companies. Your registered tax agent is best placed to assist you with these issues.

SMALL BUSINESS INCOME TAX OFFSET

You will be entitled to the small business income tax offset for the year ended 30 June 2019 if you carry on business and your aggregated turnover for the 2019 year is less than $5 million. The offset rate is 8 per cent of the income tax payable on the portion of an individual’s taxable income that is their ‘total net small business income’.

The ATO will work out the offset based on the net small business income earned as a sole trader and share of net small business income from a partnership or trust, as reported in the income tax return.

SMALL BUSINESS CGT CONCESSIONS

There are significant tax savings potentially available where an eligible active asset used in a business is sold for a profit and the taxpayer can satisfy either the $6 million maximum net asset value test immediately before the CGT event or the $2 million CGT small business entity test for the 2019 year.

Additional conditions must now be met when a taxpayer disposes of an active asset being a share in a company or an interest in a trust on or after 8 February 2018.

Given the complexity of the small business CGT concessions, taxpayers should consult their registered tax agent for advice.

MAKE TRUST RESOLUTIONS BY 30 JUNE

As always, trustees of discretionary trusts are required to make and document resolutions on how trust income should be distributed to beneficiaries for the 2018-19 financial year by 30 June.

If a valid resolution is not executed by 30 June, any default beneficiaries under the deed will become presently entitled to trust income and subject to tax (even where they do not receive any cash distribution), or the trustee will be assessed at the highest marginal tax rate on any taxable income derived but not distributed by the trust.

A trustee must be able to show how an effective resolution was made through minutes, file notes or an exchange of correspondence documented before year end. However, the trust’s accounts do not need to be prepared by 30 June.

As a corporate trustee may need time to notify its directors that a meeting must be convened to pass and record a resolution, such a notice should be sent out well before the 30 June deadline.

DOCUMENT THE STREAMING OF TRUST CAPITAL GAINS AND FRANKED DIVIDENDS TO BENEFICIARIES

Broadly, trustees of discretionary trusts can stream capital gains and franked dividends to different beneficiaries if the trust deed allows the trustee to make a beneficiary “specifically entitled” to those amounts. The trustee must document this resolution before 30 June and the beneficiary receives or is entitled to receive an amount equal to the net financial benefit of that gain or dividend.

These streaming rules are complex, and taxpayers should consult their registered tax agent for advice.

CLAIM DEDUCTIONS FOR PROFESSIONAL ADVICE WHEN STARTING A BUSINESS

Professional expenses associated with starting a new business, such as legal and accounting fees, are deductible in the financial year those expenses are incurred rather than deductible over a five-year period as was the case previously.

If you established a business during the year, you should speak to your registered tax agent about claiming professional advice fees as an expense.

CONSIDER TAX IMPACTS FROM ANY RESTRUCTURING

Small businesses can change the legal structure of their business without incurring any income tax liability when active assets are transferred by one entity to another.

This rollover applies to active assets that are CGT assets, trading stock, revenue assets and depreciating assets used, or held ready for use, in the course of carrying on a business.

However, caution must be exercised – business restructuring is complex, so you should first speak to your registered tax agent.

REVIEW YOUR PRIVATE COMPANY LOANS

The income tax laws can potentially treat the following as an unfranked deemed dividend for a taxpayer unless an exemption applies:

  • a payment or a loan by a private company to a shareholder or an associate (like a family member)
  • the forgiveness of a shareholder’s or associate’s debt
  • the use of a company asset by a shareholder or their associate
  • the transfer of a company asset to a shareholder or their associate.

The most common exemption is to enter into a written loan agreement requiring minimum interest and principal repayments over a specified loan term, which may be seven or 25 years depending on whether or not the loan is secured.

There are various things a private company can do before its 2018-19 income tax return needs to be lodged to minimise the risk of a shareholder or an associate deriving a deemed dividend.

Depending on the circumstances, these strategies may include repaying a loan, declaring a dividend or entering a complying loan agreement before the return needs to be lodged.

The rules around private company loans are complex and changing, therefore you should consult your registered tax agent on this.

PREVENT DEEMED DIVIDENDS IN RESPECT OF UNPAID TRUST DISTRIBUTIONS

An unpaid distribution owed by a trust to a related private company beneficiary that arises on or after 1 July 2016 will be treated as a loan by the company, if the trustee and the company are controlled by the same family group. In these circumstances, the associated trust may be taken to have derived a deemed dividend for the unpaid trust distribution in 2018-19.

However, a deemed dividend may be prevented if the unpaid distribution is paid out, or a complying loan agreement is entered into before the company’s 2018-19 income tax return needs to be lodged.

Alternatively, a deemed dividend will not arise if the amount is held in an eligible sub-trust arrangement for the sole benefit of the private company, and other conditions are satisfied.

Trustees and beneficiaries should consult their registered tax agent on the full implications of these very complex rules if applicable.

WRITE-OFF BAD DEBTS

Businesses can only obtain income tax deductions for bad debts when various conditions are met.

A deduction will only be available if the debt still exists at the time it is written off. Thus, if the debt is forgiven or compromised before it is written off as bad in the accounts, no deduction will be available.

The debt must also be effectively unrecoverable and written off in the accounts as bad in the year the deduction is claimed. The bad debt must have been previously brought to account as assessable income or lent in the ordinary course of carrying on a money-lending business.

Certain additional requirements must be met where the creditor is either a company or trust.

CHECK IF THE PERSONAL SERVICES INCOME RULES APPLY

Personal services income (PSI) is income produced mainly from your personal skills or efforts as an individual. You can receive PSI even if you’re not a sole trader. If you’re producing PSI through a company, partnership or trust and the PSI rules apply, the income will be treated as your individual income for tax purposes.

If the PSI rules apply, they affect how you report your PSI to the ATO and the deductions you can claim.

PAYING EMPLOYEE BONUSES

If you pay staff bonuses and you want to bring expenses into the 2018-19 year, ensure they are quantified and documented in a properly authorised resolution – for example, board minutes – prior to year-end to enable a deduction to be incurred for employee bonuses where such amounts are not paid or credited until the subsequent year.

PAY ANY OUTSTANDING SUPERANNUATION ENTITLEMENTS

Ensure superannuation guarantee payments for employees are up-to-date, and report and rectify any missed payments to the ATO.

From 1 April 2019, there are new powers and offence penalties related to the payment of superannuation guarantee obligations.

Employers can also claim deductions for superannuation contributions made on behalf of their employees in the financial year they are made.

PREPARE FOR SINGLE TOUCH PAYROLL

Single touch payroll (STP) reporting has been extended to all employers from 1 July 2019. A number of options are available depending on the number of employees you have, whether they are closely held and whether you report via your tax or BAS agent.

Check with your payroll software provider to find out if your software is STP compliant.

If you don’t currently use payroll software, you should consult your registered tax agent for advice.

SEEK INDEPENDENT ADVICE ON INVESTMENT PRODUCTS PROMOTED AS BEING TAX EFFECTIVE

The end of the financial year often sees the promotion of investment products that may claim to be tax effective.

If you are considering such an investment, seek independent advice before making a decision, particularly from your registered tax agent.

Source: https://www.cpaaustralia.com.au/professional-resources/taxation/tax-tips/small-business.

 

 

TAX TIPS FOR INVESTORS

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RENTAL PROPERTIES

The ATO has received a large boost in funding to close the $8.7 billion individuals tax gap. Part of its focus is to ensure taxpayers are returning all rental income as well as claiming only the rental property expenses to which they are entitled. Some of this additional funding will go to improving the checking of claims in real time, additional audits and prosecutions.

The ATO receives details from Airbnb and other providers which will be data matched against tax returns. From this year, the ATO will receive details of your deductions data from your tax agent or myTax, and a multi-property rental schedule for individuals may be available this year and will be mandatory in 2020.

The ATO’s most recent random checks of rental claims found 90 per cent contained an error and it plans to double the number of audits on rental deductions.

Owners of rental properties that are being rented out or are ready and available for rent can claim immediate deductions for a range of expenses, such as:

  • interest on investment loans
  • land tax
  • council and water rates
  • body corporate charges
  • insurance
  • repairs and maintenance
  • agent’s commission
  • gardening
  • pest control
  • leases (preparation, registration and stamp duty)
  • advertising for tenants.

Landlords may be entitled to claim annual deductions for the declining value of depreciable assets (such as stoves, carpets and hot-water systems), and capital works deductions spread over a number of years (for structural improvements, like re-modelling a bathroom).

Remember that landlords are no longer allowed travel deductions relating to inspecting, maintaining or collecting rent for a rental property.

Further, deductions for the depreciation of plant and equipment for residential real estate properties are limited to outlays actually incurred on new items by investors in residential real estate properties. For example, for properties acquired from 9 May 2017, landlords can no longer depreciate assets that were in the property at the time of purchase. However, should they purchase a new (not used or refurbished) asset, they can depreciate that asset.

Plant and equipment forming part of residential investment properties as of 9 May 2017 will continue to give rise to deductions for depreciation until either the investor no longer owns the asset, or the asset reaches the end of its effective life.

Ensure that interest expense claims are correctly calculated, rental income is correctly apportioned between owners, claims for costs to repair damage and defects at time of purchase are depreciated and that holiday homes are genuinely available for rent.

CAPITAL GAINS TAX PLANNING

Careful planning should be undertaken in planning the timing of the disposal of appreciating assets which may trigger a capital gain. In this context, it is important to recognise that CGT is triggered when you enter into a contract for the sale of a CGT asset rather than on its settlement.

This is particularly important where the entry and settlement of the contract straddle year-end. In these circumstances, it may be preferable from a cash flow perspective to defer the sale of the CGT asset to the subsequent year where other relief may be available, such as a capital loss sold on another asset.

Care should also be taken to ensure that an eligible asset is retained for the 12-month holding period required under the CGT discount, and to recognise that the CGT discount is not available to the extent that any capital gain accrued after 8 May 2012 and you were a foreign resident or temporary resident at any time after that date.

Keep proper records for all of your investments and ensure that you keep them for at least five years after a capital gains tax event occurred.

DO YOU HAVE FOREIGN INVESTMENTS?

If you are an Australian resident with overseas assets, you need to include any capital gains or capital losses you make on those assets in your tax return and may have to include income you receive from overseas interests in your tax return. You can ‘receive income’ even if it is held overseas for you.

If you receive foreign income that is taxable in Australia and you paid foreign tax on that income, you may be entitled to an Australian foreign income tax offset.

Please be aware that the ATO has information exchange agreements with revenue authorities in many foreign jurisdictions, and therefore is likely to receive data on any of your overseas investments and income.

Speak to your registered tax agent about your offshore investments and income.

INVESTMENT PRODUCTS PROMOTED AS TAX EFFECTIVE

The end of the financial year often sees the promotion of investment products that may claim to be tax effective. If you are considering such an investment, seek independent advice before making a decision, particularly from your registered tax agent.

Source : https://www.cpaaustralia.com.au/professional-resources/taxation/tax-tips/investors.

 

Tax Tips For Employees

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CLAIM WORK-RELATED DEDUCTIONS

Claiming all work-related deduction entitlements may save considerable income tax. Typical work-related expenses include employment-related mobile phone, internet usage, computer repairs, union fees and professional subscriptions that the employee paid themselves and for which they were not reimbursed.

Be aware that the ATO has received a large boost in funding that enables a stronger focus on ensuring taxpayers claim only the work-related expenses to which they are entitled.

Some of this additional funding will go to improving the checking of claims in real time, additional audits and prosecutions.

CLAIM HOME OFFICE EXPENSES

When you are an employee who regularly works from home and part of your home has been set aside primarily or exclusively for the purpose of work, a home office deduction may be allowable. Typical home office costs include heating, cooling, lighting and office equipment depreciation.

To claim the deduction, you must have kept a diary of the hours you worked at home for at least four weeks.

CLAIM SELF-EDUCATION EXPENSES

Self-education expenses can be claimed provided the study is directly related to either maintaining or improving current occupational skills or is likely to increase income from your current employment. If you obtain new qualifications in a different field through study, the expenses incurred are not tax deductible.

Typical self-education expenses include course fees, textbooks, stationery, student union fees and the depreciation of assets such as computers, tablets and printers.

Higher Education Loan Program (HELP) repayments are not deductible. You must also disallow $250 of self-education expenses, which can include non-deductible amounts such as child-care costs.

CLAIM DEPRECIATION

Immediate deductions can be claimed for assets that cost under $300 to the extent the asset is used to generate income. Such assets may include tools for tradespeople, calculators, briefcases, computer equipment and technical books purchased by an employee, or minor items of plant purchased by a landlord.

Assets costing $300 or more that are used for an income producing purpose can be written off over a period of time as a tax deduction.

The amount of the deduction is generally determined by the asset’s value, its effective life and the extent to which you use it for income-producing purposes.

MAXIMISE MOTOR VEHICLE DEDUCTIONS

If you use your motor vehicle for work-related travel, there are two choices of how you can claim.

If the annual travel claim does not exceed 5000 kilometres, you can claim a deduction for your vehicle expenses on the cents-per-kilometre basis. This figure includes all your vehicle running expenses, including depreciation.

The allowable rate for such claims changes annually; this year’s rate can be obtained from the ATO or your CPA Australia-registered tax agent.

You do not need written evidence to show how many kilometres you have travelled, but the ATO and therefore your tax agent may ask you to show how you worked out your business kilometres. The ATO has flagged concerns that taxpayers are automatically claiming the 5000-kilometre limit regardless of the actual amount travelled.

If your business travel exceeds 5000 kilometres, you must use the log book method to claim a deduction for your total car-running expenses.

You can contact your CPA Australia-registered tax agent to clarify what constitutes work-related travel and which of the above methods can be applied to maximise your tax position.

CLAIM DONATIONS

The ATO will pre-fill your tax return with the gifts and donations information they have received. Make sure to add in any donations not included where the receipt shows your donation is tax deductible.

If you made donations to an approved organisation through workplace-giving, you still need to record the total amount of your donations at this item.

Your payment summary, or other written statement from your employer showing the donated amount, is sufficient evidence to support your claim. You do not need to have a receipt.

CONSIDER SALARY SACRIFICE ARRANGEMENTS

You may wish to review your remuneration arrangements with your employer and forego future gross salary in return for receiving exempt or concessionally taxed fringe benefits and/or making additional superannuation contributions under a valid salary sacrifice arrangement.

You should consult a licensed financial planner to consider the merits of exploring these options.

SUPERANNUATION CONTRIBUTION LIMITS

Watch your superannuation contribution limits. You may wish to consider maximising your concessional or non-concessional contributions before the end of the financial year, but keep in mind the contribution caps were reduced from 1 July 2017.

The concessional contribution cap for the 2018-19 financial year is $25,000. Concessional contributions include any contributions made by your employer, salary sacrificed amounts and personal contributions claimed as a tax deduction by self-employed or substantially self-employed persons.

If you’re making extra contributions to your super, and breach the concessional cap, the excess contributions over the cap will be taxed at your marginal tax rate, although you can have the excess contribution refunded from your super fund.

Similarly, the annual non-concessional (post-tax) contributions cap is only $100,000 and the three-year bring forward provision is $300,000. Individuals with a balance of $1.6 million or more are no longer eligible to make non-concessional contributions.

High-income earners are also reminded that the contributions tax on concessional contributions is effectively doubled from the normal 15 per cent rate to 30 per cent if their combined income plus concessional contributions exceeds $250,000.

Importantly, don’t leave it until 30 June to make your contributions as your super fund may not receive the contribution in time and it will count towards next year’s contribution caps, which could result in excess contributions and an unexpected tax bill.

CLAIM A TAX DEDUCTION FOR YOUR SUPERANNUATION CONTRIBUTIONS

Claiming a tax deduction for personal superannuation contributions is no longer restricted to the self-employed. The rules changed on 1 July 2017 and anyone under the age of 75 will be able to claim contributions made from their after-tax income to a complying superannuation fund as fully tax deductible in the 2018-19 tax year.

Any contributions you claim a deduction on will count towards your concessional contribution cap. Such a deduction cannot increase or create a tax loss to be carried forward.

If you’re aged 65 or over, you will have to satisfy the work test to contribute and if you’re under 18 at 30 June you can only claim the deduction if you earned income as an employee or business owner. Other eligibility criteria apply.

To claim the deduction, you will first need to lodge a notice of intent to claim or vary a deduction for personal contributions form with your superannuation fund by the earlier of the day you lodge your tax return or the end of the following income year.

Source : www.cpaaustralia.com.au

Clients warned on possible car review

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Vehicle-related expenses and even the make and model of the car you drive can attract extra scrutiny from the ATO, an accountant has warned, citing the example of a manufacturing business.

Speaking on the podcast of sister publication, My Business, Alexander Laureti of LMS Advisory revealed that a manufacturing business had its fringe benefits tax (FBT) history reviewed by the Tax Office because of a BMW.

“I did have a phone conversation with an ATO officer not too long ago, and the comment was… [the taxpayer was] in the manufacturing industry, and they had had a number of vehicles actually. The FBT review that came up purely started because the owners of the business had purchased a BMW, a new vehicle, and the business wasn’t registered for FBT,” he explained.

Now there’s nothing sinister or untoward about that; there was a private-use portion that was being claimed, but the ATO didn’t see an FBT tax return being lodged on an annual basis, and they said ‘there’s a BMW in a manufacturing business — why? We’d like to find out more information about this’.

“And a whole questionnaire came out relating to all of the vehicles that were owned for a number of years.”

Mr Laureti urged anyone that has, or is looking to, purchase a luxury vehicle that will be used — either in full or in part — for business purposes to keep detailed records.

“Please make sure that you’re appropriately either registering for FBT or keeping records of your private-use portions, log books, all of the above,” he said.

“Because if you don’t have those records in place and you do come up for ATO review later on, you could get some nasty surprises.”

Brand not only red flag for ATO

It isn’t just the brand of vehicle that can attract the ATO’s attention, Mr Laureti agreed, but also the type of vehicle in question.

“The family car can be such different cars these days, and by the same token, you could take the family around in a four-door ute or you can have your tools of trade on the front seat, you can have all kinds of things that are being carried around. So, the same vehicle could have a different purpose to 50 different owners of [that type] of vehicles,” he said.

“Because the ATO doesn’t know, they will ask the questions, and the problem is that you have got to stop and take the time to answer these questions, and while the ATO is having a look around, what other things might they ask you about?

“Not to say that businesses are out there doing things that are inappropriate on purpose, but everyone just wants to get on with their businesses and not have to stop and be subject to reviews.”

Mr Laureti added: “The great majority of people are doing the right thing, and they’re lodging their tax returns and their compliance all in good faith, and yeah, these reviews are a distraction.”

Source: Article by – Adam Zuchetti (www.accountantsdaily.com.au)

US tax net expansion to hit Aussie clients

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In all the hoopla over the US corporate tax cuts, introduced late in 2017, a change to the way the US Treasury views income earned offshore went almost unnoticed in the world of private clients.

But for American citizens operating businesses in Australia, or Australian companies with a large individual US shareholder, the bite is about to be felt.

The key lies in a sweeping extension of the US tax jurisdiction, which has traditionally covered only the non-business income of corporations owned by US “persons” on an ongoing basis.

In simple terms, any person who is a US citizen is taxed by the US forever, whether they live in the US or not.

People now resident in Australia suddenly discover they need to deal with the problem of being taxed in two countries, either by unwinding or creating structures or dealing with their affairs in a way that means they don’t get double taxed. Frequently, smaller private clients are largely unaware of the vast complexity of the situation they are in.

There are good reasons why the US wants to ensure tax it is owed is collected.

Many of its multinationals operate and generate revenue largely within the nation’s physical borders but have structured their affairs so they are taxed somewhere else.

One way they do this is by holding intangible assets, such as software patents or intellectual property, abroad in low-tax countries.

Part of Trump’s tax cut package included a charge for “global intangible low-taxed income”, known as GILTI for short, which amongst other changes imposes an effective 10.5 per cent tax rate on this income for US domestic corporations.

It was a bid to limit the option for companies like Apple or Google to move IP to areas where corporations pay low tax, and bring at least some of that income back into the US tax net.

But the devil for US citizens lies in GILTI’s detail.

In making the change, the US Congress did not only target international corporations, but also managed to capture the activities of individual taxpayers operating businesses outside the US.

GILTI doesn’t apply just to big companies but to any company overseas in which US citizens have a controlling interest — a controlled foreign corporation, or CFC, as defined by the US.

So, if you are a US person living in Australia, and you set up a company and start running a business, these rules will apply to you.

Your tax exposure then comes down to how the US defines intangible income, and a good example might be to consider a coffee shop.

If a US person comes to Australia, starts a company and opens up a coffee shop, they might spend $100,000 on equipment, furniture, tables and chairs, before they ever open their doors or serve a latte.

The US laws then look at the income and consider what a fair return might be for the company’s investment in assets.

If the coffee shop made $10,000, for example, the US might say the 10 per cent profit can be attributed to a fair return on the physical assets.

But if it made $20,000, the additional $10,000 in profit would now be seen as income from “intangibles”.

In a practical light this is fiction — it is the same return for effort — but under GILTI, the income judged to be intangible now falls into a special tax category.

The first problem is the owner of the company will now be taxed as if they earned that money directly as an individual, rather than through the company.

The second problem is that, by default, there is also no credit for any tax paid in Australia.

Returning to the coffee shop example, the company might have paid 27.5 per cent tax in Australia on the profit from the business, but the US owner will still have to pay individual tax on the full profits to the US Treasury.

If there is no credit from the US for the tax paid in Australia, then the business will have a genuine double tax problem, because there will certainly be no credit from Australian authorities for tax paid in the US.

In the absence of any planning, the US owner could end up with a 70 per cent tax hit on ordinary income from running a business in Australia.

The changes were introduced in 2017 but only took effect for the 2018 tax year. In other words, the effects are just starting to be felt as 2018 returns are filed over the next few months.

Some good news was finally announced in March this year, as US Treasury confirmed the availability of election to mitigate the effects of the GILTI charge. The section 962 election is designed to ensure that an individual doesn’t pay more tax on earnings of a CFC, than if that corporation was domiciled in the US.

But US taxpayers need to act quickly to ensure the election is made in a timely fashion, and need to be aware of exactly how the election and the new rules apply to them.

Corporations may already be well versed in the new rules, but many individuals and small business owners may not have the resources to stay at the forefront of these technical changes.

Overlooking the planning options could be an expensive mistake to make, and GILTI could even become a disincentive for US citizens to invest outside their borders — which is in part the point of the legislation in the first place.

The takeaway for American citizens — or Australian companies in which a US citizen holds a substantial stake — is that the US Treasury has increased the scope of the activity it considers taxable and is not likely to back down.

It’s time to look at your exposure and take steps so you aren’t left holding the bill.

Source: www.accountantsdaily.com.au

How Much Tax Is Taken Out Of My Super Withdrawals?

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If you’re aged 60 or over, you usually won’t pay any tax on super benefits you withdraw. However, if you’re under 60 your benefits will be taxed.

To understand how much tax you’ll pay, it helps to remember that your super benefits are split into two components:

  • The “tax free” component of your benefits is not taxed when you make a withdrawal, even if you’re under 60. This component is the part of your super balance made up of things like non-concessional (after-tax) contributions.
  • The “taxable” component is taxed. This component reflects things like compulsory superannuation guarantee contributions, salary-sacrifice contributions and personal contributions for which you claimed a tax deduction, as well as investment earnings.

You can’t “cherry pick” which component you would like to fund your withdrawal. This means, for example, that if your accumulation account is 80% taxable and 20% tax-free at a particular point in time, any lump sum you withdraw at that time would also reflect this 80/20 split for tax purposes. Similarly, any pension you start at that time would have this 80/20 split locked in from the commencement day of the pension.

Therefore, the bigger your “taxable” component as a percentage of your account balance, the more tax you’ll pay when you withdraw benefits. The applicable tax rates are as follows:

  • Pensions: the taxable part of your pension payments is taxed at your marginal rate, less a 15% tax offset.
  • Lump sums: the taxable part of a lump sum withdrawal is tax-free up to your “low rate cap” of $205,000 (for 2018–2019; set to increase to $210,000 for 2019–2020). This is a lifetime cap that you gradually utilise each time you withdraw a lump sum. Once you have fully utilised your cap, the remaining taxable part of any lump sum is then taxed at 17% (or your marginal rate, whichever is lower).

Several exceptions apply to these rules. First, if you’re receiving certain “disability superannuation benefits” or accessing super before you’ve reached preservation age (eg on “compassionate” grounds), different tax treatment applies. Second, some people such as members of public sector or government superannuation funds are subject to special rules that mean they will pay some tax even if they’re aged over 60.

Planning ahead

It’s worth talking to your adviser to plan the best strategy for your super withdrawals. For example, if you’re under 60, a lump sum may be more tax effective than a pension because of the “low rate cap” discussed above.

However, to access a lump sum before age 65 you must meet a relevant condition of release such as “retirement”, whereas you only need to reach your preservation age in order to access a transition to retirement income stream (TRIS).

Your adviser can also help you explore the possible tax benefit of starting a full account-based pension (ABP). Unlike a TRIS, an ABP requires that you’ve met a relevant condition of release such as retirement, but the advantage is that it attracts a partial or possibly a full exemption from income tax on investment earnings inside the fund. So, as you can see, the decision to access your benefits is best made with professional advice that takes into account a range of factors including:

  • your age;
  • employment status and income;
  • lifestyle/cashflow needs;
  • tax efficiency of running a pension;
  • eligibility for the Aged Pension; and
  • special planning required if you hold more than $1.6 million in super (the current limit on the amount you can hold in full pensions like ABPs).

Need to access your super?

Talk to us today and we’ll help you navigate through the tax rules to get the most out of your retirement savings.

 

ATO fires warning ahead of tax time

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The ATO has released a wide range of case studies of taxpayers cheating the tax system as it signals its hard-line stance ahead of tax time 2019.

The first case involves 56-year-old Peter Garven, who was sentenced in the Sydney District Court to three years and three months’ jail time for fraudulently obtaining and attempting to obtain more than $200,000 from the ATO.

As the sole director of Peter Garven Consulting and Garven Resources, between October 2002 and July 2004, Mr Garven lodged three income tax returns where he fraudulently obtained $102,504 in refunds and attempted to obtain a further $41,758.

Mr Garven claimed to have received salary and wages of more than $150,000 from the University of New South Wales, despite the university having no record of any payments to Mr Garven.

In addition, between August 2002 and July 2004, Mr Garven fraudulently obtained $51,684 in GST refunds on behalf of his two entities, Peter Garven Consulting and Garven Resources.

In 2004, Mr Garven acknowledged that his claims were false and said he would lodge amendments. The ATO never received the amended returns, which triggered audit action.

Following this, Mr Garven failed to appear in court for his trial in March 2009, with a warrant for his arrest issued shortly after. He went into hiding and was registered on the missing persons list. In 2017, he was arrested on a warrant by the NSW Police in the Watagan Mountains.

Mr Garven has also been ordered to repay $154,188.96.

Fraudulent BAS leads to jail sentence

A wholesale distribution company director has also been sentenced to four years and six months’ jail time for fraudulently obtaining and attempting to obtain nearly $600,000.

David Irvine lodged 39 BAS between January 2012 and March 2015. By reporting fake export sales, he reduced the company’s GST payment obligations and fraudulently obtained $480,680 in refunds he wasn’t entitled to.

Mr Irvine also failed to report any income on his personal tax returns for the 2009 to 2011 financial years, resulting in a tax shortfall of $116,056.

Sole trader gets home detention

Linda Taylor was sentenced in the South Australia District Court to two years and nine months to be served on home detention after being convicted of GST fraud made in BAS lodged between April 2013 and September 2015.

Ms Taylor, a sole trader of a home styling business trading as Signature Styling Design Innovation, lodged 32 monthly BAS with the ATO, fraudulently obtaining $138,076 in GST refunds.

The audit found Ms Taylor claimed a total of $2,023,646 in capital and non-capital purchases in her BAS, with her overall reported sales during the same period inclusive of GST being $259,977. To support these claims, Ms Taylor supplied false documents to the ATO.

The court found these claims to be entirely fraudulent. Signature Styling was not entitled to GST refunds that had been claimed and received.

The audit found Ms Taylor used the money obtained to fund private expenses like school and vet fees, meals at restaurants and hotels, as well as significant spending on hair and beauty services, clothing, shoes and accessories.

She has also been ordered to perform 150 hours of community service and pay reparations of $137,936.

Source: www.accountantsdaily.com.au

CGT Strategy highlighted with work test exemption

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In December last year, the government finalised the regulations for the work test exemption measure which enables individuals aged 65 to 74 to make voluntary contributions to superannuation for an additional 12-month period from the end of the financial year in which they last met the work test.

In order to be eligible, they have to have a total superannuation balance of less than $ 300,000. According to the ATO website, the regulations will take effect from 1 July this year.

Advisers Digest director Peter Johnson said one of the ways the exemption could be beneficial for SMSF clients is where they want to sell a significant asset and contribute the proceeds from the disposal of that asset into their super fund.

The client may have an asset they wish to sell that is subject to capital gains. If they sell the asset they are going to have a capital gain, and if they want to contribute the sale proceeds to super, they will have to realise that gain in the same year as they are still working.

Under the work test exemption, however, they may be able to sell the asset and then still contribute the money to super in their first year of retirement, he said.

For a couple, he said, each spouse will be able to contribute $ 100,000 in non-concessional contributions and $ 25,000 in concessional contributions.

The government also made an amendment to the regulations which allows members to trigger the bring forward rules under the exemption, which was restricted under the original draft legislation.

The work test exemption could also be useful for those receiving an employment termination payment in July and will be retiring afterwards, he said.

Source: www.smsfadviser.com

Getting Your Small Business Ready For STP Reporting

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From 1 July 2019, Single Touch Payroll (STP) reporting will become mandatory for all employers. Small businesses (i.e. those with fewer than 20 employees) have previously been exempt, but will now need to take action to ensure they’re ready. These small businesses have a three-month transition period between 1 July and 30 September to get their STP reporting fully operational.

STP is an electronic reporting system that requires employers to submit payroll information such as salaries, wages, allowances, PAYG withholding and superannuation contributions to the ATO directly through their payroll software (or third-party service provider) when they pay their employees. The government says that STP reporting will improve the ATO’s ability to monitor tax and super compliance, and to take action when required.

How does it work?

You’ll still pay your staff according to your regular pay cycle (e.g. monthly or fortnightly), but with the added requirement of submitting payroll information electronically to the ATO each cycle.

Many businesses will take care of this in-house with payroll software that can connect to the ATO. Alternatively, you can arrange for a registered tax or BAS agent to report on your behalf.

You’ll still give your staff a payslip each pay cycle, but you’ll no longer need to prepare payment summaries at the end of the financial year because your staff will be able to access all of their STP payroll information through the ATO website in order to prepare their tax returns.

If your business has “closely held payees” such as family members who are not paid a regular salary or wage, talk to your adviser about flexible STP reporting arrangements that may be available to you.

Simple software solutions

There are many software providers in the market offering STP-compliant software that meets the ATO’s electronic data requirements. If your business already has payroll software, check with your provider whether it has been made STP-compliant and whether you need to download or purchase an upgrade.

If you don’t have existing software or you want to find a new solution, you should refer to the ATO’s website for help finding a provider. As well as publishing a list of all commercially available STP software solutions that it has approved, the ATO has a separate list of “low-cost” and “no-cost” STP solutions that have been designed for “micro” businesses with four or fewer employees. These have been created by third-party software developers and these solutions:

  • cost $10 or less per month (and some are even free);
  • are designed to take only minutes to complete each pay period;
  • don’t require the employer to maintain the software; and
  • include formats like mobile apps, web-based portals, desktop software and other simple solutions.

The ATO is continually updating the list as new products are released.

Need more time?

Small businesses can start reporting any time from 1 July 2019 to 30 September 2019. If you need more time to get ready, you can apply online for a deferred start date through the ATO’s business portal. You can also apply for an exemption from STP reporting for one or more financial years if you operate in an area with poor or no internet.

Get STP-ready

Don’t wait until the last minute – talk to us to get started now. No matter how small or large your business is, we can help you find the right solution to match your STP reporting needs and ensure you’re ready for the deadline.