Newsletter 15 - PERSONAL FINANCIAL STRATEGIES

• Super or Property?
  
• A crack down on tax discrepanices
• Asset protection, a family affair
• Voluntary disclosures for SMSFs
• Implications of pre-GST property
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Federal Budget 2011: A mixture of changes

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YEAR END STRATEGIES 2010/2011

• Changes To SMSF
• Year End Strategies For Property Owners
• Recent Amendments To Division 7A
• Too Much Super?
• The Problems Of Super And Property
• Quick Cash And Super Funds
  At The End Of The Year
• End of Year Tax Checklist
• view now PDF
  

2009 Federal Budget

Last night the 2009/2010 Federal Budget was handed down.  Although we anticipated major changes to our system of taxation and changes to the way business is conducted in Australia, the budget was mainly centered on expenditure across a broad range of areas.  There were very few changes to our current tax system and very few changes that will affect business.

The budget is characterized by a $57.6billion deficit with the government anticipating the debt worm will turn in to a surplus position by 2015.

From a financial planning or tax perspective there was not too many changes as per the previous year’s budgets; the positive point being there was no winding back of the tax cuts announced in last years budget.

Following the budget and seeing a strong deficit emerging that it is evident that working towards being a self funded retiree is even more important for the baby boomers who will be retiring when the aged pension moves to age 67.  This is evident with the back flip in respect to qualification for the health care card for self funded retirees.

One of the significant changes for current retirees was in respect to income testing of pensions; the income test is increasing from 40c in the dollar to 50c in the dollar. There is a transition period and an increase in the pension rates which minimizes the impact.

In respect to government benefits the key numbers for family tax benefit are

Part A       $94,316

Part B       $150,000

Additional income per child $3796

Planning tip: Consider the benefits of agricultural investments, Income protection, and Salary Sacrifice super to qualify for the Family tax benefits.

Please see below for a brief overview of the main announcements.

Budget Overview

A “temporary collapse in revenue” has prompted a “program of responsible borrowing” and “longer term nation building projects” by the Rudd Labor Government, as announced in the Federal Budget. The government hopes that this will provide the stimulus needed for the economy, with the aim of bringing the budget back to surplus in the medium term.

As a result, no significant tax changes were announced, although measures have been proposed to reduce tax concessions for high income earners in the form of superannuation reform and changes to the private health insurance offset. Contrary to speculation, the incentive for first home owners has been extended and so has the small business tax break. Reform of the tax system is high on the agenda but tax cuts announced in last year's Budget will be honoured.

Here are the highlights of the tax and superannuation changes announced in the Budget.

Highlights

This Report outlines the tax and superannuation changes announced in the Budget. Here are the highlights.

Superannuation concessions

The annual cap for concessional superannuation contributions has been halved from $50,000 to $25,000, and the transitional concessional contributions cap has been reduced to $50,000 per year from its former annual limit of $100,000. Whilst there were no changes to the transition to retirement strategy the impact of the reduced concessional contribution needs to be understood. The Non deductible component is expected to be 6 times the concessional amount.

* Planning Tip   Take advantage of the higher deductible limits this year.

The superannuation co-contribution scheme will be reduced to a rate of 100% for contributed amounts for the 2009/10, 2010/11 and 2011/12 years, increasing to      125% for the 2012/13 and 2013/14 years and returning to 150% for the 2014/15 year.

* Planning Tip    Tax plan to qualify for the benefit this financial year.

Individuals and families

From 1 July 2010, the government will introduce three new “Private Health Insurance Tiers” in respect of the Private Health Insurance Rebate

From the 2008/09 year, the Medicare levy low-income thresholds will be increased to $17,794 for individuals and $30,025 for individuals in families.

The First Home Owner’s Boost will be extended for an extra six     months.

From the 2009/10 income year, taxpayers with an adjusted taxable income of over $250,000 will have excess deductions quarantined to the business activity under the non-commercial losses rules.

From 1 July 2009, the foreign employment income exemption will only be available for income earned by aid or charitable workers, government aid workers, and specified government employees.

*Tax Tip Investigate when bonuses or income should be paid for this financial Year

From 1 July 2009, Family Tax Benefit Part A (FTB-A) payment rates will be indexed by the Consumer Price Index. The higher income thresholds for family payments (FTB-A, FTB-B and Baby Bonus) will be maintained at their current level until July 2012.

A Paid Parental Leave scheme will be available to parents for births and adoptions that occur on or after 1 January 2011.

*Tax tip Ensure that you review your deductible expenses prior to June 30 2009 to give yourself the greatest chance of qualifying for the benefits.

From 20/09/2009 payments to pensioners will be reduced by 50c in the dollar above $138 for a single and $240 for a couple, the current pension cut out figure for a single is currently $47444, from Sept 20^th this will be reduced to $38694. For singles and reduced from $72423 for couples to $59228.

The financial planner’s role maintaining many clients’ pension entitlements with the use of exempt income from super, annuities, insurance bonds etc will be increased.

Small Business

A bonus deduction of 50 per cent will be available to small businesses that acquire an eligible asset between 13 December 2008 and 31 December 2009 and install it ready for use by 31 December 2010

The applications of the income test for the entrepreneurs’ tax offset will be deferred for 12 months and commence on 1 July 2009.

The government has made the income recovery subsidy payments for the Victorian bushfires and for the North Queensland floods exempt from income tax.

Certain grants to small businesses and primary producers affected by the Victorian bushfire will be income tax exempt.

Companies and trusts

From 2010/11, the current R&D concession will be replaced by the new R&D tax credit.

From 1 July 2009, the non-commercial loan rules will be extended to payments by way of a licence or right to use real property and chattels.

The government will convert Medibank Private to a “for profit” government-owned business enterprise in early 2009/10.

There has been confirmation that the immediate annuity conditions for life insurance companies did not change when they were transferred to ITAA 1997.

* Planning Tip. With pension rates increasing and qualifying limits increasing annuities are an excellent form of tax advantaged income

Australia’s foreign source income attribution regimes will be reformed.

The government will implement the recommendations of the Board of Taxation to improve the taxation treatment of off-market share buy-backs.

The government will change the thin capitalisation regime for approved authorised deposit taking institutions.

Australian managed investment trusts will be able to make an irrevocable election to apply the capital gains tax regime as the primary code for taxing certain disposals of assets, with effect from the 2008/09 income year.

A limited CGT roll-over will be provided for assets transferred between trusts that have the same beneficiaries with the same entitlements and no material discretionary elements (i.e. fixed trusts).

From 1 July 2010, TFN withholding arrangements will apply to closely held trusts.

Tax administration

The government will provide $595.2m over four years to help businesses remain viable in the face of the global recession, to tackle emerging revenue risks and promote community confidence in the tax system.

Treasury will be provided with additional funding to fund private sector expert input on the practical and commercial issues arising from proposed tax changes.

A discussion paper has been released to progress the Tax Design Review Panel’s recommendation that consideration be given to whether or not the Commissioner should be given further power to modify the tax law to give relief to taxpayers.

Over 100 provisions in the tax laws that provide unlimited amendment periods will be repealed.

Other superannuation and retirement measures

The age pension age will be gradually increased to 67 years of age.

Superannuation funds will be required to align their lost superannuation reporting with unclaimed money regulations and to transfer lost superannuation accounts with balances less than $200 to unclaimed monies.

The minimum drawdown amount for account-based pensions will be halved for the 2009/10 income year.

* Planning Tip: Take advantage of the salary sacrifice limits before they reduce.

The future tax panel's review into retirement incomes has released its report, recommending keeping the superannuation guarantee charge at 9%, increasing the age pension age to 67 years and aligning the age pension with the preservation age.

Australia and New Zealand have agreed in principle to allow movement of superannuation benefits between Australian and New Zealand superannuation funds.

Indirect and other taxes

The administration of GST is to be streamlined, and compliance costs reduced, from 1 July 2010.

The GST law will be amended to clarify the GST treatment of the Carbon Pollution Reduction Scheme.

Countries eligible for the Indirect Tax Concession Scheme have been expanded.

The offshore exploration incentive in the petroleum resource rent tax will be extended by one year.

Carbon Pollution Reduction Scheme

With effect from the introduction of the Carbon Pollution Reduction Scheme all Kyoto units registered in Australia will be subject to the scheme’s proposed tax treatment.

The government will delay the start date of the Carbon Pollution Reduction Scheme by one year to 1 July 2011.

Latest News 2008

Latest News 2007

MAY 2007 BUDGET HIGHLIGHTS

Following the announcements in the May Budget handed down, please find below a brief summary of changes to Income Tax and Superannuation.

Income tax rates.            

Current rates		Effective 1/7/07		Effective 1/7/08
Taxable income	Tax rate	Taxable income	Tax rate	Taxable income	Tax rate
0-$6,000	Nil	0 - $6,000	Nil	0-$6,000	Nil
$6,001 - $25,000	15	$6,001 – 30,000	15	$6,001-$30,000	15
$25,001 – $75,000	30	30,001 – 75,000	30	$30,001-$80,000	30
$75,001 – $150,000	40	$75,001 - $150,000	40	$80,001-$180,000	40
$150,001+	45	$150,001+	45	$180,001+	45

Note this does not include the Medicare levy of 1.5% of taxable income

Low income tax offset

Effective 1/7/07 this offset will increase to $750 (from $600) and phase out from $30,000 (from $25,000).

Senior Australians

The effect of the tax cuts is that from 1 July 2007, senior Australians who receive the Senior Australians Tax Offset (SATO) will be able to earn more income without paying tax.  Singles will be able to have taxable income up to $25,867 (up from $24,867) and couples up to $43,360 (up from $41,360) depending on the income earned by each member of the couple.

Increase in Child Care Benefit Rates

From 1 July 2007 the rate of Child Care Benefit (CCB) will be increased by 10%, on top of normal annual indexation.  CCD is a subsidy paid to families to assist with the cost of care.  Families who a re currently receiving CCB increase of more than 13%. Families will also benefit from the bringing forward of the payment of the Child Care Tax Rebate.

Child Care Benefit Rebate Changes

From 1 July 2007 the existing Child Care Tax Rebate (CCTR) will be converted to a direct payment administered through Centrelink.  The payment of the CCTR will be paid through the Family Assistance Office at he end of each financial year.

Superannuation – Additional Government co-contribution

The Government will pay a one-off additional co-contribution into the superannuation accounts of those persons who made eligible contributions in the 2005-06 income Year.  In the majority of cases the additional co-contribution will be paid to superannuation funds before 30 June 2007.  Remaining amounts will be paid in 2007-08.

This payment will double to co-contribution paid in respect of the 05-06 year.  For example, if a person was eligible for a co-contribution of $1,500 in respect of the 2005-06 year they will now receive an extra co-contribution of $1,500 for the

2005-06 Financial Year.

Capital Gains Tax Changes CGT Rollover – marriage breakdown

The government has announced an extension to the existing CGT rollover of assets of small superannuation funds (complying superannuation funds with fewer than five members) on marriage breakdown.  This change is designed to facilitate complete separation of superannuation assets in these situations and to provide greater choice of fund to the spouse whose interest is transferred. 

Currently the rollover only applies where there is a payment split under the Family Law Act 1975 which results in an asset being transferred from a superannuation fund in which one spouse is a member to another small superannuation fund in which the other spouse is a member.

Under the announced changes effective from 1 July 2007, one spouse in a marriage breakdown will be able to rollover their entire in specie interest in a small superannuation fund to any other complying fund.

Forestry Managed Investment Schemes – tax deductions

The Treasurer restated the changes to the deductibility of investments in forestry managed investment schemes.  As part of the review of the industry, investors may be denied a deduction from their upfront investment in these schemes after 30 June 2008.  However, the government will introduce legislation to provide investors with deductions for their up-front investment in forestry schemes with effect from 1 July 2007.

To qualify, at least 70% of the expenditure incurred by the Forestry scheme must be directly related to forestry.

Forestry Managed Investment Schemes- trading of interests

Under the present rules, investors in Forestry Investment schemes can be restricted from trading in their investments.  This has had an adverse impact upon investment in this area.

To improve investment in Forestry, the Government will allow investors in Forestry to trade in their investments, subject to the investment being held for an initial four year holding period.

GST changes to registration threshold

The Treasurer announced an increase in the GST registration annual turnover effective 1 July 2007.  For businesses, the threshold will increase from $50,000 to $75,000.  For non-profit bodies, the threshold will increase from $100,000 to $150,000.

Voluntary registration and the option of remitting annually will continue to be available.

GST increasing tax invoice threshold

Businesses will be permitted to claim input tax credits for purchase with a GST exclusive value of $75 or less without the need for a valid tax invoice, effective 1 July 2000.  Previously, the threshold was $50.

PAYG Instalments

Effective from 1 July 2008, small business taxpayers will be able to pay their PAYG instalments on an annual basis. 

Source: http://www.budget.gov.au/2007-08/overview/html/index.htm.  Last accessed 20 May 2007

SUPERANNUATION CHANGES

There is still time to take advantage of the opportunity to contribute up to $1m in after tax contributions to your superannuation fund.  After 1 July 2007 the maximum amount allowed to be contributed will be $150,000 per annum; with the ability to pay $450,000 in one year and no further payments for two subsequent years.

From 1 July 2007 you can withdraw either lump sums or pension amounts from your superannuation fund tax free.

There is a catch!  The tax free status of death benefits is limited to payments to spouses, children under 18 and dependents.  If you have a substantial amount in your superannuation fund and your spouse is no longer living, your beneficiaries will be your adult children.  As they are not dependents they will be subject to tax at 15% on the amount received (excluding the undeducted contribution component).

Had you taken the money out of your super fund prior to death you would have collected it tax free and could have passed it on to your adult children through your will on a tax free basis.

Whilst superannuation funds are a good mechanism for saving and providing income during retirement, superannuation funds are not the best way to pass wealth to successive generations.  If possible, superannuation benefits should be cashed out immediately prior to death as a tax free lump sum and then passed on to adult children through your estate.

I would suggest you contact your financial advisor to discuss further opportunities for yourselves and to attend to any estate planning matters.

Source. TAX IQ Monthly November 2006

YEAR END PLANNING

At this time of year our thoughts turn to how we can minimise tax, legally, of course!

You should aim to have your accounting records up to date.  You would have lodged BAS returns for three quarters.  Prepare interim figures to establish what your profit is likely to be.

If you are expecting a high taxable income consider the following:-

• Bring forward expenses likely to be incurred in the 08 financial year.  For example, if you have plant or property which requires repair, get it done before the end of June and claim a deduction in 07 year.
• You can claim a deduction for bad debts if the amounts have previously been included as income.  The debts must be bad and you should write them off before 30 June. 

If you are expecting a low profit this year but a high one next year consider the following:-

• It may be helpful to bring forward income that would normally be taxed next year.  You can do this by valuing trading stock on hand at selling price rather than cost.
• Defer paying expenses with a view to claiming them in the following year.

Capital Gains – if you have a taxable capital gain.

• Can you sell other assets before 30 June which will result in capital losses, thereby offsetting the gain?  Provided you adopt market value you can dispose of the asset to another entity within your family group.  Your dominant purpose must be commercially based and not just to obtain the tax benefit.  Alternatively, you may be able to offset the gain by making a personal superannuation contribution or an employer contribution on behalf of employees.

You can use proceeds from sale of assets for your contribution or make an in specie super contribution of listed company shares or business real property.

Discretionary Trust Distributions

• If your Trust Deed allows for attribution of income then you may distribute different types of trust income (eg primary production, capital gains, franked dividends, business profits) to different beneficiaries in the most tax efficient method.

Distributions to Companies

• If you have a discretionary trust with a corporate beneficiary, you can make distributions to a company to be taxed at the company rate of 30% instead of the highest individual rate of 46.5%.  You can establish corporate beneficiaries to receive such distributions prior to 30 June.

Leasing of plant

• Are you contemplating the purchase of plant, equipment or vehicles?  If you finance the purchase by bank loans or hire purchase, your depreciation claims will be on a pro rata basis – or limited to 15% if you are an STS taxpayer.  An STS taxpayer can lease the items and negotiate an advance lease payment for the first 12 months to obtain a substantial deduction this year.  Your trade in may provide the finance necessary to make your first lease payment.  Ensure that you do not allow the trade-in value to be deducted from the price of the new vehicle.  This will prevent the transaction from being treated as a lease for tax purposes.  You should receive a cheque from the dealer for your trade in and lease the new equipment at its full value.

Interest

• You can purchase a negatively geared property and pay interest in advance prior to 30 June.  The interest will be fully deductible if it covers a period not greater than 12 months provided you are a STS taxpayer or an individual not carrying on a business if you have a separate Trust or Company operating your business. 

It is possible to claim a tax deduction without using capital or savings to physically pre-pay the interest.  You can arrange a loan that includes the establishment costs, purchase price of property and the first year’s interest.  The loan is drawn down and the surplus funds are used to pre-pay the interest.

Source. TAX IQ Monthly

FRINGE BENEFITS TAX

Two important measures were announced in last year’s budget which took effect from 1 April 2007.

• FBT minor benefit threshold.  A benefit paid to an employee on an infrequent and irregular basis to the value of less than $300 is exempt from FBT.
• FBT reporting threshold.  Employers must report the grossed up taxable value of most fringe benefits where the value of the benefit exceeds $2,000.

Another announcement has recently been made with regard to Pooled or shared cars.  With effect from 1 April 2007 the FBT regulations have been amended to exclude pooled or shared vehicles from the FBT reporting requirement.  Where a car is provided by an employer to two or more employees the grossed up taxable value will not have to be shown as a reportable fringe benefit on their payment summaries.  Source. TAX IQ Monthly

A question that I am asked is in relation to commercial vehicles.  In particular, which ones are likely to be FBT exempt.  There are a few criteria to qualify and the ATO has provided a listing of all vehicles currently available in Australia that would fall within the commercial category.  The hyperlink to this information is shown below.  The Rulings are MT 2024 and MT 2024A

Fringe benefits tax : Commercial vehicles (click here)