New Year’s Predictions! The future of tax changes for 2014 and beyond…

At this contemplative time, many people reflect on what has changed in the year past. But we don’t think you should ponder too long. It’s best to think about the future and about how this will affect you.

What are the likely and not-so-likely tax changes we should prepare for?

Start by looking at the context. The undeniable truth is that all government across Australia are short of money. They will be even shorter in the future as the economic tailwinds of massive mining investment tail off over the next few years, then company profits reduce and royalties drop, potentially unemployment rises leading to lower personal income tax receipts. The Treasuries know that the only way to balance the budget is by raising taxes (which is unpopular) or reducing spending. This is what we expect to happen – permanently lower government tax expenditure.

If you are thinking “it won’t affect me, they have never paid me a cent, I am always paying them” then think again. It’s not just handouts that are at risk. The government treats tax concessions, tax breaks and rebates as “expenses” in their annual budget. Most of us get at least something for nothing. Look for possible changes to:

Negative Gearing

Ever unpopular to change, the tax saving that investors receive from their loss making properties is a large tax expense for the government. “Never” or “Promise” are words easily forgotten when the chips are down. The pie on offer is huge and it doesn’t have to mean a complete removal of the tax break. Perhaps they could limit it like they have done with other concessions? For example, each individual could only claim up to $20,000 of rental losses with the rest carried forward, or maybe individuals with other income over a “magic number”, like $200,000, cannot claim negative gearing.

Superannuation

Pensioners paying zero tax on their savings and others paying only 15% may be a thing of the past. Consider this: what if pensioners instead paid a 10% withdrawal tax on all pension payments? Self managed super fund investors and members won’t be too happy but it’s a tempting middle ground to choose. Perhaps a 5% tax on income earned from pensioner assets too, and increase to 20% for the rest of us?

Private Health Insurance Rebate

This is the “silent change”. And it has started to happen. No-one receives the rebate in their pocket so you don’t feel it directly, but it is possible that there will be a reduction to the rebate and therefore an increase to your premiums payments. Already, families with income over a “magic number” (this time $168,000 combined) receive lower rebates. Expect this to trickle down further as this means testing becomes more accepted. There may be a time in the future when everyone with income over a “magic number” gets no rebate at all.

Childcare Rebate

Unpopular as it would be, childcare centres are running at capacity around the country. How about the rebate reducing slightly? Maybe to 25% initially, then later on means tested like the other rebates. It could be sold as just another cost to be absorbed by the operators.

Structures and Trusts

If I do one thing one way, then the same thing another way, can I save tax? Sometimes. And the ATO doesn’t like that. They are worried that a lot of clever accountants and spending hours and hours devising structures to avoid tax. They recently released a publication targeting overly complex structuring of professional partnerships. The message is clear that if you have set up an overlay of entities where you could have structured your business more simply, then they will be suspicious. Potentially, they could target you for tax evasion where they find reason to do so.

Franking credits

Individuals and super fund members ordinarily receive a refund of their left over franking credits. Could this be scaled back? Perhaps a limit per person per year or per fund. Or even an elimination of franking credit refunds in a “use it or lose it” fashion, or a carry forward of franking credits to future years.

Capital gains tax concessions

Most of us never pay income tax on the increase in value of our family homes, which to many is their biggest asset. Most of us only pay half the regular tax on capital gains from investing. This harks back to the “means-testing” theme. The government will find it hard to increase tax for low income earners, but it may not be that hard to add a tax of the sale of family homes over a “magic number”, indexed for inflation? Like a 2% sales tax for homes over $2m, or an annual land tax, similar to council rates, of 0.1% of one’s land value. For investors selling capital gains tax assets, what if the CGT discount were reduced to 30%? Still a discount, but not likely to scare away investors used to the 50% discount (NB: Did you know foreign property investors already no longer get any discount?)

Various other stimuli

Economic stimulus measures often abound, like company loss carry back, small business tax breaks etc. Great ideas that sound good when announced but eventually cost money and are easily canned. Don’t think you can rely of concessions applying into the future, so if you need to use them consider using them sooner rather than later. The track record is clear that most of them don’t last very long.

We don’t mean to alarm you, but it is beneficial to think of what could be around the corner. A good tax system is a simple tax system, that is predictable and stable, but government forgets that and changes happen all the time.

Our professional opinion with tax planning is always this: “simpler is better”. You will find your situation is more predictable, less likely to be affected by change, and it’s easier to change tack if the wind blows the other way.

Happy New Year, and remember – Lucentor is always open to help you.

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Research and Development R&D Tax Offset Claims

Businesses both small and large have been able to claim some tax benefits from their research and development activities for years. The government wants to foster innovation and is sometimes happy to pay for it.

However, in the past the range of tax benefits was limited. Previously a business could only claim some extra deductions against their taxable income. This was OK for some companies making money, but for many innovative start-up companies involved only in R&D activities, it was useless. They were burning cash and didn’t pay tax so there was no immediate use for any tax deductions.

That has now changed.

All except the largest business now have the option of cashing in their R&D spend. At tax time they can try to claim back a portion of the R&D as a tax refund. The catch is there are many more hoops to jump though to prove your R&D spend, but if you can navigate through that, it is a much better outcome for the smaller end of the market.

Before embarking on an R&D program you should know it is much harder to claim that might you think. Specialists in the field are paid a lot of money to advise businesses on their R&D plans and submissions. It really does need a lot of work and it seems like the thing being development must be close to revolutionary to qualify! If you are considering making an R&D tax offset claim, in our experience it’s probably best to try only if you have a very large R&D project.

There are, of course, many conditions and thresholds for different types of businesses. But suffice to say that the possible tax benefits now seem quite a bit better than before and it’s a step in the right direction.

If you require assistance with your tax situation please contact us.

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Company tax loss carry-back: Finally you can claim your company tax… back!

If you are running a profitable company and have paid tax for several years, it can pretty rough to go through a bad patch. You lose money, make tax losses and don’t get anything back from the taxman. Tax losses are only be used to save tax on future profits leaving your current cash flow situation a bit grim.

Well that’s all about to change.

From the 2013 financial year onwards, it is proposed that a company that makes a tax loss can try to cash back this loss. So if you make a tax loss of $100,000 after a history of making profits, you could potentially receive a refund of 30% of the loss, being $30,000. That would help immensely to rebuild your business and get back on track.

There are many conditions limiting how much you can claim back and I won’t go through all of them. But the general theory behind the rules is that:

  1. You can only claim back at most 3 years of tax
  2. You should not get double the benefit from your tax payments.
  3. You can’t claim back as many losses as you like.

Starting from 2013 there is a phase-in period where the tax loss claim time is shorter. But over the long term the ATO will only ever allow to claim back up to the last three years of losses. That is the plan. Assuming you are reading this a few years in, you will probably be aiming aim to claim back 3 years worth of tax payments.

Here’s the catch though. You can only claim back up the balance of your franking account. Tax experts would say “of course” and just move on. But to everyone else in the room this probably warrants some explanation.

Every time a company pays tax this is recorded on the company franking account. This is like a “tax bank account” which records tax payments and tax refunds. So if a company has a history of paying tax and accumulating the after-tax profits, their franking account would be pretty large.

Take a simple example. Imagine you are a small investor in Woolworths. The company makes money, say $100, then pays tax, leaving it with $70 cash. It then pays that $70 cash to you, and gives you a tax credit for the $30 of tax it has already paid. In this case, the franking account records the tax payment of +$30 and the  dividend credit of -$30 as well. The final balance would be NIL. When you do your tax return you get a benefit and pay less tax on the dividend because you have received this franking credit.

If your company has a NIL balance in your franking account it means someone, somewhere may have already received a benefit from the company’s tax payments. That is why the ATO will only let you claim back losses up to the balance left in your franking account. It doesn’t want to give out a double benefit.

Finally, the government doesn’t have endless piles of money to throw around, so the maximum tax losses you can claim per year are $1,000,000. That makes for a maximum refund of $300,000 per year regardless of how bad the business is going.

Now this is just a simple outline of the rules, but I hope you get a general understanding of how they work for you. If you require assistance with how this will work with your taxation situation please contact us.

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SMSF related-party off-market share and property transfers

Up until now members of super funds could try to transfer their personal shares off-market to their super fund. The big advantages were:

  • reduction in brokerage costs
  • ability to move personal investments to a preferred entity, like a SMSF, over time
  • sometimes people could claim a tax deduction for the contribution
  • some clever people tried to choose convenient dates to manage their tax bills

From 01/07/13 transferring investments that have an active market cannot occur off-market. So if you want to move your personal shares from your name to the super fund, you will have to first sell the shares on-market, pocket the cash, and then contribute that to the super so it can buy those same shares again. Simple off-market transfers of shares will probably not be possible anymore.

For those wishing to transfer property, you will now need a full and expensive valuation prepared from a registered valuer. Add that to the normal stamp duty payable and you’ve got one expensive proposition right there.

What the ATO are thinking is this. They saw people transferring assets at values which sometimes, according to their logic, suited the tax position of the person. So if they transferred a property, the director’s valuation was sometimes a little lower and luckily reduced the capital gains tax payable by the seller. They are trying to stamp this out with one fell swoop.

There are lots of other rules around super and asset transfers which I won’t go into but hopefully you can be wary of these new rules for the future. The ATO and the government are targeting any possible changes that could bring about easy tax revenue and enforce the spirit of the law. I would not be surprised if there were other super tax changes on the way very soon.

If you would like assistance with your tax issues please contact us.

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Tax Deducting Superannuation Contributions for Family Trust Employees and Beneficiaries

A recent case has brought to light what many have tried to forget. A family trust cannot claim super contributions for it’s beneficiaries unless they are employees.

A couple had a family trust which earned income and the trust tried to claim a tax deduction for concessional super contributions  made for their directors. This was denied. The ATO argued they were not employees of the trust in the ordinary meaning of the word.

Trusts can only contribute to a beneficiary’s superannuation fund if the person is an employee. This involves them doing work for the trust which can be administration, investment management etc. but it must be real work which would earn a wage.

The benefits paid also cannot be over and above a reasonable amount which would be paid to an outside employee. The days of passing through large super contributions to spouses and adult children are numbered. The ATO has the power to deny excessive deductions to related parties.

Have a look at your trust arrangements, then contact us to discuss your situation.

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Property Development and Family Trust Tax – Are profits income or capital gains?

A family trust which developed property has recently been caught out by the taxman. They got one key tax assumption wrong and it cost them dearly.

Income tax rules divide “profit” into two categories: income and capital. If you make “income profit” the whole amount is generally taxed. If you make “capital profit” you can sometimes reduce the tax paid by half.

In this case, the trust assumed that the profit it made from selling property which it held for years and renovated was a capital profit. After all, they were held for a long time and some earned rent too.

The ATO said no. It called the family trust’s “investment” activities a property development “business”. The entire profit (rental profit and sale of properties) was deemed to be ordinary income. The beneficiaries of the trust are now to be assessed on the whole profit (not half) which is a huge tax difference. But if there are no beneficiaries entitled to this extra taxable income, it could get worse and the trustee pay tax at the top tax rate.

Sure enough this case had many details and specific facts, but the point is still there. Family trusts and their trustees, beneficiaries and controllers who invest in property need to re-assess their tax assumptions. Contact us today to discuss your situation.

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Year End Trust Distributions Rules: make your mind by 30 June!

The ATO have confirmed that those of us with a trust which has profit to distribute at year end must write and complete the distribution minute before 30 June of that year, for tax purposes. It’s now official. The ATO used to have an “administrative practice” of allowing minutes to be penned as late as end of August, but this is now gone for the 2012 year onwards.

What is the issue here? Well, the income at year end is a fixed amount -  a “profit” from your income less expenses. But how many trustees know right-on-that-day the exact profit made for the whole year? Isn’t this normally finalised when the accounts are prepared? If the ATO now say you must determine what to do with an amount you are not sure of… well, you get my point, it could spell trouble. Especially if undistributed funds attract penalty tax rates. Ouch!

Trustees can have many ways to deal with this problem.

Take a typical investment trust like the Barry and Betty Trust which has rent, interest and dividends less expenses. Now, even though at year end the trustee does not know for sure what the exact profit is, they can still “apply it” and “distribute it”. How so? They do this by applying a percentage of all profit to a particular person – not an amount. They could do this by directing on 30 June that 20% goes to Barry and 80% to Betty. This applies all the income with none left over. If they want to stream dividends or capital gains, they can give similar directions. Say 100% of all capital gains to Betty, 100% of all dividends to Barry and the remaining profit split 50%/50% between them.

Trusts that  previously sent exact amounts to exact people will find it hard to justify how these were calculated. So ratios and percentages are now the preferred method of distribution for many.

Your trust can be a complex structure to deal with, but with experts like us to help and advise you, it doe not have to be. Contact us today to discuss your trust.

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Reporting Contractor Payments in the Contruction Industry

Starting June 2012 businesses in the construction industry will now have to report their contractor payments. The ATO says this will include payments to:

  • contractor payments
  • subcontractor payments
  • payments to workers who quote an ABN

The ATO wants details of all participants in the industry. Why so? They believe that many payments to contractors are not being reported in their tax returns, so if a builder is required to declare these payments (presumably to secure a tax deduction) then they can cross check whether:

  • the income is being declared and tax returns lodged
  • GST is properly paid
  • the contractors are working for only one person (i.e. are they employees?)
  • there are Centrelink issues (i.e. income not declared)
  • the contractors and operating in the cash economy
  • they can get a picture of how the industry works

In their audit activity they routinely find non-compliance with the tax laws in this industry. Now they are trying to fight back. If you are affected, get in touch with us today to discuss the best way to deal with the new rules and manage your risk.

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Self Managed Super Funds, Tax & Pensioner Benefits on Death

While a super fund member is drawing from a pension account in their fund, the income of the fund attributable to their account is generally free of any tax. That is a big “free kick” for self funded retirees on super fund pensions , especially if they too are not taxed on the pension income.

However, what happens when a super fund pension member dies? People thought either:

  • Nothing happens - the tax free status of the fund continues, if the fund needs to sell assets to pay a death benefit there is no tax; OR
  • Everything happens – the fund is now not in pension and the assets, when sold, incur full capital gains tax and all income incurs full income tax

The ATO has expressed their preliminary view, which matches that of many practitioners, that once a super fund member dies, the status of their fund account changes. So a pension member would not continue to get the tax break and therefore their beneficiaries will fork out a heap of extra capital gains tax on liquidating its investments.

There are some ways around this so it is best to get professional advice about tax planning for your fund. Contact us to talk about how we can help with your super fund taxation issues.

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Self Managed Super Funds & Property – Only borrow to buy a single acquirable asset

There is a seemingly simple but key requirement in:

  1. setting up a SMSF installment warrant and
  2. borrowing to buy a super fund asset.

That is: you can only use the funds to buy a “single acquirable asset”. This little condition, which sounds normal, has always been a sticky issue. For example:

  • if you buy a property, is stamp duty part of that acquirable asset?
  • if part of your property burns down, can you borrow to fix the property?
  • what if your fence is broken, can you borrow to repair it?
  • if you property is over 2 land titles, can you still buy it?

Odd as it may seem, the interaction of this rule with these everyday situations means many could not borrow to pay for these items.

The ATO has now issued a ruling on the topic of SMSF borrowing to buy an asset and what a “single acquirable asset” means. They have examples on many of the common mistakes and misconceptions.

We are experts in self managed superannuation rules and can assist you in correctly setting yourself up for self managed super fund borrowing. Contact us today to discuss your plans.

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