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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Transferring property and shares into your SMSF

Many people are approaching retirement with significant assets outside of super and little within super, even though many of us have been encouraged to maximise the amount of assets held inside of superannuation. These assets can often include a sizeable share portfolio or property portfolio owned personally. Often times these assets have been kept outside for very good reasons such as family related matters or inheritance or because the family business needs the money first.

If someone decides that they want to move these assets into their super fund, what are the strategies they use and what are the issues?

Some people use these strategies to top-up their super:

  • transfer the assets to their super fund off-market, making sure they don’t over-contribute beyond their contribution limit.
  • sell the assets, contribute the money to super and buy other investments within the SMSF.
  • transfer a part ownership of the assets to the super fund, keeping some in and some out of super, just in case.

But before implementing a strategy they need to consider a variety of issues.

For example, they review whether the type of asset to be transferred can be transferred in the first place. Is it allowable? Can the super fund purchase it from a related party? Does an ATO rule prevent the transfer? Residential property is one area where it is very hard to put your investment into your super fund. Soon transfers of most public shares will be disallowed too.

Also consideration is usually given to the costs of transfer, such as potential stamp duty as well as capital gains taxes payable by the seller. Are the costs worth it? For some assets you will even need to get a formal valuation prepared. Property is one area where a director valuation was often relied upon, but not anymore.

The new contribution limits can be a stumbling block on your way to reaching your goal. Take a simple commercial property valued at $1,000,000. Even if this was owned by several members of a family, transferring it can often breach the contributions limits. Perhaps a borrowing could be used to reduce any breach? With shares, the contribution limits can be more easily dealt with. For example, people can try to stagger the transfer of shares over many years. Or transfer shares that have a capital loss first, so that capital gains tax payments are not triggered immediately.

As you can see it is a bit more complicated than just filling in a trasnfer form. Proper planning can be very usefull and that’s we we can help. There are a few strategies people can implement to transfer large assets or figure out how best to move other assets into a SMSF without unintended consequences.

Please contact us to discuss your situation.

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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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Capital gains tax CGT discount cancelled for non-resident property investors

The Government will implement another tax policy aimed at reducing “loopholes” and the party at the expense of this current change is the humble offshore investor. This is a “palatable” change to make as it gains extra tax revenue, doesn’t affect the current electorate and offshore investors can’t vote anyway. But it sure is a rough deal for them.

This is what is going to happen. Normally, when a property is sold after one year of ownership, the investor reports the gain in their Australian tax return and gets to pay tax on only half the amount. However, soon all overseas investors in Australian real property (like houses, apartments, offices) will not get any capital gains tax reduction when they sell their property.They will have to pay the tax on the whole amount.

To make things fairer the ATO have invented some tricky rules that aim to preserve any past gains. Overseas investors will be allowed to discount any gains they have made up to the date of the new law (estimated 08/05/12). The tricky part is figuring this out. For a general application of the rules take this simple example which is how it is supposed to work:

  • Mr Li is a Chinese resident and owns an apartment in Sydney
  • It cost him $100,000 on 1st July 2000
  • He sells it for $200,000 on 1st December 2012
  • The value of the property was $180,000 at 08/05/12

In theory Mr Li made 2 gains -

  1. From 01/07/00 – 08/05/12 = $80,000 which will be half taxed (i.e. $40,000)
  2. From 08/05/12 – 01/12/12 = $20,000 which will be fully taxed

All in all it makes for a more complex situation come tax time.

As an aside, you may be wondering why foreigners have to pay capital gains tax at all? Can’t they just remain hush-hush about their Australian properties? Well, in Australia the law states that gains from most real property must be taxed in Australia. Foreign investors have to register for an Australian tax file number and pay tax in Australia on their property’s rent and realised capital gains every year.

Investors with other investments, like shares, are normally exempt from paying tax on their capital gains and franked dividends. It’s property investors who are caught out.

We have experience dealing with and advising offshore investors. If you would like some help 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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Renounceable Rights Issue Premiums – Capital Gains or Unfranked Dividends?

In taxation ruling 2012/1 the ATO clarifies what happens when:

  • you invest in a company
  • that company offer investors a discounted share purchase plan
  • you don’t participate
  • the company sells your rights to discounted shares
  • the company pays you the amount received on the rights sale

The ATO has confirmed now that these payments are dividends for tax purposes and unfranked.

So what, I hear you ask? After all,  sometimes people called it a capital gain, sometimes a dividend. Many times people just scratched their heads and said “I’ll just declare it as other income”. Either way it was taxable.

But there are two important implications here:

  1. Non residents pay tax – Capital gains on share sales by non-residents are normally not taxed as they are tax exempt. But unfranked dividends are subject to withholding tax which goes directly to the ATO. So it makes a big difference as these amounts can be taxed.
  2. There is no CGT discount – some taxpayers declared the money as a capital gain and if they held the underlying shares for a over a year, tried to claim the 50% discount to reduce their gain. Now that it is officially not a capital gain this is not an option.

The Tax Ruling is very favourable to the ATO and should be remembered by share investors and non-residents alike.

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Private Health Insurance and Medical Rebate Means Testing Changes

In line with the current Government’s policies, many rebates are now becoming means tested. Testing times indeed!

So goes the Private Health Insurance Rebate. Originally the government paid 30% of your health insurance cost to try help  keep Australian out of public hospitals. Now, from the 2013 year, the rebate will be means tested so that many higher income earners will not receive any rebate at all.

And like the sands in the hourglass, there goes the Medical Expense Rebate too. For those at higher income levels, no longer will the be able to claim 20% of all medical expenses over $2,000. Now, from the 2013 year they will introduce a high income claim level of 10% of all medical expenses over $5,000.

There you go. The details are yet to be nutted out but the theory is there and will apply. What changes now is that the effective marginal tax rate (that is, the extra tax on every extra dollar of income) is now warped at certain levels of income where benefits phase out. No doubt this makes for a more complicated tax system.

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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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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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