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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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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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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Self Managed Super Funds are great – but what are the Loan, Related party and Tax issues?

Setting up a self-managed super fund can be a great experience for those of us who love to manage our own money. Maybe in the current climate its not too pretty to see your money drop, or the market go sideways, but at least your destiny is in your own hands. You can:

  • Choose a share portfolio and investment mix to fit your exact aims and to complement your personal investments.
  • Borrow to invest (via an installment warrant) which is best suited to property purchases to grow your retirement savings over the long time.
  • Do not necessarily need to have a lot of money in super to make it cost effective especially if you negotiate good accounting and audit fees upfront and can minimize and sensibly justify the management expenses involved.

The world is your oyster! But what many people do forget though is that the money in self managed super funds (SMSFs) is not theirs and has many rules like:

  • it usually cannot be leant as a loan to related parties of the fund
  • most people cannot withdraw money from super yet
  • some investments are not generally allowed in a fund
  • as members and trustees there are specific duties required of you and
  • you could potentially lose almost half of the money in your super fund if you commit a serious breach and make the fund non-complying

The ATO releases many warnings about SMSFs and the amount of funds it has audited, found mistakes in, disqualified trustees for and the number of auditors it has castigated. We don’t want to scare you off self-managed super, but just remember you need to:

  • dedicate enough time
  • put in the investment effort
  • plan your future goals and
  • get professional advice

We have a strong background with SMSF administration, compliance and tax planning. Contact us today to discuss your situation.

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ATO: Beware Tax scams – Early release of superannuation and tax refund fraud

In these early months of tax season the ATO has let go some interest snippets of information. It would seem that there are still many fraudsters out there, only to willing to part you of your hard earned money and the government of its tax revenue.

Illegal Early Release of Super

Some promoters are only to willing to convince you that you CAN withdraw money from your super and you CAN pay them a big commission to do it. All too often the clients end up with large fees (say 20%) taken from their fund plus misappropriation of their super by the promoter and/or penalties from the ATO. This is a terrible result. People should be warned (and the ATO are doing this now) that super can only be withdrawn under limited circumstances and it does not cost a fortune to withdraw it – all you need is some quick advice from your fund, accountant and/or a financial planner and it won’t cost you the world.

Illegal Tax Refund Fraud

Fake payment summaries claiming huge tax refunds, education tax refund claims out of the blue, enormous deduction claims… basically – forget about it. The ATO systems have now developed to such an extent that they are picking up any of these odd patterns and blocking them on the spot. Unfortunately, for those of us with “unusual situations” who claim large deductions for genuine reasons, your tax refund many be delayed while they do some checking. Our hint to you is to prepare for the ATO call – yes, they do call you up based on the phone number provided in the tax return. If you can explain clearly over the phone your refund will be out to you soon and ATO action minimised, or at least provide documents asap. Otherwise your wait could be many, many weeks.

Do you have tax issues that need resolving?

We have dealt with the ATO under at all levels and are knowledgeable about what to look out for and what to avoid. Contact us to talk about your tax concerns.

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