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Borrowing Money In An SMSF

Limited recourse borrowing arrangements (LRBAs) allow an SMSF to borrow money for the purchase of a single asset (or a collection of identical assets that have the same market value) to be held in a separate trust. Investment returns from the asset go to the SMSF and if the loan defaults, the lender’s rights are limited to the assets held in the separate trust. While LRBAs could potentially be an attractive avenue to achieve your retirement goals, the complexity and risks involved mean that forward planning is essential to get the best outcome.

 

Do you have an SMSF and want to grow the assets with borrowings to fund your retirement? An SMSF, or more specifically, the trustees of an SMSF can borrow money but only in very limited circumstances. These include short-term borrowings of 7 or 90 days to cover certain events and more interestingly longer-term borrowings using limited recourse borrowing arrangements (LRBAs).

 

Put simply, an LRBA allows the fund to borrow money for the purchase of a single asset (or a collection of identical assets that have the same market value) to be held in a separate trust. Any investment returns earned from the asset go to the SMSF and if the loan defaults, the lender’s rights are limited to the asset held in the separate trust, which means there is no recourse to the other assets held in the SMSF.

 

Used as a part of an investment strategy, LRBAs can be used to purchase an appropriate growth asset with borrowed funds to maximise the level of benefits available in retirement. It may be a particularly desirable strategy for SMSFs with more modest assets looking to gain access to high-value growth assets or SMSFs looking to increase the fund’s asset base exposure by borrowing.

 

Although LRBAs seem to be an attractive avenue to achieve your retirement goals, there are risks involved including long-term geared exposure to whatever market you have invested in (eg the property market), interest rate risk, potential lack of diversification, liquidity and cash flow. Therefore, the risks to establishing an LRBA need to take into account the circumstances of the fund as well as its investment strategy.

 

Data from the ATO shows the most common asset purchased by SMSFs using LRBAs is property. 

 

A single title block of land acquired under a contract of purchase with an initial deposit and the balance payable on settlement can be funded under a single LRBA. This is also the case for the deposit and balance payable at settlement under a contract for an off-the-plan purchase of a strata titled unit. However, an “option” to acquire an off-the-plan purchase of a house or unit must be funded under a separate LRBA to any subsequent acquisition of the house or unit as the “option” is a separate asset.

 

Notwithstanding the complexity and risks involved in establishing an LRBA, there may also be restrictions on the loan and lender to consider. For example, you as the SMSF trustee or investment manager cannot allow a related party lender to charge the fund more than the arm’s-length rate of interest under an arrangement. You must also be able to demonstrate that the SMSF was not paying in excess of an arm’s length rate of interest to a related party based on reasonably objective and supportable data.

 

Want to find out more?

Before establishing a LRBA, it is vital to plan ahead to avoid any adverse tax or potential stamp duty consequences down the track. Given the complexity involved, detailed advice should be obtained in relation to the borrowing agreement and the establishment of a holding trust. We can help to ensure that the documentation put in place now will elicit favourable tax treatment and prudential compliance in the years ahead.

Can’t Buy Me Love: Conscientious Coupling and Binding Financial Agreements

This is the first article in our series on love and money, where we consider the top tax and financial issues as they apply to our primary relationships and most prized possessions. Love tops the charts as the most popular song theme, but money ranks a close second – and of course the two are intrinsically linked, in pop culture and in life. So let’s take look at when money really does “change everything”.

 

The breakdown of a relationship is frequently ranked second, after the death of a loved one, as one of life’s most stressful events. With a third of all Australian marriages ending in divorce, and similar statistics in other countries, it’s little wonder that “conscious uncoupling” has become the ideal divorce strategy (and not just for celebrities). But the reality for many of us is quite different. So, what if there were a way of limiting the emotional and financial fallout of a relationship split?

 

In fact, there is: by having a financial agreement in place before getting married or moving into together.

 

Romantic? Not really. It’s true that a discussion about the relationship’s possible end isn’t exactly at the top of any couple’s list when planning a life together. But there are many pluses to having an agreement, and it’s unarguably a pragmatic move.

 

Love tops the charts as the most popular song theme, but money ranks a close second – and of course the two are intrinsically linked, in pop culture and in life.

 

A prenuptial (prenup) or cohabitation agreement can benefit you both, fostering better upfront communication about financial matters and helping you to budget and plan a financial future as a couple.

 

It can also provide a hefty ballast for your future financial stability as individuals.

 

In 2016, the Senate Economics Committee undertook a study of gender disparity in financial security and concluded that “a husband is not a retirement plan”. Clearly, a relationship breakdown can leave either party, or both – regardless of their genders – poorer than their married or single counterparts.

So, how can we help you to plan for a “conscientious coupling”?

 

What does this type of agreement include?
A prenup or cohabitation agreement typically covers:

  • assets – what will be treated as marital or defacto assets, such as jointly owned real estate, and what will be treated as non-marital assets (for example, this could be an asset that one party owned before the marriage or cohabitation);
  • division of assets – which assets each person would be entitled to, and in what proportion, if the relationship ended;
  • financial arrangements on the death of one spouse – this can be useful for blended families and where, for example, you want an inheritance to go to a person or an entity other than your relationship partner;
  • future changes – whether the terms will change, for example, if children are involved; whether they are to inherit assets, etc.

Traditionally, these types of agreements are popular where one partner has significantly more assets than the other, or where the partners or their parents have businesses or an inheritance that they wish to retain if the relationship ends. An agreement can help ensure these important things are protected.

 

How do you make the agreement legal?
A prenup needs to be approved by the Family Court of Australia and both parties must have sought independent legal advice. For defacto agreements, we suggest you speak to a lawyer about the possibility of registering your agreement with the Family Courts in the form of consent orders.

 

What about tax?
We recommend that you and your partner each engage lawyers in the drafting of your agreement, but we can help with financial and tax strategy, particularly in more complex areas of tax law, which require some flexibility and skillful forward-planning. Here’s a snapshot of some of the areas to consider.

 

Stamp duties
If property ownership transfer is part of an agreement, then no stamp duty is payable if the property is transferred from one partner to another or sold.

 

Superannuation
Superannuation held by each partner, whether you are entering a marriage or defacto relationship, can also be split by agreement. Self managed superannuation funds (SMSFs) have more flexibility for restructuring than funds regulated by the Australian Prudential Regulation Authority (APRA).

 

Capital gains tax roll-over relief
Capital gains tax (CGT) roll-over relief may also apply. As a general rule, CGT is payable on all changes of asset ownership occurring on or after 20 September 1985. However, if you transfer an asset to your partner as a result of the breakdown of your relationship, there is automatic roll-over relief from CGT in certain cases. This can include transferring assets into or out of a family trust as part of a settlement, as seen most recently in the case of Sandini Pty Ltd v FCT [2017] FCA 287 (22 March 2017).

 

Future and estate planning
Binding financial agreements provide another way to ensure your long-term financial planning goals are not destroyed by a failed relationship, helping to protect your business or inherited family assets. They can be useful in estate planning, too, as they can help achieve some security for people in second marriages or who have children from previous relationships. Provisions for children can be written into an agreement.

 

Need to talk it over?
While it might be an unwelcome topic to think about before it happens, the end of a relationship often forces people into making financial decisions at the worst time. We can help you minimise the possible negative consequences by helping you to plan your agreement and the ongoing management of your tax affairs.

Improvements To GST Risk Assessment

Are you a business that has had a GST refund held up as a part of the ATO’s risk assessment program to verify GST refunds? The Inspector-General of Taxation (IGT) has recently completed and released his review into ATO’s practice and the findings are surprisingly good for the ATO. Even so, as a part of the review, the IGT made several recommendations to improve the process which the ATO has mostly agreed to.

 

The Inspector-General of Taxation (IGT) has recently released his review into the verification of GST refunds by the ATO. The review was initially conducted as a response to concerns raised by taxpayers which had their GST refunds delayed as a part of the ATO risk assessment program to verify certain details before refunds are issued.

 

Broadly, the ATO’s risk assessment system uses BASs as input data and automatically selects a number of cases where retention of refund and further checking should be considered. The selection is then further refined by manual intervention. The review conducted by the IGT examined the end-to-end process involved in refund verification including from initial case selection through to the review and audit activities.

 

Overall, the IGT found that the ATO’s administration of GST refunds operated efficiently with the vast majority of refunds released without being stopped for verification, while those refunds that were stopped were processed and released within 14 or 28 days. 

 

Even though that was the case, the IGT identified an opportunity to enhance ATO’s automated risk assessment tools which have only been achieving a strike rate of 26.7% (approximately 1 in 4 cases), which may be no better than random selection.

 

In addition to the opportunities to improvement, the IGT also made 5 recommendations aimed at the ATO to:

  1. develop a framework for continuous improvement of its automated risk assessment tools;
  2. streamline guidance to staff and implementing tools to assist them in complying with their statutory obligations;
  3. enhance its information requests to taxpayers and providing a channel for pre-emptive provision of such information;
  4. improve notification of when taxpayers’ objection rights to the retention of refunds has been triggered and assisting them to lodge such objections effectively; and
  5. raise awareness of staff and taxpayers about financial hardship issues, appropriately considering them and enabling automated partial release of refunds.
    The ATO has agreed to the majority of the recommendations. Although it notes that activity statements are processed through a system which does not allow for automatic alerts to notify ATO officers whether retention of a refund has been made within the statutory period. However, the ATO said it is looking to migrate activity statement processing to another internal system which may provide opportunities for alerts.

 

In addition, the ATO partially disagreed with recommendation 3 as it says taxpayers and Tax Agents who lodge electronically already have the option to supply supporting information through various portals and allowing taxpayers to send additional information may cause additional compliance costs, particularly where the refund is not subject to verification activities.

 

Perhaps the most interesting recommendation that the ATO partially disagreed with is 5. According to the ATO, system limitations prevent the automated partial release of refunds in certain situations. It notes that the manual process which is currently in place is considered to be adequate.

 

So what does it mean for your business?

The review has raised several issues which may mean improvements in service for business owners seeking refunds going forward. With the enhancement of the ATO’s risk assessment model, businesses may no longer need to be inconvenienced by an unnecessary delay in obtaining their GST refund. If you’re having issues with your activity statements or a GST issue in general, contact us today.

Does Your SMSF Have A Sole Purpose?

The sole purpose test is one the fundamental requirements for SMSFs to obtain tax concessions. It requires that the SMSF be maintained for the sole purpose of providing retirement benefits to its members or their dependents if a member dies before retirement. Broadly, the test can be contravened when a member or a related party, directly or indirectly obtains a financial benefit when making an investment decision. Trustees need to be careful of this area as the ATO has a very high standard in relation to the compliance required under this test.

 

To be eligible for tax concessions available to super funds, SMSFs need to meet the sole purpose test. Essentially, this means that the SMSF needs to be maintained for the sole purpose of providing retirement benefits to its members or their dependents if a member dies before retirement.

 

Although the question of whether the sole purpose test has been contravened is usually determined on the facts of each case. Broadly, the sole purpose test can be contravened when a member or a related party, directly or indirectly obtains a financial benefit when making an investment decision, other than increasing the return of the SMSF.

 

The ATO, which administer the relevant super laws in relation to SMSFs, has a very high standard in relation to the compliance required under the sole purpose test. It requires “exclusivity of purpose” but does accept that the provision of incidental, remote or insignificant benefits that fall outside of the scope of those specified in legislation may occur in certain circumstances.

 

According to the ATO, the sole purpose test is particularly concerned with how an SMSF came to make an investment or undertake an activity. 

 

Therefore, trustees need to ensure that they do not provide a purposeful benefit to members when undertaking SMSF activities, this is the case even if there is no net cost to the SMSF in providing the benefit. Ultimately, it is the object purpose of providing the benefit rather than the net financial impact of the arrangement on the SMSF’s resources that determines whether the sole purpose test is contravened.

 

Factors that indicate the sole purpose test being contravened include:

-trustee negotiated or sought out addition benefit, even if the additional benefit was sought out in the course of undertaking other activities consistent with the sole purpose test;
-the benefit influenced the decision-making of the trustee;
-the benefit is provided by the SMSF to a member or another party at a cost or financial detriment to the SMSF; and
-there is a pattern of events that, when viewed in their entirety, amount to a material benefit being provided that is not consistent with the sole purpose test.

 

On that other hand, factors that weigh in favour of the ATO reaching a conclusion that an SMSF is being maintained in accordance with the sole purpose test include:

 

-the benefit is inherent or unavoidable part of other activities consistent with the sole purpose test;
-the benefit is remote, isolate, or insignificant when considered in light of other activities;
-benefit was provided on arm’s length commercial terms consistent with the financial interests of the SMSF;
-all activities of the trustee are in accordance with covenants specified in the legislation; and
-all investment and activities are undertaken as part of or are consistent with a properly considered and formulated investment strategy.

 

New investment opportunity?

Determining whether an investment in an SMSF meets the sole purpose test is a complex area. This is especially true for any new or planned investments in the areas of property, club memberships/licences, artwork, discount cards, and instalment warrant arrangements. Before you decide to invest, come and see us first to make sure the investment won’t contravene the sole purpose test and leave your SMSF in the lurch.

 

 

Key Aspects of CGT Relationship Breakdown Rollover Relief

The capital gains tax (CGT) rollover relief for marriage or relationship breakdown is, suffice to say, highly significant for people who are experiencing the trauma of a relationship breakdown; especially where substantial assets may be involved. This article notes some key things about the rollover’s operation that may present planning opportunities and highlight traps to avoid.

 

As a general rule, capital gains tax (CGT) applies to all changes of ownership of assets on or after 20 September 1985. However, if you transfer an asset to your spouse because your marriage or relationship has ended, the related capital gain or loss for the person transferring the asset (the transferor spouse) is automatically disregarded (rolled over) in certain cases.In effect, the person who receives the asset (the transferee spouse) will make the capital gain or capital loss when they later dispose of the asset. The asset’s cost base is transferred to the transferree spouse.

 

This rollover automatically applies where a marriage or relationship ends on or after 20 September 1985, and:

-one spouse transfers an asset or a share of an asset to the other; or
-a company or trustee of a trust transfers an asset to one of the spouses.

Here are 13 important things to note about the CGT rollover relief for marriage or relationship breakdown:

 

1.    The rollover automatically applies where the conditions for it are met; it is not a optional matter.

Planning: If a transferor taxpayer wishes to realise a capital loss on an asset, the asset should be transferred independently of the tax rule requirements for the rollover.

 

2.    The transfer of the asset must occur pursuant to a specified court order or arrangements (as set out in the rollover provisions), such as a court order under the Family Law Act 1975 or a binding financial agreement between the parties under the Family Law Act 1975.

 

3.    The rollover is only available for the transfer of an asset to a spouse or former spouse (including de facto and same sex spouses). It does not, for example, apply to the transfer of an asset to the deceased estate of a former spouse.

 

Query: It is not clear, in light of this rule, whether the rollover is available for the transfer of an asset to a child maintenance trust for the benefit of any children of the relationship (albeit, the argument could be made).

 

4.    An asset transferred from a company or trust controlled by a spouse can  also qualify for the rollover. Similarly, the rollover can apply where a right is created in the former spouse (eg shares in a company controlled by the other spouse).

 

5.    The consequences for the transferor (be it a spouse or an entity controlled by the spouse) is that any capital gain or loss that would otherwise be realised on the transfer or the asset to the former spouse will automatically be disregarded.

 

6.    In the case of the transfer of an asset acquired before the 20 September 1985 (and therefore not subject to CGT), the transferee spouse will be taken to have acquired the asset at that time, and therefore will not be subject to CGT on a later sale or disposal of the asset.

 

7.    In the case of an asset acquired on or after 20 September 1985 (and therefore subject to CGT), the transferee spouse will be taken to have acquired the asset at the time of the change in ownership and for the transferor’s “cost”. This will include the costs of transfer incurred by either party, and any capital gain or loss to the transferee.

 

Query: It is not clear whether such costs may include legal costs incurred by the transferor  spouse in defending the proceedings as “reasonably” allocated to the asset or assets transferred.

 

8.    For the creation of a CGT asset, the transferee spouse will be taken to have acquired the asset at the time he or she comes to own it and for a cost base equal to the incidental cost incurred by the transferor in creating the asset.

 

9.    For the purpose of meeting the 12-month holding rule and qualifying for the 50% CGT discount on any later disposal of the asset, the combined period of ownership of the asset by the transferor and the transferee spouse is taken into account.

 

10.    Where a company or trust transfers an asset to, or creates an asset in, a transferee spouse, adjustments are required to reduce the cost base of interests (ie shares or trust units) held in the company or trust as a result of the transfer or creation by reference to the market value of the asset transferred.

 

Warning: The payment of money or transfer of property from a company to a transferee spouse who is a shareholder of the company or an associate will be treated as a deemed dividend (under Div 7A of the Income Tax Assessment Act 1936) in the hands of the transferee spouse. It will be frankable if appropriate (although it is not clear whether a former spouse can be an “associate” of the company for these Div 7A purposes).

 

11.    If a post-CGT dwelling is transferred between spouses, the transferee spouse will be liable for CGT on its later disposal to the extent that it did not qualify as the main residence of either spouse during the combined periods they owned it. As a result, a partial exemption may later arise to the transferee spouse under the relevant partial exemption rules.

 

Warning: As a result of this rule, it is important to factor any such potential liability into settlement negotiations between the parties.

 

12.    If a post-CGT dwelling is transferred from a company or trust and the transferee spouse makes it his or her main residence, only a partial exemption will be available on its later disposal. This is because a dwelling can never qualify as main residence when owned by a company or trust, even if it was used as a main residence by one or both of the spouses when it was owned by the company or trust.

 

13.    Where “collectables” (eg jewellery, antiques) or “personal use assets” are transferred to a spouse, they retain character as collectables or personal use assets in the hands of the transferee spouse. They are therefore subject to the rules for calculating capital gains and losses on any later sale or disposal by the transferee spouse.

Warning: This rule means it is important to maintain appropriate records.

New Destination For Super Complaints

Superannuation complaints are moving to a new destination from 1 November 2018. Previously, super fund complaints relating to the areas of regulated superannuation funds, annuities and deferred annuities, or retirement savings accounts was the domain of the Superannuation Complaints Tribunal. However, the Australian Financial Complaints Authority is the new government body set to take over. It has been touted by the government as a free one-stop shop for all financial complaints and will be more accountable to users.

 

Previously if a member of a super fund had a complaint relating to the areas of regulated superannuation funds, annuities and deferred annuities, or retirement savings accounts, they would lodge the compliant with the Superannuation Complaints Tribunal (SCT), after approaching the fund first, of course.

 

 

From 1 November 2018, these complaints will now be handled by the Australian Financial Complaints Authority (AFCA). AFCA has been established as a new external dispute resolution scheme to deal with complaints from consumers in the financial system. It will replace the Financial Ombudsman Service (FOS), the Credit and Investments Ombudsman (CIO) as well as the SCT.

 

 

AFCA has been touted by the government as a free one-stop shop for all financial complaints, which will have higher monetary limits, be more accountable to users (ie having an independent assessor to deal with complaints regarding the handling of disputes), and have rules to support its dispute resolution functions and legislation in case of superannuation disputes.

 

The new authority might seem like a great idea, but what do you do if you have an open complaint with the SCT? Or if you’ve approached your super fund regarding an issue you’re not happy with, and are unsatisfied with their response? Who do you turn to?

 

Firstly, it should be noted that the SCT is funded until the end of June 2020 to resolve all open complaints, and depending on the timing of any new complaints, the escalation point may be either SCT or AFCA. For example, the SCT will continue accepting complaints until 31 October, after which time its focus will shift to resolving existing complaints and new complaints will be directed to AFCA.

 

Secondly, the SCT and AFCA external dispute resolution processes are not the same, they each have their own rules and processes and uses different legislation. As AFCA has not yet started to accept complaints, it is unknown which system is better equipped to deal with a particular superannuation complaint.

 

According to data from SCT, in the second quarter of 2018 (ie from April to June), it increased the number of complaints resolved by 13.3% (or 551 cases) compared to the first quarter. Although, the number of complaints received also increased around 2.5% (or 580 cases), leading to the number of open complaints at the end of the second quarter totalling 1,897 cases. The number one resolved complaint by the SCT related to death benefit distribution, followed by deduction of insurance premiums, and fees and charges. These are also the top 3 most received complaints that the SCT receives.

 

Rounding out the top 10 types of complaints received are account balance, TTD benefit amounts in dispute, administration error, insurance cover dispute, delay in transfer of benefit, disclosure of information, and TPD benefit declined on medical evidence. If the numbers from SCT are anything to go by, AFCA should be expected to solve a similar number and types of disputes once it gets up and running.

 

Do you have a super complaint?

If you have a superannuation complaint relating to any of the above-mentioned categories, first contact your fund to see if something can be worked out. If you’re not happy with their response, you can then make a complaint to either SCT or AFCA depending on the timing. Contact us today if you would like help with your superannuation issue or potential complaint.

Are You An Australian Resident?

 

Tax residency is a complex area where the decision is made based on individual circumstances. As the world becomes more global and interconnected, there seem to be more cases where people who have considered themselves not to be Australian residents anymore have been caught up in the net. Before you head off overseas to work or start a business, you should consider the Australian residency tests and how they will apply to you.

 

In this global interconnected world, many Australians will no doubt leave Australia to work in many different countries in a vast array of professions. However, just because you leave Australia for a period time, that doesn’t mean that your Australian tax obligations are no longer relevant. Australian tax is based on the concept of “residency”. If you’re considered to be a resident of Australia then you will be taxed on your worldwide income with a tax offset available for any foreign tax paid.

 

To work out whether or not you’re a tax resident of Australia, there are several tests. The main test is the “resides” test under common law. This test is generally applied by considering your circumstances over the whole relevant year.

 

Rather than simply looking at the time spent in Australia, the question is whether your behaviour over a considerable period of time (6 months according to the ATO) has the degree of continuity, routine, or habit that is consistent with residing in Australia.

 

Some of the factors considered to be relevant in determining residency under this primary test include: your living arrangements (ie whether your usual place of abode is in Australia and whether you have family here, or whether any children are enrolled in school etc); the purpose, frequency and duration of visits to Australia; extent of any business/employment ties with Australia; extent of family/social ties with Australia; ownership of real estate in Australia; location of other assets and personal effects; where bank accounts are maintained; and nationality and citizenship.

 

As you can see, this primary test is entirely dependent on the individual circumstances of each case, and one change could sway the residency test one way or the other. It is also wholistic in that it encompasses almost every aspect of a person’s life and thus very complex to apply especially when you have to weigh certain factors against others.

 

If it is clear that you don’t satisfy the “resides” test, you will still be considered to be an Australian resident if you satisfy one of the following three statutory tests:

-Domicile and permanent place of abode – you will be considered to be an Australian resident if Australia is your permanent home (note permanent doesn’t mean everlasting or eternal but is rather contrasted with temporary).
-183-day test – if you’re present in Australia for more than half of the income year, whether continuously or with breaks, then you will have constructive residence in Australia unless it can be established your usual place of abode is outside of Australia and you have no intention of taking up residence here.
-Commonwealth superannuation test – If you’re a member of a Commonwealth government superannuation scheme or have a relationship to a member of such a scheme then you will be considered to be a resident of Australia.

 

A person’s residency is determined on a year-by-year basis and the Commissioner may treat an individual to be a resident of Australia until it can be clearly established that they have cut all relevant ties with Australia. Residency is a complex area, if you’re unsure or you think you’re on the borderline of being an Australian resident, a tax professional should be consulted before you make any decisions with tax consequences.

 

Are you going to work overseas or thinking of working overseas?

Before you head overseas to work or start a business, come and see us, we can help you figure out if your individual circumstance would make you an Australian resident once you leave. Or if you no longer wish to be an Australian resident and would like to start overseas with a clean slate, we can help you with that, too.

Airbnb And Home Sharing: Taxing Implications

Do you rent out a part of your home, or a holiday home, on Airbnb, Stayz or another sharing site? Perhaps you see this as a way of making a little extra income to help the household budget or to save for that holiday. But what you may not be aware of are the long-term tax implications of such a move, which may lead to a case of short-term gain causing long-term pain.

 

These days it seems more and more people are diving head first into the sharing economy by driving Ubers or listing their properties on Airbnb and other home sharing sites. Renting out a part of your home or your whole home while you’re on holidays seems like a great way to make some extra money now, but if you go down this route what about the tax implications for you now and in the future?

 

Reporting income

Unless a home was rented out to family members or under domestic arrangements that are not commercial, all income received needs to be included in your tax return. This is regardless of whether it was a long-term rental or a short-term rental.

 

Claiming deductions

Where you are only renting out a part of your home (ie a single room), say on Airbnb or another similar platform, you can only claim expenses related to renting out that part of the home. According to the ATO, a floor area method based on the area solely occupied by the renter as well as a reasonable amount based on their access to common areas should be used to apportion the expenses claimed.

In addition, where you use the room that is rented out in any other capacity such as storage, home office, or spare bedroom, then you cannot claim deductions for any expenses for the period the room is unlet. For example, heating and electricity costs received every quarter need to be apportioned based on the number of days the room was occupied and on the floor area basis to obtain the final deductions figure.

 

Selling your home eventually

As the ATO’s Deputy Commissioner for Small Business, Deborah Jenkins, has said:

 

“Just like running a business from home, once income is earned from a primary place of residence there are Capital Gains Tax (CGT) implications. It is possible that if a property significantly increases in value, the amount of CGT owed may even be higher than the amount of income received.”

 

When it comes time to sell your home and you’ve previously rented it out, you won’t be entitled to claim the full exemption for capital gains tax. This is the case even if you’ve lived in the home as your main residence and only rented out one room for a short period of time. The calculation for the portion of capital gain that will not be exempt is complex and a qualified and registered tax adviser should be consulted.

 

Want to find out more?

Renting out your home on sharing platforms may have some tax pitfalls, speak to us if you are thinking of or are renting out part of your home or your entire home. We can help you understand the intricacies and tax implications further to avoid a visit from the tax man.

Meaning Of Independent: Financial Advisers

 

The terms “independent”, “impartial”, or “unbiased” or similar terms can only be used to describe financial advisory businesses that meet certain conditions under the Corporations Act. Such conditions include not receiving commissions or volume-based payments. The independence of financial advisers is an important issue for both consumers and investors, and may sway decisions about investments as well as choice of advisers. Therefore, ASIC continually monitors the financial advice industry and take steps to intervene when it discovers false claims.

 

With all the media coverage around the negative behaviour of many large financial advisory firms and their affiliates, you may be forgiven for wanting to deal with a smaller, perhaps more independent financial adviser in the future, but what exactly does “independent” mean in in terms of financial services?

 

Under the Corporations Act, a person who carries on a financial services business or provides financial advice is prohibited from using the terms “independent”, “impartial”, or “unbiased” or any other term “of like import” in relation to the business or service, except where the person meets certain conditions. This condition is continually monitored by ASIC and it does take steps to intervene when it discovers false claims.

 

In one recent example, ASIC required four financial advice companies to cease and amend false claims of independence that could mislead consumers. The claims were made on websites and in some cases, in the marketing materials of the companies.

 

ASIC said it “will continue to publicly name advisers who do not comply with their obligations…and where appropriate, take action to enforce the obligations…and to ensure consumers are not mislead about the nature of the service they are receiving”.

 

 

So, what are the conditions that a financial services business have to satisfy to use terms such as “independent”? Basically, these restricted terms can only be used if the business does not:

-receive commissions (other than commissions that are rebated in full);
-volume-based payments (ie forms of remuneration calculated on the basis of the volume of business placed by the person with an issuer of a financial product); and
-other gifts and benefits from product issuers which may reasonably be expected to have influence.

 

In addition, the business is expected to operate without any direct or indirect restrictions relating to the financial product and be free from conflicts of interest that may arise from relationships with product issuers (which might reasonably be expected to influence the person). It is ASIC’s view that words such as “independently owned”, “non-aligned”, “non-institutionally owned”, and other similar expressions must also satisfy those conditions.

 

If you go to a financial adviser that holds themselves out to the “independent” or the like, you can expect them to not receive commissions, volume-based payments or have conflicts of interest. However, “independent” financial advisers are still able to receive asset-based fees without affecting their ability to use restricted terms.

 

Independent financial advisers would also be more likely to have an open list of products in their approved product list (APL) and have an easy process to recommend a product that is not on the (APL) should you wish to invest in those particular products. Any restrictions whereby an off-APL process is not easy to access would be considered to be a restriction and therefore, the financial services business would not be permitted to use a restricted term such as independent.

 

Looking for a financial adviser?

The independence of financial advisers is an important issue and may sway decisions about investments as well as choice of advisers. If you’re looking for a financial adviser that’s independent, remember to look out for the use of restricted terms. If you’re after some simple financial advice around your super fund or just some general advice, an accountant with a limited AFSL licence may be able to help. Contact us today to find out more.

It Follows: Higher Education Debts

 

Horror movie monsters have nothing on the higher education debts which will follow you to the ends of the earth. If you go overseas and you have a higher education debt under the Higher Education Loan program (HELP), Trade Support Loan (TSL) or the Higher Education Contribution Scheme (HECS), you are liable to repay those debts if you earn worldwide income over a certain threshold. This applies to all higher education debts regardless of when they were incurred.

 

It might seem like a horror movie cliché, a monster that follows you wherever you go, but did you know that your higher education debts under the Higher Education Loan program (HELP), Trade Support Loan (TSL) or the Higher Education Contribution Scheme (HECS) debts follow you wherever you go in the world?

 

Prior to 2017, individuals could incur these higher education debts and move overseas with no repayment obligations. However, these debts are now required to be repaid regardless of where you are in the world, as long as your worldwide income is over a certain threshold. This applies regardless of whether your debt was incurred before or after 2017. As long as you have a higher education debt to the Commonwealth of Australia, you are required to repay the debt regardless of where you reside.

 

If you have a higher education debt and plan on going overseas, you will need to update your contact details and submit an “overseas travel notification” if you intend to go overseas for 183 days or more in any 12 months. 

 

This includes for any reason such as holiday, study or work. The 183 days is counted cumulatively and does not have to be taken all at the same time. For example, you could go on a holiday for a few months in one country, come back to Australia for a few months and then travel to another country. As long as it exceeds 183 days in total in any 12 months period you will have to submit an “overseas travel notification”.

 

Once you’ve submitted the notification and have moved overseas, or if you’re already living overseas and have a HELP, HECS or TSL debt, the next step is to report your worldwide income to ATO every year through an Australian tax return. Lodgments are usually due by 31 October each year, but it may be extended if you use a tax agent. For the 2018-19 year, your worldwide income will need to exceed $51,957 before the ATO will raise a compulsory repayment (overseas levy) in relation to your higher education debt. The repayment rate depends on how much worldwide income you earn and range from 4% to 8%.

 

For the 2018-19 year, if your worldwide income is at or below $12,989 you do not have to report your worldwide income but you will need to lodge a “non-lodgment advice form” to notify the ATO of your situation. If you find yourself in financial hardship while overseas and cannot afford the compulsory repayment even though you earn above the minimum repayment threshold, you can apply to the ATO to defer the payment.

 

Remember, you have options when you report your worldwide income to the ATO, you can choose between one of three assessment methods that work the best with your situation, the self-assessment method, the overseas assessment method, or the comprehensive tax-based assessment method. If it all seems too complicated you can always reduce your debt before you head overseas by making voluntary repayments.

 

Need guidance?

If you’re going overseas and you have a higher education debt, we can help you get your house in order and lodge your returns with the ATO while you’re away. We can also help you work out which assessment method is the best for your situation if you’re already overseas and you’re not sure what the best method is.

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