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Corporate Tax Rates: Recent Changes Give Certainty

 

There’s finally some certainty about the corporate tax rate(s). Legislation has recently passed Parliament and the fate of other proposed changes has also been finalised. The law is settled, so it’s a good time to remind ourselves what the final state of play is concerning the dual rates of 27.5% and 30%.

 

There are two categories of companies when it comes to the corporate tax rate. The two categories are determined by turnover and business activity.The rate of 27.5% applies to corporate tax entities known as “base rate entities”. What is a base rate entity? Put simply, it is a company which carries on a business and has an aggregated turnover of less than $50 million. This is up from $25 million in the last financial year (ie 2017-18), but will stay at $50 million until 2023-24. The ALP has confirmed that it will not change the rules for base rate entities if elected – so there we have our first certainty.

 

The rate for base rate entities is locked in at 27.5% until 2023-24. The tax rate for all other companies remains at 30%, ie the standard corporate tax rate. This will not change.

 

There had been legislation before Parliament that proposed to progressively extend the 27.5% corporate tax rate to all companies regardless of turnover. However, the legislation did not make it through the Senate and the Government has since announced that it would not proceed with this proposal. This provides us with our second certainty – there will be no changes to the standard corporate tax rate.

 

The tax rate for base rate entities is scheduled to reduce after 2023-24, as this has already been legislated. It is reasonable to state this as the third certainty – that the tax rate for base rate entities will decline progressively to 25% by 2026-27.

 

Now, this is all perfectly straightforward if your company is carrying on what may be termed a trading business, eg providing services, buying and selling trading stock, importing/exporting etc. But if the activities of the company wholly or partly consist of receiving returns on investments – such as rent, interest and dividends (which are termed “passive income”) – then it can get a bit tricky.

 

The Government never intended that companies receiving passive income should benefit from the lower tax rate. It recently changed the rules for base rate entities to ensure this does not happen.

 

A base rate entity will only qualify for the lower 27.5% rate for a particular year if its passive income is less than 80% of its assessable income (and of course its aggregated turnover is less than $50m). Put the other way, companies that receive more than 80% of their income in passive forms will pay tax at the standard corporate tax rate, regardless of turnover.

 

The passive income is termed “base rate entity passive income” in the amending legislation. And what qualifies? Well, dividends and the associated franking credits to start with. Interest (or a payment in the nature of interest) also qualifies – but not if the entity is a financier – as well as royalties and rent. Another key area that qualifies as base rate entity passive income is net capital gains. This could be important for smaller companies – in that the sale of a substantial asset could shake the income mix and possibly put access to the lower rate at risk.

 

Does your company derive investment income?

If you are not sure of the implications of the new company tax rates, we can help. For example, if your business operates via a company, it may be worthwhile using the CGT rollover provisions to transfer assets into a separate entity, to ensure that the 80% rule is not breached. The split 27.5% / 30% rate also has implications for the imputation system and franking credits, which we would be happy to discuss.

Working-From-Home Deductions For Employees

More people are working from home than ever before. Employees who work from home may be able to deduct some of the expenses they incur in running a home office or for phone and internet usage. The key to claiming these deductions is to understand when expenses are deductible and what taxpayers must do to support their claim.

 

If you are an employee and you sometimes work from home, you may be able to claim deductions for some of the expenses you incur, provided you are not reimbursed by your employer. Here, we consider two common types of expenses that employees may claim and how you must substantiate your deductions.

 

Home office running expenses

Running expenses such as heating, cooling and lighting costs are only deductible if you exclusively use these services while performing work at home.

 

For example, the ATO says that you would not be able to claim deductions for these expenses if you work on your laptop while sitting next to your partner who is watching TV.

 

 

However, if you perform work in a room when others are not present, or in a separate room dedicated to work activities, you may be able to claim some running expenses. This is because you are entitled to a deduction when you incur additional running expenses as a result of your income-producing activities (ie above what you incur for domestic or private use).

 

In practice the ATO accepts two methods for calculating your deduction:

-A simple rate of 52 cents per hour worked (effective from 1 July 2018), which covers all the running expenses you can claim (including decline in value of home office items such as furniture). To substantiate your deduction, you only need to record how many hours you worked from home in the income year. If your hours are regular and constant throughout the year, the ATO will accept a diary of a representative four-week period as sufficient record-keeping.

-Alternatively, you can claim the work-related proportion of actual expenses incurred by maintaining thorough records and evidence. This is a more complex method suitable for taxpayers who would be entitled to claim more than the 52 cents per hour rate would allow. You should seek advice about this method to ensure your evidence will meet ATO requirements.

 

Phone and internet usage expenses

You can claim up to $50 in total for all work-related device usage charges (phone calls, text messages and internet) with basic documentation only. The ATO accepts these methods of calculation:
-Home phone: 25 cents per work call
-Mobile phone: 75 cents per work call and 10 cents per work-related text message.
-Internet data: basic records reflecting time spent or data used for work purposes.

However, if you need to deduct more than $50, you must maintain detailed written evidence to substantiate the work-related proportion of your expenses. The ATO has some guidelines about apportionment, taking into account complexities such as bundled phone and internet plans, and itemised versus non-itemised phone bills. The key is to use a “reasonable” basis for your apportionment.

 

Deductions for electronic devices are calculated separately. If you purchase these items to help you earn income, you may be entitled to an immediate deduction for items costing $300 or less, or a deduction for decline in value for more expensive items.

 

What can’t employees claim?

Occupancy expenses such as rent, mortgage interest, council and water rates, land taxes and insurance premiums are usually not deductible for employees who work from home.

The ATO also says that casual employees cannot claim deductions for telephone rental expenses. This is because they are not “at call” and do not derive assessable income until they commence duties at their place of employment.

 

Check your expenses

If you work from home as an employee, talk to us today to check whether you are claiming all of the expenses you are entitled to. We can also help you ensure that you are keeping adequate records and evidence to protect you in the event of an ATO audit.

Vested In Trusts

 

Vesting of trusts and tax consequences related to such events are complex issues which may end up costing the trust and beneficiaries needless headaches and hip pocket pain. The ATO has recently released a long awaited draft ruling which seeks to clarify some of the issues surrounding deferring vesting dates and consequences of vesting.

 

Have you looked at your trust deed recently? If you have a trust, chances are it was set up by your accountant or solicitor, and you didn’t have to do too much of the legwork. Look closely at your deed and you’ll notice that it will specify a date on which the interests in the trust vest and contain a clause which specifies the consequences of that date being reached.

 

Put simply, on the vesting date of a trust, the interests in the trust property become vested interest and possession; the beneficiaries become takers who hold a fixed interest in the capital and income of the trust property. This will have CGT and tax consequences for the trust and the beneficiaries. 

 

The ATO has recently released a long awaited draft ruling to clarify when the vesting date can be changed and the consequences of trusts vesting.

 

Broadly, the draft ruling states that prior to the vesting date, it may be possible for the trustee or a Court to postpone the vesting of the trust by nominating a later date. Once the vesting date has passed, it is not possible to change the vesting date as the trust has vested. According to the ATO, the consequences of vesting cannot be avoided by the parties continuing to carry on as though the trust had not vested or by an exercise of power to vary the deed.

 

Once the trust vests, depending on the clauses contained in the deed, there could be no CGT consequences, the creation of a new trust could occur, or a situation could arise where a beneficiary becomes absolutely entitled to the assets of the trust. The outcome depends entirely on the clauses contained in the deed and differs in each individual circumstance as each trust deed may be different.

 

The income of trust after vesting is also taxed differently. Prior to vesting the trustee had discretionary power to distribute the income or capital of the trust to certain beneficiaries entitled under the trust. However, after the vesting of the trust, the takers (beneficiaries) hold the present entitlement of the trust in proportion to their vested interests in the property of the trust and are assessed on the portion.

 

An example to illustrate this concept would be, prior to the vesting of the ABC Trust, the trustee determined that all the income would go to beneficiary X. At the vesting date, the trust deed specified that trustee was to hold the trust property in equal shares for beneficiary X, Y and Z. Therefore, for the income year that the trust vests, beneficiaries X, Y and Z are assessable on 1/3 of the share of the net income that relates to their share in the total income of the trust estate.

 

Vesting of a trust is a very complex matter and needs to be treated very carefully. The tax consequences stemming from a trust vesting could be very significant on both the trust and beneficiaries, and it cannot be undone by either the trustee or the courts. Therefore, understanding your own trust deed and forward planning is advisable to ensure that the purpose of the trust is met and maintained.

 

Too complicated?

Confused about all the potential CGT and income tax consequences for your trust? Or do you just want to make sure that plans are in place to protect your trust from falling afoul of the vesting rules? Talk to us today.

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.

When Is Early Release Of Super Legal

 

Contrary to what illegal early access of superannuation promoters may say, you cannot get your super early to pay for a holiday or buy a car. There are rules that govern when super can be accessed, and usually access can only be obtained at retirement or in exceptional circumstances (compassionate grounds, severe financial hardship, terminal medical condition, and temporary or permanent incapacity). Be very wary of any individual or company purporting to allow you to access your super early when you don’t meet those exceptional circumstances.

 

Most people know that superannuation cannot be accessed until retirement or in exceptional circumstances. What exactly are these exceptional circumstances have caused considerable confusion and allowed unscrupulous individuals to promote illegal schemes to access super early to pay for a holiday or buy a car.

 

To clarify, exceptional circumstances that allow you to access your super early usually relate to specific medical conditions or severe financial hardship. They broadly fall into 4 categories, compassionate grounds, severe financial hardship, terminal medical condition, and temporary or permanent incapacity.

 

Compassionate grounds

Includes the need to pay for medical treatment for yourself or a dependant, to make a payment on a loan to prevent you from losing your home, to modify your home or vehicle for special needs of yourself or your dependant due to severe disability or to pay for expenses associated with a death, funeral or burial. The amount of super that can be withdrawn is limited to what is “reasonably needed”.

 

Severe financial hardship

This condition may be satisfied if you have received Australian Government income support payments continuously for 26 weeks and are unable to meet reasonable and immediate family living expenses. The maximum amount that can be accessed is $10,000 at a time, and you can only make one withdrawal from the fund due to severe financial hardship in any 12-month period.

 

Terminal medical condition

Early access to super may be allowed if you have a medical condition that is “likely to result in death within the next 24 months”. The medical condition and prognosis will need to be certified by 2 different medical practitioners. One of the medical practitioners must be a specialist in an area related to the illness or injury. If you’re accessing your super early due to a terminal medical condition, you should be aware that not all super funds allow for these types of payments. Where your fund doesn’t allow for early access due to this condition, you may be able to rollover your super into a different fund which allows for these types of payments.

 

Temporary or permanent incapacity

Temporary incapacity relates to physical or mental medical conditions which renders you temporarily unable to work (or to work less hours). You will be able to receive the super in an income stream over the time you are unable to work.

 

Permanent incapacity is also referred to as a “disability super benefit” the condition is met when the trustee of the super fund is satisfied that you have a physical or mental condition that is likely to stop you from ever working again in a job you’re qualified to do by education, training or experience. If you would like to receive concessional tax treatment of the early release of super, at least 2 medical practitioners must certify your condition and prognosis.

 

Therefore, unless your circumstances fall into one of the 4 categories above or the balance of your super account is less than $200, you will not be able to access your super until you retire. Be very wary of any individual or company purporting to allow you to access your super early when you don’t meet those exceptional circumstances. If you do go ahead and withdraw your super illegally, you could be hit with a range of penalties and interest charges or even a jail term depending on your involvement.

 

Want to find out more?

Are you going through a tough time and need early access to your super? We can help you identify the best option for your circumstance. If you’ve been contacted or have inadvertently become embroiled in an illegal early release of super scheme, we can help you get the best outcome with the regulatory authorities.

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.

 

 

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.

Paying Company Debts By Instalments

 

Does your business have a debt with the ATO? Depending on your circumstances, you may be able to apply for a payment deferral, or work out a tailored payment plan with the ATO. It’s easy if you’re an individual or sole trader with a debt of $100,000 or less and can be done quickly online. For businesses with debts of more than $100,000 it may be more complex but if you act early there is still time to get the best outcome.

 

If your business has gotten into a bit of trouble lately and you suddenly find yourself faced with a tax debt. Don’t panic. Despite what has been reported in the media recently, the ATO won’t bankrupt your business if you make early contact and make a genuine attempt to either pay or work out a payment plan.

 

Depending on your circumstances, you may be able to apply for a payment deferral, or work out a tailored payment plan with the ATO. Applying for a payment plan with the ATO is easy if you’re an individual or sole trader with an income tax or activity statement debt of $100,000 or less, it can be done online through your myGov account.

 

If you have debts of more than $100,000, that’s when you and your business may need to jump through a few more loops. Usually, you would need to show the ATO that your business is viable, in that it has the ability to pay its debts and meet ongoing commitments. The assessment considers factors such as gross margin, cash flow, asset/liability position including working capital, liquidity, debtor/creditor position, and the availability of funding.

 

Typically, if your business has debts of more than $100,000 and you’re applying for a tailored payment plan, you will need to provide the following information to the ATO:

 

-proposal to pay all amounts owed in the shortest possible timeframe, while allowing all future tax obligations to be met by the due date;
-details of how the debt arose;
-steps taken to mitigate the debt (eg loans from either banks or other sources);
-most recent bank statement for each bank or financial institution account held;
-detailed profit and loss (statement of financial performance) and balance sheet (statement of financial position) for the year to date and last two financial years;
-details of overdraft or loan facilities including term loans, hire purchase and leasing facilities (needs to include details such as balances owing, monthly repayment amount for each debt and limit for overdrafts);
-aged creditors and debtors listing; and
-any other relevant information.

 

Once your business has been assessed as viable and you enter into a payment plan with the ATO, you need to be aware that interest will continue to accrue on the unpaid debt until it is completely paid off. Small businesses with a good payment and lodgement compliance history may be eligible for interest-free payment plans for activity statement debts if they meet certain conditions.

 

If you default on a payment plan, the ATO may impose stricter requirements before agreeing to a new plan. Requirements may include a higher upfront payment, or for payments going forward to be made by direct debit, or both. In cases where you and the ATO cannot reach an agreement on a payment plan, all is not lost. If you’re willing to provide security such as a registered mortgage over a freehold property or an unconditional bank guarantee from an Australian Bank, the ATO may consider requests to defer the time of payment of a debt or payment by instalments.

 

Help! I have an ATO debt.

If you have a debt, the most important thing is to make early contact with the ATO to ensure that they are aware of your situation. Contact us today and we can help your business prepare any proposed payment plans and liaise with the ATO to get the best outcome.

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.

Are You Caught Out By The Age Pension Assets Test?

The stricter Age Pension assets test came into force more than a year ago, but it is probably only now that the impact of this change is being felt, especially by middle-income wage earners. This could put you in a situation where if your assets are at a certain level, you won’t qualify for the Age Pension. It is thought that this could affect up to 300,000 retirees. Here we look at current thresholds to keep in mind.

 

The Self-Managed Superannuation Fund Association (SMSF) has expressed concern that the changes to the Age Pension asset test rules (since 1 January 2017) may be actively discouraging middle-income earners from saving to be self-sufficient in retirement. Could this apply to you? It is worth looking at your situation closely to see if the changes do affect you.

 

If you earn what is considered to be an “average” income you will most likely be caught by the asset test. But what is a middle-income? Individuals with an average taxable income of $46,000 in 2017/2018 fall within this category and could also be hit with an increase in tax rate of 3.2 per cent by 2021/2022.

 

Currently, the Age Pension assets free area for a single homeowner is $253,750 and $380,500 for a homeowner couple. For non-homeowners it is $456,750 (single) and $583,500 (couple). The Age Pension begins to phase out at $3 per fortnight for each $1,000 of assets over the relevant assets test threshold.

 

The table below outlines the current and proposed thresholds for the full Age Pension:

If you are:                                                      Homeowners                    Non-homeowners
Single                                                            $253,750                                $456,750
in a couple, combined                                    $380,500                               $583,500
illness separated couple, combined             $380,500                                $583,500
one partner eligible, combined                     $380,500                                $583,500

Source: Australia Department of Human Services https://www.humanservices.gov.au/individuals/enablers/assets

 

The table below outlines the assets test thresholds for the part Age Pension:

If you are:                                                     Homeowners                   Non-homeowners
Single                                                           $552,000                                 $755,000
in a couple, combined                                 $830,000                                 $1,033,000
illness separated couple, combined           $977,000                                  $1,180,000
one partner eligible, combined                   $830,000                                 $1,033,000
Source: Australia Department of Human Services https://www.humanservices.gov.au/individuals/enablers/assets

 

Taper rate

If you are a home-owning couple, for example, who have superannuation assets of between $380,500 and $830,000, the taper rate creates a “black hole” (equivalent to 7.8% a year), reducing your pension entitlement at a rate exceeding the income you can earn from your super balance above the asset free area. This may provide an incentive to shift investments to excluded assets such as the family home.

 

Plan your future

The SMSF Association believes that a more appropriate mechanism to integrate superannuation and Age Pension means testing would be a move to a single means test that applies a deeming rate to financial and non-financial assets, getting rid of the assets test altogether.

Melbourne-based SaveOur Super group has engaged in a debate with Assistant Treasurer, Michael Sukkar, on this issue. Sukkar has said that the Age Pension is “not supposed to support retirees with a higher level of assets to maintain their capital base”. Instead, the steeper taper rate is meant to “encourage people to draw down their savings more rapidly”. While this debate may not lead the current Government to change super and pension rules, it is good time to contact us. We can help you to assess your assets and plan well for your retirement.

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