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SMSFs Vs Other Types Of Funds: Some Issues To Consider

 

For many people, SMSFs are a great option for building retirement savings, but they may not be suitable for everyone. Before you jump in, make sure you understand the differences between SMSFs and other types of funds to help you make an informed decision.

 

Thinking about setting up an SMSF? In this first instalment of a two-part series, we explain some of the key differences between SMSFs and public offer funds. Understanding these differences can help you have a deeper discussion with your adviser.

 

Management

While public offer funds are managed by professional licensed trustees, SMSFs are considerably different because management responsibility lies with the members. Every SMSF member must be a trustee of the fund (or, if the trustee is a company, a director of that company).

This is an advantage for those who want full control over how their superannuation is invested and managed. However, it also means the members are responsible for complying with all superannuation laws and regulations – and administrative penalties can apply for non-compliance. Being an SMSF trustee therefore means you need to be prepared to seek the right professional advice when required.

 

If you intend to move overseas for some time (eg for a job posting), an SMSF could be problematic because it may be hit with significant tax penalties if the “central management and control” moves outside Australia.

 

 

On the other hand, members of public offer funds can move overseas without risking these penalties because their fund continues to be managed by a professional Australian trustee.

 

Costs

Costs are a key factor for anyone considering their super options. Fees charged by public offer funds vary, but are generally charged as a percentage of the member’s account balance. Therefore, the higher your balance, the more fees you’ll pay. This is an important point to remember when weighing up a public offer fund against an SMSF.

SMSF costs tend to be more fixed. As well as establishment costs and an annual supervisory levy payable to the ATO, SMSFs must hire an independent auditor annually. Additionally, most SMSF trustees rely on some form of professional assistance, which may include accounting/taxation services, financial advice, administration services, actuarial certificates (in relation to pensions) and asset valuations.

 

These costs may be a more critical factor for those with modestly sized SMSFs. This year, a Productivity Commission inquiry found that larger SMSFs have consistently delivered higher net returns compared with smaller SMSFs, and that SMSFs with under $500,000 in assets have relatively high expense ratios (on average). The Commission’s report has attracted some criticism that it has overstated the true costs of running an SMSF, but in any case, anyone considering an SMSF needs to think carefully about the running costs involved and make an informed decision about whether an SMSF is right for them. For members with modest balances, an SMSF will often be more expensive than a public offer fund, but this needs to be weighed up against the other benefits of an SMSF.

 

Investment flexibility

A major benefit of an SMSF is that the member-trustees have full control over their investment choices. This means they can invest in specific assets, including direct property, that would not be possible in a public offer fund. For example, a business owner wishing to transfer their business premises into superannuation would need an SMSF to achieve this. SMSFs can also take advantage of gearing strategies by borrowing to buy property or even shares through a special “limited recourse” borrowing arrangement.

However, with control comes responsibility. SMSF trustees must create and regularly update an “investment strategy” that specifically addresses things like risk, liquidity and diversification. And of course, the SMSF’s investments must comply with all superannuation laws. In particular, transactions involving related parties (eg leases and acquisitions) can give rise to numerous compliance traps, so SMSF trustees must be prepared to seek advice when required.

 

Need help with your decision?

Contact our office to begin a discussion about whether an SMSF can help you achieve your retirement goals.

Working And Studying Part-Time: Have You Considered All Your Deductions?

 

Will you need to buy textbooks for your work-related study, or perhaps invest in a new computer? You can claim deductions for these expenses, and others, if your course of study has the necessary connection to your current employment. Find out what rules apply when claiming for books, equipment, accommodation and travel, and ensure you’re claiming everything you’re entitled to.

 

Undertaking further study is a great way to enhance your skills on the job, but on top of tuition fees you may be facing a range of additional costs. In the previous instalment of our series on work-related study expenses, we explained when you can deduct your course fees. In this instalment, we look at other expenses like textbooks, computers and travel.

An important rule to remember is that in order to deduct any of the expenses discussed in this article, there must be a sufficient connection between your course of study and your current income-earning activities. This generally means the course must either maintain or improve the skills or knowledge you need for your current employment or result in (or be likely to result in) an increase in your income from your current employment.

 

Books and equipment

Textbooks are notoriously expensive! The good news is that you can generally deduct the cost of textbooks, as well as stationery and photocopying expenses, in the year of purchase.

Computers and other equipment are a little more complicated. If you buy a computer, calculator, technical instrument or tool or furniture (eg a desk or filing cabinet) to help you complete your studies, you may claim the interest expenses on any loan you’ve taken out to fund the purchase, and you may also claim equipment repair costs as they arise. However, you can’t initially deduct the purchase price. Instead, these are depreciating assets for which you can claim a deduction for decline in value. Your tax adviser can help you determine how the depreciation rules apply to your purchases.

If you use equipment such as a computer for both study and private purposes, you can only claim for the study-related proportion of your use. For example, if you use the computer for study purposes 60% of the time, you can deduct 60% of the interest expenses, repair costs and decline in value.

 

Meals, accommodation and travel

Generally, meals and accommodation are considered private expenses and therefore aren’t deductible. However, you can deduct these expenses if your study requires you to temporarilysleep away from home for at least one night. You can also claim your travel expenses in these circumstances.

 

What about day-to-day travel? You can usually deduct your costs for travel between home and the place of education (and back again) and between your workplace and the place of education (and back again).

 

 

However, if you’re making a double-leg journey, your deductions are restricted. If you’re travelling from home to your place of education and then on to work, the second leg of that journey is not claimable. (Similarly, when travelling from work to your place of education and then home, the second leg is not claimable.)

 

For public transport travel, you can claim the relevant fares you paid. For car travel, you can choose between the “cents per kilometre” method and the “logbook” method. Your tax adviser can help you determine which method is more appropriate for your situation. If you’re claiming car expenses for both study-related travel and ordinary work-related travel, you’ll need to account for these separately in your tax return.

 

In many cases, taxpayers are required to reduce their total claim for work-related education expenses by $250. This is a complex calculation that depends on what other education expenses you incur in the financial year. Your tax adviser can assist with performing this calculation.

 

Maximise your return

Work-related study deductions like depreciating assets and car travel can be tricky. Take the stress out of your claim and talk to us for expert assistance. We’ll help you substantiate your deductions and make sure you’re claiming everything you’re entitled to.

How Illegal Phoenixing Affects You

Every year, illegal phoenix activity costs the Australian economy billions of dollars not to mention the direct costs to businesses, employees, and the government. Just how much has been quantified by a recent report commissioned by three government agencies. Overall, the direct cost to businesses, employees, and the government has been calculated to around $2.85bn to $5.13bn, while the total impact to the Australia economy is around $1.8bn to $3.5bn in lost gross domestic product.

 

According to the Australian Bureau of Statistics, at the end of 2016-17 the number of businesses that ceased operating in Australia amounted to 261,450, an increase of 0.5% from the previous year. While most of these are likely to be honest commercial failures, after all, there are statistics that indicate that around 60% of Australian small businesses fail within the first 3 years, a percentage of these yearly failures may be attributable to illegal phoenixing.

 

Illegal phoenixing is the deliberate liquidation of a company to avoid liabilities while simultaneously commencing similar operations in another company or trading entity. This type of illegal activity leaves behind not only outstanding payment to tax authorities, but also unpaid creditors, unfulfilled customer orders and unpaid employee entitlements.

 

“[Illegal phoenixing] can occur in any industry or location. However illegal phoenix activity is particularly prevalent in major centres in building and construction, labour hire, payroll services, security services, cleaning, computer consulting, cafés and restaurants, and childcare services. [it is also seen] in regional Australia in mining, agriculture, horticulture and transport. There is an emerging trend in intermediaries who promote or facilitate illegal phoenix behaviour.”

 

To tackle this issue on a national level, the Inter-Agency Phoenix Taskforce has been established to identify, manage and monitor suspect illegal phoenix activity. This task has been made significantly easier with the development of the ATO Phoenix Risk Model (PRM) which allows for the identification of potential illegal phoenix population which can be more closely monitored by the taskforce. As at June 2018, the taskforce comprises of 29 government agencies including all State and Territory Revenue Offices.

 

A recent report commissioned by three Phoenix Taskforce member agencies (ATO, ASIC and the Fair Work Ombudsman) into the economic impacts of illegal phoenixing activity shows a sobering picture of how this illegal activity affects all of us, either directly, or through broader economic impacts:

-direct cost to businesses in the form of unpaid trade creditors is $1,162-$3,171m;
-direct cost to employees in the form of unpaid entitlements is $31-$298m;
-direct cost to the government in the form of unpaid taxes and compliance cost is $1,660m; and
-the net effect to the Australian economy is $1.8bn-$3.5bn lost gross domestic product.

 

As the figures show, illegal phoenix activity has deep financial impact on the Australian economy. Not to mention the costs unable to be captured by the report such as employee stress related to losing their jobs, discouragement effect on labour supply due to people not getting their full entitlements, increased social welfare burden through increased government support, and distortionary competition effects on lawful businesses.

 

How to protect yourself

As an employee, you should ensure that you receive a payslip and regularly review your entitlements and superannuation. As a business owner, look out for warning signs such as a company offering lower than market value quotes, or changes to a company name with the same management or staff. If you think you may be dealing with a company the is involved in illegal phoenixing, we can help with the due diligence before you enter into any business arrangements.

 

How Much Tax Is Taken Out Of My Super Withdrawals?

You’ve worked hard for your super, so make sure you access your benefits in the most tax-effective way possible. Members aged under 60 years will pay tax on their withdrawals, but if you’re over 60 you generally will not pay any tax. But there are always exceptions! Find out what taxes apply before you jump in.

 

If you’re aged 60 or over, you usually won’t pay any tax on super benefits you withdraw. However, if you’re under 60 your benefits will be taxed.

To understand how much tax you’ll pay, it helps to remember that your super benefits are split into two components:

-The “tax free” component of your benefits is not taxed when you make a withdrawal, even if you’re under 60. This component is the part of your super balance made up of things like non-concessional (after-tax) contributions.

-The “taxable” component is taxed. This component reflects things like compulsory superannuation guarantee contributions, salary-sacrifice contributions and personal contributions for which you claimed a tax deduction, as well as investment earnings.

 

You can’t “cherry pick” which component you would like to fund your withdrawal. This means, for example, that if your accumulation account is 80% taxable and 20% tax-free at a particular point in time, any lump sum you withdraw at that time would also reflect this 80/20 split for tax purposes. Similarly, any pension you start at that time would have this 80/20 split locked in from the commencement day of the pension.

 

Therefore, the bigger your “taxable” component as a percentage of your account balance, the more tax you’ll pay when you withdraw benefits. The applicable tax rates are as follows:

Pensions: the taxable part of your pension payments is taxed at your marginal rate, less a 15% tax offset.

Lump sums: the taxable part of a lump sum withdrawal is tax-free up to your “low rate cap” of $205,000 (for 2018–2019; set to increase to $210,000 for 2019–2020). This is a lifetime cap that you gradually utilise each time you withdraw a lump sum. Once you have fully utilised your cap, the remaining taxable part of any lump sum is then taxed at 17% (or your marginal rate, whichever is lower).

 

Several exceptions apply to these rules. First, if you’re receiving certain “disability superannuation benefits” or accessing super before you’ve reached preservation age (eg on “compassionate” grounds), different tax treatment applies. Second, some people such as members of public sector or government superannuation funds are subject to special rules that mean they will pay some tax even if they’re aged over 60.

 

Planning ahead

It’s worth talking to your adviser to plan the best strategy for your super withdrawals. For example, if you’re under 60, a lump sum may be more tax effective than a pension because of the “low rate cap” discussed above.

 

However, to access a lump sum before age 65 you must meet a relevant condition of release such as “retirement”, whereas you only need to reach your preservation age in order to access a transition to retirement income stream (TRIS).

 

Your adviser can also help you explore the possible tax benefit of starting a full account-based pension (ABP). Unlike a TRIS, an ABP requires that you’ve met a relevant condition of release such as retirement, but the advantage is that it attracts a partial or possibly a full exemption from income tax on investment earnings inside the fund. So, as you can see, the decision to access your benefits is best made with professional advice that takes into account a range of factors including:

-your age;
-employment status and income;
-lifestyle/cashflow needs;
-tax efficiency of running a pension;
-eligibility for the Aged Pension; and
-special planning required if you hold more than $1.6 million in super (the current limit on the amount you can hold in full pensions like ABPs).

 

Need to access your super?

Talk to us today for expert advice tailored to your individual circumstances. We’ll help you navigate through the tax rules to get the most out of your retirement savings.

Working And Studying Part-Time: Can I Deduct My Course Fees?

If you’re working and also studying part-time in a work-related course of education, you may be able to deduct some expenses like tuition fees. However, to be eligible there must be a sufficient connection between the course and your current job. Make sure you understand the ATO’s criteria before making a claim.

 

Planning on going “back to school”? The costs can really add up, but the good news is that your course fees may be deductible if the course is sufficiently related to your current employment. In this first instalment of a two-part series, we explain when you can deduct your tuition fees for work-related education. Our second instalment will look at other expenses like textbooks, computers and travel.

 

What courses are eligible?

The first step is to work out whether the course you’re studying entitles you to claim self-education deductions. Not all courses you study while you’re working will be eligible.

Importantly, the course must lead to a formal qualification from a school, college, university or other educational institution. Courses offered by professional associations (as well as other work-related seminars, workshops and conferences) generally don’t come under “self-education” for tax return purposes, but these course fees will often be deductible as “other work-related expenses” in a separate part of your tax return. Your tax adviser can help you determine how to claim these.

Second, there must be a sufficient connection between your formal course of study and your current income-earning activities.

This means the course must either maintain or improve the skills or knowledge you need for your current employment, or result in (or be likely to result in) an increase in your income from your current employment.

 

Therefore, a course that directly enables you to:

-become more proficient in performing your current job;
-move up to a new pay scale; or
-be promoted to a higher-salary position with your current employer
is likely to be eligible.

 

However, the ATO says it’s not sufficient if a course is only generally related to your job, or if it will help you to get employment or get new employment. The ATO gives the following as examples of study that would not be eligible:

-An undergraduate student studying a course with the intention of working in that industry in future.
-A worker studying in order to change industries, or to get a new type of job within the same organisation.
-A professional like a general medical practitioner studying to become a specialist in a particular field of medicine.

 

When are course fees deductible?

If your course has the necessary connection to your current work as explained above, you can deduct course fees that are funded under the government’s “FEE-HELP” or “VET FEE-HELP” loan programs. However, you can’t deduct course fees funded under the “HECS-HELP” program.

You also can’t deduct any repayments you make under any government loan scheme. This is best illustrated by an example:Sarah is an employee who is also enrolled part-time in a course funded by a FEE-HELP loan. This course will help her improve skills needed in her current job. Her tuition fees for this financial year are $2,000. She can claim this $2,000 as a deduction in her tax return.

When she later makes repayments on her FEE-HELP loan (either compulsory or voluntary), those repayments will not be deductible.

If you’re paying course fees yourself without any government assistance, you can claim a deduction and you can also claim the interest expenses on any loan you’ve privately taken out to finance this (eg a bank loan).

In many cases, taxpayers are required to reduce their total claim for self-education expenses by $250. This depends on what other self-education expenses you incur in the financial year. Your tax adviser can perform the necessary calculations to finalise your claim.

 

Get it right before you claim

Tertiary course fees can involve some large deductions. Talk to us today for expert advice on your eligibility and to ensure your claim will stand up to ATO scrutiny.

Government Tenders And Tax Compliance

Bidding on Commonwealth government tenders could soon be more complex, with the government seeking to exclude businesses that do not have a satisfactory tax record from the tender process. It would apply from 1 July 2019 to all tenders with an estimated value of over $4m (including GST) and includes construction services. Businesses that wish to tender must generally be up-to-date with their tax obligations including both registration and lodgement requirements and not have any outstanding debt.

 

Do you run a business that would like to bid on lucrative Commonwealth government contracts or is likely to do so in the future? From 1 July 2019, the government is seeking to exclude from the tender process those businesses that do not have a “satisfactory tax record (STR)” as a part of its measures to tackle the black economy. The initiative would apply to all tenders with an estimated value of over $4m (including GST) for all goods and/or services including for construction services.

 

Those companies wishing to tender must either provide a satisfactory STR that is valid for at least 2 months or more at the time of the tender closing, or in circumstances where a satisfactory STR has not been issued, provide an STR receipt demonstrating that an STR has been requested from the ATO and then provide the STR no later than 4 business days from the close of tender and before the awarding of the contract.

 

To obtain a satisfactory STR from the ATO, the business must:

-be up-to-date with registration requirements (ie ABN, GST, TFN etc);
-have lodged at least 90% of all income tax returns, FBT returns and BASs that were due in the last 4 years or the period of operation if less than 4 years;
-not have $10,000 or greater in outstanding debt due to the ATO on the date the STR is issued. Note this does not include debt subject to a taxation objection, review or appeal or debt that is a part of a payment plan with the ATO.

 

When an STR is issued, it will usually be valid for 12 months from the time of issue. However, those businesses that do not hold an Australian tax record with the ATO of at least 4 years will generally receive STRs that are only valid for 6 months.

 

There may also be additional requirements in relation to obtaining STRs for subcontractors, foreign companies, partnerships, trusts, joint ventures and tax consolidated groups tendering for Commonwealth government contracts from 1 July 2019.

 

Depending on how well the policy runs in its first year, the government is open to introducing further criteria to determine an STR, such as whether the business:

-meets its superannuation law requirements and PAYG withholding obligations;
-discloses information about its tax affairs under the voluntary tax transparency code;
-has had court order penalties imposed on its directors; and
-its related parties have had convictions for phoenixing behaviour, bribery or corruption.

 

Note this initiative is not designed to replace existing due diligence and checks that are already undertaken, including those relating to business practices that are dishonest, unethical or unsafe, not entering into contracts with businesses that have had a judicial decision against them relating to employee entitlements and who have not satisfied any resulting order (not including decisions under appeal).

 

Want to get your tax obligations in order?

Get on the front foot with your business by getting all your tax obligations in order. Contact us today for all your income tax, FBT and GST needs, we have the expertise to help you with any tax issue, no matter how complex. If you’re planning to expand your business, we can help you map out a plan for a smooth evolution.

Changes Ahead For Inactive Super Accounts: Are You Affected?

Got an old super fund account you haven’t touched for years? New rules mean “inactive” accounts (ie no contributions or rollovers for 16 months) will lose their insurance coverage from 1 July 2019 – unless you want to keep your insurance and take action now. Low-balance accounts may even be transferred to the ATO. Find out if you’re affected and what steps you might need to take.

 

This year’s Productivity Commission inquiry into superannuation highlighted concerns that many Australians’ super benefits are being eroded by fees and inappropriate insurance premiums. The government has now passed laws to force superannuation funds to take action – in some cases by cancelling insurance policies or paying benefits over to the ATO for consolidation. While the reforms will undoubtedly benefit many Australians, some members who wish to prevent unwanted action on their account may need to take action.

 

The new laws broadly take effect from 1 July 2019 and apply to “MySuper” and choice products (eg retail and industry fund accounts), but don’t apply to SMSF trustees or small APRA funds.

 

Fees reform

The new laws ban superannuation funds from charging exit fees when a member wants to leave the fund, making it easier for members to close and consolidate their super accounts.

 

For member account balances below $6,000, funds are also prohibited from charging annual administration and investment fees totalling more than 3% of the member’s account balance.

 

Insurance changes

Currently, many funds offer insurance on a default “opt-out” basis. While insurance is beneficial to many Australians (eg for death, permanent disablement or income protection), the government is concerned that some members are signed up for inappropriate or multiple insurance policies (eg from having accounts across multiple superannuation funds) and their super is being eroded by the premiums deducted from their accounts. Members are sometimes not fully aware of the costs and benefits involved.

 

Under the new laws, funds may not provide insurance for members of accounts that have been “inactive” (ie have not received any contributions or rollovers) for at least 16 months, unless specifically directed by the member. This means many existing insurance policies will be cancelled from 1 July 2019.

 

Funds were supposed to contact potentially affected members by 1 May 2019, but all members should check for themselves by asking:

 

-Do I have an “inactive” account? This commonly includes workers with one or more old accounts from a previous job, parents taking time out of the workforce to care for children and even SMSF members who also keep an old public offer account open just for the insurance coverage.

-What insurance am I signed up to? How much am I paying annually in premiums, and what is the insured amount? Do I hold multiple policies for the same insurance?

-Do I want to keep the insurance cover? Your needs are unique and depend on your own financial and personal circumstances. If in doubt, seek professional advice.

 

If you wish to keep the insurance policy, you must make an election in writing. Contact your fund if you’re unsure how to do this. You can make an election before 1 July.

 

Consolidating inactive low-balance accounts

Inactive accounts with balances below $6,000 will be paid over to the ATO, who will then take action to consolidate the person’s super into a single account (or pay the benefits to the member directly if they are old enough to qualify or, if the member has died, to their beneficiaries or estate).

 

Even if your low-balance account has not received any contributions or rollovers for 16 months, the account will not be deemed “inactive” if you have taken actions such as changing investment options, changing insurance coverage or making or amending a binding nomination. You can also elect in writing to the ATO not to be treated as an inactive account member.

 

Get your super in order 

Now is a great time for superannuation members to take stock of their accounts and insurance arrangements. Contact us if you need assistance with any of the upcoming changes.

Black Economy Taskforce: Who Could Be Included

 

In a bid to crack down on tax evasion, the Government has proposed to extend the taxable payment reporting system to two new high risk sectors identified by the Black Economy Taskforce: cleaning services and couriers. The Government cited the improved tax compliance in the building and construction industry as a model of what can be achieved in newly targeted sectors. We will keep you up to date with developments in this area as legislation is enacted.

 

The proposed new laws will require entities that provide courier or cleaning services to report to ATO details of transactions involving contractors. According to ATO guidance, contractors include sole traders (individuals), companies, partnerships, or trusts.

 

For couriers, the proposal captures any service where an entity collects goods (ie, packages, letters, food, flowers, or any other goods) and delivers them to another location.

 

The Government is hoping the imposition of additional compliance will encourage tax compliance, particularly in the food delivery market, which is gaining in popularity.

 

Similarly, cleaning services have also been broadly defined in the proposal to refer to any service where a structure, vehicle, place, surface, machinery or equipment has been subject to a process in which dirt or similar material has been removed from it.

 

What will you need to declare?

If you employ couriers or cleaners

Entities captured by this measure will need to lodge an annual report to the ATO detailing each contractor’s ABN, name, address, gross amount paid for the financial year (including GST) and the total GST included in the gross amount that was paid. If this applies to you and you employ couriers or cleaners you may also be required to provide additional information, such as the contractor’s phone number, email address and bank account details. In essence, companies such as deliveroo, ubereats, foodora, as well as a host of other players, could face the increased compliance costs of having to lodge hundreds, if not thousands, of these reports to the ATO each year.

 

If you contract as a courier or cleaner

If you are a courier or a cleaner (and you provide contract services), the data collected about you will be used in data-matching programs to ensure that all of your income is reported correctly to the ATO. If you are contracted to a delivery company or a cleaning company you will need to keep careful records of what you are being paid. This is particularly important if you only work for these companies on an occasional or part-time basis.

 

How about the timing?

Should this proposal pass as law, the first annual report will be for the 2018–2019 financial year.

 

What to do next

Any relevant business that is required to report will need to collect relevant information from 1 July 2018, with the report due by 28 August 2019. Information from the reports (which will be data matched with information provided by contractors) will apply on tax returns for the 2018–2019 income year. Speak to us if you think this could be relevant to you.

Reverse Mortgage Lending And Retirement

Since the global financial crisis, demand for reverse mortgages have grown steadily. It allows older individuals, perhaps retirees, to unlock the equity in their homes while they continue to live in the property. However, reverse mortgages may not be all it’s cracked up to be. A recent review by ASIC found that borrowers had a poor understanding of the risks and future costs of their loan, inadequately documented long-term financial objectives, and lack of protection for non-borrowers who live in the property. When it comes to reverse mortgages, it may be a case of buyer beware.

 

Reverse mortgages are a credit product that allows older individuals to achieve their immediate financial goals by using the equity in their home to borrow amounts. The loan typically does not need to be repaid until a later time (ie when the borrower has vacated the property or has passed away). For older individuals who own their home but few other assets, the advantage of reverse mortgages is that it allows them to draw on the wealth locked up in their homes while they continue to live in the property. As good as it sounds, reverse mortgages may not be all it’s cracked up to be.

 

ASIC recently reviewed data on 17,000 reverse mortgages, 111 consumer loan files, lender policies, procedures and complaints, along with in-depth interviews with 30 borrowers and 30 industry and consumer stakeholders. The review evaluated the effectiveness of enhanced responsible lending obligations and examined 5 brands who collectively lent 99% of the dollar value of approved reverse mortgage loans from 2013 to 2017.

 

The average size of a reverse mortgage loan was found to be around $118,627 with an average home value of $632,598 (average loan-to-value ratio 26%). Borrowers typically took out reverse mortgages to pay for daily expenses, bills and debts, home improvements and car expenses. Unlike other loans, reverse mortgage borrowers had limited choices due to a lack of competition, with 2 credit licensees writing 80% of the dollar value of new loans from 2013 to 2017.

 

The review also found that borrowers had a poor understanding of the risks and future costs of their loan, and generally failed to consider how their loan could impact their ability to afford their possible future needs. In addition, it found reverse mortgages were a more expensive form of credit compared to standard variable owner occupier home loans with the interest rates typically being 2% higher and as no repayments are required, the interest compounds.

 

According to ASIC, lenders have a clear role to play and in nearly all the loan files reviewed, the borrower’s long-term needs or financial objectives were not adequately documented. 

 

This is important as borrowers can never owe the bank more than the value of their property, however, depending on when a borrower obtains their loan, how much they borrow, and economic conditions (eg property prices and interest rates), they may not have enough equity remaining in the home for longer term needs such as aged care.

 

The other concerning finding by ASIC is that some reverse mortgages may not protect other residents in the home. For example, if a borrower vacates the property or passes away, the borrower or their estate can often only afford to pay off the loan balance of a reverse mortgage by selling the property. This can require non-borrowers still living in the home (ie a spouse, relative, or adult children) to move out unless the contract contains a “tenancy protection” provision allowing them to remain in the home for a period of time.

 

Only one lender in the review offered a limited option to include a tenancy protection provision in their loan contract which lasted for one year after the death of the borrower with certain conditions. Other lenders in the review would only protect non-borrower residents if they added their name to the loan contract. ASIC notes that under enhanced consumer protections, lenders must give potential borrowers a prescribed tenancy protection warning, which did not occur in a majority of the cases.

 

Thinking of getting a reverse mortgage?

If you think a reverse mortgage would suit your retirement needs, come and speak to us today to ensure that you get the full picture before you sign up to anything. We can help you understand all the terms and protections to make the most out of your retirement.

Are You Declaring Your “Odd Jobs” Income From Gig Economy Sites?

“Gig economy” platforms like Airtasker are allowing Australians to earn some extra cash by completing a staggering variety of odd jobs – everything from gardening to data entry and even standing in line for concert tickets! But if you earn money from these platforms, you must ensure you meet your tax obligations.

 

Have you ever considered joining a site like Airtasker to make some extra cash? If so, you’ll need to keep the ATO happy. Here, we explain the tax issues that arise when you earn money performing “gigs” through Airtasker, or any other online platform that connects workers with third-party hirers looking for help with one-off tasks.It’s important to understand that these platforms are used by everyone from “moonlighters” making some extra dollars on top of their regular job, through to self-employed people running substantial businesses (eg tradespeople) who use these platforms to pick up extra clients. Certain tax issues like GST registration can therefore depend on the person’s particular circumstances.

 

Is this money assessable income?

Yes, you must declare this income in your tax return. This means you must keep records of the amounts you earn.

 

If the platform charges you a fee or commission, you must declare the gross amount of income you earn. For example, if Sally earns $100 from a gardening gig and pays the platform a $15 service fee, she must declare the full $100 as income in her tax return.

 

However, you’re entitled to claim relevant deductions, including platform fees and commissions. You may also be able to deduct other expenses you incur in generating the income, including equipment and some car expenses. If your expenses also entail some personal use, you’ll only be able to claim a portion of the expenses. Your tax adviser can explain exactly what you’re entitled to deduct and how to substantiate this. In the meantime, ensure you keep receipts of all expenses related to your gigs.

 

How does GST work?

If your annual turnover is $75,000 or more, you must register for GST. Below this threshold, registration is optional. Being registered for GST means:

-You must report and remit GST of 10% to the ATO. This involves additional administration, and you’ll need to take this into account when deciding what price you’re willing to perform a “gig” for. Other workers you’re competing against who aren’t GST-registered may be willing to perform a gig at a lower price.

-However, you can claim GST credits on the GST components of business expenses you incur, including the GST included in any platform fees. (Note that where you can claim a GST credit for an expense, you can only claim the GST-exclusive part of that expense as an income tax deduction in your annual tax return.)
If you’re below the $75,000 threshold, seek advice from your adviser about whether GST registration would be worthwhile in your situation.

 

Do I need an ABN?

If you must register for GST (or wish to do this voluntarily), you’ll need an ABN. But what if your turnover is below $75,000 and you don’t want GST registration? While you’re not legally required to have an ABN, there are downsides of not having one: in some cases, businesses who hire you may have to withhold tax at the top marginal rate from the payment if you don’t provide an ABN.

Anyone who carries on an “enterprise” may apply for an ABN. Most gig platform users, as independent contractors performing services to make money, arguably carry on an enterprise. If you’re only planning to use gig platforms very occasionally (or as part of a genuine “hobby” like photography or crafting, rather than to make a profit), talk to a tax adviser about your ABN needs.

 

More time earning, less time on tax!

Whether you’re using gig platforms occasionally or as part of a significant business, let us handle all your tax issues. We offer expert advice and assistance with deductions, ABNs and GST, freeing you up to spend more time pursuing your income-earning opportunities.

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