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Drawing On Super To Buy Your First Home

Saving for your first home? In a market where owning your home is increasingly out of reach for many, the First Home Super Saver (FHSS) scheme offers some practical hope. Here we look at how it works.

 

Where super was once locked away until retirement, you can now actively use its tax concessions to save up to $30,000 towards your first home, and then access your savings when you’re ready to buy. But this scheme is not for the faint-hearted, with lots of steps to climb before you get to your new front door.

 

Eligibility

The FHSS scheme is clearly for first home buyers – those who are buying or constructing their first home in Australia. But those buyers must:

-be 18 years or older;
-have never owned a property in Australia (being a freehold interest in real property, a long-term lease or a company title); and
-only apply for the scheme once.

However, there is provision for owners who have previously lost their property through financial hardship to be considered eligible for the scheme.

 

The good news is that there is no limit on the number of those eligible to share in the purchase of the same home under the scheme. So, couples, siblings and friends – as long as they meet the FHSS requirements – can pool their FHSS contributions towards the one purchase.

 

A further caveat is that you either live in the home you’re buying or you intend to do so for at least six months within the first year of ownership.

 

The scheme

The FHSS scheme refers only to contributions made since 1 July 2017. The scheme allows you to release up to $15,000 of voluntary contributions you’ve made to your super in any one financial year, and up to $30,000 in contributions in total, plus all the associated earnings, subject to contribution caps.

 

To be eligible, these contributions:

-are those made by you as the member or by your employer (but do not include compulsory super guarantee contributions – there are other specific exclusions so it is important to check with your adviser); and
-can be made up of concessional and non-concessional contributions, but only 85% of eligible concessional contributions can be released.

 

Get the sequence right

While you’re house hunting, it’s important to be clear on the FHSS process ahead. Once you’ve saved the final amount and, before signing a contract to purchase your home or applying for the release of your FHSS funds, you must apply to the ATO, and obtain, an FHSS determination. This determination will set out the maximum amount that you can release under the scheme.

 

Once you receive the determination you can then make a valid request to the ATO to issue an authority to your super fund for the release of an amount up to the maximum in the determination.

 

Your fund will then pay the released amount to the ATO but this may take about 25 days, so timing can be critical particularly if the funds are needed for the deposit.

 

If eligible, you can enter into a contract to purchase or construct your home either:

-as soon as you make the request to release the funds (rather than when the funds are released); or
-up to 14 days before the date you make this request.

You have up to 12 months after you’ve requested the release (unless more time is allowed by the ATO) to sign a contract to buy it.

 

Once you finally do sign your contract, you must notify the ATO within 28 days that you have done so.

 

All in order

It’s important to note that there’s an ordering rule for release of your super savings.Contributions are counted in the order in which they are made to your fund, from earliest to latest and also non-concessional contributions are counted before concessional contributions.

 

If you decide not to go ahead with the purchase you must notify the ATO within 12 months of making the release request, and either take advantage of a further 12-month extension or recontribute an eligible amount back into super as a non-concessional contribution. Alternatively, if you fail to comply or decide to hang onto your FHSS released amounts they may be subject to 20% FHSS tax.

 

Guidance at an important time

If drawing on your super to buy your first home is right for you, take care not to mess with the rules, or you’ll miss out. We know the traps and can provide expert advice to guide you safely to your front door.

GST On Imports: Are You Optimising Your Cashflow?

Looking for opportunities to improve cashflow? If you import goods as part of your business, you don’t have to pay GST upfront if you’re registered for the ATO’s deferred GST scheme. Instead, you can defer and offset GST amounts in your next activity statement. However, there are some eligibility requirements – including a condition that your business lodge activity statements monthly (rather than quarterly). Find out how you can take advantage of the scheme.

 

If you import goods into Australia as part of your business, your cashflow position is probably top of mind. So, if you’re not already taking advantage of the ATO’s scheme to defer GST payments on imports, it’s time to talk to your adviser. The scheme can benefit not only wholesalers, distributors and retailers, but also any business that imports goods for use in carrying on its business.Usually, GST is payable on most imports into Australia and goods will not be released until the GST is paid to customs. This can have significant cashflow implications for importers. While you’re generally able to claim a credit later for the GST paid, you still need to have the funds to pay the GST at the time of importation.

 

The ATO’s deferred GST scheme allows participants to defer payment of the GST amount until their next business activity statement (BAS) is due.

 

This means you can start selling or using the imports in your business right away without having to come up with the GST amount when the goods arrive in the country.

 

Eligibility for the scheme

Businesses who wish to take advantage of this scheme must apply first and be approved by the ATO. To be eligible, you must have an ABN and be registered for GST. You must also lodge and pay your BAS online. This can be done yourself or through your registered tax or BAS agent.

 

Another key requirement is that you must also lodge your BAS monthly, which means that if you’re currently lodging quarterly you’ll need to elect to lodge monthly. (When you make this election, the change won’t take effect until the start of the next quarter, so you won’t be able to defer GST on imports until the start of that quarter.) If this applies to you, you’ll need to weigh up whether the deferred GST scheme is worth giving up quarterly BAS lodgement.

 

Once you’re approved for the deferred GST scheme, it’s important that you lodge and pay your monthly BAS on time. The ATO may remove you from the scheme if you fall behind, and in this case you’d need to reapply for the scheme.

 

Timing of the deferral and credits

Once you’re approved, your GST amounts on taxable imports will be deferred until the first BAS you lodge after the goods are imported (which for monthly lodgers is due 21 days after the end of the month). The deferred amount is reported electronically by customs to the ATO, who will use this data to pre-fill the “deferred GST” in your BAS.

 

The deferred GST liability is then effectively offset by a GST credit you can claim for the deferred amount. As with all GST amounts you pay on purchases you make for your business, you can claim a credit for the deferred GST liability on your imports to the extent that you use the goods in carrying on your business (and you can’t claim a credit for private use or to make input-taxed supplies). Therefore, the overall effect of participating in the deferred GST scheme is that your GST on imports is deferred and offset, and you aren’t required to have funds available to pay the GST when the goods are initially imported.

 

Could your cashflow be improved?

Contact our office to discuss how the deferred GST scheme could benefit your business or to explore other strategies for improving your cashflow position.

Top 10 Rules For The CGT Replacement Asset Rollover

When you suffer the loss or destruction of assets through natural disasters or through compulsory acquisition, you most likely will be in a position to receive money or another asset (or both) as compensation. You are also left with a choice to either defer any capital gains liability (CGT) or receive an exemption. We look at the top 10 rules for when this occurs.

 

Urban growth often triggers a correlative expansion of our road networks and related civil works. To accommodate these you might find yourself losing your home or a portion or all of your land through its compulsory acquisition by a government agency. Similarly, natural disasters in the guise of hurricanes, floods and fires can lead to wide-scale destruction of property and personal assets.

 

In both situations you could receive money or another CGT asset (or both) as compensation, leaving you with a choice to:

-defer your liability to pay tax on any capital gain arising on the disposal (ie, rollover); or

-receive a CGT exemption for any replacement asset if you acquired the original asset before 20 September 1985.

If the asset is property and it qualifies as your main residence, then you can ignore any capital gain or loss that results from the compulsory acquisition.

 

Qualifying for CGT rollover can bring a number of tax benefits for small business and individuals, but navigating the intricacies of CGT exemptions and rollover rules can take some work. To help we have compiled a list of the top 10 rules for application of the rollover, but please get in touch with us for advice tailored to your individual circumstances.

 

Top 10 rollover rules
1. The rollover only applies if the taxpayer has made a capital gain on the compulsory acquisition of a post-CGT asset (or its loss or destruction).

 

2. The rollover applies if either money (ie, compensation), or a replacement asset is received for the compulsory acquisition (or its loss or destruction).

 

3. If money is received the taxpayer must incur expenditure in acquiring a “replacement” asset and the expenditure must begin to be incurred no later than one year after the income year in which the compulsory acquisition occurs – being the income year in which the contract for compulsory acquisition is entered into (or within such further time as the Commissioner allows).

 

4. Basic requirements for a replacement asset are:

it cannot be a depreciating asset;
if the compulsorily acquired asset was used, or installed ready for use, in the taxpayer’s business, the replacement asset must also be used for a “reasonable time” after the taxpayer acquires it
if the compulsorily acquired asset was not used, or installed ready for use, in the taxpayer’s business, the taxpayer must use the replacement asset for the “same” or a “similar” purpose as the compulsorily acquired asset immediately before its acquisition – and for a reasonable time after acquiring it.

 

5. If the compulsorily acquired asset was a pre-CGT asset, the replacement asset will also be deemed to be pre-CGT status provided:

the taxpayer does not expend more than 120% of the market value of the original asset (immediately before its disposal) in acquiring a replacement asset or;
if the asset was destroyed by natural disaster, it is reasonable to treat the replacement asset as “substantially the same” as the original asset.

 

6. Despite the application of the rollover, an immediate CGT liability will arise if the compensation received exceeds the expenditure on the replacement asset. The amount of the capital gain in this case will depend on the following:

If the capital gain that would otherwise have arisen from the compulsory acquisition is greater than the “excess” of the compensation over the expenditure incurred on a replacement asset, then a capital gain will arise equal to that “excess”. See Example 1 below.

 

Example 1

John owns an asset that has a cost base of $10,000. The asset is destroyed and he receives $40,000 in compensation. John spends $24,000 in replacing the asset. There will be a “notional” capital gain of $30,000 (ie, $40,000 compensation less $10,000 cost base). This notional capital gain of $30,000 is greater than the “excess” of $16,000 (ie, $40,000 less $24,000). Therefore, John will realise a capital gain of, $16,000, which is the amount of the “excess”. In calculating any future capital gain or loss on the replacement asset, the cost base expenditure incurred on the replacement asset (ie, $24,000) is reduced by the amount by which the notional gain (ie, $30,000) is more than the “excess”(ie, $16,000); so $24,000 is reduced by $14,000 ($30,000 less $16,000), leaving cost base expenditure for the replacement asset of $10,000.

 

If the capital gain that would have arisen from the compulsory acquisition is less than or equal to the “excess” of the compensation received over expenditure on a replacement asset, then the capital gain is not reduced. See Example 2 below.

 

Example 2

Jenny receives $4,000 compensation for damage to an asset. The cost base of the asset is $1,600. Jenny expends $1,000 repairing it. There will be a notional capital gain of $2,400 (ie $4,000 less $1600) and the “excess” will be $3,000 (ie $4,000 less $1,000). As the notional capital gain of $2,400 is less than the “excess” (ie $3,000), the notional capital gain is not reduced and is taxed as the actual capital gain. Therefore, Jenny would have an actual capital gain of $2,400.

7. If the compensation received does not exceed the expenditure incurred on the replacement asset, then no capital gain arises – but the cost base expenditure incurred on the replacement asset or repair is reduced by the amount of the capital gain that would otherwise have arisen but for the rollover.

 

8. If the taxpayer receives a replacement asset instead of money, any capital gain made on the original asset is disregarded. If the original asset was post-CGT, the taxpayer is taken to have acquired the replacement asset for an amount equal to the cost base of the original asset. If the original asset was pre-CGT, the replacement asset is also taken to be pre-CGT.

 

9. If both money and a replacement asset are received each part of the compensation is treated separately, in accordance with the rules for the receipt of money or the receipt of an asset.

 

10. If the compulsorily acquired asset was an “active asset” (ie, used in a business) then the taxpayer would also qualify for the CGT Small Business Concession (SBC) and could choose to apply them instead (with better tax outcomes). This would include the CGT small business rollover. Note, that the advantages in applying the CGT SBC is that the replacement asset does not have to be acquired until two years after the relevant income year and it can be a depreciating asset.

 

If you need help to understand the rules listed above, please talk to us.

Capital Gains Tax And Death: It’s Not The End Of The World

There’s nothing as certain as death and taxes, but tax on death is not so clear. The good news is that when an asset passes to a beneficiary, capital gains tax (CGT) generally does not apply. But down the track when the beneficiary decides to sell that asset, there are many forks in the path.

 

There is enough pain and anguish when someone dies, so fortunately there is, in most cases at least, no duty on assets that form part of the deceased’s estate and are passed to a beneficiary, or their legal personal representative (LPR). But as with life, the rules regarding death and CGT are not meant to be easy, particularly when that asset is a “dwelling”.

This article will explore the CGT consequences for the deceased estate and the beneficiary of:

-the transmission on death, of an asset, specifically a dwelling

-the subsequent sale of that dwelling.

 

CGT on the inheritance of a dwelling

Generally, the law says that there is no CGT liability for the deceased on the transmission of an asset to a beneficiary.

 

The beneficiary is considered to be the new owner of the inherited asset on the day the deceased person died and CGT does not apply to that asset.

 

This applies to all assets, including a dwelling.

The exception is where the beneficiary is a “tax advantaged entity” (TAE), such as a charity, foreign resident or complying superannuation entity. In this case the deceased estate (not the TAE) is liable for any capital gain or loss attached to the asset. This will need to be taken into account in the deceased’s final tax return in the year in which he or she died.

 

CGT on the sale of an inherited dwelling

If the beneficiary subsequently sells the bequeathed asset, this may create a CGT “event”, depending on the status of the property, when it was purchased, when the deceased died and whether the sale qualifies for the CGT “main residence” exemption.

 

CGT liability on the sale will be determined by whether:

-the deceased died before, on or after 20 September 1985 (when CGT was introduced); and

-the dwelling was acquired before, on or after 20 September 1985; and if acquired post-CGT, whether the deceased died before, on or after 20 August 1996.

 

The following table identifies when CGT applies to the sale of an inherited dwelling and the relevant cost base. It refers to these two conditions:

 

Condition 1: Dwelling was sold (note that this means settlement must have occurred) within two years of the person’s death. This exemption applies regardless of whether the beneficiary used the dwelling as their main residence or produced income from it during this period. The two-year period can be extended at the Commissioner’s discretion. New safe harbour rules allow executors and beneficiaries to self-assess this discretion provided a number of conditions are met.

 

Condition 2: From the deceased’s death until the sale, the dwelling was not used to produce income, and was the main residence of one or more of the following:

-the deceased’s spouse;

-an individual who had a right to occupy it under the deceased’s will; or

-the beneficiary.
 

CGT on the sale of an inherited dwelling

Dwelling acquired by deceased (D)                  Date of death                         Subsequent disposal by beneficiary (B)
Pre-CGT (ie before 20 September 1985)                      Pre-CGT                                                    No CGT

Exception: dwelling subject to major capital improvements post-CGT  and used to produce assessable income

 

 

Pre-CGT                                                                            Post-CGT                             No CGT if: Condition 1 or 2 is satisfied
If CGT applies, B’s cost base is the dwelling’s cost base in D’s hands at the date of death

 

 

 

Post-CGT                                                                  Before 20 August 1996                    No CGT if:

 

Condition 2 is satisfied; and D always used dwelling as main residence (MR) and did not use it to produce assessable income

If CGT applies, B’s cost base is the cost base of the dwelling in D’s hands at the date of death

 

On or after                                No CGT if:

21 August 1996

 

Condition 1 or 2 is satisfied; and just before D died dwelling was used as MR and was  not being used to produce assessable income

 

If CGT applies, B’s cost base is the market value of the dwelling at the date of  death

 

In calculating the CGT, the beneficiary or the LPR cannot use any of the deceased’s unapplied net capital losses against the net capital gains.

 

Guidance at hand

If you have inherited a dwelling and are in the dark about the CGT impact of hanging onto it or selling it, we can guide you through the minefield and minimise any tax consequences.

ATO Clamping Down On Clothing Deductions

 

Planning to claim some clothing or laundry expenses this tax time? These deductions are on the ATO’s watch list again this year, and there are many traps for the unwary. For example, did you know that non-branded work uniforms are not deductible? Find out what categories are allowed and what records you need to keep.

 

Taxpayers who claim deductions for work-related clothing and laundry expenses may find themselves under the ATO’s microscope this tax time. Even if your claim is relatively small, penalties can apply for making incorrect claims.

 

What clothing is eligible?

If your work-related clothing falls into one of the following three categories, you can claim the purchase cost and the costs of laundering that clothing:

1. Uniforms. To qualify, your uniform must be both unique (designed only for your employer) and distinctive (with your employer’s logo attached, and it must not be available to the public). This means you can’t make claims for generic, non-branded uniforms. And if your uniform is compulsory, you may also be able to claim shoes, socks and stockings provided they’re an essential part of the uniform and their characteristics (such the required colour, style and type) are outlined in your employer’s uniform policy.

Non-compulsory uniforms have much tighter rules, so check with your adviser before claiming.

2. Occupation-specific clothing. This is clothing that is unique to your occupation, is not “everyday” in nature and allows the public to identify your occupation. Examples include a chef’s checked trousers or a barrister’s robes. In contrast, a bartender’s black trousers or a swimming instructor’s swimwear wouldn’t be allowable.

3. Protective clothing. To be eligible, the clothing must offer a sufficient level of protection against injury or illness in your work setting. Typical examples include high-visibility clothing, steel-capped boots, non-slip shoes, smocks/aprons and fire-resistant clothing.

 

The ATO is particularly concerned that many taxpayers incorrectly claim for ordinary clothing, like suits or black work trousers. It says the following are not valid reasons for deducting clothing:

 

-Your employer requires you to wear a certain colour (eg trousers must be black).
-You bought formal clothes to wear to work functions such as awards nights where you represented your employer.
-You bought clothes just to wear to work.

 

Record-keeping

 

For total clothing and laundry claims of up to $150, you aren’t required to keep detailed records. However, the ATO stresses that taxpayers aren’t “automatically” entitled to a $150 deduction – you must have actually incurred the expenses you claim. The ATO can still ask you to substantiate your claim, and can contact your employer to verify its clothing requirements.

 

If your total claim is under $150, you can calculate your laundry claim using a simple rate of $1 per load where all the clothing is work-related, and 50 cents per load where other clothes are part of the load.

If your total claim for clothing and laundry exceeds $150 (and your total claim for work-related expenses exceeds $300), you’ll need to keep receipts.

 

To prove your laundry costs, you’ll need to keep a diary for a representative one-month period. Your adviser can help you ensure you have the correct records in place.

 

Reimbursements and allowances

To claim a deduction, you must have incurred the expense yourself. So, if your employer reimburses you for an expense, you can’t deduct that amount.

On the other hand, if you receive a clothing allowance you must declare that allowance in your tax return. You can then deduct your costs for eligible clothing, but only the amount you actually spent.

 

Take the stress out of tax time

Talk to us for expert assistance with all of your work-related expense claims. We’ll help you claim everything you’re entitled to, while keeping the ATO happy.

Binding Nominations: Make Sure Your Super Passes Into The Right Hands

Your superannuation balance is probably one of your biggest assets – perhaps up there with the family home. It’s therefore vital to plan for how that money will be distributed on your death. Find out how a binding nomination can give you peace of mind that your wishes will be complied with when you’ve passed on.

 

When you pass away, your superannuation benefits do not automatically form part of your estate. Instead, they’re paid out by the trustee of your superannuation fund. So, what can you do to ensure your super is paid out in accordance with your wishes? For many people, a binding death benefit nomination (BDBN) is an appropriate safeguard to put in place.

 

How does a BDBN work?

If you don’t make any nomination during your lifetime about how your superannuation benefits should be paid on your death, the trustee has discretion to decide who will receive your benefits and in what form. Under superannuation law, your death benefits can be paid to either, or a combination, of:

 

-your “legal personal representative” (LPR) – effectively, the executors of your estate (which means those superannuation benefits will then be dealt with by your will); and/or

-one or more of your “dependants” directly, which include your spouse, children (of any age) and anyone with whom you were in an “interdependency relationship”.

 

Where the trustee decides to pay some benefits directly to a dependant, the trustee can also decide whether to pay your benefits as a lump sum or pension. This is a lot of discretion for the trustee! If you’d prefer to have certainty about how your benefits will be paid, consider making a BDBN.

 

This is a written direction given to the trustee specifying where your death benefits should be paid (and optionally, in what form). Provided the BDBN is valid and still in effect when you die, the trustee is bound to follow it.

 

Making a valid BDBN

You should seek expert assistance when preparing a BDBN, especially if you’re an SMSF member. In recent years, legal disputes before the courts (eg between surviving family members) over the terms of BDBNs have highlighted the traps that can arise. Here we outline a few key principles to keep in mind.

 

First, the trustee can’t follow a BDBN to the extent the payments would breach superannuation law. This means your BDBN can only specify the permitted recipients discussed above (your LPR and/or “dependants”). There are also restrictions on when your children can receive benefits in pension form.

 

Second, for non-SMSFs, a BDBN must meet various documentation requirements in order to be valid, such as being witnessed correctly by two eligible adult witnesses, among other requirements. For SMSFs, these requirements vary, depending on the particular terms of the SMSF’s deed.

 

Third, the BDBN must work in harmony with other relevant legal documentation. This includes:

-The fund’s deed (as mentioned above): the terms of SMSF deeds vary greatly. SMSF members must therefore ensure their BDBN is permitted, valid and enforceable under their fund’s deed.

-Pension documentation: if you’re receiving a pension just before your death, any terms of the pension documentation that contradict your BDBN (eg a stipulation that the pension is to revert to a certain beneficiary) may cause confusion and legal uncertainty.

-Your will: if your BDBN directs your benefits to your estate, your will can be tailored to ensure the benefits pass to specific beneficiaries in the most tax-effective manner.

 

Expiry dates

For non-SMSFs, a BDBN expires after three years. In an SMSF, a BDBN can potentially last indefinitely, but there’s a trap: many SMSF deeds impose a three-year expiry anyway!

In any event, it’s good practice to review your BDBN every few years or whenever a major life change occurs (eg, marriage, divorce or death of a dependant).

 

Need to make a BDBN?

Contact our office to begin your superannuation succession plan. We’ll help you ensure your wealth passes into the right hands, giving you maximum control and peace of mind.

Tax Time 2019: Your Payment Summary Is Changing

Ready for tax time 2019? This year there’ll be some changes to how many employees access their tax information from their employer. The good news is this is part of a big switch to electronic reporting that will eventually make tax time easier. But as with all new systems, there are some new details to get your head around.

 

If you’re an employee, there are a few things you need to know this tax time about the ATO’s new “Single Touch Payroll” (STP) system. This system requires employers to report information like salaries, wages, allowances, PAYG withholding and superannuation contributions to the ATO electronically every time they pay their employees.

 

You’ve probably still been receiving payslips each cycle, but at tax time you’ll generally no longer receive a payment summary (sometimes known as a “group certificate”) from your employer.

 

Instead, you’ll be able to access a summary through the ATO’s online services. This will now be known as an “income statement”.

Because STP is new, we’re still in a transitional period. Here’s what you need to know:

-For businesses with 20 or more employees, STP became compulsory last year on 1 July 2018.

-For businesses with under 20 employees, STP applies from 1 July 2019, but these businesses still have a few months to get their systems working.

This means that for tax time 2019, some employers will still give their staff a payment summary while others will not because their reporting has already shifted online to the ATO. And if you have two employers, it’s possible you might receive a payment summary from one this year but not from the other.

 

How does it all work online?

Taxpayers with STP-compliant employers will access their new income statements through the “myGov” online portal. This is a central government portal where you can also access services like Centrelink, Medicare and others. To use this online service to view your income statement, you first need to have a myGov account, and then link your account up to ATO services.

 

Once your employer is using STP and your myGov account is linked to the ATO, you can access your information as follows:

-Throughout the income year, you can log on to check your year-to-date income, tax and superannuation information at any time. Each time your employer pays you, this data will be updated (although it may take a few days for updated amounts to appear).

-After the end of the income year, the ATO will send a message to your myGov inbox to let you know your annual income statement is finalised and ready.

 

If you log on in July to access your income statement, you should wait until your employer has marked your statement as “tax ready” before you lodge your tax return. Employers have until 31 July to do this. The data from your income statement will be pre-filled into the “myTax” online tax return system even if your income statement isn’t “tax ready” yet, so be careful when lodging.

 

It’s not compulsory to have a myGov account and you don’t need one to lodge your tax return. Your tax agent can access your income statement for you. However, not having a myGov account means you can’t check your information online yourself.

 

The ATO has recently reminded taxpayers that your tax agent can also view communications the ATO has sent you from within their own tax agent portal, so they don’t need to access your personal myGov account. Your tax agent can also tell whether your employer is using STP.

 

Let us do the hard work

Not sure whether your employer is using STP, or just want to keep tax time as stress-free as possible? Talk to us for expert assistance and advice this tax time for all of your lodgment needs.

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.

Dealing With The ATO: Simple Tips For Taxpayers

Being a smart taxpayer means knowing what resources are available to you and understanding how the ATO deals with individuals as tax problems arise. Here are three simple things all individuals can do to help keep their tax affairs as stress-free as possible this tax time.

 

Sometimes, the way we approach tax matters can end up making a big difference to our bottom line and stress levels. Here are three tips to help individual taxpayers achieve a better outcome when lodging and dealing with the ATO.

 

Tip one: Get help with debts early

 

If you’re experiencing financial difficulties, there are a number of ways the ATO can assist. If you can’t pay your tax bill, the ATO encourages you to contact them early to discuss your options. This might include:

Payment plans: In 2017–2018 the ATO negotiated 226,000 payment plans to allow taxpayers to pay in instalments. For tax bills under $100,000 you can set up a payment plan online through myGov, or through your tax agent. For bigger debts, contact the ATO to discuss a plan.

Debt relief: The ATO has power to release an individual from their tax bill (in part or in full) where paying the bill would leave them unable to afford food, clothing, accommodation, medical treatment, education or other necessities. In 2017–2018, the ATO granted 2,174 full or partial releases.

 

A good tip for anyone having trouble paying their tax bill is to stay on top of their lodgment obligations. Even if you can’t pay, you should still lodge your tax returns on time (and any business activity statements).

 

Not only will you show the ATO that you’re aware of your obligations and making an effort to comply, you’ll avoid penalties for non-lodgment.

 

Tip two: Stay off the ATO’s radar

 

No one wants to be audited, so it pays to know the “red flags” the ATO looks for when analysing its increasingly vast data sources. Understanding these risk areas can also help you self-identify any mistakes you might have accidentally made, or areas where it’s worth getting professional tax advice. For individuals, the ATO looks closely for:

-work-related expense claims that are unusually high or out of the ordinary, especially in relation to clothing, cars, travel and self-education;
-rental expenses, especially those inconsistent with rental income or other information the ATO holds about the property;
-undeclared capital gains from property sales, the Australian share market and cryptocurrency;
-undeclared income (eg cash payments or income from foreign sources); and
-taxpayers who don’t lodge returns on time.

 

Tip three: Manage disputes efficiently

 

There are many options for resolving tax disputes, ranging from lodging an objection, seeking external review, alternative dispute resolution and litigation. However, the ATO wants to resolve tax disputes quickly and fairly. It says in the last five years, there has been a 60% reduction in Administrative Appeals Tribunal applications made by taxpayers against its decisions.

 

To achieve an efficient resolution, individual taxpayers should consider taking advantage of the ATO’s “in-house” facilitation service. This gives individuals (and small businesses) free access to an impartial ATO mediator who will take the taxpayer and ATO case officers through the issues in dispute and attempt to reach a resolution. It’s a voluntary process and can be undertaken at any time from the early audit stage up to and including the litigation stage. If the mediation fails, your usual review and appeal rights aren’t affected at all. It may not solve the problem in every case, but if the facilitation is successful it could save you time, stress and money.

 

Need help with a tax problem?

We’re here to support you in all of your dealings with the ATO. Whether it’s an unpaid tax debt, a disputed assessment or a complicated deduction you’re just not sure about claiming, our experts will guide you every step of the way and help you achieve the best possible outcome.

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.

 

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