Ambrosiussen Taxation Solutions

The 2012 financial year is now off to a flying start, and I trust that it is shaping up to be a great one for you and your business.  As you are settling into this year, allow me to take you on a brief tour of some of the tax changes that have been brought in from 1 July 2011, so you can be informed about how this might impact on your business, your family and your superannuation: 

Business
Adjustments to PAYG instalments for 2011-12 to provide cash flow
- If you receive income from your business or investments, you might notice that your quarterly tax instalments don’t increase as much as they normally would.  This is because the ATO have set the increase at 4% this year, down from the 8% that it would normally be, to help a little with your cash flow.
 
Reform of the car fringe benefit rules
- Have you bought a car in your business recently?  The rates used to value your car fringe benefit are changing over the next few years to a flat rate of 20% – to remove the incentive for people to drive more to access lower rates.  This table summarises the changes to the rate you apply to the cost of the vehicle in determining your fringe benefit, based on when you buy your car:

  Removing minors’ eligibility for low income tax offset on unearned income
- Do you distribute to your children from a trust? To discourage this, the low income tax offset (LITO) will no longer be able to reduce the tax on unearned income for children under 18 – including trust distributions, dividends, interest, etc.  This means that the amount you will be able to distribute to each child tax-fee will be $416 for the 2012 financial year (down from $3,333 in 2011).

Individuals & Families
Flood levy
- I am sure that you will all have heard of the flood levy brought in by the government to assist in recovery and reconstruction from the floods during the last summer.  Individuals will pay a levy of 0.5% for each dollar of income earned between $50,000 and $100,000, and 1% for each dollar of income over $100,000.  Tax withholding tables for employers have been updated to take into account the additional withholding due to the flood levy.

Dependent Spouse tax offset phase-out
- Do you have a non-working spouse less than 40 years of age? To encourage more Australians into paid employment, the Dependent Spouse Tax Offset (DSTO) will only apply to taxpayers with a spouse born before 1 July 1971.  If your spouse was born after this date, you will no longer be able to claim the offset.

Education Tax Refund to include school uniforms
- Do you have children in primary or secondary school?  The government have now added uniforms to the eligible education expenses for the purpose of the Education Tax Refund.  To qualify, the uniforms must be required or otherwise approved by a school – including optional school uniforms and sports/physical education uniforms.

Superannuation
Refund of excess concessional contributions
- Is there any chance you might have put a little bit too much in tax-deductible contributions into super last year?  If you have exceeded your relevant cap for tax-deductible contributions ($25,000 for under 50s, $50,000 for over 50s) by less than $10,000 and this is the first time you have gone over, you can apply to have the excess refunded to you and have this assessed at your marginal tax rate (and not at the 46.5% rate of excess contributions tax).

Reduction of 25% in the minimum payment amounts for account-based pensions in 2011-12
- Are you taking a pension from your super fund?  Since the 2009 financial year – in the middle of the GFC – you have only had to withdraw half of your normal minimum amount each year (for example, 2% of your member balance each year instead of 4% for those under age 65).  This was to avoid having to sell-off fund assets at a loss in order to pay your minimum pension amount. 

This has now been increased to three-quarters of the normal minimum amount for the current year (for example, 3% of your member balance instead of 4% for those under age 65).  So, you may need to plan ahead to make sure that you take a little more out this year to meet your minimum withdrawal amount.

As with every kind of change in the tax rules, it is good to think through how the changes might apply to you before you reach the end of the financial year so you can put in place the right steps now – to ensure that you make the most of the benefits available and are able meet any additional costs where this is applicable.  So plan ahead, seek the right advice, and position yourself well for a great year in 2012

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Since the announcement of the details of the carbon tax in early July, much coverage has been dedicated to the headline features of the package – the $23 per tonne carbon price, the transition to a full market-based ETS, and arrangements for compensation for trade-exposed industries and households.

Relatively little attention has been paid, however, to the details of the income tax changes being introduced as a part of the carbon tax package.  These changes are designed to be the vehicle for delivering compensation to households for the price impacts of the carbon tax.

Here is how it works – the Government will raise the tax-free threshold from $6,000 to $18,200 from 1 July 2012 – meaning that about 1 million individuals will no longer have to lodge a tax return.  Changes to the tax offset for low income earners will mean that individuals will not pay any tax until their income reaches $20,542, up from $16,000 currently.  Further changes to the tax rates for middle-income earners mean that individuals on incomes between $30,000 and $67,000 will pay around $300 less tax per year.

On top of this, there will be increases in payments between $100 and $500 per year for pensioners and self-funded retirees, families with children and people receiving government allowances.  In fact, the government is redirecting around half of the revenue raised from the carbon tax towards these compensation arrangements.  On the whole, this all sounds pretty good, right?

However, what happens for households with higher incomes?  Well, according to the tables on the Clean Energy Future website, the average effect of a $23 per tonne carbon price on the household budget will be $9.90 per week, or $514.80 across a year.  My estimates indicate that you are compensated for this kind of increase in living costs until your income reaches about $60,000 if you are a single-income household or $70,000 each if you are a double-income household.

This means that, if your living expenses are higher than the average or your household income is beyond these levels the relief available through the tax system will not compensate you for the price impact of the carbon tax and you will be a net payer of this tax.

This raises real questions about whether people on incomes of $70,000 or more per year should be considered “wealthy” for the purposes of this tax and ineligible for compensation, while individuals on lower incomes may effectively be over-compensated for the price impacts of the tax.  There is also some concern that bracket creep will erode the benefit of the income tax changes, particularly when the carbon price rises in its transition to a full market-based system.

It is important to recognize that, if legislated, the changes to income tax associated with the carbon tax will change the context of your personal tax planning in the years ahead.  If you would like to find out more about how the proposed changes to income tax will impact on your household, there is an estimator available on the Federal Government’s Clean Energy Future Website at www.cleanenergyfuture.gov.au.

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It is quite common for business owners who want to have greater control over their superannuation to establish a self-managed superannuation fund (SMSF) as a vehicle for investing funds for retirement.  Because a self-managed super fund is a highly-regulated investment structure with very specific rules, questions sometimes arise about what tax-deductions a SMSF can claim.

In this third blog entry on superannuation, I have outlined the types of expenses your self-managed superannuation fund can claim a tax-deduction for.  The following list is by no means exhaustive, but is a good starting place if you want a quick reference for what your SMSF can claim:

• Administration fees
• Actuarial costs
• Accounting & taxation compliance costs involved in:
    o Preparing financial statements
    o Preparing income tax returns
    o Tax planning advice
    o Disputing ATO assessments
• ATO general interest charge and shortfall interest charge
• ATO annual supervisory levy ($150)
• Audit fees
• Costs of calculating & paying benefits to members.  This can include:
    o Interest on short-term finance for the payment of benefits
    o Medical costs in assessing invalidity benefit claims
• Costs of collecting or receipting of contributions (whether assessable or not)
• Insurance premiums which involve:
    o Protecting an asset of the fund (real property)
    o Superannuation death benefits
    o Disability superannuation benefits
    o Temporary salary continuance
• Investment advisor fees and costs in providing pre-retirement services to members
• Investment related expenses:
    o Ongoing management fees or retainers paid to advisors
    o Costs of servicing and managing an investment portfolio
    o Cost of advice to change the mix of investments, provided it does not amount to a new financial plan
• Legal costs of certain types (for example to amend your SMSF deed to satisfy changed legal requirements or make  administration of the fund more efficient)
• Membership subscriptions paid to professional associations
• Subscriptions to share market information services and investment journals (to the extent these relate to earning dividend or  interest income)
• Trustee fees and premiums under an indemnity insurance policy
• Other administrative costs incurred in managing the fund

The following are types of expenses your super fund can’t claim a tax-deduction for:
• Deed establishment and amendment costs (except in cases listed above)
• Business capital costs (eg, establishing a corporate trustee)
• Upfront investment-related expenses (eg, the cost of an initial financial plan)
• Legal expenses (where of a capital nature)
• ATO penalty items:
    o Late payment penalties
    o Late lodgement penalties
    o Superannuation Guarantee Charge
• Benefits payments to members
• Trauma policy premiums

There are also cases where an expense is only partly to do with earning assessable income in your super fund.  In these cases, it will be necessary to apportion the expense between the deductible and non-deductible amounts to determine how much of the expense the super fund can claim.

And it is also important to keep in mind that, as well as considering tax-deductibility, you need to check that any proposed expenses in your SMSF line up with the “sole purpose test” and other parts of superannuation law prior to incurring any of these amounts.

In my next blog entry, I will look at the tax benefits of commencing a pension before you retire, as well as a strategy to boost the tax-free percentage of your super balance if you decide to retire between age 55 and 60.

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Risk is a natural part of life in business.  Along with the opportunity to make some great returns from what you do, there is always the possibility of events beyond your control disrupting your business or in some cases, threatening to destroy what you have worked so hard to build. 

What strategies do you put in place in your business to ensure that your personal assets are protected from creditors?  Going further, do you have any measures in place to make sure that you and your business would survive financially if something were to happen to you as the business owner?

In this second blog entry on superannuation, I will take a look at how super fits into this picture, with some more key points for you to think about if you want to become savvy with your super in a tax-effective manner:

1. Maximise Bankruptcy Protection Afforded to Your Super Assets – In a general sense; your super is protected from the bankruptcy trustee, unless certain claw-back provisions apply (usually where it can be shown that assets were transferred into super with the main purpose of hiding them from creditors).This protection provides an incentive for you to make any new investments in superannuation as a part of an overall asset-protection strategy.  In addition, if you have existing investments in business real property or listed securities, it is worthwhile thinking about transferring these assets into super as well.The protection of assets in a self-managed superannuation can be made even more effective by setting up a company to act as Trustee of the Fund.  Setting in place a sole-purpose corporate trustee makes it absolutely clear that assets are owned by the fund, making it very difficult for creditors to seize these assets in the event of bankruptcy.  A corporate trustee also makes things easier when you have members joining or exiting a SMSF, as it saves you the paperwork of having to change the name on the assets of the fund every time there is a change in membership.
2. Consider Taking Out Insurance in Super – by holding certain kinds of insurance in super, there is the opportunity for the fund to claim a tax-deduction where you may not be entitled to do this personally.  Premiums for these policies can also be paid by the fund so they don’t need to come out of the cash flow of your business.Life, Total & Permanent Disability (TPD) and Terminal Illness are all examples of premiums that a superannuation fund can claim a tax-deduction for that you would normally be prevented from claiming personally.  Salary continuance policies, similar to income protection insurance, also fall into this category and are becoming more commonly held in super.If you are going to take out insurance in your super fund, it is important to make sure that the super fund is the owner of the policy, so you do not breach the superannuation rules.  You also need to be aware of the tax consequences of insurance proceeds being received by the fund, particularly in the case of TPD policies.

In my next blog entry, I will take a look at the tax benefits of commencing a pension before you retire, as well as a strategy to boost the tax-free percentage of your super balance if you decide to retire between age 55 and 60.

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