Posts Categorized: News
The $1,600,000 pension cap
The most complex of the super changes are in respect of the $1,600,000 pension cap & associated CGT relief rules.
If you have more than $1,600,000 in pension mode come July 2017 then the ATO will force you to:-
- Withdraw the excess amount,
- Pay a penalty tax,
- Lose any entitlement to Capital Gains Tax relief, and
- Not allow you to access any future indexation increases in the transfer balance cap?
So what do you need to do? There is no one right answer for everyone as what is best for you depends on your individual circumstances and goals. It is, to say the least, tricky as there are a number of inter-related decisions to be made.
Following the removal of the accountants’ exemption, an accountant can only make factual statements about tax law and limits. Advice as to amounts to be held inside and outside pension mode, amounts to be contributed and assets to be sold is financial planning advice. Such advice is only given by way of a Statement of Advice (financial plan). It will soon be July and with many seeking advice and with strategies to be formulated and implemented, the time to act is now.
A super asset protection story
I have just read an interesting super asset protection story.
Most people understand that super is a low tax rate environment and one of the strongest forms of asset protection. The extent of that asset protection now seems to be much stronger than previously thought.
Put simply, one can have their pants sued off, but one’s super will be protected except for last minute contributions made to defeat creditors.
In the case of The Trustees of the Property of Morris (Bankrupt) v Morris (Bankrupt) 2016, a widow received two lump sum payments out of her late husband’s super. Her late husband was a bankrupt and she was also declared bankrupt after his death. It was held that those lump sum amounts could not be paid over to her trustee in bankruptcy and shared with creditors. So the asset protection of super lasted beyond the deceased’s lifetime as the lump sums were held to be a crystallised interest in his super fund. Arguably this protection would also extend to reversionary pensions and binding death benefit nominations.
Perhaps this court case is a timely reminder of the benefits of super when recent changes have some re-evaluating how much they hold within super whilst others may find it harder to accumulate super given the upcoming reduction in the contributions caps. As has always been the case, a specialist estate planning lawyer can guide you through all of the important matters.
At MRS, we will spend today planning for your success tomorrow.
Debts, snails & the ATO
One has two obligations to the ATO – lodge any required return and pay any associated tax. Those in financial trouble or difficulty often fail to do both. This is a pity as the ATO is quite reasonable in dealing with paying off taxes owed.
If you are in financial difficulty, you should ensure that the activity statement or return is lodged on time. If they are lodged late, then late lodgement penalties will be levied and the ATO will be far more reluctant to agree to any deferred payment arrangement.
Non-lodgement is particularly an issue for employers as unreported and unpaid PAYG withholding (tax from wages) and SG super become a personal liability if they remain unreported and unpaid for three months. The ATO routinely issue what are called Director Penalty Notices (DPN) and actively chase amounts owing.
A word of caution though. Entering into a payment arrangement with the ATO could be a breach of your loan terms or possibly even your franchise agreement.
The ATO may reverse fines for late lodgement of a Tax Return(s) where there are extenuating circumstances. In an article in The Age on 13th February 2017, a list was provided of reasons that the ATO rejected as not constituting extenuating circumstances and which included:-
- Snails eat our mail, so your lodgement demand letter must have been eaten.
- I had a fight with my wife and she works my tax agent so I couldn’t meet with him.
- My client can’t lodge because she is currently of the North Pole.
- I could lodge my 2003 Tax Return because suffering from trauma from a serious car accident I had in 2007.
At MRS, we will spend today planning for your success tomorrow.
Can I deduct the cost of a website?
Can I deduct the cost of a website? This has always been a good question but an even better one now that the ATO have re-defined their position.
The ATO released TR2016/3 just before Christmas. A TR is a tax ruling which is binding on taxpayers and the ATO. They are only issued for big ticket items.
The ATO had previously issued a tax ruling in 2001 but withdrew it in 2009 due to the changing nature of websites.
So what is the ATO’s stance now?
No matter how basic, the costs to acquire or develop a website are deemed to be capital. This means they are progressively depreciated. However, an immediate deduction can be claimed where the purpose and life of the web page is intended to be short – say like a short term sales campaign.
Initial website expenditure may also be deductible where it is paid for periodically under a licence fee model.
Domain name registration fees and website hosting costs are deductible when expended.
So what about maintaining a website?
Such costs would generally be deductible provided they aren’t in respect of significant modification. The ATO states that significant modification would not include:-
- Persevering the website.
- Doesn’t alter the functionality of the website.
- Doesn’t improve the efficiency of the website.
- Doesn’t extend the useful life of the website.
One common question is in respect of adding another on-line payment method. This would be considered to not being a significant modification and can therefore be deducted in full.
Social media posts are generally deductible due to their immediate short term nature.
We welcome any question you may have.
At MRS, we will spend today planning for your success tomorrow.
Beware of the $1,600,000 pension cap
Beware of the $1,600,000 pension cap. If you thought it was straight forward, then think again.
It’s complex and the costs of getting it wrong are high as evidenced by:-
- You have to monitor your position. You have to know the balance of your transfer balance cap (your amount in pension mode) against the general transfer balance limit (the allowable limit).
- If you exceed your transfer balance cap at 30th June 2017, you will receive an excess notice which will require you to pay tax and withdraw sufficient monies to get beneath the general transfer balance limit. Doing nothing is not an option if you currently exceed or may exceed your transfer balance cap. Thankfully our SMSF clients will know where they are at with our real time SMSF reporting system and will be able to take prompt action. Those with public funds may know their balance as of the day before but will find it, to say the least, difficult to bring themselves sufficiently under their cap as redemptions can take weeks to process.
- Many with their own super fund may well know the value of their super interests. But what if the fund’s assets include assets that aren’t valued daily such as properties? One needs to have a very good understanding of the value of all fund assets. And keep in mind that Melbourne property prices posted double digit growth for 2016.
- You need to be aware that the very useful estate planning tool of reversionary pensions may no longer be such a wonderful solution. The reversionary pension will count against your transfer balance cap – although one has 12 months grace in pulling money out as a lump sum.
- The growth in your pension assets doesn’t count against your transfer balance cap. Think carefully about what assets you keep / put into pension mode.
- And here is a real nasty one. If you exceed your transfer balance cap, then you will be denied taking advantage of any further increases in the cap. So when it increases from $1,600,000 to $1,700,000, to $1,800,000 and so on, you will be denied these increases if you have ever exceeded your transfer balance cap.
These are just some of the issues to be addressed well before July 2017.
Inaction can be the worst action.
With the removal of the accountant’s exemption as from June 2016, accountants can no longer provide any form of financial planning advice. The only way for you to properly address your situation is to obtain financial planning advice and do so from a financial planner who understands these complex tax rules.
So what are the ins and outs of the $1,600,000 pension cap?
July is now not that far away and by then the amount of monies you can have pension mode will be limited to $1.6 million. So what are the ins and outs of the $1,600,000 pension cap?
The $1,600,000 will be indexed in $100,000 increments. It will also be recorded and tracked like a general ledger account with various transactions and events either adding to or reducing the balance.
Items that will count against the balance include:-
- The balance of any pension account as at 30 June 2017.
- Reversionary pensions commenced between 1 July 2016 and 30 June 2017 (and which will be subject to a separate blog).
- Superannuation pensions started after 30 June 2017.
- Reversionary pensions started after 30 June 2017.
- Excess transfer balance earnings (a.k.a. the penalty for exceeding a pension cap).
- Reversionary death benefits (and which will also be subject to a separate blog).
- Defined benefit income streams (as rare as they are these days).
Items that will reduce one’s balance include:-
- Amounts converted back into accumulation mode.
- Structured settlement contributions (being personal injury payments).
- Losses due to fraud.
- Transactions voided under the Bankruptcy Act.
- Family Law superannuation splits.
- Pensions that fail to comply with the standards (with the most typical occurance being a pension that ceases as the minimum pension has not been made).
It is important to note that the pension payment will not be reduced by:-
- Pension payments.
- Investment losses – although the government’s 364 page Explanatory Memorandum contemplates the impact of another 2008/2009 financial meltdown. Paragraph 3.103 states at the government will review the impact of the transfer balance in the event of a microeconomic shock that substantially affects retirement incomes. It is only a stated intention to review – it doesn’t say they will do anything and doesn’t say how big a shock it has to be.
The superannuation changes are complex (as evidenced by a 364 page explanatory memorandum) and require many to properly review their affair and to do so well before July.
In this blog, we have simply outlined the technicalities of the new pension cap. In future blogs we will explore various aspects of this in more detail as well as addressing some of the other more significant super changes.
At MRS, we will spend today planning for your success tomorrow.
Positive cash flow is king
It’s not all about profit. Positive cash flow is king. There are many businesses that have failed which have been profitable and even had a great good or service. Yet that doesn’t translate to survival if cash flow is negative.
Various studies of small business failure all list poor or inadequate cash flow as the number reason for small business failure – and do so by a long way with most surveys attributing this as the main reason in anywhere from 70% to 90% of cases.
One should never go into business without understanding such things as:-
- How big is the market.
- Who is the competition.
- What are the direct costs of producing the good or service.
- What are the other costs of running the business.
- If you need staff, where are you going to find them and how are you going to train them.
- How much cash do you need to get started and then grow – and how long before you can repay yourself.
- If you need bank finance, what are the measures by which they are going to approve your loan application both initially and on-going.
This is where planning and budgeting are so important. You will be forced to address all these issues and more. You will need to assess priorities to various tasks and needs. Planning and budgeting provide clarity and removes foggy uncertainty and fear.
Too many small businesses either fail to undertake any of these tasks, or may be at best scratch out some kind of profit and loss statement. Sadly most people plan their holidays better than the very thing that will generate income, support their family and pre-occupy most of their waking hours. We have planning templates as well as specialised software which can generate not only a P&L but a cash flow, balance sheet and a funds statement (showing where money will come from and where it will go). We can then play with various high and low forecasts. We can then go and show you the measures by which a bank may finance you and assess you in their annual reviews (bankers love our reports). This includes giving you a dashboard to regularly check your progress and performance.
We welcome the opportunity to meet with you in a free one hour meeting to understand your business and to explain they ways we can help.
At MRS, we will spend today planning for your success tomorrow.
Why is planning so important?
Why is planning so important? No doubt you had numerous ideas over the summer break on ways you can improve your business in 2017. Don’t let that impetus and initiative slip away! The medium by which to bring those thoughts together and generate results is to bring everything together in a business plan.
Planning requires thought, analysis and decisions to be made in context of other factors and considerations (and not in isolation). Planning requires clear thinking, rather than knee-jerk reaction, and forces you to take a breath. It is no coincidence that those businesses that plan tend to be more successful. It is that focus that also ensures that key people work on the key tasks and aren’t consumed by dealing with what were really unimportant but neglected matters that have become urgent.
Some think it requires you to lock yourself away for days on end. It doesn’t. It will however take time as will the on-going reviews of performance. Planning gives you a roadmap and series of goals to measure yourself against. It also gives not clarity but also focus to your employees. Don’t lose those ideas you had! Set aside time to plan and put it into writing.
A good plan is like a road map: it shows the final destination and usually the best way to get there (H J Judd)
At MRS, we will spend today planning for your success tomorrow.
The new $1,600,000 pension cap
The new super rules first announced in this year’s Budget and passed by the Senate last month will include a new limit as to how much money one holds within pension mode. As from June 2017, there will be a $1,600,000 pension cap (which will be indexed in $100,000 lots).
The threshold will be calculated as the accumulated amounts one has commuted into pension mode less any commutations. Pension payments do not reduce your limit.
If Fred was to move part of his super accumulation balance into pension mode in June 2016 and do so with $1,600,000, he will not be able to move any further monies into pension mode until the threshold is indexed to $1,700,000. If that $1,600,000 grows to $3,200,000, he is entitled to keep that within pension mode. That’s great. On the flip side though, if it falls to $800,000, then that will be doubly unfortunate as Fred will not be able to top up.
Those in pension mode are going to have to think very seriously about what assets they put into pension mode and when they do so.
There is also another issue here in that if Fred only put $800,000 into pension mode in June 2017 and thereby only use half of his threshold, he can then only top up with $50,000 when the threshold increases to $1,700,000. It’s a strange system and careful planning is required.
At MRS, we will spend today planning for your success tomorrow.
Christmas and tax
Entertaining and providing gifts at Christmas time to staff, customers and suppliers is a cost of doing business. However, there are some important FBT, GST and income tax considerations and outcomes.
Under-pinning the implications are the following key points:-
Christmas parties, entertainment and gifts are all treated under entertainment tax rules.
- FBT applies to benefits given to employees.
- There are no FBT implications on entertainment and gifts given to customers, clients and suppliers.
- There are three methods under which an employer can quantify the taxable components of any entertainment expenditure – in fact there are 38 permutations depending on who is entertained where, how and with whom. We will largely address the actual method which the vast majority of clients use and which delivers more favourable outcomes. It is beyond the scope of this briefing to address 12 week log method and we will only touch upon the 50/50 method where relevant.
- Christmas comes but once a year and to the best of my knowledge and experience does so on 25th December. Nevertheless, the ATO treats Christmas parties and gifts as being what are called minor, infrequent and irregular benefits.
- Such minor benefits are FBT exempt where they cost less than $300 (including GST) provided the actual method is used to quantify entertainment.
The Christmas party
Where entertainment is calculated under the actual expenditure method:-
- If a Christmas party is held on-site on a work day, the whole cost for each employee will be an exempt fringe benefit. So too will the spouse’s cost provided the cost per spouse is less than $300. No income tax deduction can be claimed for the cost of the party including that in respect of any family members that may attend. Taxi travel to or from the workplace (not both ways) will be exempt from FBT and not tax deductible.
- If a Christmas party is held off the work premises, then the whole cost will be exempt from FBT provided the party costs less than $300 per person (employees and their spouses). No income tax deduction can be claimed for the cost of the party including that in respect of any family members that may attend.
- If an external Christmas party costs more than $300 per person then the total cost is subject to FBT.
- The cost of any entertainment provided during the party (whether that be at the work premises or outside) will be exempt if it costs less than $300 per head – for example DJ, musicians, clown and comedian.
- The cost of entertaining clients, customers and suppliers is not subject to FBT and is not tax deductible.
- If any exemption is exceeded then FBT is payable. Consequently, an FBT Tax Return must be lodged and FBT paid. Please keep this in mind when completing the 2015/16 FBT Questionnaire in early April 2016.
Where entertainment is calculated under the 50/50 method:-
- 50% of the cost will be subject to FBT and this portion will be tax deductible. The other 50% will not be subject to FBT and will not be tax deductible. An FBT Tax Return must be lodged and FBT paid.
- Only taxi travel from home to the venue will be FBT exempt and not deductible for tax.
Gifts
The following gifts are exempt from FBT and are tax deductible:-
- Hampers, bottles of wine, gift vouchers, a pen set costing less than $300 (inclusive of GST).
The following gifts are subject to FBT and are not tax deductible:-
- Tickets to a sporting event or theatre, holiday, accommodation, etc.
GST
- The GST component of any tax deductible portion can be claimed back.
- The GST component that relates to the non tax deductible portion can’t be claimed.
Please do not hesitate to call us should you have any queries.
At MRS, we will spend today planning for your success tomorrow.