Posts Categorized: Tax

Should you elect for CGT relief

Should you elect for Capital Gains Tax (CGT) relief? This is just one of the crucial questions facing those who are either commuting part of their pension to come under the $1.6 million pension cap or are ceasing a Transition To Retirement Pension.

These two situations mean that asset sales which would have been CGT tax free or largely tax free will be taxable. In recognition of this, The ATO is granting CGT relief. This relief is optional but only obtained if an election is made. It is also irrevocable.

It can also be chosen on an asset by asset basis – which means down to individual purchases of listed shares. This is an important point as it is quite common to see a holding that has unrealised capital gains on some purchases but unrealised losses on others – this would be the case if one bought shares in say BHP or Woolworths 10 years ago but had bought further shares last year.

If CGT relief is chosen, the asset is deemed to be sold and repurchased at financial year-end. The tax-free portion (based of the exempt current pension income %) of any gain is ignored. The taxable portion can either be declared within the 2017 Tax Return or can be deferred for payment until the asset is sold.

So should you elect the CGT relief? Well it depends.

Most self managed super funds are unsegregated so we will limit our comments to that scenario.

One should first determine whether CGT relief is indeed available. It can only being claimed for assets that were held from November 9 2016 through to July 1 2017. The asset(s) in question must also have been supporting an existing pension during this period.

What is best for each SMSF will depend upon:-

What is the exempt current pension income now and what will it be in the eventual year of sale.
Does the fund have significant capital or revenue losses?
Could the value of the asset actually fall after June 2017?
Has the share been held for 12 months by the end of June 2017? If not, then electing to obtain CGT relief will mean that the one third CGT discount will not be allowable within the calculation of the gain to be deferred.
Will the share be sold within 12 months? If so, electing to obtain CGT relief will mean that the 12 month CGT one third discount period starts again as from July 2017.

It is highly unlikely that the members of any two funds will be in the same situation. This is a quintessential example of the dangers of following a mate’s advice. These changes are also dangerous in that there are more considerations than just this CGT relief. We cannot stress the importance of seeking advice from a licenced financial planner (in this regard as Maggs Reid Stewart as an accounting firm can’t help you but our separate financial planning company can).

Transfer Balance Cap and the cost of doing nothing

July is almost here and many are still to resolve what they are going to do in response to the $1,600,000 Transfer Balance Cap (pension balance limit). This is rather scary as the cost of doing nothing can be very expensive.

Take this notional case of Ms She Willbe Right-Mate who does not grasp the opportunity to act and has $3,200,000 in pension mode on 30^th June 2017.

The ATO will force her to:-

Remove the excess balance of $1,600,000 from pension mode.
Assess her Excess Transfer Balance Earnings (ETBE). ETBE is an amount of income deemed to have further accrued within pension mode and must also be removed from pension mode. It is calculated on a daily basis at the ATO’s GIC interest rate (currently 8.76%). If we assume the monies remain in pension mode for 5 months after year end, then the ETBE will be $1,600,000 * 8.76% * 5/12 = $58,400. In all likelihood, she is not earning 8.76% on that excess balance so it has forced extra monies out of pension mode than if she had acted before July.
An Excess Transfer Balance Tax (ETBT) will then be applied. This is a penalty payable by the member and which can’t be paid from super fund monies. First time breaches are taxed at 15% (30% for a subsequent breach) so in this case it will equate to $8,760.
If she is particularly lazy and doesn’t act on the ATO demand within 60 days, the fund will be deemed not to be in pension mode in the year prior. Wow! In this case a pension balance of $3,200,000 earning say 6% (including franking credits) would have derived tax free income of $192,000. Having the ATO now deem that year as taxable would result in a tax impost of $28,800.

A lack of action has become rather costly!

So what does one do? One should obtain financial planning advice (which an accountant can’t provide). It will be highly unlikely that anyone you know will be in a similar situation – there is no cookie cutter approach / copy what your mate is doing. This in part due to the fact that the $1,600,000 pension is just one of the changes and considerations to be addressed.

So if you haven’t received personal financial planning advice focused and tailored to your circumstances, jump to it.

The $20,000 instant asset write-off continues

One of the good news items in the 2017 Federal Budget is that the $20,000 instant asset write-off will continue until June 2018.

So small businesses which buy assets costing less than $20,000 (excluding GST) will be able to deduct the cost in full. This is great for cash flow as the tax deduction will match the expenditure. So an asset costing say $10,000 excluding GST will reduce a Company’s tax liability by $2,750 (meaning that the net cost to a company will $7,250). For those undertaking their business in their own name or via a trust or partnership will save tax at their marginal tax rate (which could be as high as 49%).

What makes this news so welcome is that a small business is now defined as one with group turnover under $10,000,000 (previously $2,000,000).

So should you jump at this opportunity? Be careful as there are a number of matters to consider and traps to be aware of. To read more, go to http://www.mrsaccountants.com.au/the-20000-instant-asset-write-off/

At MRS, we will spend today planning for your future success

What was in the 2017 Federal Budget for you?

So what was in the 2017 Federal Budget for you?

There weren’t the nasty changes so often seen in a budget delivered in the first year of a new electoral term. There were even some welcome announcements – particularly in respect of the extension of the $20,000 instant asset write-off.

That all said, much of what appeared on TV and the press is simplistic and narrow further confused by useless political clap-trap from both parties.

We have published a briefing paper which sets out the important changes and includes tips thereon. You can make a request by e-mailing admin@mrsaccountants.com.au

We will be modifying our 2017 pre-year end checklist for businesses to take advantage of any opportunities and avoid any of the pitfalls where possible.

But whilst there may be only be minor adverse outcomes from this year’s budget, we remind you of the superannuation changes announced in last year’s budget which include:-

From July 2017, the concessional contribution limit everyone will reduce to $25,000.
From July 2017, the non-concessional contribution limit everyone will reduce to $180,000 and the three-year bring forward limit will reduce from $540,000 (for which there are tricky transitional rules).
From July 2017, one will not be able make any further non-concessional contributions if their superannuation balance exceeds $1,600,000.
From July 2017, one will be fined and forced to withdraw any pension balance in excess of $1,600,000. Those affected by these rules and who take action before July also have the option of nominating Capital Gains Tax relief on an asset by asset bases.
From July 2017, income on transition to retirement pensions will be taxed.

These and other changes require many to take action both well before and after June and do so based on their individual circumstances. Many will also need to revisit their estate planning.

At MRS, we will spend today planning for your success tomorrow.

The importance of coming under your transfer balance cap

The importance of coming under your transfer balance cap can’t be understated.

If you do exceed your transfer balance cap you can rectify the matter yourself. There is also transitional relief in the 2018 year were a breach of less than $100,000 is rectified before January 2018. Otherwise, there is a three-way penalty:-

The ATO will issue you with an excess notice which includes a 15% penalty (30% for a second offence).
The amount payable will attract interest charged daily at the GIC rate (currently about 9%).
You will be denied the option to claim Capital Gains Tax relief on assets that are removed from your pension balance.

So an excess pension balance can prove to be quite costly.

But it doesn’t end there.

One has 60 days to act on an excess notice from the ATO (called a Crystallised Reduction Amount). If you do not commute (remove) the excess balance out of your pension balance within 60 days then:-

The fund (not just your portion) will be in breach. This may result in the ATO removing complying status for the fund. This has many nasty implications including the fund not being able to receive concessional contributions from any source.
The offending pension balance will cease to be in retirement phase in the year which the 60 day period ends. This could easily result in upwards of $5,000 of tax being payable.

The changes in respect of pension balances are amazingly complicated. If you have not acted upon your situation then you need to do so immediately to ensure that everything is done that needs to and can be done before July 2017. Receiving advice on your particular circumstances is financial planning advice for which you will need the services of a financial planner; as accountants we are prohibited from doing any more than explaining the rules to you.

Lessons from a Master Chef

George Calombaris from Master Chef was in the news during the week for his restaurants under-paying staff.

He apologised for this and said it was a book-keeping oversight caused by the business growing too quickly. This often happens. And it can happen all too easily as whilst there are support channels and complaint procedures for employees (as there should be), there is no such similar support for businesses. It is a pity there is such a lack of support for employers as there are so many matters to comply with. It is particularly difficult for most employers to correctly identifying what award (or awards) employees apply.

Sometimes, breaches are quiet avoidable – like not issuing pay slips or not issuing employees with the national 10 employment standards.

The costs of getting it wrong can be considerable – both financial (as in fines) and reputation (due to negative press stories).

We ran a seminar on employment obligations two years ago and will look to re-run it again. In the meantime, we can refer you on to a qualified employment expert who can ensure that you comply with all obligations – including PAYG WH, WorkCover, Pay-roll Tax, employment law, awards, FWA provisions. We can also set you up on a complying payroll program (and guide you away from deficient ones).

At MRS, we will spend today planning for your success tomorrow.

What do the company tax cuts mean to you?

After much debating and deal making, the company tax rate cuts announced in last year’s Federal Budget have finally been passed by the Senate. So what do the company tax cuts mean to you?

The most important matter to understand is that the tax rate cuts only apply to businesses – the company tax rate for companies that earn passive income from such sources as interest, rents and dividends will still be taxed at 30%.

So for companies with turnover under $10,000,000, the tax rate for 2016/17 will be 27.5%. The same rate will apply in 2017/18 for those companies with turnover under $25,000,000 with progressive increases in the threshold turnover until it applies to all corporate businesses in 2023/24. Thereafter, the rate will reduce progressively down to 25%.

Businesses who trade through a corporate structure will benefit in that they will pay less tax (including PAYG Instalments). Their cash flow will improve.

So who won’t benefit:-

Businesses who don’t trade through a corporate structure whether that be as a sole trader, partnership or trust (although there is a tax discount of up to $1,000 granted to non-corporate businesses).
Corporate businesses who make a loss or have carried forward income tax losses. In this regard, it must be noted that it is said that half of all companies don’t make a profit.
Those shareholders who are remunerated by dividend from their company as they will receive a lower imputation credit and will therefore either pay more tax or receive a lesser refund.

The last point is just as important to investors (including self managed super funds) as it is to shareholders of their own company.

So let’s compare the situation as we have known it with what happens if a (a) company pays out the same amount of dividend and (b) a company that pays out all after tax profits out as dividends.

	To date at 30% company tax	If company pays same dividend amount	If company pays out same amount of pre-tax profit
Profit	1,000	1,000	1,000
Tax	300	275	275
Profit after tax	700	725	725
Assuming all paid out as a dividend	700	700	725
Franking credit	300	266	275
Taxable income	1,000	966	1,000
Individual’s tax at 39% MTR & M/care	390	377	390
Franking Cr claimed	300	266	275
Tax payable by shareholder	90	111	115
After tax money	610	589	610

Companies will still be able to attach imputation credits to dividends at the same rate the company tax was paid. That said, it won’t be long before the 30% credits are used and the first column in the above table will be a thing of the past.

So what can you do to maximise your position? If you or your super funds is a shareholder in a public company, then your position will be dictated by the dividend pay out rate as resolved by the board and existing tax credits. However, if you are a shareholder in your own name, you may wish to change your strategy to better suit your circumstances both now and into the future. We would the opportunity to discuss your situation with you.

At MRS, we will spend today planning for your success tomorrow.

Why valuers and actuaries are going to have a field day

If you see someone happy about these super changes, then you can safely presume what they do for a job as valuers and actuaries are going to have a field day.

The importance of being above or below the transfer balance cap and/or the pension balance cap requires that those members who are borderline need to have accurate numbers within their self managed super fund (SMSF) both before 30^th June and thereafter each 30^th June. Yes, the trustees of a SMSF are entitled to determine the value a fund’s property(ies), but no doubt the ATO will question those that appear to have a favourable outcomes from changing property values. In such cases, it may be prudent to pay for a valuation from a licenced valuer to remove any doubt and to stop any ATO enquiry in its tracks.

Actuaries’ workloads will increase more so. There will be a number of funds that stop and/or start pensions before 30^th June and for which they will need an actuarial percentage should the fund be unsegregated. And then there will be those large funds that can no longer remain segregated after 30^th June 2017 with the excess of any members’ balances over the $1,600,000 pension cap thereafter required to be moved into pension mode. The wonderful days of the fund being entirely in pension mode will cease in just over 100 days. Accounting fees will increase with the actuarial tasks and tax refunds from imputation credits will fall with large funds no longer having 100% of their income being tax free.

If you are affected by these and indeed other super changes, you are best supported by:-

An accounting firm who can provide you with real time numbers for your SMSF (as Maggs Reid Stewart Pty Ltd can).
Financial planning advice from a licenced financed planner (as accountants are prohibited from advising you on what actions you should undertake). So Maggs Reid Stewart can’t advise you as to what to do, but Maggs Reid Financial Planners Pty Ltd can.

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 13^th 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.

Simpler BAS reporting

Simpler BAS reporting? Sounds too good to be true doesn’t it?

The ATO has been in consultation with tax bodies, industry associations, small businesses and accounting software providers. The end result is that one will soon be able to choose to only report:-

G1 – Total sales
1A – GST on sales
1B – GST on purchases

But does this really save time and cost?

It depends.

If your accounting processes are basic then it probably will.

But for most people, it won’t constitute any real saving. With modern accounting software and by implementing automated bank feeds and perhaps even integrated point of sale systems and other modules, it has become much easier to run an up to date and accurate accounting system. From such a system, completing a BAS is no harder than running a couple of reports after undertaking some checks. Preparing an accurate BAS should be no more than a by-product of a reliable and up to date accounting system. So reporting less on a BAS doesn’t mean much.

If running an up to date accounting system is a challenge or impractical, then I suggest that the simpler BAS option may not be the best option. If you struggle to run accurate accounting records, then having fewer labels to won’t actually amount to much. Perhaps the better solution is to utilise GST Option 3 where one pays a fixed amount as advised by the ATO. Then, when the year end financial statements and Tax Return have been finalised, an annual BAS / GST Return can be prepared (within which credit is given for the quarterly GST instalments paid).

I suggest that for most, a Simpler BAS is only simpler in name.

At MRS, we will spend today planning for your success tomorrow.