Changes affecting small businesses and individual taxpayers
Taxation of superannuation
Currently all earnings from assets supporting superannuation pensions are tax-free, however from July 1, 2014, individual superannuation member accounts which are in pension phase that have more than $100,000 annual earnings will be taxed at 15% on their earnings above that amount. The change applies only to earnings and does not apply to pension payments. It is anticipated that the $100,000 threshold will be applied to multiple pension accounts that each member has across all super funds, although it is not clear how this would be administered.
The Government estimates that this measure will only affect superannuation members who have superannuation balances of $2 million and over (i.e. $2,000,000 divided by 5% = $100,000).
Transitional provisions will apply to capital gains derived on assets purchased before 1 July 2014 as follows:
- Assets purchased before 5 April 2013 – Only the capital gains that accrue after 1 July 2024 will be counted as income;
- Assets purchased between 5 April 2013 and 30 June 2014 – The fund member can choose to include as income the lower of the capital gain calculated from the date of purchase or the gain that accrues from 1 July 2014; and
- Assets purchased from 1 July 2014. The entire capital gain is included as income.
Pension deeming rules, used by Centrelink, which deem minimum rates of interest wiil be applied to superannuation account-based income streams. All products held by pensioners before January 1, 2015 will be grandfathered indefinitely and continue to be assessed under the existing rules for the life of the product “unless they choose to change products”.
From 1 July 20-14, deferred lifetime annuities will receive the same concessional tax treatment that superannuation assets supporting income streams receive.
Concessional contribution caps
Concessional contribution caps for people aged over 60 will increase from $25,000 to $35,000 from July 1, 2013. The higher limit will also be made available to those aged 50 and over from July 1, 2014, and all other super contributors from July 1, 2018. The government had previously said it would increase the cap to $50,000 – which is no longer on the table.
Excess concessional contributions will be taxed at an individual’s marginal rate, plus an interest charge.
Increase in Superannuation Guarantee (SG) Rate To 9.25%
From 1 July 2013 the superannuation guarantee (SG) rate will increase from 9% to 9.25% and will increase incrementally each year as follows until the year ended 30 June 2020 as follows:
|1 July 2013||9.25%|
|1 July 2014||9.50%|
|1 July 2015||10.00%|
|1 July 2016||10.50%|
|1 July 2017||11.00%|
|1 July 2018||11.50%|
|1 July 2019 and onwards||12.00%|
Superannuation Guarantee (SG) Contributions To Continue From Age 70+
From 1 July 2013 superannuation contributions must be paid for all eligible employees – irrespective of their age and the only age-based exception which will continue from 1 July 2013 is that SG contributions do not need to be made for an employee under the age of 18 and working for no more than 30 hours per week.
Increase in ASIC fees
The government has revealed an increase in the cost of registering a business name, with the Australian Securities and Investments Commission (ASIC) increasing fees to $32 for one year and $74 for three years. Some of the revenue from the move will be used by the corporate regulator to upgrade its call centre infrastructure to better cope with increasing demand from small business.
Net medical expenses tax offset to be phased out
The Net Medical Expenses Tax Offset (NMETO) will be phased out with transitional arrangements for those currently claiming the offset. The NMETO will continue to be available for taxpayers for out-of-pocket medical expenses relating to disability aids, attendant care or aged care expenses until July 1, 2019 when DisabilityCare Australia is fully operational and aged care reforms have been in place for several years.
From 1 July 2013, taxpayers who claimed the NMETO offset in 2012-13 will be eligible for 2013-14 if they have eligible out-of-pocket medical expenses above the $2,120 or $5,000 expense threshold, depending on income. Taxpayers who claim the offset in 2013-14 will be eligible to claim the offset in 2014-15.
Out-of-pocket medical expenses relating to disability aids, attendant care or aged care will continue until 1 July 2019.
Medicare levy low-income threshold
The government will increase the Medicare levy low-income threshold to $20,542 for individuals, $32,279 for pensioners eligible for the Seniors and Pensioners Tax Offset, and $33,693 for families, with the additional family threshold amount for each dependent child or student increasing to $3,094. This measure is estimated to have a cost to revenue of $38 million over the forward estimates period. The additional amount of threshold for each dependent child or student will also increase to $3,094. These measures apply from July 1, 2012.
Changes to work-related self-education expenses
The government will clamp down on work-related self-education expense deductions through an annual $2,000 cap on these expenses from July 1, 2014. Deductible education expenses are costs incurred in undertaking a course of study or other education activity, such as conferences and workshops, and include tuition fees, registration fees, student amenity fees, textbooks, professional and trade journals, travel and accommodation expenses, computer expenses and stationery, where these expenses are incurred in the production of the taxpayer’s current assessable income.
Employers are generally not liable for fringe benefits tax for education and training they provide or fund for their employees, in order to support employers investing in the skills of their workers. This treatment will be retained, unless an employee salary sacrifices to obtain these benefits.
HECS-HELP discount and voluntary HELP repayment bonus discounts to end
From January 1, 2014, the following discounts relating to the Higher Education Loan Program will be removed:
- the 10% discount available to students electing to pay their student contribution up-front, and
- the 5% bonus on voluntary payments made to the ATO of $500 or more
Increase in the Medicare Levy to fund DisabilityCare Australia
From July 1, 2014, the Medicare levy will increase by 0.5 %.The funds raised will be spent on DisabilityCare Australia to provide certainty to Australians with a disability, their families and their carers.
Low-income earners will continue to receive relief from the Medicare levy through the low-income thresholds for singles, families, seniors and pensioners. The current exemptions from the Medicare levy will also remain in place.
Capital gains tax (CGT) and foreign residents
The principal asset test for foreign resident CGT will be amended and a non-final withholding tax will be introduced. This will ensure that indirect Australian real interests are taxable if disposed of by a foreign resident.
Effective from 1 July 2016, when a foreign resident disposes of certain taxable Australian property, the purchaser will be required to withhold and remit to the ATO 10% of the proceeds of the sale as a non-final withholding tax. This will not apply to residential property transactions under $2.5 million or disposals by Australian residents.
Business owners should now be looking at strategies to legitimately reduce their tax liability for the 2012/13 tax year. This is especially important if the business has traded profitably during 2011/12. Business owners should carefully review their current and future cashflow position before embarking upon these measures.
Some tax planning strategies techniques differ depending on whether the business is a “small business entity” (SBE). The most popular strategies to be considered prior to 30 June 2013 include:
Small business entity (SBE) tax concessions
A “small business entity” (SBE) is a business with a turnover less than $ 2million, excluding GST.
SBE qualify for a range of tax concessions that businesses can apply without the need to make a formal election in the tax return. A business can choose which one or all of the concessions to apply.
The major tax planning concessions that are available under the SBE rules are:
- The choice to adopt the simplified depreciation rules which give an immediate deduction for assets costing less than $6,500.00, excluding GST. Depreciable assets costing $6,500 or more are depreciated in an asset pool. A full depreciation deduction of 15 per cent (30 per cent thereafter) can be claimed for 2012/13 where the asset has an effective life of less than 25 years regardless of when the asset was acquired during the income year.
- Claiming an immediate deduction for certain prepaid business expenses where the payment covers a period of 12 months or less that ends in the next income year. Subject to cash flow requirements, the most common expenses that an SBE taxpayer should consider prepaying by 30 June 2013 include lease payments, interest, rent, business travel, insurances, business subscriptions, etc.
- The ability to apply the small business capital gains tax concessions without the need to satisfy the $6 million net asset value test.
Prepayment of expenses
Certain prepayments are not subject to the above 12-month rule and therefore both SBE and non-SBE taxpayers may be able to claim deductions for expenditure that is:
- Less than $1,000 GST exclusive.
- Incurred under a law of the Commonwealth, State, or Territory. Common examples are motor vehicle registration and compulsory third party insurance and Workcover premiums and statutory licences.
- Paid under a contract of service (for example, prepayments of salary and wages, bonuses and commissions).
Many people would be surprised that there is now over $ 1 trillion invested in superannuation ! So just who manages all this money ?
A recent review of the superannuation industry by the Cooper Superannuation Review has just released comprehensive statistics about the superannuation industry and notes that the largest group managing these funds is held by Australia’s Self-Managed Superannuation Funds (SMSFs). SMSFs accounted for 30.9% of all superannuation assets ($332 billion out of $1 trillion). SMSFs have been the fastest growing segment of the superannuation industry, at 20% per annum over the five years to June 30, 2009 compared with the overall industry growth rate of 8% per annum.
These statistics released disprove claims that SMSFs are generally high-cost operations. The SMSF sector has reduced its average fees from 0.86% of assets in 2006 to 0.69% of assets in 2008. This figure is well below the superannuation sector as a whole, with an estimated cost of 1.2% per annum in 2008.
The lower administration fees indicates that the SMSF sector is competitive and has been able to attract larger account balances, without extensive promotion. SMSFs are popular with small businesses owners and offer potential cost savings, allowing up to four members in the one fund, thus aggregating the funds available for direct investment.
The operating costs of a SMSF are relatively fixed and include accounting, government fees and audit fees.
SMSFs have also performed well on the investment side. The Australian Taxation Office estimates of SMSFs produced returns of 12.6%, 16.9% and -6.1% in the years ended 2006, 2007 and 2008 respectively. These returns are better than the APRA regulated fund returns of 12.2%, 13.3% and -7.8% over the same period. SMSFs have clearly provided competitive returns over recent years. Less than 1% of SMSF assets are in overseas investments. This has possibly helped the performance of this sector in recent times.
The advantages that SMSFs offer means the growth is likely to continue – subject to whatever changes the Cooper review into super may recommend – but it is a complex area and you need to think through the long-term impacts.
New superannuation funds are being established at the rate of 2500 per month.
Seeking specialist advice and taking the time to understand things like trustee responsibilities before climbing aboard the SMSF bandwagon may be the best investment you make.
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There is a saying “There are only two certainties in life – death and taxes.”
The Commonwealth of Australia derives its taxing powers from the Constitution. The Australian Taxation Office (ATO) is the Commonwealth government agency responsible for collection of Federal taxes and administering our taxation laws. Part of the income tax collected by the Commonwealth is shared with the States, to help meet their operating costs.
The former Income Tax Assessment Act was originally proclaimed in 1936. Since then, thousands of amendments have been made to the Act, making it one of the most complex pieces of legislation in Australia. Taxpayers are therefore STRONGLY advised to seek professional assistance when dealing with Australian income tax law. Over the past two years, the Act has been re-written, in an effort to make it easier to understand. The new Act came into force on July 1, 1997. The re-write continues.
Each year millions of Australians lodge an income tax return. Workers employed on a wage pay most of their income tax as a regular deduction from their wages. This tax is remitted periodically by employers on their behalf to the ATO. The annual income tax return declares a taxpayer’s income from all sources and the taxpayer may make legitimate tax deductions incurred in earning their income. An assessment is made of the return lodged to the ATO and a refund or an amount payable usually arises. Most profitable small business taxpayers pay their income tax annually.
Australia’s financial year operates from July 1 to June 30 each year.
Each year the ATO produces a magazine style booklet called “Tax Pack”, which is a guide designed to assist individual taxpayers in completing their annual income tax returns. This guide has itself become a voluminous piece, which many taxpayers find daunting.
Australia has thousands of registered tax agents who are qualified to prepared and lodge income tax returns, and to charge a fee for this service. If you need assistance in preparing your Australian income tax return, from a qualified, registered tax agent then please contact us.
You can read about our income tax return service here.
Shareholders receiving franked dividends can benefit from surplus imputation credits where their taxable income is below $58,000 per annum. The surplus imputation credits are applied towards tax payable on other income.
Recent budget announcements have had the effect of limiting the practice of trading in franking credits, by requiring that shareholders retain shares for at least 45 days before they can obtain the taxation benefits of imputation credits. For most investors this change has little effect on the overall tax payable.
Shareholders who are acting in their capacity as trustees of complying superannuation funds can obtain larger taxation benefits from surplus imputation credits, due to the fund’s tax rate generally being only 15%. Where the fund receives a number of fully franked dividends, this can in some cases result in the fund paying little or no income tax.
It is very important that shareholders retain documentary evidence of dividends received and share transactions (i.e. purchase and sale details). This is particularly important where shareholders are involved with dividend re-investment plans. Where a company re-structures its share capital, merges, is taken over or goes into liquidation, information is usually sent to shareholders about the changes. Please retain this information. There are a number of computer software packages which will collate and summarise share holdings to assist with record-keeping. Taxpayers who are not well disciplined in the above record-keeping procedures, but want sharemarket exposure, may wish to consider other forms of investment, such as managed equity investments.
Capital gains tax affects most sharemarket transactions. CGT calculations are possible only when all the necessary information is available. Accountants generally make the CGT calculations on behalf of shareholders, based on the above information.
Please consult a reputable sharebroker for your sharemarket decisions. A good sharebroker can be a valuable resource in selecting the correct portfolio.
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It might at first sound like a daunting task to start and administer your own superannuation fund. Thousands of new funds are established each year. The benefits of operating your own fund include:
- You have the capacity to exercise direct control over the performance of your superannuation investment. Questions are often raised about the poor recent performance of some pooled or managed superannuation policies, and this has led many to the belief that they could do the investment management role as well as the professional fund managers. This is a debate that I won’t weight into.
- A flexible investment approach. The nature and extent of superannuation investments is controlled by the Superannuation (Supervision) Act, however despite these controls, there is ample scope for a very wide selection of investments, including property related investments.
- Possible administration savings. Where significant superannuation investments are available for investment, there can be cost savings in administering your own fund rather than paying a fixed percentage of the amount invested to a professional fund manager. Discuss this further with your accountant or solicitor.
- Tax deductible term life assurance cover. Term life assurance premiums are not tax deductible when paid directly by the policyholder. However, these premiums are tax deductible when paid by a complying superannuation fund. Discuss this matter further with your accountant.
Procedures involved in establishing your own Superannuation Fund
For clients wishing to establish their own superannuation fund, clients would be advised to seek professional assistance from their accountant or solicitor. Each superannuation fund requires a trust deed to be prepared and executed. In some states stamp duty is payable on the executed deed.
Decisions need to be made at the outset who will be the trustee of the superannuation fund. The trustee could be individual/s or a company.
Each excluded superannuation fund is required to establish an investment strategy. This document sets out the goals which the fund intends to achieve, and takes into account matters such as the risk profile of members, the ages of the members, cashflow requirements of the fund, and diversification of investments to minimise investment risk. The investment strategy should be monitored and reviewed periodically to ensure it remains relevant to the needs of members.
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The following represents a brief summary of the most common pitfalls encountered when completing the BAS :
- Failure to claim car expenses for vehicles used partly for business purposes. A percentage of the GST paid on running costs for these vehicles. Tax Office guidelines indicate the various percentages which may be claimed if you have not kept a log-book.
- Claiming all the GST paid on car operating expenses, home electricity, home rates, internet access and home telephone bills, when these items were only used partly for business purposes. If you use computerised accounting software be careful with this one, as special procedures are required. Some accounting software cannot handle this at all.
- Assuming all business expenses include GST. Common examples of business expenses that do not include GST are :
- Most bank charges. Merchant fees charged by banks, for retailers to have credit card facilities, do have GST in them. Refer to the monthly merchant statement for the GST amount.GST amounts are often not shown on the normal bank statements.
- Motor Vehicle Registration fees.
- Rates on business premises.
- Assuming the GST is exactly one eleventh of every amount paid. This assumption is not correct in the case of :
- Workers Compensation premiums, (which include GST free stamp duty),
- Motor vehicle registration
- Yellow Pages Advertisements paid by instalments, which often require all the GST to be paid “up-front”.
- Some electricity bills
- Failure to properly report interest paid on hire purchase contracts. These are very common for motor vehicles. An amortisation schedule needs to be prepared to properly account for this.
- A general misunderstanding of what items go at what boxes. The Tax Office guidelines have been very poor at giving specific examples. They have instead tended to use terms which are not readily understood, like “input taxes sales” and “input taxed supplies”.
- Not knowing the difference between “cash accounting” and “accrual accounting”.
- Failure to understand what is “Instalment Income” for PAYG and how it is calculated – especially for partners in partnerships.
If you need assistance in completing a Business Activity Statement then contact us before you make mistakes.
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A Chartered accountant is a member of the Institute of Chartered Accountants in Australia, a body established under Royal Charter in 1928. Membership currently exceeds 29,000. While the majority of Chartered Accountants are engaged in public practice, either as principals, partners or employees of accounting firms, other members occupy senior positions in industry, commerce, government and education.
Chartered Accountants have experience second to none in the theory and practice of accountancy. Stringent membership qualifications include a degree in commerce, economics or business, completion of the Institute’s own demanding Professional Year, and at least three years’ work experience under the supervision of a Chartered Accountant. Once qualified, members may use the designation CA (Chartered Accountant) after their name. After 10 years of continuous membership they may advance to FCA (Fellow Chartered Accountant).
Chartered Accountants play a vital role in advising the small business sector on financial and management matters. They handle more than 90% of the nation’s public company audits, and their expertise on accounting and tax matters is widely recognised in the business community.
Read more about Drew Stephenson chartered accountants here.
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