Urgent retirement action required before July 2012

Executives and business owners nearing retirement or planning an exit from their business need to urgently rethink their planned date of retirement from employment.

Federal budget changes mean that from 1 July 2012 the tax on retirement payments may increase by up to $52,500.  People affected should consider retirement in June 2012.  In such circumstances, it may still be possible to consult back to the business in a changed role.

Businesses where family succession plans are underway should also consider whether there is an opportunity to take advantage of this closing opportunity in June 2012 for the family members that are handing down the business to the next generation.

For more information, please contact your Adviser.  

Stephen Cribb is a Director of Business Services and Tax at Prosperity Advisers Group.  

How business can level the playing field after Budget blues

After the Federal Treasurer’s rhetoric on his Government being the government for small and medium business, the Federal Budget delivered on 8 May 2012 is remarkable in that if contains no new meaningful support to businesses that are not loss making.  If poor business conditions mean you are a loss maker this year (2012), please defer your loss until 2013 because the loss carry back rule to refund overpaid tax does not activate a refund until 2013. You must pay tax in 2012 to play.  Only a bureaucrat could come up with such a commercially inastute approach for suffering businesses.

Many business owners who have put in the kilowatt hours and made their way through difficult trading conditions to remain profitable have seen their positions deteriorate under recent budgets.  A working family in business may have seen their relative ability to contribute to their annual after tax wealth deteriorate by more than an annual $17,000 in post tax money. Losing that much cash hurts.  For someone selling out of their business or retiring in 2012/13 this position could snowball to more than $70,000 if you take into account a clever play to change tax rates to remove the benefit of a higher general tax free threshold from the “wealthy”, the exclusion of the middle to upper middle class in compensation for the effects of the carbon tax, lowering of tax deductible superannuation thresholds for those over 50 and the increase in superannuation contributions tax (see below).  One single measure causes most of the damage – the loss of a tax rebate on golden handshakes worth up to a whopping $52,500 if you do not retire before July 2012. Because so many of these measures hit people nearing retirement, some business owners will justifiably feel that the Government is changing the rules of the poker game just as they prepare to take some money off the table.

It is an article of faith in business that win-win deals produce better and more enduring results.  It is therefore deeply disturbing for the psyche of SME’s that an increasing focus on means testing full access to fundamental elements of our taxation system, such as the superannuation system or compensation for a scheme such as the Carbon Tax which has a universal effect, is producing winners and losers.  Losers often stop playing.

In 2012/13 when your tax deductible superannuation contribution is taxed at an extra 15% if your personal “adjusted taxable income” is greater than $300,000, you may feel a desire to throw in the towel and give away the superannuation system entirely.  Particularly if you and your spouse have been in business together but an act of history means one of you has all the family income counted mainly to one name only.  Take the case where one spouse owns all the shares in a trading company. It is time to pass out some profits to pay the bills. In such a case, let us take the example where there is a family cash income of say $200,000 funded as a dividend (effectively $100,000 for each spouse).   An add-back of your super and franking credits will easily take you over the $300,000 limit.  So could one-off leave pay-outs and gearing cash losses.  This creates what many would call the artificial result of placing you in the over $300,000 category. To have full access to super concessions denied to you feels unjust – why not just withdraw?

Don’t take the bait.  Leaving the superannuation system will ultimately do you far more harm than good.  Some of the people in Treasury would probably love to see you give away all those compounding tax concessions in a lifetime – they could be worth hundreds of thousands.  Instead, look at better ways to level the playing field and change the rules of the game to better protect yourself from any further unfavorable policy changes that this or any future Government might have on you.

Maximize what opportunities remain on the table and in particular at the State Government level with a modest improvement in the NSW state taxes landscape and strengthen your business against the general risks of difficult trading conditions.  Put a passive holding company over your trading company to create improved asset protection.  Examine shifting your wealth into structures that are separated from your personal names so that the income does not get counted towards your “$300,000” limit.  If you and your spouse are in business together and the allocation of equity is actually unfair and articificial based on contribution, look at restructuring this to create an enduring platform that can benefit both you and next generations of the family.  The Government has demonstrated its agenda to distribute wealth away from the middle to upper middle class.  You do not just have to sit there and take it.

If the Government is not going to help you grow your business, it’s time to take matters into your own hands.  There are many constructive and efficient actions that you can take to outmaneuver a “lose” position. Take control.

Stephen Cribb is a Partner, and the leader of the Growthstar program at Prosperity Advisers. 

Save up to $1,200 by prepaying your private health insurance

As part of the 2012 Federal Budget, the Federal Government proposes to means test the government rebate on private health insurance payments paid on or after 1 July 2012.  For those adversely affected, prepaying your private health insurance before 1 July 2012 could save you real money!  The Federal Government also propose to means test the Medicare Levy Surcharge levied on individuals without private insurance hospital cover.  These measures and what you should do is discussed below.

Private Health Insurance Rebate

For payments of private health insurance from 1 July 2012, the rebate will depend on the age and “adjusted taxable incomes” (see below) of singles and families.

The changes will adversely impact:

  • Singles aged under 70 years of age with an adjusted taxable income of more than $84,000
  • Singles aged 70 and over with an adjusted taxable income of more than $97,000
  • Family members aged under 70 years of age with a family adjusted taxable income of more than $168,000
  • Family members aged 70 and over with a family adjusted taxable income of more than $194,000

For these purposes adjusted taxable income is calculated as your taxable income, adjusted to include fringe benefits, tax free pensions, tax exempt foreign income, reportable super contributions and total net investment losses, less any deductible child support expenditure.

The tables below show the revised rebate rates.

Singles (single on the last day of the year and have no dependants)

 

Adjusted Taxable Income

 Age

Up to $84,000

$84,001 – $97,000

$97,001 – $130,000

$130,001 or more

Under 65:

30%

20%

10%

0%

65-69 years:

35%

25%

15%

0%

70 and over:

40%

30%

20%

0%

 

Families  (if you have a spouse on the last day of the income year, or are a single parent with one or more dependants)

 

Adjusted Taxable Income

 Age

Up to $168,000

$168,001 – $194,000

$194,001 – $260,000

$260,001 or more

Under 65:

30%

20%

10%

0%

65-69 years:

35%

25%

15%

0%

70 and over:

40%

30%

20%

0%

Note: The family income thresholds are increased by $1,500 for every dependant child after the first child.

Medicare Levy Surcharge

The same adjusted taxable income criteria will also be used to determine an individual or family’s exposure to the Medicare Levy Surcharge from 1 July 2012.  The rate of the Medicare Levy Surcharge will be means tested and taxed up to a maximum of 1.5% as per the tables below.

The changes will adversely impact:

  • Singles with an adjusted taxable income of more than $97,000
  • Family members with a family adjusted taxable income of more than $194,000

Singles (single on the last day of the year and have no dependants)

 

Adjusted Taxable Income

 

Up to $84,000

$84,001 – $97,000

$97,001 – $130,000

$130,001 or more

All ages:

0%

1.0%

1.25%

1.5%

Families (if you have a spouse on the last day of the income year, or are a single parent with one or more dependants)

 

Adjusted Taxable Income

 

Up to $168,000

$168,001 – $194,000

$194,001 – $260,000

$260,001 or more

All ages:

0%

1.0%

1.25%

1.5%

Note: The family income thresholds are increased by $1,500 for every dependant child after the first child.

What can you do?  What should you do?

If you would be adversely affected by these measures, you should consider:

  • Prepaying your annual private health insurance before 1 July 2012 to maximise the private health insurance rebate available to you (on a $4,000 policy, the saving could be up to $1,200); and
  • Taking up private health insurance hospital cover to avoid the Medicare Levy Surcharge (if applicable).

If you are unsure whether you might be adversely impacted by these measures or would like to talk about the implications/opportunities, contact me or your Prosperity Adviser for advice.

Michael Griffiths is a Director of Business Services and Taxation at Prosperity Advisers.


Image source; Flickr; Ryan Smith Photography


Tax Office using discretion to stretch the Trust

Following an eventful 18 months in the Courts fighting taxpayers over disputes regarding the effectiveness & legitimacy of distributions by trustees (Bamford’s case), the Tax Office has announced new compliance measures for trustees of discretionary trusts in relation to 2012 trust distributions.

The Tax Office is planning on using the trust deeds of discretionary trusts against trustees, by clamping down on the timing of documenting the trustee’s annual income distribution. In previous years the Tax Office has accepted that it was not practical for trustees to make accurate income distributions by June 30 each year, notwithstanding the fact that many trust deeds impose such a requirement on the trustees.

Under a new hardline approach, covering the 2012 and subsequent financial years, the Tax Office has announced a compliance program which will target a selection of discretionary trusts, requiring the trustees to provide a copy the 2012 income distribution resolutions as well a copy of the trust deed (including any amendments).

The penalties for failing to make a valid trust distribution by the required date could be severe, with the Tax Office having the ability to assess the trustee on the income of the trust at the top marginal rate (46.5%).

Trustees need to act now to ensure that they are ready to make valid trust distribution resolutions by 30 June. Many older trust deeds may be in need of a review to ensure that the powers to distribute income reflect the principles arising from Bamford’s case. Over the last 12 months, Prosperity has been in contact with clients regarding updating their deeds. Secondly, with the Tax Office raising the stakes regarding pre June 30 resolutions, trustees of discretionary trusts will need to be diligent in preparing and assessing interim results to allow appropriate resolutions to be prepared before year end. More than ever before, trustees need to be seeking advice to ensure they are prepared in case the taxman comes knocking in July.

 

Image source; Flickr; Krug6


Super tax to be doubled for high income earners

If the Government raises the super contribution tax to 30% for high income earners in the budget next week, will you be affected?The Government announced to the major media over the weekend that Wayne Swan is going to double the 15% tax on concessional superannuation contributions to 30% for those with adjusted income over $300,000 per annum in his budget speech on 8th May 2012.  

 

For these purposes, adjusted income is expected to include taxable income, concessional superannuation contributions, adjusted fringe benefits, total net investment loss, some foreign income, tax-free pensions and benefits, less child support.

As a result of the adjusted income definition, a taxpayer with salary income of say $250,000 but with significant negative gearing into property or shares might still be caught by these measures.

The start date for this change is expected to be 1 July 2012 (although it is conceivable that this could be brought forward to budget night – 8 May 2012 – if budget surplus pressures are strong enough).

The 30% tax rate will apply to all concessional superannuation contributions with one exception.  The exception is where the adjusted income threshold of $300,000 is breached by an amount less than your concessional superannuation contributions amount.  In that case, the 30% tax rate will only apply to the concessional superannuation contributions that exceeds the adjusted income threshold.

Whilst it is said this change will affect just 128,000 people nationwide, it is clearly something that, if it impacts you, you may want to consider preparing for now.

Under certain circumstances, those who may not ordinarily have an adjusted income of $300,000 or more may have to be alert to this change.  For example, this could impact investors selling assets such as property or shares which might throw their adjusted income above the threshold (in the year they enter contracts to sell).

The measure will increase the tax on a standard $25,000 contribution by $3,750 per person in a move that is estimated to bring in more than $1 billion in revenue over the period forecast in the budget.
What can you do?  What should you do? 

If you are unsure whether you might be impacted by these measures, contact your Prosperity Adviser for advice, or speak to one of our leading wealth advisers, John Manuel or Gavin Fernando, who work across our Newcastle, Sydney and Brisbane offices.

If you would be affected by these measures, you should consider:

  • Maximising your concessional superannuation contributions for the 2012 year whilst the tax rate is still 15% (if possible, it would be ideal if this could be done prior to the budget announcement on 8 May 2012 in case the expected start date is brought forward); and
  • Other ways to build wealth in superannuation, including property ownership in a self managed superannuation fund.