Tax tips to consider before 30 June 2014

There is less than a month until the end of the financial year and following on from a very tough Federal Budget this is shaping up to be a very important year-end for tax planning.  This is largely thanks to the increase in tax rates we are likely to see next year from the proposed deficit levy. 

So in preparation for the changes coming, there are some important steps you can take, before the end of the financial year that will assist in reducing your tax payable when your 2014 returns are lodged and in the year beyond to 2015.

Here are a few, and you can see more in our downloadable tax preparation guide ‘113 Tax Tips‘.

 

Avoiding the Deficit Levy

The deficit levy, which is due to commence on 1 July 2014 is likely to impact individuals with a taxable income above $180,000 and is expected to last for 3 years (i.e. the 2014-15, 2015-16, and 2016-17 financial years).  Managing your tax affairs to minimize exposure to the levy is one of our most important tasks this year.

When combined with the 0.5% increase in the Medicare Levy from 1 July 2014, this represents a jump in the top marginal tax rate from 46.5% to 49%.

If you are already on the top marginal tax rate, then increasing your income this year with an offsetting reduction in next year’s income could save you 2.5% in tax on that amount. Strategies could include the following:

  • Choosing not to prepay expenses such as interest.
  • Bringing forward into 2013-14 any expected income from asset disposals via early sale.
  • Deciding not to delay income receipts (if this is a strategy you typically use).

You may also choose to make greater use of salary packaging in the next 10 months to reap the benefits. To match the personal tax increase, the FBT rate increases to 49% from 1 April 2015. Interestingly this means that there is a 2% benefit to packaging taxable fringe benefits for people on more than $180,000 between 1 July 2014 and 31 March 2015.

Changes to the rules around the purchase of depreciating business assets

In 2013 the Government foreshadowed changes to the ability of eligible small businesses to claim an  immediate deduction for expenditure on depreciating assets costing less than $6,500 (and the ability to claim $5,000 for motor vehicle purchases).

Whilst these changes have yet to be enacted they are intended to be retrospectively implemented from 1 January 2014, when the threshold will be reduced to $1,000.  So being aware of this is important in your tax planning process.

Superannuation contributions for the year ending 30 June 2014

Prior to year end it is also important not to forget about superannuation. You may consider any of the following strategies in looking over your superannuation:

  • Where appropriate, ensure that maximum concessional contributions are paid before 30 June. It is also critical that care is taken to not exceed the maximum contribution limits.
  • You may wish to give consideration to making non-concessional contributions to superannuation.
  • If you have a spouse, parent or child on a low income then consideration should also be given to making a non-concessional contribution for them and taking advantage of the government co-contribution.
  • If your superannuation fund is in pension phase then it is important to remember to make the minimum pension payments from your SMSF before 30 June 2014. This is discussed further below.

Understand your minimum Pension Payment requirements

It is worth noting that the pension drawdown relief provided by Government as a result of the downturn in the global financial markets ceased from the 2013-14 year. Minimum pension payment percentages have now reverted back to those last seen in the 2007-08 year.

While the table below provides further details, we recommend that you discuss your personal circumstances with your adviser before making the payment to ensure the correct amount is paid and to also ensure an appropriate buffer given changes.

Age                              Minimum

Under 65                               4%
65 to 74                                 5%
75 to 79                                 6%
80 to 84                                 7%
85 to 89                                 9%
90 to 94                                 11%
95 to whenever                    14%

 

Put in place appropriate trust distributions

As in previous years, if you operate a trust it is crucial that the trust resolves how it will distribute the income of the trust prior to 30 June 2014.

Other items

While there is various other year-end tax planning items that can be considered, it is not possible to provide a comprehensive list in an article such as this. Please discuss any items you wish to consider with your adviser or download our 113 Tax Tips for more insights that you can review in your own time.

Please note that our comments above are general in nature, and should not be relied upon without seeking further advice from your adviser.

Federal Budget 2014 – “Lifters not leaners”

An old proverb says “people unite over problems but divide over solutions”.  The weight of expectation lies heavily on Joe Hockey’s first Federal Budget to solve many many long standing fiscal problems without creating a war in the voter base over the solutions.  The budget sell is an appeal to a vision of a national ideal that Australians are “lifters not leaners”.  It is a sales pitch with modest increases in taxation and significant cost reduction measures including significant welfare reductions.  In return, the budget deficit will reduce from a projected $49.9 billion in 2014 to $29.8 billion in 2015.

Almost all the tax increase measures had been leaked prior to the budget.  Of 235 pages of budget measures, only 14 pages are devoted to revenue measures.  The headline revenue measure is the 3 year “Temporary Budget Repair Levy” of 2% which applies to income in excess of $180,000.  This increases the personal income tax rate to 49% from 1 July 2014.  To match the personal tax increase, the FBT rate increases to 49% from 1 April 2015.  Interestingly this means that there is a 2% benefit to packaging taxable fringe benefits for people on more than $180,000 between 1 July 2014 and 31 March 2015.  Will we see a salary packaging frenzy in the short term?  The same opportunity arises from 31 March 2017 to the end of the 3 year levy on 30 June 2017.  Indexation of the fuel excise is set to recommence ½ yearly by indexation to movements in customs duty rates on other fuels.  This will hit people at the bowser.

The balance of the budget is devoted to expense measures directed at cost management and reductions and which affects various forms of welfare.  In particular, the reduction in the income limit on primary earners for Family Tax Benefit B from $150,000 to $100,000 will sting the middle class from 1 July 2015 and apply only to children under 6 with a 3 year phasing out for older children.  From 1 July 2015 the Medicare rebate for a standard consultation will reduce by $5 with a doctor entitled to collect a patient contribution which would appear to create a $2 per visit windfall to doctors who choose to collect $7. Patients on concession cards and with children under 16 return to the current rebate after 10 visits each year.

Gens X, Y and late blooming boomers (born after 1 July 1958) will be hit by the increase in the qualifying age for the aged pension to age 70 by 1 July 2035. Pension income and assets threshold increases will be paused for 3 years from 1 July 2017.  The increase in the SGC rate to 12% will be slowed rising to 9.5% from 1 July 2014, remaining static to 30 June 2018 before rising over 5 years to 2023 to 12% and excess super contributions will become refundable.

Students will be affected from 1 July 2016 by a requirement to repay HELP debt at a lower starting income level set at 90% of the threshold that would currently apply, being in the order of $50,638.  However, the rate of repayment will reduce from 4% to 2% of income above the threshold.  The “cost of finance” on unpaid HELP debt will also be increased to a rate matched to the 10 year bond yield capped at 6%. Deregulation of fees for higher education will also shake up the cost of higher education.

What about small to medium enterprises? Not much.  $10,000 per employee to employ a worker over 50 who has been on benefits for 6 months.  A modest reduction in the refundable R&D tax offset of 1.5% applies from 1 July 2014 in anticipation of the drop in the company tax rate to 28.5% from 1July 2015.

All of these measures are of course subject to approval in a post 1 July hostile Senate which would appear to require cooperation with the Palmer United Party.  Early theatrics suggest that this could, at least, be entertaining.

Individuals & families

As a result of the need to improve the budgets bottom line, this years budget has focused heavily on individuals and families.

We note in particular that the changes to the family tax benefit part B will have a significant impact on many family budgets.

Deficit levy of 2% (Temporary Budget Repair Levy)

From 1 July 2014 to 30 June 2017, a temporary three-year deficit levy of 2% will be imposed on individuals with taxable income over $180,000.

A number of other tax rates that are currently based on calculations that include the top personal tax rate will also be increased accordingly (except the Fringe Benefits Tax rate) for the relevant 3 income years.  However to prevent high-income earners from utilising fringe benefits to avoid the levy, the FBT rate will be increased from 47% to 49% from 1 April 2015 until 31 March 2017 (see also companies section on FBT).

Example.  For a taxpayer with a taxable income of $200,000 per year, this results in an additional tax impost of $400 per year or $1,200 in total over three years.

 


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Government Incentives

As we approach 30 April it is useful time to think about Government incentive programs. This is because 30 April marks 10 months from the end of the financial year and is therefore the deadline for the lodgement of your R&D project details with Austrade. Once approved these projects give access to valuable tax concessions.

If you are a business that tries to be innovative or a business that comes up with new ideas, then it is a good time to revisit what the R&D incentives are and the type of activities that will qualify.

In addition to the R&D incentives, we will also look at the export market development grant. Like the R&D incentives, this is another government incentive that is very valuable to businesses.

Research and Development

What is R&D?
The R&D tax incentive program allows participants who satisfy the requirements to claim an additional credit in their return in relation to money they have spent on R&D. In some cases this credit can be refunded in cash.

In determining when R&D is being carried on core R&D means experimental activities that satisfy the following two requirements:

  1. The outcomes are not known and can only be worked out by applying some kind of systematic approach.
  2. Research is conducted for the purpose of generating new knowledge. For example better materials, or processes.

Leading on from the above it is also important that whatever the “thing” is, it is being developed for the purpose of commercialisation. Therefore the development of computer software for use within your business would typically not be R&D.

While we note there are quite a number of elements to the above, the potential application of these definitions is broad. There are also various more specific requirements such as specifically excluded activities. However as a starting point if your business does things that are new and involve some form of uncertainty regarding the outcome then it is worth considering these provisions further as you may be able to access these tax concessions.

What is the concession?
If the concessions are available then the following can be received:

  • A 45% refundable tax offset for those businesses with an aggregated assessable income turnover of less than $20 million.
  • A non-refundable 40% tax offset which is available for businesses with turnover between $20 million and $20 billion.

Export Market Development Grant (“EMDG”)

What is the EDMG?
Like the R&D concession the EDMG is also administered by Austrade and is a Government funded financial assistance program for aspiring and current small and medium business that are establishing themselves as exporters of either goods or services.

One of the key incentives it provides is a reimbursement up to 50% of eligible export promotion expenses for expenses greater than $10K, with a maximum reimbursement of $150K.Other points to note include the following:

  • The Grant is provided in the year following expenditure.
  • Grants are provided up to seven years to each eligible applicant.

Who is eligible?
Australian individuals, partnerships, company associations, co-operatives, statutory corporations or trusts carrying on a business in Australia may apply for the EDMG provided they:

  • Have an ABN.
  • Had an annual income of not more than $50 million during 2012-13.
  • Spent at least $20,000 on eligible export promotion activities during 2012-13. First time applicants may combine expenses incurred in 2011-12 and 2012-13 to meet this threshold.
  • Are the principal – they must own the product they are promoting (some exceptions apply).
  • Promoted the product for export and their product is:
    –  A good made in Australia
    –  A good made outside Australia where Australia will derive a significant
    net benefit from its sale overseas
    –  A service except those specified as ineligible in the EDMG Regulations
    –  A tourism service
    –  An event held in Australia
    –  An intellectual property right that mainly resulted from work done in Australia
    –  A trade mark first used in Australia, or which has significantly increased in
    value from its use in Australia
    –  Know-how that mainly resulted from work done in Australia.

 Type of expenses that are claimable – nine categories

  1. Costs paid to overseas representatives to market / promote the product (max $200,000).
  2. Cost of engaging an arms-length consultant to undertake export market research or marketing activities (max of $50K).
  3. Cost of travel during marketing visits ($300 per day).
  4. Cost of communications to promote product.
  5. Cost of providing free samples of product promoting for export.
  6. Cost of granting, registering or extending rights under foreign laws in relation to eligible intellectual property (up to a maximum of $50K per application).
  7. External costs directly related to participating in an international trade fair, seminar, in-store promotion, international forum, private exhibition or similar activity.
  8. External costs of promotional material, such as brochures, videos, advertising and website development.
  9. Costs of bringing potential buyers who are non-residents to Australia for an eligible export promotion purpose ($7.5K per buyer per visit, maximum of $45K per application).

As you can see the potential application of the above concessions is quite broad and also quite valuable. Therefore if you are currently looking to expand your business overseas the above concession may be able to provide you with some assistance.

Could you be eligible for the Commonwealth Seniors Health Card?

If you are ineligible for the Age Pension due to your wealth but still have an annual income below $50,000 pa for singles or $80,000 pa for a couple, you might be eligible to receive the Commonwealth Seniors Health Card (CSHC).  And the benefits are nothing to shirk at. 

As a holder of the card, you can access a whole host of things you might never have known about, the first of which is cheap medicine.  And it is worthwhile noting up front that there is no assets test to qualify.

The main attraction of CSHC is that eligible pharmaceuticals under the PBS are available at just $6.00 per script.

In addition to this, you can receive a Seniors Supplement from the Government of up to $858 pa (singles) and $647.40 (for each member of a couple). You may also be able to take advantage of bulk billed GP appointments and a range of other benefits at concessional rates.  So if you think you might qualify, it is definitely worth a look.

More money in your pocket
As detailed above, CSHC holders are entitled to receive the Seniors Supplement and the Clean Energy Supplement, both annual payments made to cardholders. The maximum seniors supplement is currently $858 pa for single people and $647.40 pa for each member of a couple, paid quarterly. The clean energy supplement is currently $356.20 pa for a single person or $267.80 pa for each member of a couple.

Services and Benefits of the CSHC
The services specifically available through the CSHC may include:

  • Bulk-billed GP appointments, at the discretion of the GP.
  • A reduction in the cost of out-of-hospital medical expenses in excess of a concessional threshold, through the Medicare Safety Net.
  •  In some instances, additional health, household, transport, education and recreation concessions which may be offered by State or Territory and local governments and private providers. These concessions are offered at the discretion of the private providers, and their availability may vary from state to state.

Could you be eligible?
So, could you be eligible? In order to receive the CSHC, certain criteria must be met:

Residence
You must be an Australian resident, or a holder of a special category visa, and be living in Australia at the time of lodging the claim.

Age
You must have reached Age Pension age or qualifying age for DVA recipients.

Payments
You must not be receiving:

  • A social security pension or benefit (eg age pension), or
  • A DVA service pension or income support supplement.

Income test
You must have an adjusted taxable income of less than:

  • $50,000 for a single person
  • $80,000 for a couple

Assets test
There are no asset limitations or requirements.

 

I think I’m eligible, what do I do now?

If you believe you are eligible for the CSHC then contact your Prosperity Financial Adviser who can help with any questions you have. Alternatively you can contact the Department of Human Services on 13 23 00 or visit their  website on:
http://www.humanservices.gov.au/customer/services/centrelink/commonwealth-seniors-health-card

 

 

Prosperity’s Steve Cribb warns of ATO ramp up on TEN eyewitness news

Prosperity’s Steve Cribb warns of ATO ramp up on TEN eyewitness news

View interview

 

 

 

Act NOW if you wish to access immediate tax deductions for your small business

The Government is planning to remove the immediate tax deduction for depreciating assets costing less than $6,500 and the accelerated depreciation allowances for motor vehicles which  are currently available to small businesses (i.e. businesses with an annual aggregate turnover of less than $2 million).  It is important that you ACT NOW to access immediate tax deductions for your small business.  

These concessions were enacted by the previous Government and were to be funded by the Minerals Resource Rent Tax (MRRT). However following the proposed repeal of the MRRT, these concessions will be removed as well. The Bill, if passed, will be effective from 1 January 2014.

Current Rules

Presently, the main concessions available for small businesses with depreciating assets used in the business are as follows:

  • Plant and equipment – Assets costing less than $6,500 are subject to an immediate tax deduction; and
  • Motor vehicles – An immediate tax deduction of the first $5,000 value of the motor vehicle plus 15% of any residual value. The remaining value is allocated to the small business general pool with a rate of 30% to be claimed in subsequent income years.

Impact of the Proposed Amendments

The proposed amendments will remove the current rules and replace them with the following small business concessions:

  • Plant and equipment – The $6,500 threshold will be reduced to the previous limit of $1,000, with assets exceeding the $1,000 threshold to  be allocated to a general small business pool for tax depreciation claims (i.e. 15% tax depreciation in the first year and 30% in subsequent years on a diminishing value basis); and
  • Motor vehicles – No immediate tax deduction will be available. The total cost of your motor vehicle will be treated like any other depreciating asset and allocated to the general small business pool.

It is expected that if the Bill is passed to repeal the MRRT in the new year, the proposed amendments will be applied retrospectively. This means that the repeal of these small business concessions will be expected to commence from 1 January 2014, which is less than four weeks away.

What you can do

If you are an eligible small business wishing to maximise your tax deductions for the 2013-14 income year, it is advised that you bring forward your purchases of the above-mentioned depreciating assets to before 1 January 2014, so you can utilise the immediate deduction concessions currently available to you.

To be able to access these concessions the asset purchased will need to be installed ready for use before 1 January 2014.

Therefore if you have equipment that you know needs to be replaced shortly these concessions may make it worthwhile making the purchase and arranging delivery before the year ends. This could include for example ageing IT equipment or furniture.

 

Give your employees a well deserved break…on tax

With the Coalition winning the recent election and scrapping the Rudd Government’s proposed changes to FBT rules on salary packaged vehicles, current low interest rates and high Aussie dollar, now is a good time to negotiate a good deal on a car – and get a tax break too!

Giving your employees the opportunity to purchase a vehicle under a novated lease arrangement provides them with the most tax-effective way to buy a car of their choice for their own use – and at no cost to the business.

To many employers however, the mention of novated leasing immediately brings concerns around administrative burden, FBT liability, requirement for vehicle logbooks and maintenance and perceptions that it only applies to employees who need a car for work or high income earners. It ends up in the too-hard basket.

But novated leasing is not as complicated as it first seems. In fact, by utilising a dedicated external provider (like Prosperity), there is very little the employer needs to do. At Prosperity we provide the complete solution – from the initial consultation with an employee (lease quotes, tax saving calculations etc), finding the vehicle, arranging the finance, to managing the ongoing requirements (payroll deductions, reporting etc).

What is a Novated Lease?

A novated lease is simply an agreement between the employer, the employee and a finance provider/leasing company.

Under a novation agreement, the employer agrees to deduct money from the employee’s salary (each pay period) to cover the costs of the lease payments, registration, running costs, insurance and maintenance costs of the car. These costs are calculated upfront and usually remain constant during the lease period.

During the lease the employee is responsible for the registration, insurance and maintenance of the car. If the employee leaves, then the responsibility of the lease is transferred to them and they must arrange to make their own payments.

At the end of the lease, the employee has a few options; sell the car, pay any residual and own the car outright; keep the vehicle and extend the lease; or trade in purchase new vehicle on a new lease.

Employer Benefits of a Novated Lease

  • You can offer all your employees the extra incentive of a car in their remuneration package – the vehicle does not have to be used for business purposes;
  • It potentially takes away the burden and responsibility of managing a company car fleet;
  • It takes away the necessity of recording the car as an asset or liability in the business;
  • It takes the responsibility of making lease payments away from the employer as soon as the employee leaves their job;
  • It leave no FBT liability. FBT is deducted from employees pay as part of the lease agreement.

Employee Benefits of a Novated Lease

  • No GST is charged on the purchase of the car or on its operating costs;
  • Tax savings are provided through salary sacrifice arrangements as the lease payments are taken out of pre-tax wages;
  • Employees have the freedom to choose their own vehicle;
  • Vehicle can be used unconditionally for both work and private purposes;
  • Employee can get discounts on vehicle purchase price and operating costs – as a result of Prosperity’s purchasing power;
  • Employee has the option to own the vehicle outright at the end of the lease term.

Let’s look at how it works in real life…

Juliet works for an IT company and earns $60,000. She is looking to buy a Toyota RAV4. She has found the perfect one for $35,000. Her employer puts her in contact with a Prosperity Smart Drive consultant and they provide her with a novated lease quote.

Juliet instantly receives a discount of $3,181 on the car as she doesn’t have to pay GST. On a three year lease, her repayments are $1,278 per month which includes all costs (finance payments, CTP and comprehensive insurance, registration, roadside assistance, fuel, tyres and servicing).

As a portion of these costs are taken from Juliet’s pre-tax salary, she ends up $3,290 better off each year as compared to paying for the car out of her disposable income.

Juliet is happy that she saves some money, has the car she wants and she simply puts all petrol and servicing costs on the fleet card provided.

In summary, novated leasing has become increasingly popular over recent years and provides real advantages to both employers and employees.

Talk to us today!

 

Tax Tips to consider before 30 June 2013

With less than two weeks until the end of the financial year and after a federal budget designed to take away a bigger share of income than in previous years, there is no better time to put some effort into year-end planning.

To help you with this we have summarised some things that need to be done before year-end and some other useful ideas that may assist with reducing the tax payable when tax returns are lodged.

Trust distribution minutes

Similar to last year if you operate a trust, it is crucial that prior to 30 June 2013, the trust has resolved how it will distribute the income of the trust. Your adviser is aware of the importance of this issue and is currently in the process of preparing the required minutes. If the required resolution is not completed on time it can result in some unfavourable implications.

Don’t forget also that this year 30 June falls on Sunday. Therefore the target date for completing these resolutions needs to be Friday, 28 June. If you don’t hear from you adviser by 25 June please take steps to contact them.

Trust distributions to companies

Following on from the above distributing net income to a company can be an effective strategy to reduce tax.

While this will have the effect of capping the tax at 30%, consideration will need to be given to what is done with these funds once they are in the company.

In such a case our firm has designed some investment structures that you may find appealing. Please consult your adviser if you wish to find out more.

Loss carry-back rules

A new measure that is currently before the Senate and likely to be passsed soon, provides tax relief to companies by allowing them to carry-back tax losses so they receive a refund against tax previously paid.

These rules are new this year and will allow a one-year loss carry-back in the current financial year. These rules allow tax losses incurred to be carried back and offset against tax paid in the 2012 financial year.

For 2013/14 and later years, tax losses can be carried back and offset against tax paid up to two years earlier.

Loss carry-back will:

  • be available to companies and entities taxed like companies who elect to carry-back losses
  • be capped at $1 million of losses per year
  • apply to revenue losses only
  • be limited to the company’s franking account balance.

Are you thinking about buying a car?

If you operate a small business then there have been some changes from last year that mean that if you have purchased a new car since 1 July 2012, you can claim an instant tax write-off of the first $5,000.

The balance over $5,000 is depreciated as per usual.

Therefore if the business is in the process of buying a new car it is likely to be worthwhile ensuring the purchase happens before 30 June. This could combine with the year end run out sales to produce real benefit.

Purchase of depreciating business assets

In a similar vein to the previous point, the changes implemented from 1 July 2012 also mean that an eligible small business can claim an immediate deduction for depreciating assets costing less than $6,500.

If your business is therefore in need of any new equipment, such as computers or printers, then it might make sense to make those purchases before 30 June.

Superannuation contributions for the year ending 30 June 2013

Just like prior years don’t forget to lock some money away. While superannuation has taken a few punches from the government and the media during the year it is still the most tax effective environment for saving for the future.

It’s therefore critical that contributions are paid before 30 June. It is also critical that care is taken to not exceed the contribution limits.

The maximum concessional contributions for the year ending 30 June 2013 are $25,000. This limit applies on a per person basis and includes concessional contributions from all sources.

The concessional cap will increase to $35,000 for individuals over the age of 60 from 1 July 2013.

At this point it is also useful to note another widely publicised change to the super rules. This change will increase the contributions tax from 15% to 30% for individuals who have income of more than $300,000. It is proposed that this change will apply from 1 July 2012. These changes however are not yet law as their application depends on the passage of the law through parliament.

Government co-contribution

If you have a spouse, parent or child on a low income then consideration should also be given to paying a non-concessional contribution for them.

Non-concessional contributions up to $1,000 will be matched by a government co-contribution of $500 for people earning less than $31,920. Transitional rules apply for incomes up to $46,920.

To be eligible the person must be employed or self-employed.

Non-concessional contributions

While on the topic of superannuation it is also necessary to note non-concessional contributions. These contributions are broadly contributions you make to super from after tax dollars. This is typically used to get additional money into the low taxed super environment

The non-concessional contribution limits are $150,000 per member per year, or $450,000 per three-year period.

As penalties can apply to excess non-concessional contributions, please discuss this with your adviser before making a large non-concessional contributions.

Superannuation pensioners

If your superannuation fund is in pension phase then an important thing to remember is to make the minimum pension payments from your SMSF before 30 June.

While the table below provides further details, we recommend that you discuss this with your adviser before making the payment to ensure the correct amount is paid and to also ensure an appropriate buffer.

Age Minimum
Under   65 3%
65 to   74 3.75%
75 to   79 4.5%
80 to   84 5.25%
85 to   89 6.75%
90 to   94 8.25%
95 to whenever! 10.5%

 

Are you over age 60?

If you are over age 60 and have not started a superannuation pension then you need to call your adviser ASAP, because you are missing out. The taxation benefits of starting a pension mean that there is no tax in the hands of the fund and no tax on the pension income in your hands.

Medical expenses claim

For the current financial year the net medical expenses rebate, which currently allows you to claim a 20% tax offset on out-of-pocket medical expenses above $2,120 (this includes medical costs for all family members), is means tested.

The test applies to people with adjusted taxable incomes in excess of $84,000 and in excess of $168,000 for couples. For people in this income category, the offset will only be available for out of pocket expenses above $5,000 allowing a claim of 10% only.

However the more important point this year is that the net medical expenses tax offset is being phased out from 1 July 2013. This basically means that you need to claim it this year to be able to claim it next year. Therefore if you are close to the line it may be worthwhile bringing forward the payment of some medical expenses to protect access to this concession next year.

Tax rates for 2012/13 and 2013/14

As previously advised new tax rates apply from 1 July 2012. These new rates broadly mean that individuals earning less than $80,000 will pay less tax than in previous years. If your trust distributes to multiple family members then this will be to your advantage.

The tax rates for 2012/13 and 2013/14 are shown below:

Taxable income Tax on this income
0 to $18,200 Nil
$18,201 to $37,000 19 cents for every dollar over $18,200
$37,001 to $80,000 $3,572 plus 32.5 cents for every dollar over $37,000
$80,001 to $180,000 $17,547 plus 37 cents  for every dollar over   $80,000
$180,001 and more $54,547 plus 45 cents for every dollar over $180,000

 

Other items

While there are various other year-end tax planning items that can be considered, it is impossible to provide a comprehensive list in an article such as this, please therefore discuss this with your adviser if there are other items you wish to consider.

This could include prepaying expenses, other issues that affect the timing of deductions, other issues that affect the timing of income receipts, or managing the sale of different assets to either delay a tax payment or offset other capital gains.

Please note that our comments above are general in nature, and should not be relied upon without seeking further advice from your adviser.

Grant Ellis is an Associate Director with Prosperity Advisers Group.

The Federal Budget 2013-2014: Comedy or Tragedy?


As potentially the final act plays out in Treasurer Wayne Swan’s Federal Budget performances, it is perhaps fitting to ask the question – was this long drama a comedy or a tragedy? 

Tonight’s budget was a safety first affair, largely being a renouncement of previous big announcements designed to reassure the patrons before they prepare to leave the theatre.  There is nothing in this budget to give a strong indication that the box office will not close on 14 September when the Federal Election is held.

The Budget confirms the announced significant deteriorations in the fiscal outlook.  Deteriorating commodity prices, diminished company tax revenues, disturbingly low carbon tax and mining tax revenues.  The inability of the Treasurer to reliably estimate short term forward revenue over past months definitely presents as a comedy.

But in my view, this is a tragic budget.  This Government, in its possible final act, has decided to attack large corporates and foreign investors in ways that achieve modest revenue gains, but which clearly present the message to the world that Australia is indifferent and ungrateful to inbound foreign capital  investors, or to corporate innovation and research and development by large corporates.

R&D concessions are scrapped for businesses with turnover of more than $20 billion.  Thin capitalisation thresholds are potentially reduced from a debt equity ratio of 3:1 to 1.5:1.  Outbound corporate investors will lose a tax deduction for interest on borrowings against some foreign investments that produce tax exempt dividends (still ultimately fully taxed to shareholders).  We will apply a non-final 10% of face value withholding tax when foreigners sell commercial real estate, mining assets (or residential real estate with a value of more than $2.5 million). Ultimately, we will require all entities with a turnover of more than $20 million to pay tax instalments monthly, creating a permanent cash drain even on smaller businesses.

The announced superannuation reforms are simply ill considered, riddled with potential injustices and inconsistencies which demonstrate a lack of proper due diligence and a tendency to announce measures without fully assessing potential impacts. Expect a red tape boom as compliance costs soar across all these measures that, by their nature, must be complex.

Small to medium business gets just about nothing (again!).  Exceptions are the quarterly refund of R&D tax credits to small enterprises – a welcome cash flow reprieve – and the removal of the thin capitalisation rules where debt deductions are less than $2 million.

The big picture measures have already been announced – the Gonski Education Reforms, the modest “Industry and Innovation” package, DisabilityCare Australia (funded by an increase in the Medicare levy from 1.5% to 2% from 1 July 2014).  Reannouncements of big infrastructure projects mainly already in the budget (again).  There is nothing to capture the imagination of businesses (large, small or international) and set up the environment for the next economic boom.  This budget represents an opportunity missed and simply sets up this Government and its people to tread water until voters express themselves at our looming election.  But most tragic of all, many of these budget measures may never see the light of day in Parliament. 

 

INDIVIDUALS & FAMILIES

Increase in the Medicare levy

From 1 July 2014, the Medicare levy will increase from 1.5% to 2%. This increase in the levy will fund DisabilityCare Australia.

2012/13 Medicare levy low income thresholds

The Medicare levy low income threshold for the 2012/13 income tax year will increase to $20,542 for individuals and $32,279 for pensioners eligible for the Seniors and Pensioners Tax Offset.

The Medicare levy low income threshold for families for the 2012/13 income tax year will increase to $33,693, and the additional family threshold for each dependant child or student will increase to $3,094.

Net Medical expenses tax offset to be phased out

For those taxpayers who claim the NME tax offset in the 2012/13 income year they will continue to be eligible for the offset in the 2013/14 income tax year if they have out of pocket medical expenses above the relevant thresholds.

The relevant threshold for people with adjusted taxable incomes above $84,000 ($168,000 for couples) is $5,000 in out of pocket expenses and the rate of reimbursement is 10%. For those taxpayers who claim the NME tax offset in the 2013/14 income year they will continue to be eligible for the tax offset in the 2014/15 income year.

Income tax cuts deferred 

Income tax cuts that had already been legislated (by way of increasing the tax free threshold) and that were due to commence on 1 July 2015 will be deferred indefinitely.

Replacing the Baby Bonus with new family payment arrangements 

Family Tax Benefit Part A (FTB Part A) payments will be increased by $2,000, to be paid in the year following the birth of a first child, and $1,000 for a second and subsequent child. The additional FTB Part A will be paid as an initial payment of $500, with the remainder to be paid in seven fortnightly instalments.

As a result of these reforms the Baby Bonus will be abolished.

HECS-HELP discount and voluntary HELP repayment bonus discounts will end

From 1 January 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 upfront, and
  • The 5% bonus on voluntary payments made to the Tax Office of $500 or more. 

Work related self education expenses

From 1 July 2014, a taxpayer will only be able to claim a maximum deduction of $2,000 for work related self education expenses.

Eligible work related self education expenses include costs incurred on a course of study or other educational activity such as a conference or workshop, and include tuition fees, registration fees, textbooks, professional and trade journals, travel and accommodation expenses and computer expenses, where these expenses are incurred in the production of the taxpayer’s current assessable income.

Introduction of CGT Withholding Tax Regime for Non-resident Taxpayers

From 1 July 2016, where a foreign resident disposes of taxable Australian property, the purchaser will be required to withhold and remit to the Tax Office 10% of the proceeds from the sale. This measure will apply to commercial property and residential property with a value over $2.5million.

 

CORPORATES AND BUSINESS

The dramatic fall in the health of the budget has meant that for the business community the budget delivers only bad news. This bad news comes in the form of bringing forward the timing of tax payments irrespective of the cash flow and administrative problems this may cause, or the tightening of other provisions such as the thin capitalisation provisions for international businesses.

In a business environment that is probably best described a fragile, let’s hope the budget doesn’t further hamper an already difficult environment.

Monthly PAYG Tax Instalments

Changes to the PAYG tax instalment system to be introduced by government will result in all large entities paying monthly tax instalments to the government. These changes will be an administrative nightmare and result in cashflow management issues for the entities affected.

The entities caught and timing of the changes have been summarised in the table below:

Entity Affected Date Monthly Instalments Begin
Companies with turnover greater than $1b. 1 January 2014
Companies with turnover greater than $100m. 1 January 2015
Companies with turnover greater than $20m and all other entities with greater than $1b turnover. 1 January 2016
All other entities with turnover greater than $20m. 1 January 2017

As shown in the table above these changes are far reaching in the number of taxpayers that will be impacted.

Foreign Non-Portfolio Equity Interests

Presently, the receipt of dividends from a non-portfolio investment of greater than 10% in a foreign company are treated as exempt from tax. These rules are going to be tweaked by the government to ensure they operate as intended.

This will include ensuring that the exemption flows through a trust or partnership correctly.

Interest Expenses Relating to Foreign Exempt Income

The government has announced that it will be amending the legislation to prevent an interest deduction being claimed with respect to the derivation of certain foreign exempt income.

Changes to Mining Concessions 

The generous tax concession available to the mining industry are being tightened to exclude acquired mining rights and information from those assets that can be claimed as an immediate deduction as part of the cost of assets first used for exploration. Affected assets will need to be depreciated over the shorter of their effective life or 15 years.

Only original costs of issue from government and genuine new exploration expenditure will qualify for outright deduction.

This does not apply to rights and information acquired from a government authority. These changes will apply from budget night.

Thin Capitalisation

As was expected by many advisers, the government has made the decision to tighten the thin capitalisation rules that apply to foreign companies that have operations in Australia and Australian companies that have operations overseas.

The government has increased the de minimis threshold from $250,000 to $2 million. This means that taxpayers with total interest expense below $2 million are not subject to the thin capitalisation rules. The rules broadly apply to disallow interest deductions where a taxpayer has more than $3 of debt to every $1 of equity. Interest deductions are reduced on proportionate basis.

The budget has proposed that this ratio be reduced to $1.50 of debt for every $1 of equity. This is a significant blow to both Australian companies that are looking to expand offshore and to international companies looking to invest in Australia.

For foreign multinational companies this is a significant change that makes Australia a less appealing place to carry on business. When the boards of these large foreign companies sit down to determine where to invest their capital, this is one extra reason to choose a country other than Australia.

The government has noted that these changes will apply to financial years beginning on or after 1 July 2014. These changes are significant and therefore it will be crucial to closely monitor the details of how these changes will be implemented and the drafting of the legislation surrounding these changes.

Other Changes Impacting Corporate Taxpayers

Other changes to note include the following:

  • Removal of dividend washing opportunities exploited by some taxpayers. This enables some sophisticated investors to claim franking credits twice by selling shares ex-dividend and re-purchasing other shares that carry a right to dividends.
  • R&D benefits have been scrapped for corporate groups that have greater than $20b turnover.
  • The changes previously announced by the government in the 2009/2010 budget with respect to the CFC and FIF provisions have been put on hold until the OECD has finished a review of international profit shifting. This announcement means that businesses with international operations face a longer period of uncertainty.
  • The Venture Capital regime will be amended to encourage ‘angel’ investors. This will be achieved through lowering the minimum invested capital requirement from $10m to $5m.
  • Various amendments are to be made to the tax consolidation provisions, to prevent taxpayers from obtaining unintended benefits, such as double deductions through shifting assets between groups and deducting liabilities twice.

 

CHARITIES AND NOT FOR PROFIT ENTITIES

Definition of Charity

A statutory definition will be applied to the term charity from 1 January 2014, rather than the reliance that is currently placed on common law principles. The statutory definition will however preserve these principles.

Not For Profit Tax Concession Changes

Planned changes to the tax concession that apply to commercial activities that are carried on by not for profit entities are to be delayed. These changes will commence from either 1 July 2014 or 1 July 2015 depending on when the activities commenced.

These changes will broadly mean that income tax concessions will not always be available for unrelated commercial activities carried on by not for profit groups. The availability of income tax concessions will only be available where the unrelated commercial activity profits are not directed back to the organisations altruistic purpose.

FBT, GST and DGR benefits will also not be available in relation to the unrelated commercial activities.

These changes could be far reaching for the not for profit sector and should therefore be considered in detail for clients that operate in this sector. This issue is further hampered by uncertainty surrounding what these provisions will actually entail when legislated.

 

SUPERANNUATION

Increase in concessional contributions cap

A temporary cap of $35,000 (up from $25,000) will apply from 1 July 2013 for individuals aged 60 and over. The increased cap will apply for individuals aged 50 and over from 1 July 2014.

The government will index the general cap of $25,000 that applies to everyone else from the 2015 financial year onwards. The increase in the cap to $35,000 will apply as follows:

Start Date Age Requirement
From 1 July 2013 60 and over
From 1 July 2014 50 and over
From 1 July 2018 No age requirement 

Example

Tony’s birthday is 12 May 1954. He is 59 years old on 30 June 2013. For the 2013-14 financial year, Tony’s concessional contributions cap is $35,000, and his non-concessional contributions cap is $150,000 (where the general concessional contributions cap is $25,000).

Removal of $500,000 superannuation balance test 

As a result of the above-proposed increase in the concessional contributions cap, the previously announced concessional contribution limit of $50,000 for individuals with superannuation balances below $500,000 will be removed.

Taxation of earnings on superannuation assets supporting income streams 

From 1 July 2014, future earnings (such as dividends and interest) on assets supporting income streams will be tax free up to $100,000 a year (to be indexed in $10,000 increments), and the balance of earnings will be taxed at 15%.

Under the current law, all superannuation earnings on assets supporting superannuation pensions and annuities are tax-free.

The change to the taxation of superannuation funds in pension phase will undoubtedly punish good investment performance. For example, the Government announcement points out that “assuming a conservative estimated rate of return of 5%, earnings of $100,000 would be derived from individuals with around $2 million in superannuation”. However, if a superannuation fund earns 10%, then it will be subject to tax for assets that are at the $1 million level.

Special transitional rules for capital gains

  • Special arrangements will apply for capital gains on assets purchased before 1 July 2014:
    • For assets that were purchased before 5 April 2013, the reform will only apply to capital gains that accrue after 1 July 2024;
    • For assets that are purchased from 5 April 2013 to 30 June 2014, individuals will have the choice of applying the reform to the entire capital gain, or only that part that accrues after 1 July 2014; and
    • For assets that are purchased from 1 July 2014, the reform will apply to the entire capital gain.

The government is yet to release draft legislation with respect to this measure but the flow-on impact, if legislated, is likely to impact other areas. For example, if after 1 July 2014 you buy a capital asset in your superannuation fund, sit on it for 10 years, and then realise a $1 million gain to fund your pension as a one-off.

Without further clarification from the government, it might be that averaging will apply to the capital gain, that is, $100,000 gain each year that the asset was held, thereby limiting tax exposure. Alternatively, $900,000 of the capital gain could potentially be taxed at a higher tax rate.

Tax relief for excess contributions

Many innocent people have been subject to a punitive rate of tax if they accidentally exceed their concessional contributions threshold. Individuals are taxed at 46.5% even if their personal tax rate is lower, where they have exceeded the cap. Moreover, if the excessive contribution was accidental, it has not been possible to withdraw the excess contribution and correct the error.

Pleasingly from 1 July 2013, it will be possible to withdraw the excessive contributions, be taxed at your ordinary rate with an interest charge on the benefit of a tax timing difference that arises because of the different tax payment dates of the superannuation fund.

Changes to government co-contributions

The government has introduced legislation to halve the co-contribution to $500 for eligible taxpayers.

The superannuation co-contribution matches eligible (after-tax) personal superannuation contributions made to a superannuation fund up to the maximum amount of $500. However, the government has recognised that this benefit is not as popular with the targeted group – lower income earners.

Increase in Superannuation Guarantee

The Superannuation Guarantee rate is gradually increasing from the current 9% to 12% by 1 July 2019 in 0.25% increments each financial year. From 1 July 2013, employer will be required to contribute 9.25% to superannuation.

The government has also increased the maximum age limit to 75 for when employers are required to make superannuation guarantee contributions for employees. Previously, employers were not required to make superannuation contributions on behalf of employees over the age of 70.

 

INNOVATION AND RESEARCH

While not specifically a budget measure, one of the key developments in 2013 was the announcement of the 1 billion dollar “Industry and Innovation Statement” in February 2013. Financials of this package were re-announced in the budget.  There are some beneficial elements which apply from 1 July 2013 in this package.

Research and Development

Following the announced changes, there are now three tiers of research and development support:

  • A 45% refundable tax offset for those businesses with an aggregated assessable income turnover of less than $20 million.
  • A non-refundable 40% tax offset which is available for businesses with turnover between $20 million and $20 billion.
  • Access to the ordinary dollar for dollar tax deduction rules, capital allowance rules and blackhole expenditure rules for large businesses that have a turnover of more than $20 billion.

Essentially, the message is that research and development incentives are not for the top end of town.

For businesses that are not yet cash flow positive and that have a turnover of less than $20 million, an important improvement in the refundable tax offset system is the ability to opt in for a quarterly refund from 1 July 2013. The refund for each quarter will be physically paid 28 days after quarter end. In theory, this means that the first payment of a quarterly refund would be 28 October (i.e. after the next Federal election).

Taxpayers can either choose to adopt a “safe harbour” instalment credit based on last years R&D claim. Alternatively, a reasonable assessment can be made. There are two key requirements in order to get the quarterly credit. The first is that the taxpayer must have a reasonable expectation of qualifying for the credit in this years income tax return. The second is that the taxpayer must have complied with all its obligations for the last five years and it must be reasonable to expect it will continue to comply. The ATO has a discretion to waive certain types of non-compliance.

Australian Industry Participation Authority

A non-revenue measure which has been announced by the government is that businesses that plan to initiate projects with a cost of greater than $500 million will be required to create an Australian Industry Participation Plan in the early stages of project planning to outline opportunities for local industry to participate in the project. The Australian Industry Participation Authority will then coordinate with industry to improve supply of local production, creating local jobs.

Projects which have a value of more than $2 billion will be required to “embed” Australian Industry Participation Officers.

Innovation Precincts

The government also announced plans to create up to 10 “innovation precincts”. The first two precincts have been announced in the manufacturing and food industries with hubs based around Melbourne. Participation in the precinct also opens access to a $50 million Industry Collaboration Fund which is aimed at getting different businesses aligned around common technology and process solutions required to drive that particular industry segment forward.

Venture Australia

An additional $350 million has been made available for new “Infrastructure Investment Funds”. In summary, approved managed fund operators will have the opportunity to place strategic investments in applicant businesses from this fund subject to the investment rules specified by government.

Enterprise Connect and Enterprise Solutions

The enterprise connect program has been expanded to include additional industry categories of professional services, information and communication technologies, and transport and logistics. This gives qualifying businesses the opportunity to work with a business coach to develop an appropriate business plan and is to apply for grant funding from the government to implement recommendations that are specified in that business plan. This can release $20,000 or in some cases more for businesses to address improvements to systems and processes.

Additionally, the government intends to proceed with a program to assist growing businesses to develop their capabilities to meet the standards for supply required by government.

Finally, qualifying businesses will gain access to “Gold” Executive Training (Growth Opportunities Leadership Development). This is a new executive training program aimed at building the next generation of leaders in future industry employers.

Superannuation Pensions – Implications of not playing by the rules

Many Australians who are either approaching retirement or have permanently retired from the workforce are running ‘Account Based Pensions’ through their superannuation structures. It is important to understand the rules of running an Account Based Pension in order to avoid potential taxation penalties in the future.

Under the current legislation it is a requirement for individuals to make a minimum drawdown payment from their pension account each financial year. This minimum payment is calculated based on two factors, firstly a percentage factor which is dependent on the member’s age (as detailed in the table below) and secondly the persons account balance.

Age at start of account based pension (and 1 July each year)                      

2012/13
Minimum Drawdown

2013/14
Minimum Drawdown

Under 65

3%

4%

65-74

3.75%

5%

75-79

4.5%

6%

80-84

5.25%

7%

85-89

6.75%

9%

90-94

8.25%

11%

95+

10.5%

14%

The current tax rate that applies to investment income derived from superannuation assets is 15% and the tax rate for realised capital gains is 10% to 15% (depending on whether the asset has been held for more than 12 months).

Once a superannuation fund commences to pay an Account Based Pension, the fund maybe entitled to an exemption on the payment of tax for the investment income and realised capital gains derived from fund assets backing the Account Based Pension. This income is referred to as ‘exempt current pension income’.

For trustees running Self-Managed Superannuation Fund (SMSF), these rules are particularly important given that the ultimate responsibility for making the minimum pension payment each year lies with the trustees.

So what are the implications under the current superannuation regulations if the trustee of the superannuation fund fails to pay the minimum pension?

The pension will be deemed to have ceased for income tax purposes at the start of the financial year (or the start date of the pension if it’s a new pension). As a result, the superannuation fund will not be entitled to treat any investment income or realised capital gains as ‘exempt current pension income’ for that year. Also any payments made to the member during the financial year will be treated as superannuation lump sum payments for both taxation and superannuation purposes.

Under what circumstances will the Australian Taxation Office (ATO) exercise discretion to allow an SMSF to continue to claim the tax exemption on pension income even if the minimum pension payment is not met?

  1. If the SMSF has failed to pay the minimum pension amount due to a trustee error or honest mistake that has resulted in a small underpayment (i.e. is less than one twelfth of the annual minimum payment); and
  2. The entitlement to exempt pension income would have continued but for the trustees failing to make the minimum payment; and
  3. The SMSF endeavours to make a catch up payment as soon as possible (within 28 days of the trustee becoming aware of the underpayment) in the following financial year which would has resulted in the minimum payment being satisfied in the previous financial year; and
  4. The SMSF treats the catch up payment as if it was made in the prior financial year.

Does a superannuation income stream cease in the event of a member’s death if the account based pension does not automatically revert to a dependent beneficiary?

In August 2011 the ATO released a draft tax ruling (TR 2011/D3). The purpose of this ruling was to address ‘when a superannuation pension commences and ceases’. This ruling indicated that superannuation pensions cease as soon as a member dies unless the member had in place a reversionary pension nomination (which means that the pension automatically reverts to a dependent beneficiary upon death). Therefore, in the event that the member did not have a reversionary beneficiary in place, then the member’s assets would revert back to superannuation phase and subsequently loose the tax exempt pension income status. Therefore, should these assets be disposed of, then capital gains tax maybe applicable upon sale at the rate of 10% to 15%. This draft ruling resulted in confusion amongst superannuation advisers.

As a result of this confusion the Government released amendments to the regulations on 29 January 2013 which aimed to clarify that if a superannuation fund member was receiving a pension and then died, the superannuation fund will continue to be entitled to the earnings tax exemption in the period from the members date of death until their benefit is paid out by the fund. This amendment will  be a welcome relief for beneficiaries of death benefits as no capital gains tax will be payable from the superannuation fund when the pension assets are sold or transferred to fund the payment of death benefits.