Summer 2011

Season’s greetings

12/12/11

Each year brings with it its own challenges, and 2011 has been no different. From ongoing global financial instability to significant changes in Australian taxation, there have been plenty of challenges – and opportunities – for our clients.

Businesses: we have been pleased to again support you with expert advice and services as you grow and adapt to our changing economic climate and manage taxation complexities.

Families and individuals: we understand the daily challenges of managing household finances and have welcomed the chance to help you plan effectively for your short and long-term financial and taxation needs.

We made some big changes ourselves this year, relocating to new premises in Woolloongabba and consolidating our accounting, tax, financial planning and mortgage broking under the single banner of Perrier Ryan.

The busier the year, the more important it is to take time during the festive season to relax, rejuvenate, and remind ourselves of what’s most important to us.

So, from our families to yours, we wish you a safe, happy and relaxing festive season, and look forward to working with you again in 2012.

(Note: our offices will be closed from Friday, 23 December, to Monday, 9 January 2012)

Pros and cons of buying property through self-managed super funds

One of the big new trends in our marketplace today is the increasing number of investors buying property with their self-managed super funds (SMSFs). 

Back in 2007, the super rules changed to allow people to borrow through their super funds for investment. It’s taken a while for people to get used to the idea of running their own super fund, let alone borrowing through it to buy a property. However, with more and more people setting up their own super funds today, we’re seeing a significant flow-on effect in the property market. 

Latest figures from the Australian Tax office (ATO) show a 50 per cent increase in property investment via SMSFs since June 2008 and a 13 per cent jump in the past year alone. 

Just like the First Home Owners’ Grant prompted more first homebuyers to get into the property market, more people are taking advantage of the opportunity to borrow up to 70 per cent of a property’s value through their SMSF to buy an investment. 

Australia’s largest mortgage broker, AFG, reports that for every first homebuyer who takes out a new mortgage in Australia, there are three property investors doing the same thing.

We believe SMSF property investing is becoming more popular because there are very strong rental returns available, the costs have dropped and, quite simply, more people are realising the benefits.

A lot of people ignored the opportunity before because running your own super fund sounds pretty daunting and the structures used to buy property through your super are pretty complicated. 

On paper, buying property with your super sounds like a great idea and there are definitely many benefits. But there are also many rules and regulations, so we don’t recommend using this strategy without getting independent advice (which we can provide). Here are the main advantages and disadvantages. 

Advantages

Disadvantages

Buying property through super is a great way to invest for retirement but it’s probably more relevant for people who are only 20 to 25 years away from it. Not only do they have more super money at their disposal, they are also more likely to be able to hold the property until after retirement to realise those big tax savings.

To find out more, phone Ben Littleton on 07 3391 7566 or email: benl@perrierryan.com.au

Did you know we offer expert advice on borrowing?

Borrowing money from a bank is one of the biggest financial decisions a business or individual can make, so it’s important to get the right advice.

There are common questions you should ask yourself when you are considering borrowing from a bank, be it for a home, an investment, a car, or business finance:

Perrier Ryan can help you:

Perrier Ryan finance specialist Andrew Forsyth can help take the hassle out of applying for a loan. He is also available to review your existing loan/s at no cost, to ensure your current financial situation is the best fit for your needs. We know what banks can and should be offering to their clients.

Phone Andrew on 07 3391 7566 or email: andrewf@perrierryan.com.au.

Taxwise Business News

Taxing carbon

The carbon tax has passed !!, this means that unless the legislation is repealed down the track, the carbon tax is here to stay and will come into effect from 1 July 2012. As such, it is important for you to understand how it affects your business.

Only around 500 businesses will be required to pay for their pollution under the carbon pricing mechanism. This number is not expected to change dramatically either during the fixed price period or once the ‘tax’ becomes an emissions trading scheme down the track. If you are unsure of whether your business will be subject to a requirement to buy permits in order to conduct your business you should consult with your Perrier Ryan tax adviser who will be able to assist you in working through the requirements.

The part of the package that is more likely to affect your business is the range of compensation measures that are being introduced as part of the carbon tax package. For business, the most significant of these changes is the government’s announcement that the small business instant asset write-off threshold will be increased from $1,000 to $6,500 for depreciable assets from the 2012-13 income year.

The government is of the view that this measure will boost cash flow and help small businesses to grow and invest in assets.

For individual taxpayers, the part of this package that will be of most interest will be the accompanying ‘compensation measures’. The most significant of these changes is the increase in the tax-free threshold from $6,000 (currently) to $18,200 in 2012-13, with a consequent increase in some marginal tax rates. The low income tax offset (LITO) will be reduced from $1,500 to $445, with the benefit being reflected in the new tax-free threshold.

This means that, when the threshold is combined with the LITO, each taxpayer will not need to start paying tax until their income exceeds $20,542.

The government has announced that, in the 2015-16 year, the tax-free threshold will again be increased to $19,400, with a further increase in one marginal tax rate. The LITO will be reduced to $300. The effective tax-free threshold applying to individuals will rise to $20,979.

The table below shows the current and proposed marginal tax rates and thresholds as part of the carbon tax package:
 

  Current 2012-13 2015-16
  

Threshold 
($)

Marginal 
Rate

Threshold 
($)

Marginal 
Rate

Threshold 
($)

Marginal 
Rate
1st rate 6,001 15% 18,201 19% 19,401 19%
2nd rate 37,001 30% 37,001 32.5% 37,001 33%
3rd rate 80,001 37% 80,001 37% 80,001 37%
4th rate 180,001 45% 180,001 45% 180,001 45%

 

  Current 2012-13 2015-16
LITO

Up to 
$1,500

4% withdrawal rate
on income over $30,000

Up to
$445

1.5% withdrawal rate
on income over $37,000

Up to
$300

1% withdrawal rate
on income over $37,000

Effective
tax-free threshold*

 16,000 20,542 20,979

 * Includes the effect of the tax-free threshold and the LITO.

Separately, the Federal Treasurer also announced (following the Tax Forum in October 2011) that the government will, when the Budget is in a sufficiently strong position, ‘increase the tax-free threshold further, to at least $21,000, and remove the low income tax offset entirely’.

There is no detail yet on the timing of any such change. However, we will bring you further news as soon as such detail is available.

In addition to the above, the government will also be increasing family payments, pensions, benefits and allowances.

Note: If you are unsure of how the carbon tax compensation package will affect your circumstances, you should seek advice from your tax advisor.

Roy Morgan and the Superannuation Guarantee Charge

In September 2011, the High Court handed down its judgment in the appeal from Roy Morgan Research Pty Ltd v FCT [2010] FCAFC 52.

While this case was famously reported in the press as affirming the constitutional validity of the Superannuation Guarantee Charge (SGC), it has also raised a separate issue that is much more immediate for businesses – many businesses still remain confused as to the circumstances in which the business is liable to pay SGC (especially in respect of contracts for labour).

As the liability to pay SGC lies with the employer, even where the employer and individual are mutually of the view that the relationship is a contractual agreement – as a result of which the individual (and not the employer) is liable to make super contributions – the liability of the employer to pay SGC is not extinguished.

This means that employers may be required to make payments of SGC outside the contractual arrangement with the individual, where the nature of the relationship differs (for legal purposes) from that considered to be the case by both parties. Should such a situation arise, the employer will be liable to pay not just the SGC, but also interest and administration charges. In addition, SGC is not deductible and there is no legislative ‘cut-off’ date for the liability to SGC.

While the ATO has noted in a practice statement that it will typically not seek to impose liability back further than five years, this practice statement does not represent a guarantee of any sort to employers caught in this situation.

Adding further fuel to this fire, legislative amendments in a Bill currently before Parliament seek to extend the Director Penalty Regime to unpaid Superannuation Guarantee Charge, so that directors will be personally liable for this payment. As such, the potential pitfalls of an incorrect assumption in relation to your liability to make super contributions may be significant.

Note: If you are uncertain of whether you are required to make super contributions in respect of certain individuals, you should seek advice from your Perrier Ryan tax adviser to undertake a full review, and to ascertain your obligations. The potential pitfalls of an incorrect classification may be significant!

Incorporation of professional practices

This month, the ATO released its final tax determination on the capital gains tax, employee share scheme and share buy-back consequences of dealing in shares in companies that are incorporated professional practices.

These determinations will affect any business that is or is going to be carried on in a company structure and provides professional services (for example medical practices, law firms or accounting firms). By way of background, many practices of this nature were previously prevented from operating in an incorporated structure. As a result, many such practices were instead run through a partnership structure.

In order to prevent the crystallisation of capital gains and losses on the introduction or exit of partners in large practices (which would have caused significant compliance and cash flow difficulties), the Commissioner issued IT 2540 in 1989. Broadly, this IT applied to certain partnerships that permitted the introduction of partners for nil (or nominal) consideration and permitted no capital proceeds to be paid to a retiring partner. In the IT, the ATO sets out the manner in which the Office will seek to tax such transactions.

This treatment is as follows: the ATO will treat the partnership as having no goodwill (for capital gains tax purposes). This means that when partners join or leave the partnership, no CGT gain or loss will typically be crystallized, so long as the partnership holds no other assets and the partners are acting at arm's length.

TD 2011/26 is intended to mirror this outcome for:

Broadly, according to the determination, if:

This treatment will also apply for the purposes of the employee share scheme provisions and the share buy-back provisions (when these draft TDs are finalised).

If your business provides professional services, and has either incorporated or you are thinking about incorporating the business, you should consult your tax adviser in relation to the applicable tax treatment of dealing in shares in this practice.

Note: If your business provides professional services, and has either incorporated or you are thinking about incorporating the business, the tax treatment of dealings in shares in the practice may have become a lot clearer. You should consult with your Perrier Ryan tax adviser to discuss.

Building and construction industry contractors

During the 2011-12 Budget, the federal government announced that a new reporting regime would be introduced requiring certain businesses in the building and construction industry to report annually to the ATO with details of payments made to contractors.

This new reporting regime will start on 1 July 2012.

The new regime is intended to level the playing field between the use of employees and contractors in the industry and ensure that employers correctly apply the distinction and therefore appropriate tax treatment to individuals that fall into either of these categories.

Under this regime, businesses will be required to report to the ATO any amounts paid to contractors along with each contractor’s ABN.

At this stage it is envisaged that payments for a supply made under a contract that is in whole or in part for the supply of building and construction services will need to be reported under this regime.

Only businesses will have these reporting obligations, in other words, no individual that hires a contractor will be required to report payments under this regime. It is hoped that these additional reporting requirements will result in information that the ATO will use to target its compliance and education efforts.

Note: If you engage contractors to provide ‘building and construction services’, from 1 July 2012, payments that you make to these contractors will need to be reported separately to the ATO. Much of the information required to be remitted will be available to you anyway, but you may have to reconfigure your reporting systems. You should talk to your Perrier Ryan tax adviser about updating your system to cope with this change.

ATO compliance program 2011-12: target areas

On 1 July 2011, the ATO released its compliance program for the 2011-12 income year.

Each year, the Commissioner sets out in the compliance program the ATO’s views on the most significant tax compliance risk areas for individuals, small to medium enterprises, high net worth individuals, large businesses and the not-for-profit sector.

An overview of the areas that are likely to affect you is set out below for your information. Notably, these are the ATO’s areas of focus only. Falling into one of these areas does not mean you have done anything wrong, or will be required to pay additional taxes.

However, at the ATO’s discretion, one or more of the items on your tax return may be queried and you may be required to substantiate one or more claims on your income tax return.

We note we were recently advised by a tax audit officer that all Qld based Plasterer’s are on the hit list after the flood recovery work, as they believe a lot of plasterer’s were requesting cash payments from disaster victims. So plasterers make sure you are vigilant in preparing your 2011 tax return.

If you receive any documentation from the ATO in relation to a risk review or audit, you should contact your tax adviser to discuss.

This year, the ATO will be focusing on a range of areas in relation to individuals, including the following:

Employees v contractors

The ATO will be checking to make sure employees and contractors have been correctly classified as such, from an employer as well as service provider/employee perspective. The ATO is of the view that persons inappropriately classified as contractors may be under-reporting income, but may also be missing out on entitlements such as superannuation, leave and workers compensation.

Specific industries being watched by the ATO include:

The ATO is also concentrating on the following industries to make sure employers are fulfilling their superannuation guarantee surcharge obligations:

If you are concerned about your classification, or suspect that relevant factors may not have been taken into account when determining your classification with your ‘employer’, you should contact your tax adviser to discuss.

Personal services income

Income earned primarily through the provision of personal services or exertion is taxed in the hands of that person regardless of the entity that derives the income, pursuant to specific personal services income rules. The ATO is watching for taxpayers who ignore these rules and report such income in the hands of a company, trust or another person where the personal services rules would apply to tax the income in the hands of the primary service provider.

Work-related expenses

The ATO continues to focus on claims for work-related expenses (which continue to climb) and will be especially focusing on workers in the following industries in the coming year:

Overseas income

The ATO continues to use data-mining techniques to make sure taxpayers are reporting all of their overseas income. Remember – Australian tax residents are taxed on their worldwide income, in other words, income derived from all sources. Where tax has been paid in a foreign jurisdiction, you will likely get a rebate or offset so that you may not be required to pay top-up tax in relation to your overseas income, but you still need to report it!

Pre-filling

It is essential that you double check information that is pre-filled into your tax return. Australians are increasingly reliant on pre-filled information to complete their income tax returns, but the ATO is reminding taxpayers that this information may not be absolutely correct in all instances and should be checked against primary sources prior to lodgment.

Split loans

Split loans (for example, where one loan is used for two or more purposes, especially where at least one purpose is business-related, and at least one is personal) are again under the microscope. If you have such a loan, make sure costs in relation to the loan are apportioned correctly. If you are unsure, speak to your Perrier Ryan tax adviser.

Refund fraud

The ATO has gone to a lot of effort to build fraud detection tools into its data-checking systems, but it is still important to be wary of potentially fraudulent transactions in relation to your tax file number. If you receive any correspondence from the ATO that relates, for example, to a return that you haven’t lodged, make sure you contact your tax adviser or the ATO as soon as possible.

Executives, directors and other highly paid individuals will have their tax affairs watched more closely by the ATO, with a specific focus on:

Tip: Although the ATO is targeting the areas mentioned above, businesses should not think that this means the ATO will not be looking at other areas too. They will!

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