Old
adnews2
From:
Sent: 29 June 2006 9:20 PM
Subject: Adnews 29th June
2006
1.
BUDGET
TAX
ADVANTAGES
The proposed changes to
superannuation announced in the federal budget are aimed at simplifying
superannuation planning and increasing the benefits to retirees. Taxes have been
reduced to an extent, and in a manner, that was not anticipated. The changes
will benefit some already in retirement, but more importantly are designed to
encourage greater contributions to superannuation than under the current system.
Under the proposals, superannuation will offer clear and simple-to-understand
tax concessions for the majority of those in a position to make voluntary
contributions. All employees, including the self-employed, will be able to make
tax-deductible contributions up to the age of 75. The tax advantages are clear
at the point of saving, while savings grow and at the point when benefits are
taken. The four stages are noted below;
1. When savings are made: So
long as the member’s marginal tax rate is above the 15 per cent contributions
tax, the amount saved through super will exceed the amount saved outside super.
That is, $1000 of pre-tax income will result in $850 savings in super and $685
(30% tax rate) outside super.
2. Savings accumulating
pre-retirement:
Superannuation savings are subject
to an annual 15 per cent earnings tax rate, while non-super savings are taxed at
the member’s marginal tax rate. If the member’s marginal tax rate is above the
15 per cent earnings tax, superannuation savings will accumulate faster than the
same amount saved outside super.
3. Savings accumulating
post-retirement:
Post-retirement super savings are
subject to zero tax. If a member’s marginal tax rate is above zero,
post-retirement super savings will accumulate faster than the same amount
outside super.
4. When benefits are taken:
Under the new rules commencing July 1st 2007, for people over 60,
there are no further taxes when money is taken from either post-retirement
superannuation or private savings.
At stage 1, taxpayers get
to “exchange” their marginal tax rate for the contributions tax rate of 15 per
cent on a maximum of $50,000 of income a year.
Stages 2 and 3 provide taxpayers
with tax-advantaged deferral. Stage 4 ensures these tax advantages are not
eliminated when benefits are taken. Non-deductible contributions, that is,
contributions from after-tax income, benefit only from deferral at stages 2 and
3. With non-deductible contributions, there is no tax advantage between the
amount contributed to super and the amount saved outside super. Non-deductible
contributions will be limited to $150,000 a year.
Furthermore, with annual
contribution limits, financial planning must occur over a period of time and not
just at the point of retirement. However, one risk, particularly for those many
years away from retirement, is whether the rules will change again in the future
in a manner that will disadvantage those that have acted as the current
legislation intends.
All tax systems face a trade-off
between equity and efficiency. Equity is designed to give benefits where they
are most needed. When equity is the overriding objective, the system can become
overly complex, raising the costs of compliance, increasing the need for
specialist advice and reducing the benefits since many participants will not
understand how the system works. Efficiency is improved through simplification,
which lowers the cost of compliance, makes the benefits understandable to a
wider group of people and typically promotes confidence and better planning. The
trade-off is that the benefits are not as carefully distributed across
taxpayers, requiring rules, such as limits on annual contributions, to prevent
abuse.
If the major political parties value
equity and efficiency differently, Australians planning for retirement might
assume the rules will change with a change in government. When tax concessions
are given at the start of the planning horizon and not the end, it is harder for
any future government to take these concessions away in a manner that penalises
those that have already saved. The danger when significant tax concessions lie
at the end of the planning horizon, as they do when taxes on benefits are
eliminated, is that a decision to reintroduce taxes on benefits will penalise
those who have already made contributions.
Despite this tax rule uncertainty,
the proposals provide a significant improvement to the existing system, which
has become so complex that tax advice around retirement has been essential and
few investors have understood the advantages of making voluntary contributions.
The advantages are larger and much clearer than with the current system.
Finally, even for those with equity concerns, it is possible to limit any
taxpayer’s access to benefits without changing the underlying simplicity of the
proposed system, through measures like further restricting the level of annual
contributions.
Source:
IFA Magazine
2.
Timely tax tips
Records are normally required to be
retained for tax purposes for at least five years, but special requirements
apply in some areas. For example, in the case of capital gains tax and the
substantiation rules, records have to be held for longer periods. In other
cases, for individual taxpayers with simple returns, the relevant period is only
two years. A similar period is also likely to apply to very small businesses
that elect to join the simplified tax system.
Certain building capital works
(including construction and improvement costs) may be written off as a tax
deduction over a 40-year period (2.5 per cent per
annum).
Work-related
expenses (WREs)
The Australian Taxation Office’s
compliance program for 2006 again focuses on over-claiming of employees’
work-related expenses. Such expenses typically include employee claims for
expenditure incurred on items such as travel, uniforms, subscriptions, union
fees and self-education.
To ensure that interest and
dividends are returned by taxpayers, the ATO matches information provided in tax
returns with information from external sources. But don’t forget to put in your
imputation credits. The best way to avoid trouble here is to include all such
income in your return and retain supporting documents such as bank and company
dividend statements.
The ATO is maintaining its strong
focus on this area because of the large amount of revenue involved. The types of
things the ATO looks out for are repairs versus improvements, ensuring the
property was really a rental property (and not just your
weekender),
Capital gains on
shares and real property
This area is also being closely
monitored, so make sure that you keep all relevant records to support the
details provided in your return. You should also check your eligibility for the
general 50 per cent discount and, if you are a small business owner, the various
small business CGT concessions.
Salary packaging
and fringe benefits
This can be a useful way to obtain
some tax savings, particularly if you are on the top marginal tax rate and your
employer offers it. Some of the most common and tax effective items to consider
include superannuation, laptop computers and motor vehicles. Note that
your employer will include the reportable fringe benefit amount on your payment
summary, which must be included in your tax return. This may impact on your
liability for the Medicare levy and entitlement to certain benefits. Business
owners should note that fringe benefits tax may be applicable entertainment
expenses (from business lunches to tickets for sporting events) company motor
vehicles, some directors’ loans and a host of other benefits received by
employees and directors.
Family tax
benefit
Family tax benefit (FTB) is
available eligible families (including sole pare with children). You can claim a
direct payment from the family assistance office, or as a lump sum your tax
return, or periodically through, reduced PAYG withholding payments. But make
sure you don’t “double dip”
Rebates
Tax rebates (or offsets) can reduce
your tax bill, so it pays to know what you entitled to. What you can claim
depends on the level of your income and family circumstances. Examples subject
to satisfying certain criteria, include private health insurance, medical
expenses, dependent spouse rebate, low-income rebate and the senior Australians
tax offset. The new 25 per cent entrepreneurs’ tax discount will also be
available this year, together with the childcare rebate of 30 per cent for
out-of-pocket childcare expenses up to a maximum of $4000 per child for approved
care for costs incurred in the 2004/05 income year. You should ensure that you
have retained all your relevant receipts and records for that year to
substantiate your childcare claim.
Can I just make
an estimate of my stock?
It’s not
sufficient to simply make an estimate of your stock, or to take a guess. Each
year you need to include a value in your accounts of stock in hand and
work-in- progress at 30
June. Closing stock can
be valued at cost, replacement or market value or less if obsolete, but you have to document which
method you use.
What is the
position regarding private company loans?
It is important to ensure
that private company loans that extend beyond the end of the income year are
properly documented, to ensure that a tax liability is not triggered under the
tax rules in this area. Adequate annual repayments of a properly documented loan
are also required.
I’ve
got a couple of bad debts - can I claim them as a deduction?
If you want to claim for
bad debts, remember they must be bad and written off before the end of the
financial year. To do this, the debt must generally have been brought to account
as assessable income and you must have given up all hope, and more importantly,
all action for recovery.
When do the
substantiation rules apply?
Substantiation rules may
apply to motor vehicles and travel expenses. So log books and odometer readings
should be kept, as well as other records itemising travel expenses. They also
apply to WRE claims by employees.
Why should I
review my assets?
It’s too easy to carry
assets on your books that have no real value, are obsolete or have been
scrapped. The only way to get a write-off deduction for them is to review
your depreciation schedule and take the necessary action before 30 June. The
depreciation schedule is the list we keep of all plant, equipment, furniture,
fittings and any other assets, including all items bought, sold and disposed of
during the year.
Note also that special
advantageous depreciation rules apply to a small business that is taxed under
the STS regime.
Should I elect to
be taxed under the simplified tax system (STS)?
This is the fifth year of
the STS, which is a special regime for very small business taxpayers. Its key
attractions are the $1000 write-off rules and the accelerated depreciation on
business assets. More recent improvements to the regime include its extension to
businesses that do their accounting on an accruals basis and reducing the audit
review period for such taxpayers from four to two
years.
If you are not already in
the STS, you may wish to consider if you qualify and whether to elect into the
regime. To obtain the STS benefits for 2006, the necessary election must be
lodged with the ATO when you lodge the income tax return for your business for
the year ended 30 June 2006.
Prepayments
Most business taxpayers
must pro-rata the deduction for prepaid expenses over the period to which the
expenditure relates. Restrictions also apply to prepayments by investors in
certain agro-forestry investments. However, individual non-business and
STS taxpayers can pre-pay some expenses up to 12 months in
advance.
Superannuation
Employers must ensure
they have made sufficient superannuation contributions (currently 9 per cent)
for all of their employees on a quarterly basis throughout the financial year to
avoid the risk incurring a penalty under the Superannuation Guarantee Charge
(SGC) regime.
Eligible superannuation
contributions for the June quarter must be paid by 30 June 2006 to be tax
deductible. Book entries alone are not enough. Even if you miss the 30 June
deadline for deductibility, you must make the payment by 28 July 2006 to avoid
SGC penalties. If you are substantially self-employed or under age 65 and
no longer in the workforce, you can claim a deduction on any superannuation
contributions that you have made on your own behalf with a full deduction up to
$5000 and a deduction for 75 per cent of the amount above this. As for
employees, the maximum deduction available is equal to the taxpayer’s age-based
limit. Special concessions are available to low income or non-working
spouses and also for low-income employees.
Some additional benefits
are also available this year. Splitting of superannuation contributions for
married and de facto couples is now available via spreading the total
contributions from 1 January across two account names after the end of the
financial year. The introduction of transition to retirement pensions
allows those over 55 to draw down a tax-effective non-commutable allocated
pension income stream from their savings while also adding to it. For example,
you can salary sacrifice, say, $20,000 a year and, if necessary, draw down the
equivalent amount from your superannuation fund, with the benefit being that the
pension income will generally be taxed at a lower rate than your normal marginal
tax rate.
Personal services
income (PSI)
The PSI measures are
designed to limit the level of deductions available to certain contractors
whether operating as a sole trader or through a company, trust or partnership,
and to also extend the PAYG withholding rules in such cases. A taxpayer that
meets certain specified tests such as the “results” test will be treated as
carrying on a personal services business and will be able claim a wider range of
deductions, but PSBs need to be aware of the ATO’s strict approach to income
retention and income splitting (with some exceptions such as for standard “mum
and dad” partnerships).
Non-commercial
losses
For a business to be
commercial under these rules, it needs to meet certain prescribed tests. If the
tests are not met, any losses arising from the activities will have to be
carried forward and offset in a later year, against future income from the same
type of source.
At-call
loans
A carve-out
from the rules applicable to certain related-party at-call loans is available
for small businesses with an annual turnover of less than $20 million. The
carve-out or exemption applies from 1 July 2005, which follows the end of the
earlier transition period.
Is there anything
else?
A commonly
overlooked item is interest earned on bank accounts, cash deposits and
income earned from other sources, as well as a schedule of non- business
deposits. All these should be declared, as must “other expenses”, such as
cash payments, including the nature of the payment and how the funds were
provided.
Source: In the Black CPA
Australia
Please feel free to review our
websites at http://www.addisons.com.au/
and http://www.addisonsfinancial.com.au
Privacy: if at any time you no
longer wish to receive this newsletter or require your contact details changed,
please advise us by return email
Disclaimer
This document is intended only to
provide a summary of the subject matter concerned and does not purport to be
comprehensive or to render specific advice. No reader should act on the
basis of any matter contained in this document without first obtaining specific
professional advice