In the lead-up to the Federal Election next year, we take a look at one of the Labor Party’s planned tax policies in relation to franking credits. With Christmas just around the corner, we also take a brief look at Fringe Benefts Tax consequences of providing gifts and benefts to staﬀ, with the ATO being ‘The Grinch’.
To save you having to laboriously search for the right tax rate or relevant threshold, the essential information is right here in one place.
This guide includes tax rates, offset limits
and benchmarks, rebate levels, allowances, and essential super as well as FBT rates and thresholds (including current gross-up factors) and student loan repayment rates.
In the 2017-18 Budget, the Government announced that they were extending the immediate write off for assets that cost less than $20,000 for an additional 12 months, until 30 June 2019, for small businesses (i.e. aggregated turnover threshold of $10 million). This change is not yet law.
- Immediate deductions for most depreciating assets that cost less than $20,000 that are acquired and installed ready for use, up to and including, 30 June 2019. These accelerated depreciation rules apply to both new and second hand assets. Excluded assets are horticultural plants including grapevines, in-house software allocated to a software development pool and capital works.
- The depreciating assets acquired and installed ready for use, up to and including, 30 June 2019 for $20,000 or more must be pooled and depreciated at 15% in the first year and 30% each year thereafter.
- Write off the balance of your small business pool at the end of a financial year if the balance, before applying the depreciation deduction, is less than $20,000.
The current $2 million turnover threshold will be retained for access to the small business capital gains tax concessions.
In addition to the extension of the immediate write off, primary producers are eligible for the following concessions:
- Primary producers can claim immediate deductions for capital expenditure on water facilities including dams, tanks, bores, irrigation channels, pumps, water towers and windmills; and fencing assets.
- Primary producers can also claim fodder storage assets such as silos and tanks used to store grain and other animal feed assets over 3 income years.
Farm Management Deposits (FMD) are a useful tax smoothing tool for Primary producers. They allow an individual who earns primary production income to deposit funds into a FMD in a good year and get a tax deduction equal to the greater of the deposit or their primary production income for that year if held for at least twelve months. When the money is withdrawn from the FMD it is assessable income to the tax payer. FMDs earn interest income assessable to the tax payer each year.
From July 2016 the Australian Taxation Office (ATO) have allowed for FMDs to offset loans which have been used to invest in primary production assets.
There a few restrictions to using the offset, being:
- The FMD & Business loan have to be held by the same financial institution
- The provision is only available to sole traders and individual partners in partnerships
- Loans have to be 100% related to primary production business (not a mixed loan)
For example; a farmer has a $100,000 in a FMD and a $500,000 primary production business loan. The $100,000 could be used to offset the loan so that interest is only charged on $400,000.
Currently there are only a few banks that allow this feature being; Rural Bank, Rabobank, Elders, NAB & CBA.
For fund members with existing benefits in retirement phase (RP) as at 30 June 2017, the maximum amount allowed to remain in RP at that date, also known as the transfer balance cap, is $1,600,000. Any excess is required to be returned to accumulation phase.
Earnings on fund benefits in RP are exempt from tax, whereas earnings on fund benefits in accumulation are not. Transitional capital gains tax (CGT) relief allows a fund to reset the cost base of the fund’s investment to its market value so that the previous RP tax exemption is protected. Any increase in value whilst supporting a RP benefit remains exempt. This cost base resetting process requires a notional sale and immediate repurchase of the assets held by the fund. This process is on a per asset basis so you will need to carefully choose which assets you notionally sell and buy back.
In electing for CGT relief to apply, a fund also needs to consider if, as at 9 November 2016, it is using the segregated method or the proportionate method to determine which assets support the RP benefit.
A fund in 100% pension mode is using the segregated method. If it remained segregated until 30 June 2017 the fund should sell and repurchase only those assets with unrealised capital gains on that date. The gain is realised but is not taxable. This resets the cost base of the asset to its current market value and ensures only future increases in market value will be taxable.
It is important to note that no CGT relief is required on assets with unrealised losses. Applying relief to a loss would mean the loss is disregarded and lost to the fund forever.
If the fund became unsegregated between 9 November 2016 and 30 June 2017, it can employ the same strategy on the earlier date that it became unsegregated.
A fund with mixed benefits, i.e. RP and accumulation cannot be a segregated fund. However, the fund can still elect to notionally sell and repurchase the fund’s assets as at 30 June 2017. The cost base of each asset is then reset to its current market value as at that date.
All unrealised capital gains and losses to 30 June 2017 are now realised and assessable (to the proportion that they support an accumulation balance) to the fund.
However a further transitional provision allows the fund to defer any taxable capital gains to the date of its future sale. Capital losses are carried forward for future offset against future capital gains.
If your fund has not carefully considered its options regarding the transfer balance cap and transitional CGT relief you may wish to double check these have all been dealt with in the most appropriate manner.
Substantial changes to the superannuation rules took effect from 1 July 2017 and one of them is the introduction of a $1.6 million transfer balance cap. Effective since 1 July 2017, a $1.6 million superannuation transfer balance cap has been imposed on the lifetime amount of superannuation that an individual can transfer into retirement phase. The question that must be asked is there any rule of thumb when adopting a strategy to commute the pension amounts that are over $1.6m for rolling back into accumulation.
The method DBA Lawyers special counsel Bryce Figot suggested involves a comparison between the amount an SMSF member has to draw down and the level of investment return generated by the supporting assets. Though this may sound relatively simple there are a few other key elements to consider such as the taxable and tax free components of the pension when there are more than one pension interest in the fund, who are the dependent beneficiaries etc.
Make sure you have everything covered off correctly – the following articles cover some general rules, guidelines and strategies to look at when deciding which pension to commute first.
Should borrowing (ie LRBA’s) be banned from super?
Banning borrowings in superfunds seems to be a popular political topic at the moment. The argument seems to revolve around the idea that borrowing to buy property in a superfund is risky. But does this make any sense in the context of which borrowings are made?
Let’s look at the two most common uses of LRBA’s
Purchase of Business Property
The first thing to note is that superfunds traditionally have been able to hold business property and that there is currently no debate on removing this as an investment class for superfunds.
Normally though when it comes to buying business premises they are most commonly acquired by either individuals, companies or trusts. As the cost of acquiring property is generally high it is also typical that most of these purchases would be funded by borrowing. This type of purchase is not out of the ordinary and isn’t something that is labelled as being risky.
However, if a superfund acquires a business property using an LRBA can it be considered more risky? The asset itself is no more risky and if superfunds by nature are more risky why do we use them for retirement at all?
In fact you could argue holding a property in super is less risky as banks generally require greater equity contributions for the purchase of property in a superfund – this should reduce the risk. Also if you need to increase your contributions to super to cover loan instalments this can be done through pre-tax contributions whereas outside super any additional repayments have to be made from after tax income. Again this should only reduce the risk.
Purchase of Investment Property
Superfunds traditionally have also been able to purchase investment property. Again there has been no argument to remove this as an investment class for superfunds.
Individuals (or other entities) can also purchase an investment property. Again people have traditionally borrowed to buy an investment property and this is something which is commonly referred to as negative gearing. As mentioned before this type of purchase is common and has never been under attack as being risky.
However, if a superfund acquires an investment property using an LRBA can it be considered more risky? Basically it’s the same outcome – it’s just a different entity holding the property.
As per the business property example above banks generally require greater equity contributions for the purchase of property in a superfund – this presumably reduces the risk. Also if you need to increase your contributions to super to cover loan instalments this can be done through pre-tax contributions whereas outside super any additional repayments have to be made from after tax income. Again in my view this only reduces the risk.
So what is risky anyway – who decides and is it the same for everyone? Sure the government can ban superfunds being able to borrow. However, people being people will want to invest for the future and will borrow in other entities. Will the government therefore successfully reduce the risk by this strategy? Won’t this policy, if adopted, result in people simply investing in less tax efficient structures to hold and manage their retirement assets leading to less wealth to retire on? Could this policy therefore create a new tax burden for future generations to deal with as social welfare dependence increases ? And finally if people can’t borrow to buy property in their superfund as they don’t have enough funds to acquire a property outright – what will they do? What will they invest in? The share market? Well isn’t that supposed to be more risky !!
As part of the package of reforms commencing from 1 July 2017, superannuation funds, (including self-managed superannuation funds), will have new reporting requirements to allow changes in members transfer balance caps to be tracked in real time. A member’s transfer balance is the total amount of superannuation benefits in retirement phase, (i.e. paying a pension). The ATO has confirmed that only events which affect an individual member’s transfer balance need to be reported. Common examples include:
- Income streams, (i.e. pensions), that a member was receiving on 30 June 2017 which continue to be paid to them on or after 1 July 2017 and that are in the retirement phase, (this does not include transition to retirement income streams)
- New retirement phase income streams commencing on or after 1 July 2017; and
- Commutations of retirement phase income streams on or after 1 July 2017.
The time at which an SMSF is required to report will depend on the value of the member’s total individual superannuation balances. Total superannuation balance refers to the total amount of funds in superannuation for an individual which may be across more than one fund and partly in retirement phase and partly accumulation.
SMSF’s with all members total balances less than $1 million are not required to report during the year, and can instead report events which impact their members’ transfer balances at the same time that the SMSF is required to lodge its SMSF annual return, (usually 15 May of the year following the end of the financial year). They can report the event at the time it occurs if preferred.
On the other hand, funds with at least one member with a total superannuation balance above $1 million will be required to report events affecting members’ transfer balances within 28 days after the end of the quarter in which the event occurs. This could mean an SMSF with all member balances below $1m, is still required to report after the end of the quarter if at least one member has additional superannuation funds elsewhere totalling more than $1m.
The time at which a member’s total superannuation balance is valued is either 30 June of the financial year preceding the year the member first commences a retirement phase income stream, otherwise 30 June 2017 if a member was already in receipt of a pension at that date, or commences a pension in the 2017 -2018 financial year.
If a fund was paying a pension to a member as at 30 June 2017, and this continues to be paid into the 2018 financial year, (and is a retirement phase pension – not a transition to retirement pension), these must all be reported to the ATO by 1 July 2018, regardless of member total superannuation balance.
We will be providing further updates shortly to our superannuation fund clients, however in the meantime if you have any queries, please don’t hesitate to contact us.