Author Archive
Tax Newsletter December 2012/January 2013
November 26, 2012 | 
Author Mini-budget tightens fringe benefits, health rebates and more
The Government’s mid-year budget update was handed down in late October 2012. The Treasurer revised down the expected Budget underlying cash surplus to $1.1 billion for 2012–2013 – down from $1.5 billion estimated in the May 2012 Budget.
The Government did not announce anticipated changes to claw-back superannuation tax concessions (much to the relief of many superannuation investors). However, the update did contain a host of small, but not insignificant, tax proposals.
In the mini-budget update the Government announced the removal of the concessional treatment for in-house fringe benefits that are accessed through a salary sacrifice arrangement. The proposal will apply from 22 October 2012 to salary sacrifice arrangements entered into on or after 22 October 2012, and from 1 April 2014 for salary sacrifice arrangements entered into prior to 22 October 2012.
Changes to the Private Health Insurance Rebate were also announced. From April 2014, the premium to which the rebate is applied will move in line with the CPI or commercial premium increase, whichever is lower.
The Government is also widening the circumstances for which monies in “lost” or “inactive” superannuation accounts are to be transferred to the ATO. However, the Government said that from 1 July 2013, interest at a rate equivalent to CPI inflation will be paid on lost superannuation monies reclaimed from the ATO.
TIP: These proposals, including many others, are subject to the formal enactment of legislation. Please contact our office for further information.
ATO to data-match motor vehicle purchases
The ATO is collecting details of individuals and businesses who have purchased or acquired a vehicle with a transaction value of $10,000 or greater in the 2011–2012 or 2012–2013 financial years. The information will be collected from state and territory motor vehicle registries and matched electronically with the ATO’s records. The ATO is seeking to address potential non-compliance in the following areas:
- income tax;
- superannuation;
- goods and services tax;
- fringe benefits tax; and
- luxury car tax.
AUSTRAC shares information with the ATO
AUSTRAC has recently highlighted the growing role of financial intelligence in tackling crime, including tax evasion. In 2011–2012, AUSTRAC reported that information sharing with the ATO assisted with over 3,500 cases that resulted in $252 million in additional tax assessments being raised. The year before, AUSTRAC reported that its information directly contributed to some 1,600 ATO investigations, leading to tax assessments of around $241 million.
Honest mistake in not documenting private company loans
A taxpayer has been, in most part, successful before the Administrative Appeals Tribunal (AAT) in relation to a matter concerning loans from a private company. These loans were made to him, over various years, as a shareholder and director of the private company. The ATO had treated the loans, which were made in the 2005, 2006 and 2007 income years, as assessable dividends.
The AAT sided with the ATO in relation to the 2005 loans. However, the AAT decided differently in respect of the 2006 and 2007 loans. It found that a discretion under the tax law should be exercised to disregard the deemed dividends because it found that there was an “honest mistake” in failing to properly document the loans.
TIP: The Tax Commissioner has the ability to disregard a deemed dividend, or allow it to be franked, if certain conditions are met. Generally, a taxpayer must apply to the Commissioner to ask for the discretion to be exercised, and must be able to demonstrate that the failure to meet the requirements of the law was due to an honest mistake or an inadvertent omission.
In making his decision, the Commissioner must have regard to various factors specified in the law. Please contact our office if you have any questions.
Depreciation deduction allowed for certain equipment
A recent case before the AAT has highlighted the need for businesses to maintain appropriate records of plant and equipment used in business.
The taxpayer, who was a partner of a box manufacturing business, was partially successful before the AAT in relation to claims for depreciation for certain items of plant and equipment used in the business. The AAT found that there was sufficient evidence that some items of plant and equipment were used in the business for the purpose of deriving assessable income. However, the AAT found it was not possible to allow the depreciation claimed for a number of other items. A key problem noted by the AAT “was the fact that the partnership did not keep basic business records”.
TIP: The depreciation rules for small businesses have recently been amended. The changes only apply to small businesses (including connected or affiliated businesses) that have an aggregated turnover of less than $2 million. Businesses must keep appropriate records. From the 2012–2013 income year:
- the small business instant asset write-off threshold has increased from $1,000 to $6,500;
- small businesses can claim an accelerated initial deduction for motor vehicles acquired in 2012–2013 and subsequent years; and
- the long-life small business pool and the general small business pool have been consolidated into a single pool to be written off at one rate.
Special circumstances found to set aside excess contributions tax
A taxpayer has successfully argued before the AAT that there were special circumstances in his situation to allow for the exercise of the Commissioner’s discretion under the law to reallocate superannuation contributions. Accordingly, monies paid into his superannuation account in late July 2009 could be attributed to the 2008–2009 financial year, and this meant that the taxpayer would not exceed the (then) $50,000 contributions cap.
The taxpayer had a salary sacrifice arrangement with his employer, whereby funds were paid on his behalf to his super fund. The taxpayer had the intention of contributing super each month and staying below the relevant cap.
However, the AAT heard that the disputed payments occurred because salary sacrifice amounts for the months of April, May and June 2009 were not transferred by the taxpayer’s employer to the fund until July 2009.
The taxpayer claimed that he had been unaware of the delay because he believed the sums were transferred to the fund, based on his monthly payslips. The AAT found that, in this case, there were “special circumstances” that allowed the reallocation of the monies to the previous year.
TIP: This case highlights the need for individuals to check their payslips for their super contributions (especially year-to-date amounts) and know when their super contributions are being paid into their super fund by their employer.
Individuals should also consider reviewing their salary sacrifice arrangements to check whether there is an agreement as to when salary sacrifice amounts will be transferred by the employer to the individual’s super fund. Please contact our office if you have any questions.
Posted in 
Property Newsletter November 2012
Beware the Hype: 6 Marketing Traps Investors Get Sucked Into
When it comes to deciding how to spend your property investment dollar, there are many options from which to choose, from established houses to off the plan apartments and everything in between.
As if the decision wasn’t difficult enough, there are also many people and organisations out there trying to sway your decision in their favour with an avalanche of marketing messages competing for your attention and ultimately your wallet.
The major problem is that many of the products these people are selling are fundamentally flawed and will ultimately underperform, as many investors have unfortunately discovered. So how do you avoid being sucked into acquiring a dud investment? Here are 6 of the main marketing traps you should look out for:
1. The big budget campaign Property marketers are typically smart people. They know how to grab the attention of buyers and are prepared to spend big money to make whatever they are selling seem very appealing.
Anyone who has ever bought an apartment off the plan will be familiar with the glossy brochures, artist impressions, detailed research reports, full page advertisements and 3D models that often accompany a sales campaign. And these tools can be very impressive. Quite often they will tell you what a great investment the property will be.
The key thing for astute investors to realise is that the more money spent on a slick marketing campaign, the more developers need to charge to recover all the expenses. Just because there is a big budget marketing campaign doesn’t mean it’s a good investment.
2. Incentives and kickbacks An incentive is a great way to encourage people to commit to a property purchase, whether it is a rebate, brand new car or furniture package. The thing to remember with any incentive is that the value of the incentive has already been factored into the price of the property. If you’re getting a $30,000 rebate on a house and land package, you’re likely paying at least $30,000 too much for the property, even if you think you’ve negotiated a good deal.
Property investors need to remember that quality investment properties, i.e. those for which there is a genuine demand, don’t need incentives to sell.
Kickbacks work in the same way but are not as obvious. A developer or building company will often pay a salesperson, which could be an advisor or marketing company, a commission of up to $40,000 per sale. As with incentives, kickbacks artificially increase the price you pay for the property and should set off alarm bells for investors. Nothing is free. If anyone says they are helping you build your wealth and there is no charge, you can be almost certain they are getting paid by the seller and working for them not you.
3. Guarantees and big claims Any guarantees that promise a particular investment outcome or that are designed to reduce the perceived risk of an investment should be clear warning signs for investors.
The classic example is the rental guarantee. Although a guaranteed rental income (for a short period of time) may seem enticing, it probably masks the fact that there isn’t a strong rental demand for the property. Worst still, the total amount of rent that is “guaranteed” is often built into the price of the property anyway.
Similarly, promises of extremely high rental returns could be designed to distract investors from the fact that the property has little potential for capital growth. These claims generally have little substance to them and almost always fail to mention the high risk that may come with the high returns. Investors should always ask why the developer needs to offer this guarantee.
4. The location trap A lot of products targeted to naive investors and first home buyers are located in parts of the country with little potential for upside. These are often areas with abundant supply of land, poor economic drivers and a lack of infrastructure, which hold back capital growth.
Many first homebuyers buy a house and land package on the outskirts of the city with a plan to get their foot on the property ladder and later upgrade to a better location. The problem is that because these locations have abundant free land and a constant flow of newer properties coming to market, the capital growth rate underperforms the market.
Property is about demand and supply. If there is lots of potential supply then the growth rate may suffer and it means there are better property investment options available.
5. Too much in the building Logic dictates that when investing you should seek out a property with a high proportion of land value as this is what will drive capital growth. With new property, however, most of the value lies in the building component and not the land, which will hamper capital growth as the building depreciates.
The 30 year old property on a good size block in the middle of suburbia might not look too glamorous when compared to a brand new property, but chances are it will make a far better investment over the long term.
6. Buying for tax reasons Some products, such as properties sold under the National Rental Affordability Scheme (NRAS), are often promoted for their tax advantages. This marketing approach is ultimately designed to distract investors from less favourable aspects of the investment, such as its location or potential for capital growth.
Investors should never base an investment decision solely on the impact it will have on their tax return. Tax deductions should be considered a welcome bonus of investing but tax is one of a number of factors investors to consider, not the main factor.
Conclusion Property investors should always bear in mind that the more marketing activity surrounding a particular product, the more red flags should go up. It’s always wise to ask the question ‘how hard is the seller or developer trying to convince me to buy?’ I’m not saying that all heavily marketed investments are automatically bad. However, noticing these marketing techniques should at least drive you to do your own independent investigations. Slick marketing is no substitute for quality research. Just because the sellers and selling agents tell you it’s a great investment doesn’t mean it is.
Perth Gains Best in the Country Perth house prices have increased more in the last year and quarter than in any other Australian city, according to data from Residex. The market could also be heating up further with September figures showing growth in Perth is ahead of Sydney, Brisbane, Melbourne and Adelaide. House prices have increased 6.63% over the year, with a 13.41% jump in the number of sales to 24,707. Rents for houses have also increased dramatically, up 21.52% for the year to $480 per week, which is double anywhere else in the country. REIWA president David Airey believes higher rents, a low rental vacancy rate and strong population growth will continue to put pressure on property prices. He also sees positive signs in the first home buyer market, which tends to underpin the rest of the market. “First-home buyer grants for the September quarter were at their highest level since 2009, before the first-home owner grant boost ended, and now account for around 30% of sales,” says Airey.
Acquisitions: Location or Type of Property – Which Should you Choose First? Two of the most important decisions you can make when buying an investment property are (1) where to buy, and (2) what type of property to choose. But which decision should come first?
Some investors choose a specific location and then find a property in that location that meets their budget and criteria. Others will have a specific property type in mind and will be far more flexible with regard to the location. Let’s have a look at whether any of these approaches is better than the other.
There are many types of property an investor can choose including houses, villas, townhouses, and apartments. Plus, you could easily divide each of those categories further, such as new houses and old houses, which can offer very different things to an investor.
It’s understandable why an investor might decide on a property type before choosing a location because of the inherent benefits and burdens associated with each type. Certain types of property, such as apartments for instance, can provide excellent rental returns but they may also come with additional costs (e.g. strata fees). Houses, on the other hand, might cost more to buy and hold but could provide better capital appreciation.
Similarly, new property can provide impressive depreciation allowances, but buying this type of property can mean choosing locations on the outskirts of the city that are likely to offer less in terms of capital growth potential.
Buying an established villa might be a great option for an investor as it offers a good balance between land value and rental return. But a villa might not be a good choice in certain suburbs where the demand heavily favours another type of property.
It would seem therefore that a location should be chosen first. However, choosing a location first could also be problematic. For example, an investor might not be able to afford the right type of property in a chosen location and end up buying a sub-standard asset that is either inappropriate for the market or that has fundamental issues associated with it (e.g. being on a main road).
In the end, the choice of location is arguably more important in determining the long term success of an investment, though it’s difficult to separate it entirely from the decision of property type. Both decisions need to happen in unison and ultimately be based on the investors goals, budget and appetite for risk.
Property Management: A Risky Friendship There may be times as a landlord when you personally meet and directly converse with your tenants. You may even get to know them quite well and start forming a friendship, or perhaps you were even friends before they became your tenant. But is it a good idea to be friends with your tenant? Some would say it’s a good thing as there will be mutual trust and better communication and understanding. Plus, it may even encourage the tenant to stay in the property long term.
However, there are very good reasons why it isn’t advisable to get too friendly with your tenants. For instance, tenants may get too comfortable and start asking for favours, such as delaying their rental payments or bringing a pet into the property. And you as the landlord may find yourself being easier on them with some matters such as how they are maintaining the property.
When the boundaries between landlord and friend become blurred, it could easily open a can of worms, especially if something goes wrong. What will you do when the neighbours complain about loud parties at the property? How will you handle a serious breach of the lease agreement? It might be tough to evict a friend. It’s absolutely a good idea to be courteous and treat your tenants with respect, but being friendly is very different from being friends. So by all means, feel free to send your tenant a Christmas card but perhaps don’t invite them over for Christmas dinner.
Always keep in mind that owning an investment property is a business, and it’s rarely a good idea to mix business with pleasure. The tenant-owner relationship should almost always remain at arm’s length. That’s where a professional property manager is essential, to help keep your business on track, remove the emotional component in decision making and act as the ideal intermediary when handling issues.
Wealth Protection: I’m Ok, I Don’t Need Insurance
Many people think ‘It’s ok I’ve got Workers comp… I don’t need any more insurance!’ or ‘I pay enough taxes, the government can pay for me if something happens.’ Well do you think if these people really knew how much they would get this will still be their response?
As at September 2012 the payments from Centrelink would be the following;
| Centrelink Payment Type | If you are | Maximum fortnightly payment |
| Sickness Allowance | Single, no childrenPartnered | $492.60$444.70 (each) |
| Carers Payment | SingleCouple | $712.00$536.70 each |
| Disability Support Pension | SingleCouple | $712.00$536.70 each |
| Bereavement Allowance* You are paid for up to 14 weeks after the death of your partner | $712.00 a fortnight which includes a pension supplement of $60.60 a fortnight |
Compare that with what you could insure yourself for in the domestic market:
| Type | Maximum Amount Payable |
| Term LifeAccidental death cover | No Limit$1 million |
| TPD | $5 million |
| Trauma | $2 million |
| Income ProtectionAccident Only IP | Up to $30,000 monthly benefitUp to $30,000 monthly benefit |
I am sure if asked yourself would you CHOOSE to live on $492.60 per fortnight your answer would be probably be no…
How much do you need to service lifestyle expenses, living expenses, debt expenses, medical expenses and how much would you receive right now if something happened?
If you don’t know or are concerned about the answer then come in and have a chat as to what insurance can provide a better alternative to the above.
Justin McManus is a Corporate Authorised Representative of Marsh Pty Ltd Australian Financial Services Licensee No. 238983. This information has been prepared without taking account of your objectives, financial situation or needs. Before acting on this information you should consider its appropriateness, having regard to your objectives, financial situation and needs
Development: The Pay Off for Converting to Strata-Title Have you driven past one of those old run down blocks of flats recently and thought “what an eyesore?” Getting council approval and converting old flats over to strata title could make you a tidy profit, meaning that “eyesore” could in fact be a goldmine.
Strata titling of old units is a unique strategy used by some savvy developers to make great gains. And although the likelihood of finding these opportunities is becoming slimmer as the years go by, they are still available with some shrewd investigative work (and a bit of luck!).
Strata titling was first introduced in the 1960s. Before then, it was virtually impossible to own a portion of a property. Most blocks of units or flats were effectively owned in full by one entity, with the individual units leased out. Strata titling enables you to subdivide the units, meaning each can then be owned by individual persons or entities immediately adding value (and flexibility) to the property. Despite strata titling being introduced in the 1960s, it’s quite typical to find opportunities even in property built around the 1970s or thereabouts.
Of course, as with every development, there is an element of risk to this strategy. You need to be confident that you’ll be able to get the necessary approval from council to make it all worthwhile. The first obstacle is making sure the property was originally built as a block of flats, or converted with approval. You’ll also need to make sure the current zoning will allow for strata titling. If the area has been down zoned it may mean that you can’t strata title the property and you will have to keep it on one title.
Adhering to current building practices and codes is the other major and costly hurdle. You may need to comply with a range of council requirements which could include things like firewalls, visitor parking, private open space for residents, and meters for services like electricity and water housed in a common area with each property being on an individual meter. Even just getting the necessary access to address any of these potential requirements can be one of the biggest risks of all.
Finding one of these gems and successfully navigating the approvals process can potentially reap financial rewards. But finding these types of properties is certainly not easy. Often they are silent sales so it pays to get a buyers agent with good connections and let them know what you’re looking for.
Finance: Comparing Loans Beyond the Interest Rate With all the news about interest rates recently, it’s not surprising that many borrowers seem obsessed with them. There are the people that typically choose a loan on the interest rate alone. This can be a costly mistake. You’re not necessarily better off by going for the lender with the cheapest rate. Even if two loan products seem very similar on the surface, they may in fact be very different.
It’s important to not just look at the interest rate as the deciding factor between various loan options – differences in the small print can mean thousands of dollars difference between two loan products.
First, the interest rate quoted may be similar or may be the same. If you will be selling the property rather quickly, you should investigate paying higher interest rates with lower application costs and exit costs. There are other costs that may be added on but may not be immediately noticeable. You need to read the fine print and determine exactly how much you are paying and see if you can convert application costs to interest rates and vice versa. Once you understand these components, you need to compare the interest rate using the Comparison Rate. The Comparison Rate gives a clearer idea of the true interest costs after taking into account all the fees and charges involved in establishing the loan. The term of the loan is also very important. You also need to be aware of any early repayment penalties that are associated with the loan.
At the end of the day you will have to make a decision on what you consider is the best loan for you. If you are able to obtain some of the features that are important to you then the fact that the interest rates is a little bit higher shouldn’t scare you off. For instance, if you got a higher loan to value ratio, it may be worth an additional half a percent interest rate. A good finance broker will be able to steer you through all the alternative options and help you find the most suitable loan for you.
Finance Newsletter – November 2012
Finance Newsletter –
Good news for all borrowers – there are some great variable and fixed rates available.
This means if you look around you are likely to find a better rate than you currently have. Heritage bank is currently offering 5.64% variable rate, with no monthly or annual fees. Refinancing is easy with the help of a mortgage broker, so have a look at your loan. We may be able to save you thousands per year. Fixed rates as low as 5.34% for 2 years are available
Use this opportunity to speak with a mortgage broker to ensure your bank is looking after you and that you have the best loan for your circumstances.
You may be able to save interest by fixing your home loan . You may be able to fix for 1-3 years at a lower rate then you currently have. Why wait for rates to go down. Switch to a lower rate now.
There are many benefits of using a mortgage broker and our services are provided to the borrower free of charge.
Call Dan Goodridge on 0414 423 340 or e-mail dg@iinet.net.au at Mercia Finance for obligation free finance information.
Tax Newsletter November 2012
ATO benchmarking can be improved: report
The Inspector-General of Taxation’s report into the ATO’s use of performance benchmarks to target small businesses who may not be reporting all their income has been released by the Government and it says that improvements can be made.
The report was sparked by concerns raised by tax practitioners and their clients concerning the ATO’s use of the benchmarks. The ATO uses the benchmarks to compare the performance of businesses with similar businesses in the same industry. One purpose of the benchmarking is to help identify potential cases for audits, with a particular focus on unreported cash transactions.
The report made 11 recommendations for the ATO to improve its use of the benchmarks, which the ATO has largely accepted. According to the Government, the recommendations should improve the ATO’s risk identification and audit selection processes to further exclude compliant businesses from audits, thereby minimising unnecessary compliance costs in relation to the cash economy and GST obligations.
TIP: Reporting more net income than industry peers could be a sign that a business might have forgotten to claim a business deduction. However, reporting significantly lower income than industry peers would attract ATO attention.
Living-away-from-home concessions: new laws
The Government has made a raft of changes concerning living-away-from-home allowances (LAFHAs) and benefits. Essentially, the Government is restricting access to the concessions. Employers and employees who may be affected need to take note. The changes started on 1 October 2012, although there are grandfathering provisions to preserve tax concessions for a limited time for some arrangements that were in place prior to Budget night (8 May 2012).
TIP: The changes raise significant issues for affected employers and employees. If you have any questions, please contact our office.
Contractual promises can have GST implications
A recent High Court case has highlighted a need to take a closer look at contracts for the provision of services or goods. The majority of the High Court recently allowed the Tax Commissioner’s appeal in relation to a case concerning whether an airline, Qantas, was liable for GST on purchased airfares where the passenger does not turn up for the flight.
Qantas had argued that no GST was payable on unused fares and that the GST that had been paid should be refunded by the Commissioner. The majority held that Qantas was liable for GST and that the taxable supply for which the consideration, being the fare, was received was something less than the actual air travel – namely, Qantas’ contractual promise to use “best endeavours to carry the passenger and baggage, having regard to the circumstances of the business operations of the airline”.
Contractor payments undergo ATO data-matching
The ATO has recently released details of a data-matching program focusing on contractor payments. Under the program, the ATO intends to collect information in relation to payments made to contractors for the 2009–2010 to the 2011–2012 income years by businesses audited by the ATO’s employer obligations area. The program will also cover this financial year. According to the ATO, records relating to around 75,000 individuals and entities who have received contract payments from the employers or businesses will be matched.
TIP: The ATO says its matching capabilities have grown strongly over the years. This financial year, the ATO expects to match over 600 million transactions.
Property developers and GST under ATO spotlight
The ATO has advised that it intends to increase its focus this financial year on property developers who have a history of non-compliance with GST obligations. The ATO has observed that some developers have claimed input tax credits throughout the life of a development, but then avoided paying the GST when they sell. The ATO says it has adopted a new approach of identifying and engaging with these developers prior to the sale of a development.
ATO warning on dodgy offshore emission unit schemes
The ATO has issued a warning for individuals to be aware of arrangements that promote deductions for the purchase of offshore “emission units” that do not exist at the time of the arrangement.
“These arrangements, entered into with an offshore entity which may be incorporated in a tax haven, claim to allow participants to deduct the entire purchase price of the offshore ‘emission units’, while making only a small initial payment,” the Commissioner of Taxation Michael D’Ascenzo said. The ATO warns these arrangements may not be legitimate and that those involved could face a large tax bill, substantial penalties or even prosecution.
Excess super contributions: once-only refund offer
The ATO has started offering refunds to some individuals who have exceeded their annual superannuation concessional contributions cap. From the 2011–2012 year, there is a once-only opportunity to have excess concessional contributions refunded. The offer will only be made once. If individuals decide to accept the offer, they will pay marginal tax rates on the amount above the cap, instead of paying excess contributions tax.
An individual’s choice as to whether to accept the one time only offer, or not, is a final decision and cannot be revoked. Once a taxpayer has received an offer, regardless of whether or not they accept it, they will not be eligible for an offer in future years. The ATO says the offers will be sent directly to the taxpayer’s postal address. Election to accept the offer must be returned to the ATO within 28 days of the issue date of the offer.
TIP: The refund offer provides some relief, but is not without conditions and limitations. Please contact our office for further information.
Goods taken from stock for private use
The ATO has determined for the 2011–2012 year the amounts the Commissioner will accept as estimates of the value of goods taken from trading stock for private use by businesses in certain specified industries. The amounts (which exclude GST) are as follows:
| Type of business | Adult/child aged over 16 years ($) | Child aged 4 to 16 years ($) |
| Bakery | 1,300 | 650 |
| Butcher | 770 | 385 |
| Restaurant/cafe (licensed) | 4,300 | 1,685 |
| Restaurant/cafe (unlicensed) | 3,370 | 1,685 |
| Caterer | 3,640 | 1,820 |
| Delicatessen | 3,370 | 1,685 |
| Fruiterer/greengrocer | 760 | 380 |
| Takeaway food shop | 3,240 | 1,620 |
| Mixed business (includes a milk bar, general store and convenience store) | 4,030 | 2,015 |