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Tax Newsletter – May 2012
May 9, 2012 | 
Author Tax planning
Simply put, tax planning is the arrangement of a taxpayer’s affairs so as to comply with the tax law at the lowest possible cost. This involves objectively assessing and actively managing tax risk. Common tax planning techniques include deferring the derivation of assessable income and applying techniques to bring forward deductions.
Deferring income
- Income received in advance of services to be provided will generally not be assessable until the services are provided.
- Taxpayers who provide professional services may consider, in consultation with their clients, rendering accounts after 30 June to defer the income.
- A taxpayer is required to calculate the balancing adjustment amount resulting from the disposal of a depreciating asset. If the disposal of an asset will result in assessable income, a taxpayer may want to consider postponing the disposal to the following income year.
Maximising deductions
Business taxpayers
- Debtors should be reviewed prior to 30 June so that any bad debts can be identified and written-off.
- A deduction may be available on the disposal of a depreciating asset if a taxpayer stops using it and expects never to use it again. Therefore, asset registers may need to be reviewed for any assets that fit this category.
- Review trading stock for obsolete stock for which a deduction is available.
Non-business taxpayers
- Outgoings incurred for managed investment schemes may be deductible.
- Assets costing $300 or less may qualify for an immediate deduction, subject to certain conditions.
- A deduction for personal superannuation contributions is available where the 10% rule is satisfied.
Capital gains tax
- A taxpayer may consider crystallising any unrealised capital gains and losses in order to improve his or her overall tax position for an income year.
Small business entities
- From 2012–13, the small business instant asset write-off threshold will be increased from $1,000 to $6,500.
- Consider whether the requirements to be classified as a small business entity are satisfied to access various tax concessions, such as the simpler depreciation rules and the simpler trading stock rules.
- Eligible small business entities can access a range of concessions for a capital gain made on a CGT asset that has been used in a business, provided certain conditions are met.
Companies
- Companies should ensure that all dividends paid to shareholders during the relevant franking period (generally the income year) are franked to the same extent to avoid breaching the benchmark rule.
- Loans, payments and debt forgiveness by private companies to their shareholders and associates should be repaid by the earlier of the due date for lodgment of the company’s return for the year or the actual lodgment date. Alternatively, appropriate loan agreements should be in place.
- Companies may want to consider consolidating for tax purposes prior to year end to reduce compliance costs and take advantage of tax opportunities available as a result of the consolidated group being treated as a single entity for tax purposes.
- Companies should carefully consider whether any deductions are available for any carry forward tax losses, including analysing the continuity of ownership and same business tests.
Trusts
- Taxpayers should review trust deeds to determine how trust income is defined. This may have an impact on the trustee’s tax planning.
- Avoid retaining income in a trust because the income may be taxed at 46.5%.
- If a trust has an unpaid present entitlement to a corporate beneficiary, consideration should be given to paying out the entitlement by the earlier of the due date for the lodgment of the trust’s income tax return for the year or the actual lodgment date to avoid possible tax implications.
- Trustees should consider whether a family trust election (FTE) is required to ensure any losses or bad debts incurred by the company will be deductible and to ensure that franking credits will be available to beneficiaries.
Personal services income
- Individuals operating personal services businesses should ensure that they satisfy the relevant test to be excluded from the Personal Services Income regime or seek a determination from the Commissioner.
FBT – car fringe benefits
- The four rates used in the statutory formula method for determining the taxable value of car fringe benefits are being replaced with a single statutory rate of 20% for fringe benefits provided after 10 May 2011. Taxpayers should review contracts for changes to a “pre-existing commitment”.
Superannuation
- The ATO has reminded taxpayers to consider the superannuation contributions caps when planning tax affairs to avoid excess contributions tax.
- The Government has proposed that eligible individuals who breach the concessional contributions cap by up to $10,000 will be allowed a once-only option for the excess contributions to be refunded without penalty.
- The Government has proposed to temporarily “pause” the indexation of the superannuation concessional contributions cap so that it will remain fixed at $25,000 up to and including the 2013–14 financial year.
- For eligible individuals, a government low-income superannuation contribution of up to $500 may be available from 1 July 2012.
- A member of an accumulation fund (or a member whose benefits include an accumulation interest in a defined benefit fund) may be able to split superannuation contributions with his or her spouse.
Individuals
- Individual taxpayers with a taxable income exceeding $50,000 in 2011–12 will have to pay an additional levy known as the temporary flood and cyclone reconstruction levy, unless they fall within an exempt class of individuals.
- The Government is phasing out the dependent spouse tax offset. For 2011–12, the offset will only be available to those born on or before 1 July 1971.
- The Government has proposed that from 1 July 2012, living-away-from-home allowances will be taxed to the recipient as assessable income rather than to the employer under the FBT rules.
- The Government has introduced legislation to extend the Paid Parental Leave scheme by introducing a two-week “dad and partner pay”.
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Property Newsletter – May 2012
Do Families that Invest Together Stay Together?
Is investing with family members a good idea or a ticking time bomb waiting to go off? Co-ownership arrangements can actually work very well provided you follow our six golden rules to keep your family more ‘The Brady Bunch’ than ‘Malcolm in the Middle’.
With the median house price in Perth nudging the half a million dollar mark, some would-be investors might be considering the possibility of joining forces with other family members in order to buy. While pooling resources with family members has many advantages, it’s also a path that is fraught with danger for the uninitiated
Here are our top 6 golden rules for entering into co-ownership arrangements with family members:
DO make sure you’re doing it for the right reasons
Perhaps you can’t afford to buy on your own? Maybe you’ve got the money but not the time to develop property? Or perhaps you would prefer to have a diverse portfolio across a number of properties in different areas than putting all your eggs in one basket? These are all potentially valid reasons to consider teaming up with family members. But what if you’re really only doing it to help someone out? Maybe it’s to get your son or daughter on the property ladder, or to help a sibling put their income towards something useful instead of squandering it like they normally do? These kinds of reasons are dangerous when the other family members are not as committed or interested in investing in property as you are. Chances are you could end up carrying the whole burden on your own.
DO team up with those who share the same vision
Buying property is one of the biggest purchases you’ll ever make, so make sure you choose your co-owners carefully. Select family members that wish to follow the same property strategies as you, share the same kinds of goals, and have a similar appetite for risk. This should help to avoid family squabbles and make decision making far quicker and simpler.
DO treat it like a business decision
Don’t be afraid to speak openly about each other’s financial situation as well as future plans (starting a family or relocating could throw a real spanner in the works). You should even check their credit report to verify their true financial position because there are serious consequences for you if they default. Of utmost importance is having an agreement drawn up by a lawyer to specify the rights and obligations of each party and how a variety of potential situations will be dealt with. For example, what happens if one of you wants to sell? What if one of you can’t meet their repayments? How will maintenance work be handled? These are just some of a multitude of questions that should be answered at the onset.
DON’T ignore the fact that money can affect relationships
Let’s face it; money can be an area of great stress for us all, particularly when times are a bit tough. It will almost certainly cause disagreements, some minor while others much more serious with the potential to ruin what was once a great relationship. With so much on the line, arguments could emerge over selection of a tenant, getting quotes for repair work, choosing to renovate or not, or buying out someone’s share. Thinking that money will never get in the way of your family bonds, even if you are an incredibly close-knit family, is naïve.
DON’T underestimate the risks
Although you will only have a share in the total loan taken out on the property, you will have full liability for the loan. This means that if a family member can’t meet their repayments, you will be held liable to make those repayments or risk losing the property and having your personal credit rating damaged. Remember, buying property is often over long periods of time and a lot can change. Someone could fall seriously ill, get divorced, or have trouble finding a job and be unable to meet their repayments. You will also be stuck with carrying the load for any short-term costs like insurance and maintenance. It’s also worth mentioning that your future borrowing capacity will also be severely restricted even though you only have a part-share. If you go out to buy another property down the track, most lenders will take into account the full mortgage of your shared arrangement because you are ultimately responsible for that if another party defaults.
DO establish a fund to cover ongoing and unexpected costs
It seems like commonsense but many people will just wait until costs arise and then try and sort out retrieving money from co-owners then. You may be a saver, but many people aren’t, meaning they may not have the money available at the time leaving you to front the bill. Instead, arrange for each person to contribute to a fund both initially and regularly that can be used to pay bills, maintenance costs, and other unforeseen events.
In summary, entering into a co-ownership arrangement can work well for many investors, especially those who would otherwise not be able to enter the market at all. If you follow these rules, you should be well on your way to creating a successful partnership with your family. It’s also worth mentioning, that the same rules apply even if you’re thinking about a similar arrangement with friends.
All Eyes on Perth in 2012
A number of property experts are tipping better times ahead for the Perth property market for a variety of reasons.
Perth is the city to watch this year, according to Tim Lawless, research director at RP Data.
He pointed to the fact that, despite the city’s property market underperforming since 2008, there had been recent improvements in key indicators. Specifically, he highlighted the increase in the number of transactions and less discounting by vendors as reasons for his confidence the market is heading up.
“That’s quite a ray of hope,” Mr Lawless said.
“All the indicators are looking positive. We’re actually seeing some evidence that the market is turning around. Perth is going to be the market to watch this year (although) I’m not saying it’s going to boom.”
Lawless isn’t alone in his prediction. Peet property group managing director, Brendan Gore, who joined Lawless on a panel of four at the Urban Development Institute of Australia national conference, is also optimistic about the Perth property market.
He pointed to the tightening rental market, which will entice more people to buy, and the emergence of investors from the East Coast as clear signs of better times ahead.
Terry Ryder also recently wrote an article in Property Observer citing that “Perth is where investors should focus their attention” and that “the impact the resources revolution will have on Perth’s property market is unprecedented”.
Offset vs Redraw Account
If you’re interested in saving more interest on your loans, it would be wise to consider the use of an offset or redraw account. While many think they are virtually the same, there are key differences so you must choose wisely.
If you’ve got a home loan as well as a chunk of spare cash sitting in your everyday bank account, you’re losing hundreds if not thousands of dollars every year. While you may earn interest on these savings, it’s often meager and is also taxable. Instead, put your savings to much better use by utilising an offset account or redraw facility with your home loan which will save you more and also save you tax.
What is a redraw facility?
This facility allows you to pay extra onto your home loan to reduce your loan balance and the amount of interest you owe, while still being able to redraw this excess when you need it.
What is an offset account?
An offset account is a separate savings or transaction account that is linked to your home loan. The money you deposit in this account is offset against the loan balance, meaning the interest on your home loan is calculated based on the net balance. Most lenders offer 100% offset accounts.
What are the key points of difference between them?
- Essentially, both alternatives offer the same outcomes in terms of interest savings (assuming a 100% offset account).
- The redraw is more direct in that the money goes straight onto the loan reducing both the loan balance and interest owing, while the offset is indirect. Having said that, if paying principal and interest, your repayments will stay the same meaning more money goes towards the principal each time so the loan balance will also be effectively reduced with an offset account.
- Offset accounts are more flexible and convenient in that they act like a regular savings or transaction account, allowing you to withdraw as often and as much as you please including at ATM’s. Redraw facilities are usually more restrictive allowing only a limited number of redraws or a minimum amount for redrawing, take longer to transfer the funds and often there are fees applied for each withdrawal. These drawbacks can be beneficial, however, for those who like to eliminate the temptation of withdrawing the excess funds.
- Some lenders loan products may have a higher interest rate if you want an offset account linked or may only offer a partially offset account. With these lenders, you will need to do the sums to work out if the additional cost is worth it as you may need to have a large sum of cash regularly offsetting the loan to make it worthwhile.
As an investor, is one better than the other?
It depends on your circumstances however many would say an offset account is better suited for investors. The reason for this is the tax implications. If you were to place a sum of money onto an investment loan and then redraw it later on for personal purposes (e.g. buying a car), you will reduce your ability to claim the full interest expenses on that loan as a tax deduction for the life of the loan. You will also encounter a similar problem if you have a redraw sum available on your principal place of residence, redraw the funds as a deposit for another family home down the track, and then turn your old home into an investment. You therefore need to consider if, and how, you may use any excess funds in future to determine which option is right for you. Speak with a Momentum Wealth Finance specialist who will set you up with the right structure for you in conjunction with your Accountant or Financial Advisor.
Suburb Snapshot:Maylands
Our bi-monthly Suburb Snapshot section shares our tips on the best suburbs to keep a watchful eye on for your next investment purchase. In this month’s issue, we profile the north-eastern suburb of Maylands.
Maylands is an inner-city heritage suburb located approximately 5km north-east of the Perth CBD.
It sits along the Swan River and is bordered by the suburbs of Mount Lawley, Inglewood and Bayswater. It enjoys excellent transport infrastructure with several bus routes, a train station, and key arterial roads such as Guildford Road and nearby Tonkin Highway. Both the Mitchell and Kwinana Freeway are also just minutes away via the Graham Farmer Tunnel.
Maylands has one primary school; a public golf course on the river; a yacht club; a new library, community and sporting centre; and a rejuvenated café and shopping strip amongst other things. Maylands also enjoys a number of parks, beautiful lakes, children’s playgrounds, and walking and bike trails that follow the Swan River through East Perth and into the CBD. It is closely situated to utilise the amenities of Belmont, Morley and East Perth.
Once quite working class and run-down, the suburb has already seen immense change over the past decade. New housing estates have been built, streetscapes have been transformed, and heritage buildings restored into funky cafes and apartment complexes. The West Australian Ballet will also be calling Maylands home in 2012, basing its headquarters in a $12 million newly restored heritage building. However, the suburb still has much more room for improvement. Identified as a key district town centre in the state government’s Directions 2031 framework, it is set to benefit from a revitalisation of the town centre, increasing levels of private development, and an influx of young professionals into the area.
Housing in the suburb is varied and interesting with everything from old and new apartments, villas and units, development plots, and multi-million dollar family homes. Prices are still affordable but have been steadily increasing in recent years and are set to rise even further. Housing is most popular in the south-east of the suburb close to the Swan River and at the opposite end nearer to Beaufort Street, with lock-up and leave properties in demand near the town centre.
Entry level into the suburb is around $200,000 which will fetch a small one bedroom apartment. Villas and townhouses start from the low-mid $300’000’s through to high $600,000’s. Land can be found from as little as $275,000 although rises to as much as $900,000 for premium plots with more generous sizes and river, lake or city views. Development projects are priced from $600,000 upwards. Houses are quite varied depending on their condition, size, and particular location. Those on small lots typically start from around $500,000, while those brand new or situated in the newer estates from around $800,000. Prices, however, do go for as much as $2.5 million in some parts. Rents are equally diverse due the varied housing available, thus range on average from around $250 to $950 per week.
Key Statistics
| Growth rate (1 year average) | -3.4% |
| Growth rate (5 year average) | 1.5% |
| Growth rate (10 year average) | 10.3% |
| Population | 10,448 |
| Median age of residents | 35 |
| Median weekly household income | $807 |
| Percentage of rentals | 52% |
Source: REIWA.com.au, January 2012
Selecting a Suitable Renovation Candidate – Part Two
In our last newsletter we discussed what characteristics make a suitable renovation candidate. In this month’s newsletter, we focus on what features are generally not desired and as such may signal a poor renovation prospect.
Some properties to avoid include those that:
Do not meet market demands
The lifestyle and expectation of people twenty years ago is vastly different to that of today. Some people may make sacrifices for some styles of home (eg a period home), but most want a property that doesn’t constrain their lifestyle. They like big bedrooms, ensuites, and large open-plan dining areas for entertaining. Unfortunately properties that require major floor plan changes to make them suitable for today, require renovations that are usually prohibitively expensive. And although the new purchaser or tenant may thank you for the works done, your ability to easily add value relative to the expense is dubious (particularly for a novice renovator).
Are not consistent with surrounding properties
If the neighbourhood has been compromised by ugly infill construction you should think carefully before committing to a purchase in that area. The best prices are obtained when people feel they “must have” a property. A compromised neighbourhood usually turns a “must have” property in a “settle for” property regardless of the quality of the individual property. When this happens, the emotional attachment to a property is diminished and they are less likely to pay good prices.
Have an alternative highest and best use
If the property is in a high density zoned area and is in need of renovation, you may find that any renovations you undertake add little value to the property. That is because the development value may continue to be higher than as a single residence into the future, thus negating the renovations you may undertake (eg it would be better to demolish and build townhouses or units). If you own a property in a high density zoned area, it is probably unwise to spend too much upgrading the property as it may still simply be worth its land value regardless of the improvements undertaken.
Are over capitalised
One of the biggest mistakes renovators make is not knowing the market area and market limits. Most localities have a price limit where it will be difficult to sell a property at that level or above regardless of the quality of the property being offered. This is because people prefer to substitute an inferior quality of home for a better location, thus if the property was over the price limit they would likely choose the alternative entry-level home in the better suburb. You may find that the property you are considering is already close to that limit and therefore any renovations may not add much value.
With council or heritage problems
In many areas, councils have strict development control policies and heritage precincts that severely curtail alterations and renovations to property. You will need to check the Town Planning Scheme and the zoning in the area you are considering. You will also need to check council policies and design guidelines. This is most important if you are intending to make major alternations or make changes to the front of the property. It is best to discuss your proposed alterations and additions with the council before proceeding with purchase to reveal any possible issues.
The lesson here is to carefully evaluate the properties you have identified and avoid rushing into a project. While most renovations can significantly improve a property, there are some that should not be considered if the aim is to come out with a profit.
The 6 Year Rule
It’s a common question asked by property investors. If someone decides to move out of their home, can they still claim it as their primary residence and therefore obtain the capital gains tax exemption? The answer is yes with some limitations.
The temporary absence rule states that where a dwelling ceases to be an individual’s main residence, the individual can choose to treat the dwelling as their main residence for all or part of the period they are not living in the property.
If the property is NOT used for income producing purposes after the person moves out, then the taxpayer can treat the dwelling as their main residence indefinitely. But if the dwelling IS used for income producing purposes (i.e. it is rented out) the dwelling can be treated as the person’s main residence for up to six years after they move out.
The good news is that if the property is rented for longer than six years in one continuous period, than the exemption still applies for the six years. It is not lost entirely. But you can only have one primary residence at a time. You cannot purchase another property and rent the old property out and claim both properties as your primary residence for capital gains purposes.
What happens if someone moves out of the property, rents it out then later moves back in, then later moves out again and rents the property? Does the 6 year rule apply to the total of the two periods?
No. The ATO has said in TD 95/9 that the six year rule applies to each period of absence. That means you can access the six year rule more than once for the same property. For the new six year period to start, you must move back into the property.
Momentum Wealth and its affiliated entities are not Accountants or Financial Planners. While all information is provided in good faith, you should seek your own independent advice in relation to all tax matters.
Paid on Time
Managing a property is like running a business and like any business; all landlords would like to receive their payments on time. In an ideal world, landlords would like to receive the rent from the tenant when it is due at all times, however all experienced landlords will agree that things don’t always go to plan.
When realising the rent is late, it is common for most landlords to experience 2 emotions – anger and fear. The landlord is often angry because it effects his/her ability to meet mortgage repayments and afraid because this one late payment may be the beginning of a string of late payments.
Like a business, remember that for each day of unpaid rent that goes by, your financial security is threatened. Late rent must be appropriately dealt with quickly. By taking the correct action immediately, you will redeem your rent and will ensure your tenant does not get into the habit of breaching the terms of their lease agreement in future. There are a number of legal matters you must consider in order to ensure you collect your rent on time and a good Property Manager will be on top of the process and make sure that tenants are followed up as soon as the rent is late.
What is Life Insurance?
Planning is the essence of any financial strategy. If you’ve planned properly, then you’ve left nothing to chance. Effective planning also means having a strategy in place to deal with life’s unexpected events. One of the best forms of protection against these circumstances is adequate insurance. There are several forms of insurance available to protect you and your family’s financial security against life’s misfortunes, the most common being life insurance.
What is life insurance? A life insurance policy provides financial assistance in the form of a lump sum to your family or other dependants in the event of your death. At a time when your family won’t want to be worrying about money, this lump sum can be used to meet their ongoing financial commitments, such as the mortgage, and to maintain their standard of living.
You may be thinking ‘who needs life insurance?’ Simply, if you have a family who is financially dependent on you and/or have debts that are serviced from your income alone, you should look at taking out life insurance. Obviously, the greater your financial obligations and the more dependants you have, the more life insurance you’ll need to protect your assets and your family’s financial security.
There are different types of life insurance available to you. For example, term life insurance only provides death cover and has no real investment value, but life insurance is a cumulative investment that has a monetary value at the end of the policy. You’ll need to explore your options to make sure you have the type of life insurance cover, which best suits your needs and personal situation.
Most superannuation funds also offer some form of life insurance protection if you invest your retirement savings with them. However, don’t assume this cover alone will be adequate. It will be entirely dependent upon your current needs, debts, and other obligations such as your own business, as well as the number of family members financially dependent on you.
Ensuring you have adequate life insurance given your individual circumstances can be a difficult task. We can sit down with you and discuss your current financial situation to ensure that in the unfortunate event of your death, the last thing your family will have to worry about is their financial security.
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.
Tax Newsletter – April 2012
Tax anti-avoidance rules to be tightened
The Government has announced that it will amend the general anti-avoidance provisions in the tax law. First introduced in 1981, the provisions broadly allow the Commissioner to cancel a tax benefit obtained in connection with a scheme subject to some conditions. According to the Government, the changes will ensure the provisions will continue to be effective in countering tax avoidance schemes that are carried out as part of broader commercial transactions. The announcement was made on 1 March 2012 and the Government proposed that the changes would apply to schemes entered into or carried out after that date.
Some commentators have expressed alarm over the Government’s announcement, saying the move will only cause greater uncertainty for businesses when considering key transactions and that it is an overreaction to the Commissioner’s recent court case losses. In particular, the arguments have centred on the announced retrospective start date of 1 March 2012 with little detail on the proposed changes. The Government said it intends to release draft legislation for public consultation before introducing the amendments in Parliament later this year.
Check your small business benchmarks regularly
The ATO has recently updated its small business benchmarks. It has also added two new activity statement benchmark ratios for non-capital purchases and GST-free sales. The ATO uses the benchmarks to identify businesses that it considers may not be reporting some or all of their income. The ATO can also use the benchmarks to quantify income that it considers not reported. According to the ATO, the benchmarks provide the “most accurate predictor of business turnover for each industry”.
It recommended that taxpayers review their relevant business benchmarks regularly.
The ATO has published benchmarks for a wide range of industries, including:
- accommodation and food services;
- building and construction trade services;
- education, training, recreation and support services;
- health care and personal services;
- manufacturing;
- professional, scientific and technical services;
- retail trade; and
- transport, postal and warehousing.
ATO data matching coffee sellers and builders
The ATO has announced data matching programs targeting coffee sellers and hardware store trade account holders as part of its latest compliance activities to tackle the cash economy. The ATO said it has already obtained data from a number of coffee suppliers and a major warehouse chain and from NSW Fair Trading, Queensland Building Services Authority, and the Government of South Australia, Consumer and Business Services. Under the “coffee suppliers” data matching program, the ATO expects to match records of more than 8,000 individuals to ensure they are reporting all their business income. In relation to the “building industry” program, the ATO says around 20,000 individuals will have purchases cross-checked with reported income.
TIP: If you are concerned these data matching programs will affect you, please contact our office.
Private health insurance rebate changes
A package of Bills to means test the 30% private health insurance rebate has made its way through Parliament. The changes will mean the amount of rebate available will depend on an income test for each financial year for individuals and families. The changes will apply from 1 July 2012 and will introduce three new “Private Health Insurance Incentive Tiers”. In conjunction with this, and also from 1 July 2012, the rate of Medicare levy surcharge for individuals and families without private patient hospital cover will increase depending on their level of income.
TIP: Individuals and families should be mindful of the 1 July 2012 start date. Further, some health insurance companies have indicated their intention to increase premiums. Please contact our office for more information.
| Table: Private Health Insurance Incentive Tiers from 1 July 2012 | ||||||
| Tier | Income ($) | Private health insurance rebate | Medicare levy surcharge | |||
| Singles | Families | Under 65 yrs old | 65 – 69 years old | 70 years or over | ||
| 0 – 84,000 | 0 – 168,000 | 30% | 35% | 40% | Nil | |
| 1 | 84,001 – 97,000 | 168,001 – 194,000 | 20% | 25% | 30% | 1% |
| 2 | 97,001 -130,000 | 194,001 – 260,000 | 10% | 15% | 20% | 1.25% |
| 3 | 130,001+ | 260,001+ | 0% | 0% | 0% | 1.5% |
Note: The thresholds increase annually, based on growth in Average Weekly Ordinary Time Earnings (AWOTE). Single parents and couples (including de facto couples) are subject to the family tiers. For families with children, the thresholds are increased by $1,500 for each child after the first.
Tribunal finds businessman a resident for tax purposes
A businessman has been unsuccessful before the Administrative Appeals Tribunal in arguing that he was not a resident of Australia for tax purposes as he had spent most of his time overseas. The businessman was a director of a company incorporated in NSW and he worked for that company as a sales agent on commission, selling Australian residential property to overseas investors mainly in Indonesia. However, the Tribunal noted, among other things, the businessman’s family home in Australia and confirmed the tax assessments and penalties issued by the Commissioner of Taxation for the 2002, 2003, 2005 and 2006 income years. The Tribunal concluded the businessman had his home, or “settled place of abode”, in Australia and was therefore a resident of Australia for tax purposes.
TIP: A taxpayer’s country of residence and the source of income are important issues. As a general principle, an Australian resident is subject to tax in Australia on income derived from all (worldwide) sources, whereas a foreign resident is only subject to tax in Australia on income from Australian sources. There are a number of tests under the tax law. If an individual passes any of the tests, the individual will be considered a “resident of Australia” for Australian domestic tax purposes.
Super rules breached for investment in related entities
In a recent decision, the Administrative Appeals Tribunal affirmed a non-compliance notice issued to a self-managed superannuation fund (SMSF). The Commissioner of Taxation had issued the notice for regulatory breaches in respect of “book entry” loans made via a related party trust. Broadly, the case concerned members of an SMSF who were also directors of the corporate trustee of the fund and other related trusts, including one which operated a family business. The SMSF had invested in a related unit trust which in turn had financial dealings with the family business. The Tribunal confirmed the non-compliance notice after finding there were breaches of the “sole purpose test” and “in-house asset rules” under the superannuation law.
TIP: Broadly, the “sole purpose test” seeks to ensure that superannuation money is set aside and only applied to fund members’ benefits in retirement, whereas the “in-house asset rules” generally restrict an SMSF from having more than 5% of its total assets invested in “in-house assets”. An “in-house asset” can include a loan to, or investment in, a “related party” of the fund. The rules can be complex, so it is important for trustees to carefully consider their investments to avoid falling foul of the rules.
Property Newsletter – April 2012
An End to the “Dullsville” Tag?
The next ten years will unveil a very different Perth than the one we’re used to. With more than 60 hectares of land set for development, Perth is set to experience significant economic gains and property investors will reap the rewards.
It may very well be the end of an era for Perth. The city famously dubbed as ‘Dullsville’ is set to undergo some radical transformations which could finally put an end to this unflattering tag.
In what is likely to be the biggest ever change seen in Perth’s short 183 year history, the CBD and surrounding areas are set to be overhauled in a radical move to breathe new life into the city. Fast forward ten years, perhaps even just five, and we’ll be seeing a very different side to Perth.
In this futuristic vision of central Perth with the unsightly railway line now sunk, you’ll be able to easily walk from the CBD through serene gardens to the culinary delights of Northbridge, or even catch a public concert in the newly built City Square along the way. New waterways will be carved into the bank along Riverside Drive creating an inlet and man-made island. Here in this riverside haven, you can take a morning stroll along the promenade beside the water’s edge followed by breakfast or lunch in one of the many waterside bars and restaurants. Or, you could head to Kings Park with a picnic before catching a cable car down to the inlet, hiring a bike, and setting off to explore the new city sights on wheels. Further along towards East Perth, you’ll now be able to dock your boat at a mooring by the Causeway and indulge in a little retail therapy while the kids take a dip at the newly built public beach on the foreshore.
All these projects will result in more than 60 hectares of land being developed, more than $10 billion dollars spent on infrastructure and development, more than 500,000sqm of commercial and retail space being created, and the addition of approximately 7000 new dwellings (mostly apartments) into the area.
Whether you agree with the specific plans for these projects or not, it’s hard to dispute that this rejuvenation is exactly what a growing, cosmopolitan city like Perth needs. For some time, Perth has lagged behind other more progressive cities both in Australia and around the world with a city hub that is grossly underutilised and lacking amenity and vibrancy. It’s been a poor reflection on what is otherwise one of the most beautiful and liveable cities in the world.
Importantly, these projects also help address some key economic issues. For many years the city has struggled to supply enough office and commercial space to the market, with Perth having the most expensive office rents in the nation and a chronic shortage of short-term accommodation (just 200 beds have been added to the CBD in the past 5 years). Perth is also growing faster than any other city in Australia and is projected to have the highest percentage growth in population over the next 15 and 45 years.
With land becoming scarcer, Perth will need more multi-residential developments and urban infill to cater to the larger population and these new, smaller households. In an era of growing concern on environmental impacts, the redevelopment of the city centre will also help create a more transit-orientated and sustainable local community that contributes a smaller carbon footprint.
All of this is good news for Perth investors. This ‘new look’ Perth will attract more tourists and their dollars, more jobs and more new residents needing homes, increased consumer spending by locals and increased expenditure and investment by businesses. The projects will help Perth move forward in leaps and bounds by resolving rather than hindering economic problem areas. Along with the strength of WA’s resources sector, Perth should therefore experience significant growth and prosperity over coming years which is necessary to support a rising property market.
Demand for properties in and nearby the Perth CBD will be likely to increase the most as a result of these transformative projects, however Perth overall will probably feel the ripple effects to varying degrees. While apartments have traditionally not been as popular as in the eastern states, that trend is probably set to change. I would however stress caution upon investing in one of the 7000 odd apartments due for construction in these areas. Although demand may increase, supply is also likely to be high which doesn’t make for particularly strong capital growth. The apartment would need to have a key point of difference that would be difficult to replicate to be considered a wise investment in my books.
The future of Perth is certainly looking bright and I’m pleased to see that the prosperity Perth has experienced over the recent decade is starting to filter through to projects such as these, which enhance the city and the economy. It’s just another reason why you’ll be hard pressed to find a better city to invest in over the next 10 years.
Acquisitions: Selecting a Suitable Renovations Candidate – Part One
Many first time renovators make the mistake of rushing into their first project. They are excited and ready to start and unfortunately end up purchasing a property that is not suitable for renovation. They convince themselves that they will be able to fix the problems that impair the property. Sound familiar?
There are a number of characteristics you should look for when scouting a suitable property renovation candidate:
Similar style
People typically prefer to live in a relatively homogenous neighbourhood, where the properties have a similar style. For example, a run down character or period home in a character or period home area would generally be a good prospect.
Open floor plan
Open floor plans and flexible living are a desired part of today’s lifestyle. The floor plan needs to flow well or an opportunity needs to exist for the property to be altered (preferably requiring only minor structural change). The property must be able to accommodate today’s living requirements, such as large dining areas for entertaining and predominantly double bedrooms. You should always have a tape measure with you when inspecting property to renovate.
Privacy
An important feature in any property is the ability to maintain privacy and present a pleasant outdoor entertaining area. Being overlooked by adjoining properties is a serious detriment, especially if it cannot be addressed.
Off Street Parking
If it is not available, you should assess whether it can be added – perhaps to the rear via a paved lane or perhaps the front if it does not compromise the property? Will the council permit covered parking to be installed? If there’s no opportunity to provide parking then this becomes a flaw that may make it harder to sell or rent.
Property with a sense of style or charm
Some older homes that were butchered in the 60’s and 70’s by horrible alterations can possibly be returned to their former self. If the property was build in the 50’s through to the 80’s that it is less likely to have any style or charm that is appreciated today.
Natural light
Does the solar orientation of the property provide for an aspect that lets plenty of winter sunshine into the courtyard areas and the living spaces? Is the home protected from summer sun? Does the inside of the home have lots of natural light? Can dark spaces be fixed, perhaps with skylights? Natural light and solar orientation are becoming more important in the purchase decision.
So be aware, although all properties can be renovated not all properties can be renovated successfully and for a profit. Look out for our next newsletter in which we’ll discuss some of the less desirable characteristics to avoid.
Current Property News: Market Commentary
The latest population projections for WA, released recently by Planning Minister John Day, show that by 2026 the state’s population will grow to over 3 million thanks to strength of the economy.
WA’s population boom expected to be even bigger
The latest population projections for WA, released recently by Planning Minister John Day, show that by 2026 the state’s population will grow to over 3 million. This new view of the future is 400,000 more than previous projections made in 2006.
It is based on a recovery in the fertility rate and the assumption that WA’s record of good economic performance will continue for at least another 20 years, which will drive overseas migration.
In light of the data, Mr Day called for more urban consolidation in Perth and emphasised that outdated practices of pushing the boundaries of the Perth metropolitan area were no longer best practice.
“In other words we can’t continue to rely on peripheral urban developments, greenfields developments, producing urban sprawl as by far the dominant way to grow our city” Mr Day said.
Hot Property
In this month’s Hot Property section, we go back to see how one of our previous buys in Carlisle has performed 12 months on.
Around 12 months ago, we shared with our readers an acquisition in the suburb of Carlisle for a client who had a tight $400,000 budget. They were specifically looking for a property with good capital growth potential, but also a reasonable cash flow to aid in the shorter term.
Buyers’ agent Ray Chua located a fantastic 1970’s duplex half for them in the suburb of Carlisle that met the required criteria. Not only was Ray able to strategically purchase the property under market value, but he saw the potential in creating instant equity and a higher rental yield through a small renovation of the property.
The client paid $316,000 for the property. Upon settlement, the client proceeded to undertake approximately $11,000 of renovations; this included painting, replacing floor coverings, refurbishing the kitchen, and opening up the living area.
12 months on, a bank valuation was recently ordered on the property. Despite what some would say has been a gloomy period for the Perth property market, the property has netted the owners $90,000 in equity according to this valuation. Some of the improved value is attributed to the renovation which brought the property up to market standards, although the main lesson here is that purchasing the right property with strong growth fundamentals can pay dividends no matter what the state of the market.
SPECIAL FEATURE: Momentum Wealth’s Rising Stars
In this quarterly special feature, we profile one of our star client’s who are well on their way to achieving their wealth creation goals. This month we speak with a couple nearing retirement proving that you’re never too old to start your wealth creation journey.
Hugh Soord and his wife Anne had dabbled in the odd property investment here and there, but it took moving closer towards their golden years to kick-start them into taking property investment more seriously.
With their three children now all grown up and retirement looming, Hugh started contemplating their financial future. Having sold previous investments and not convinced superannuation would provide them with a comfortable retirement, it took a chance discussion with a work colleague (coincidently, a client of Momentum Wealth) that put Hugh and Anne on the right path and in touch with buyers’ agent Mark Casey.
Although the couple had bought and sold some investment properties in earlier years, Hugh openly admits that they just didn’t have the know-how to do it successfully, hence why they had made the decision to ultimately sell each of them.
“We were trying to do things on our own and we thought we were making the right decisions but we weren’t necessarily buying property in the right place at the right time, and we really had no idea how to keep building our property portfolio”, says Hugh.
However, with Mark and the team at Momentum Wealth on side, they now felt in safe hands and confident in the expertise of Mark to help them make the right decisions for their future.
After evaluating a few different properties, Mark found a property in Kingsley that hadn’t even hit the market yet. He proceeded to run background checks on the property, presented comparisons to other properties that were being considered, and gave Hugh and his wife a frank and detailed evaluation of the property’s investment potential. Armed with this information and after a private inspection of the property, Hugh gave the nod and Mark proceeded to secure the property for $485,250. Not only is it a structurally sound 4 bedroom home in very good condition, but it is also a duplex site with the potential to be a triplex site in the future.
Before the dust has even settled on this purchase, Hugh and his wife are already preparing to do it all again with another investment property purchase in about 6 months time. As for the Kingsley property, they would like to hold the property for 5-10 years before looking at developing the land to its full potential. When that time comes, Hugh plans to involve their children in the re-development as a way to give them experience in property investing; something he feels he was never lucky enough to have and learn from at their age.
“For me I wish I’d known about property investment in this way. I mean I knew it was out there but I didn’t know how to do it. If I’d known how to do it at a much younger age I’d be better off now than I am. So that’s what I’m doing with my kids”, remarks Hugh.
Buoyed by their experience so far, Hugh and Anne are confident they’ve made the right move to secure their financial future. It’s a journey they say you don’t need to take on your own, and they count the guidance and advice they’ve received from Mark as being instrumental to their success. When looking for an investment property, Hugh has now learnt the true value of thorough research.
“Find out as much as you can about the property that you’re thinking about purchasing, because if you’re looking at it from an investment perspective, you may be making the wrong decision if you haven’t done that homework and Momentum Wealth does that homework for you”.
As for their age, Hugh and Anne have certainly proven that it’s never too late to invest in property. Hugh admits that investing at his age was initially a bit frightening, with a fear of losing money or worse, your own home. But the fear of not having enough money and assets when he retires was a far scarier prospect that made investing well worth the risk.
Finance: Improving Your Chances of Securing a High Valuation
Leveraging equity from your current properties is essential when building a property portfolio. But what can you do to improve your chances of securing a high valuation.
For most investors, buying further property often means having to refinance with the bank in order to gain access to their equity.
Many people do complain that valuations come in lower than expected. In fairness to valuers, it’s not the easiest job because no two houses are alike. Valuers need to assess the land, location, physical attributes such as age, condition and size of the property, and analyse and compare it to sales of similar properties in the area. Generally speaking they will look back on about six months worth of data but this will all depend on market conditions. If conditions are quite volatile, it could be less; if stable it could be more.
Valuations can, and do, often fall on the lower end of the price spectrum for various reasons. Firstly, valuers have limited time to turnaround valuations. They usually spend their whole day rushing from place to place to return a full valuation in 48 hours or less. This can result in the overlooking of important information. Secondly, the valuer takes legal responsibility for their estimate, meaning they can be held accountable in the event a property needs to be sold and the lender can’t recoup their costs because it didn’t meet the valuation figure. This liability risk can cause valuers to err on the side of caution. Thirdly, as mentioned earlier, it may be because there are limited recent sales to compare against which generally means the valuer will make a more cautious estimation.
So what can you do to improve your chances of a better valuation or challenge an existing valuation you’re already received?
It’s always best to do your homework and preparation before the valuation. There are not many instances I know of where someone has been able to get a valuer to revise their valuation, unless they have been able to present some new evidence which wasn’t considered or available at the time. Generally, you’d probably need evidence of at least two to three recent comparable sales that support your higher estimate in order to have any chance of success. But there are a couple of things you might like to consider prior to a valuation in order to get the best possible outcome:
Prepare a summary for the valuer
Valuers are busy people so it’s a good idea to prepare a short document summarising aspects of the property to give to the valuer prior to the inspection. Use this document to bring to their attention key selling features such as proximity to schools, transport and other amenities, the size of the land, number of living areas, completed renovations, views, and less obvious features like smart wiring. You may also like to propose your own estimate of the property’s value. This should be based on actual comparable sales data (which you should present to substantiate your estimate), not listings currently on the market. Talk to your property manager or a sales agent to see if they will help you obtain access to such information. A sales agent may also be able to shed light on sales within the past month or two that wouldn’t yet be publicly available. Do try to be as objective as possible and draw on a range of recent comparable properties, not just those that support your highest estimate. A valuer is more likely to consider all this information if they feel it is valuable and impartial, but won’t give it a second glance if they sense you’re information is unrealistic or biased.
Order your own valuation
You could also consider organising your own accredited valuation. Typically they cost between $300 and $600. If you go down this path, I recommend using a valuer on the bank’s panel and doing so prior to lodging your refinancing application. If you are happy with the valuation, ask to have it assigned to your lender when lodging your application. Doing it this way gives you more control over the valuation and the bank less control. There is a good chance under these circumstances that the bank may accept your provided valuation but if not, it may still have some influence on their own ordered valuation. You should be aware though that some banks may want to organise their own independent valuation regardless of what you do.
Aim for the right type of valuation
As mentioned earlier, there are different types of valuations – desktop, kerbside (drive-by), and full. The type of valuation you receive could potentially work for or against you. For example, if your property is a bit of shambles from the outside but fully renovated within, then you will want to get a full valuation to ensure the valuer inspects the property internally. You may simply ask the bank for the valuation you wish, but if they don’t oblige you may be able to influence the type of valuation you receive. For example, if you borrow a large sum of the property’s value or a not already a customer of the bank you are applying at, this would more than likely guarantee the bank pursues a full valuation.
Present your property well
A misconception amongst investors is that a valuer will be able to see past the mess and clutter of you or your tenants and value the property on its fundamentals. This is untrue. The valuer needs to base their estimation on what your property would get today, presented as it currently stands. We all know poorly presented homes can turn off buyers, hence why presentation is important to securing the best valuation. Remove the beat up old cars decaying in the front yard, mow the lawn, tidy up, de-clutter and fix up the old peeling paint.
Leveraging equity in your properties is a key wealth creation strategy so getting a fair and strong valuation is critical to maximising your portfolio. If you have had a poor valuation, or believe you will, give some of these suggestions a go or talk to one of our finance brokers who will be able to help you improve your chances.
Momentum Wealth and its affiliated entities are not Accountants or Financial Planners. While all information is provided in good faith, you should seek your own independent advice in relation to all matters regarding investing, taxation and superannuation.
Property Management: Protecting Your Interests With the Right Lease Term
Little thought is often given to the length of a lease. However, choosing the right lease length can benefit owners in more ways than one.
When leasing a property, one of the areas that often doesn’t receive enough thought is the length of the lease.
Most residential leases have a typical length of six months, twelve months or even twenty-four months, but there are circumstances where it’s beneficial to deviate from the norm. If you have plans to renovate or sell the property in the near future, then it would be wise to consider a shorter lease as it’s very difficult (if not impossible) to move a tenant on when they are signed under a fixed lease. However, shorter leases can expose owners to more frequent periods of vacancy and higher management and maintenance costs.
On the other hand, longer leases provide stability and security for owners, which can be particularly important for those who have a large mortgage on the property. The risk in offering a long lease is that owners can be stuck with tenants they aren’t happy with and have less flexibility over their investment should their personal or financial circumstances change.
Owners and property managers should also consider the overall portfolio of the owner when setting the lease length. Preferably, owners should not have all their properties’ leases expiring close to one another. In the event one or more tenants decide to move on, the owner could potentially be left with more than one property being vacant at the same time. Lease periods should instead be staggered to protect the owner’s cash flow. This could mean setting a more unusual length like 8 months or 13 months for some leases.
There may also be times of year when leasing a property can be more difficult, for example the week of Christmas. In this situation, the expiration date of the lease should ideally be adjusted to fall a few weeks before or after this time to minimiseany possible vacancy period.
Good property managers don’t just manage your property; they appreciate the needs of an investor and always go one step further to ensure your best interests are managed also.
Development: Protecting Yourself When Acquiring Your Development Opportunity
You’ve done your research and now you are ready to put an offer in for your development property. It sounds straight forward, but there are some potential traps that you need to avoid.
Although you may have conducted substantial research prior to placing your offer, it’s unlikely that you would have had the time or the opportunity to cover all your bases. With that in mind, it’s an absolute necessity to have a ‘due diligence’ clause in your contract of purchase. This gives you the ability to walk away if you are not satisfied for any reason with the outcome. Despite what some people may believe, a finance clause is not adequate!
You must also remember that sales agents work for the seller, and for that reason their contracts are skewed to suit the seller’s needs and not necessarily yours. A properly written due diligence clause is essential; a poorly written one could cost you tens or even hundreds of thousands of dollars. Using a buyer’s agent is a good way to manage this process as they should have the appropriate clauses to insert into the contract and can also protect your identity and motives for purchasing to give you leverage.
Where possible you should aim to negotiate a reasonable period for due diligence, enough for you to undertake all the extra checks you need to. And also, a longer settlement is also advisable.
Once your offer and all terms and conditions have been accepted, then it’s time for you to get started on your post-acquisition feasibility study. Start by refining your numbers (particularly in light of any new information you acquire), and begin conducting your due diligence. This is your opportunity to look at the property in more depth, find out if there are any nasty surprises, and walk away from the deal if you’re no longer comfortable.
Your due diligence can encompass a number of things. Start by talking more freely with sales agents about realistic sale prices and get the builders on site to ensure your costing estimates are valid. Consider undertaking a soil analysis to ascertain what sort of foundations might be required (amongst other things), investigate the services available and where they are located (such as sewerage lines), and check the title for any restrictive covenants or easements. Talk with surrounding property owners about the site and your plans – this will give you an indication if you’re in for a battle! And don’t forget to liaise with the local council about your plans and their requirements to make sure your proposed development has a strong chance of approval.
There is lots of work to be done once you decide you’re ready to place an offer, it’s definitely not the time to rest on your laurels. But know that if you go into it with your eyes open, you can rest assured that you’ve done all you can to protect yourself and make your development a success.
Wealth Protection: Shopping for the Right Income Protection
Three centuries ago, the original premise of life risk insurance was based on the assumption that an unexpected event, such as death would affect another party detrimentally. If no detriment to another party resulted from such an event, there was nothing to insure. Insurance is most definitely not designed to be a windfall, if it was, it would be classed as gambling.
Travel forward to today and nothing about that basic premise has changed. To compensate for the detrimental effect of an unforeseen event is still what insurance is all about. The available tools have changed however, such that advisers now have a plethora of products with which to work to solve the risk management issues of clients. But apart from the tools – products – which we use to craft protection packages, advisers can also offer clients their capacity to provide advice.
This, alas, is where the process is still falling down. It is all too often that the advice provided has been driven by just a few fact finding questions which have not adequately uncovered the totality of a client family’s detriment. Rather than asking “What are all the circumstances which would be of detriment within your whole family (and business for that matter) sphere, if you were to die?” The common questions imply “What would happen to your spouse and children if you were to die?” This is not broad enough, if an adviser is to do a truly thorough job during the advice process.
If an architect were to construct a plan for a high-rise office building without considering the safety exits, the plan would be flawed and the building, if it went ahead, would not be appropriately catering to the risks which the building’s occupants may have to face. Planning for such a substantial project must employ breadth – and depth – of vision. This idea similarly applies to the “sphere of risk”. It simply widens the aperture over the client’s circumstances so that all detriment likely to result from an event is discovered and addressed in the advice given.
This is done by asking questions beyond the impact on just the spouse and children, it is finding out about any particular group of people who would be impacted if an event occurred, such as parents, adult children, ex-wife or ex-husband, disabled niece or cousin for whom the client is legal guardian, etc.
The lack of attention to the building safety exits would be easily noticed and rectified by the engineers and builders. However in the risk insurance advising arena, the missed elements of risk insurance advice and the subsequent plan are most likely to be noticed only when it comes time to claim. Like the fire in a building with no exits available, the client’s circumstances might well be in trouble at this point.
The risks which will pop up as ‘unplanned-for problems’ might be so familiar to the client that they don’t even think of them. These risks might sit at the edge of the adviser’s vision but are often shadowed by the ‘main game’: that is the risks and consequent needs of the immediate family. The adviser or client may never have thought of these peripheral risks during the advice process.
Many clients have not been through or their adviser may not have provided a thorough enough advice process and this unfortunately only becomes evident at the worst time, a claim. Are you comfortable that you have catered for the appropriate safety exits?
Justin McManus is a representative of AXA Financial Planning Limited, ABN 21 0005 799 977 AFSL 234663. 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
Tax Newsletter – March 2012
Wrong property valuations can be costly
A few cases recently before the courts have centred on the issue of property valuations. If a valuation of a property is not above board, the ramifications could include a larger tax bill. The Australian Tax Office (ATO) has recently highlighted what it believes to be recurring issues concerning valuations of property in relation to the application of the GST margin scheme provisions. Often, when certain elements of a valuation are outside an acceptable range, the ATO says the ultimate valuation is higher than it should be resulting in a lower margin and less GST payable. One common area of contention is the use of purported comparable sales figures in making a valuation. The ATO has warned that comparable sales must withstand objective scrutiny of their comparability.
ATO to hold refunds pending checks
The government has announced that it will amend the tax law to allow the Tax Commissioner to hold onto refunds pending “verification checks”. Assistant Treasurer Mark Arbib said the legislation would provide the Commissioner with “legislative discretion” to delay refunding certain amounts to taxpayers pending necessary verification of their claims. Interested stakeholders have a very small window of time to comment on the draft legislation which is in response to a recent Full Federal Court decision which required the Commissioner to immediately pay to a taxpayer GST refunds worth around $930,000. The ATO had withheld the money pending the outcome of its audit of the taxpayer’s entitlement to the refunds.
Tricky excess super refund proposal
The government has released for comment draft legislation to implement its proposal to give individuals a once-only option to be refunded excess superannuation concessional contributions up to $10,000 from 1 July 2011. The proposal aims to stem the instances of inadvertent breaches of the caps which result in the “excess contributions tax”. However, there have been criticisms that the $10,000 amount may not be enough. Another concern is the application start date of 1 July 2011. Many commentators have said it should apply from at least the 2009–2010 year when the concessional contribution caps were halved to $25,000 ($50,000 for those over age 50 until 30 June 2012).
TIP: Although the proposed refund may provide some welcome relief in limited situations, it is not without its complexities. Some commentators have indicated that many individuals could still find themselves inadvertently breaching the relevant caps. If you have any questions, please contact our office.
No more deductions with Youth Allowance
The government is expected to introduce legislative amendments soon to prevent deductions against all government assistance payments for individuals from 1 July 2011, following a controversial High Court decision in 2010 (the Anstis decision). In that decision, the High Court had allowed an individual who incurred study expenses in gaining Youth Allowance to deduct the expenses from her assessable income. The government’s proposed legislative amendments will also affect students on Austudy and ABSTUDY.
Personal services income test failed
The Federal Court has recently confirmed an earlier Tribunal decision that the taxpayer had failed the “unrelated clients” test for the purposes of the personal services income (PSI) rules in the tax law in relation to a drafting business he carried on through his private company. However, the Court found the Tribunal had not properly applied the “business premises” test.
This issue has been sent back to the Tribunal for
re-determination.
TIP: Many consultants and contractors operate as a sole trader or through a company, partnership or trust. In many cases, the income received for the work they do may be classified as PSI if certain tests are not passed. However, the PSI rules do not apply to individuals or interposed entities carrying on a “personal services business”. It should be noted the ATO has recently advised that it will hold onto some income tax returns to check for PSI where appropriate. Please contact our office for any assistance.
Unfranked dividends from off-market share buy-back
A taxpayer has recently been unsuccessful before the Administrative Appeals Tribunal in arguing that an amended tax assessment was excessive. The amount of tax in question was around $195,000. The Tribunal concluded the amount of $451,600 for unfranked dividends that the taxpayer had received from a selective off-market buy-back of her shares in a company was properly included in her assessable income for the 2009 income year.
TIP: Off-market share buy-backs can give rise to deemed dividends. In the above case, the Tribunal held the consideration for the buy-back was a “deemed dividend” that was assessable to the taxpayer under the tax law in the year in which the buy-back occurred. The rules to determine the deemed dividend in these situations can be complex. In addition, special rules may apply to determine a capital gain tax (CGT) liability. In the above case, it was determined that there was no CGT as the shares were acquired before the commencement of the CGT provisions (that is, they were “pre-CGT shares”).
Tribunal highlights responsibility of SMSF trustee
A recent matter before the Administrative Appeals Tribunal has highlighted the importance of what it means to be a trustee of a self-managed super fund (SMSF). The case involved a trustee of an SMSF along with her husband. In 2006, some $3,460,000 was removed from the SMSF and transferred to an overseas bank account of the husband. The Commissioner issued a non-complying notice to the taxpayer along with an income tax and penalty assessment. Among other things, the taxpayer argued she had no knowledge of her husband’s acts as co-trustee and that the SMSF was entitled to a deduction for the misappropriated funds. However, the Tribunal affirmed the non-complying status of the SMSF and held there was no deduction available in this case. It also affirmed the 75% shortfall penalty. The taxpayer has appealed to the Federal Court against the decision.