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Tax Newsletter – May 2016
April 28, 2016 | 
Author Tax planning
There are many ways in which entities can defer income, maximise deductions and take advantage of other tax planning initiatives to manage their taxable income. Taxpayers should be aware that they need to start the year-end tax planning process early in order to maximise these opportunities. Of course, those undertaking tax planning should be aware of the potential application of anti-avoidance provisions. However, if done correctly, tax planning can provide a number of tax savings.
Deferring assessable income
- Income received in advance of services being provided is generally not assessable until the services are provided.
- Taxpayers who provide professional services may consider, in consultation with their clients, rendering accounts after 30 June in order to defer the income.
- A taxpayer is required to calculate the balancing adjustment amount resulting from the disposal of a depreciating asset. If disposal of an asset will result in assessable income, the taxpayer may consider postponing the disposal to the following income year.
- Rollover relief may be available for balancing adjustments arising from an involuntary disposal of assets where replacement assets are acquired.
Maximising deductions
Business taxpayers
- Taxpayers should review all outstanding debts before year-end to identify any debtors who may be unable to pay their bills. Once a taxpayer has done everything in their power to seek repayment of the debt, they may consider writing off the balance as bad debt.
- The entitlement of corporate tax entities to deductions in respect of prior year losses is subject to certain restrictions. An entity needs to satisfy the “continuity of ownership” test before deducting prior year losses. If the continuity of ownership test is failed, the entity may still deduct the loss if it satisfies the same business test.
- 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.
- Small business entities are entitled to an outright deduction for the taxable purpose proportion of the adjustable value of a depreciating asset, subject to conditions.
Non-business taxpayers
- Non-business taxpayers are entitled to an immediate deduction for assets that are used predominantly to produce assessable income and that cost $300 or less, subject to conditions.
- Self-employed and other eligible people are entitled to a deduction for personal superannuation contributions, subject to meeting conditions such as the “10% rule”.
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 debts forgiven by private companies to their shareholders and associates may give rise to unfranked dividends that are assessable to the shareholders and their associates. Shareholders and entities should consider repaying loans and making payments on time, or have appropriate loan agreements in place.
- Companies should consider whether they have undertaken eligible research and development (R&D) activities that may be eligible for the R&D tax incentive.
- Companies may consider consolidating before 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.
Trusts
- Taxpayers should review trust deeds to determine how trust income is defined. This may have an impact on the trustee’s tax planning.
- Trustees should consider whether a family trust election (an FTE) is required to ensure that any losses or bad debts incurred by the trust will be deductible and that franking credits will be available to beneficiaries.
- Taxpayers should avoid retaining income in a trust because it may be taxed in the hands of the trustee at the top marginal tax rate.
Small business entities
- From 2015–2016, the tax rate applicable to small business entities that are companies is 28.5% (rather than the standard 30% rate) and other types of small business entities are entitled to a tax discount in the form of a tax offset.
- Small business entities are entitled to an immediate deduction for certain pre-business expenditure incurred after 30 June 2015.
- 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.
- An optional rollover has been introduced for the transfer of business assets from one entity to another for small business owners who change the legal structure of their business.
- A CGT “look-through” treatment for eligible earnout arrangements has been introduced.
- From the 2016–2017 FBT year, small business entities will be able to provide more than one work-related portable electronic device to an employee and claim the FBT exemption for each device, even if the devices have substantially identical functions and are not replacement items.
Capital gains tax
- Taxpayers may consider crystallising any unrealised capital gains and losses to improve their overall tax position for an income year.
Superannuation
- Individuals who wish to take advantage of the concessionally taxed superannuation environment should keep track of their contributions.
- Individuals with salary sacrifice superannuation arrangements may want to have early discussions with their employers to help ensure contributions are allocated to the correct financial year.
- Individuals earning above $300,000 are subject to an additional 15% tax on concessional contributions. However, despite the extra 15% tax, there is still an effective tax concession of 15% (ie the top marginal rate less 30%) on their contributions up to the relevant cap.
- Self managed super funds (SMSFs) have been reminded that if they have investments in collectables or personal-use assets that were acquired before 1 July 2011, time is running out to ensure they meet the requirements of the superannuation law for these assets.
Fringe benefits tax
- The rules for individuals claiming car expense deductions have changed. As a result, if employers reimburse expenses relating to an employee’s use of their own car, only two methods are available for calculating the taxable value of this fringe benefit (when employers apply the “otherwise deductible rule”).
- A separate gross-up cap of $5,000 has been introduced for salary sacrificed meal entertainment and entertainment facility leasing expenses for certain employees of not-for-profit organisations. Affected individuals may want to discuss it with their employers.
Individuals
- For the 2015–2016 income year, the general tax-free threshold available to Australian resident taxpayers is $18,200.
- Australians who have student debts and are travelling or living overseas will soon have the same repayment obligations as people who are still living in Australia.
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Property Newsletter – April 2016
Hypothetical borrowers shine light on lenders’ changes
New research shows the Australian Prudential Regulation Authority’s (APRA) crackdown on investor loans is taking effect with average loan sizes recording a sharp drop.
APRA has increased scrutiny of financial lenders’ practices in recent times in a bid to bolster the nation’s banking system.
To compare how lenders evaluate their clients, APRA created four hypothetical borrowers.
Using the four borrowers, APRA surveyed 20 banks, building societies and credit unions in December 2014 to determine how they evaluate these clients.
To test how lender’s policies had changed in response to APRA’s crackdown on property loans, the watchdog ran a second survey in September 2015 using the same four hypothetical borrowers.
The results found that the maximum loan sizes to property investors dropped 12% on average. Meanwhile, the maximum loan sizes for owner-occupiers dropped 6% on average.
Lenders tighten investor-loan criteria
To determine how different lenders evaluate these four hypothetical borrowers, the survey utilised four data points. These are:
•Borrower’s income
•Living expenses
•Interest rate for the new loan
•Interest rates for their existing loan
Most lenders use these four factors to determine a borrower’s Net Income Surplus (NIS), which is used to determine the serviceability capacity of a borrower.
The research found that lenders were now applying higher interest rate stress tests to existing loans with rates of between circa 5-8% in December 2014 compared to 6-9% in September 2015 – with most typically above 7%.
Many lenders had also raised the borrower’s minimum living expense assumptions, while some lenders applied larger discounts to borrower’s incomes, particularly those on less stable sources of income, such as overtime, bonuses and commissions.
Given the changing financial lending market, investors should engage brokers who specialise in investor loans to ensure they’re optimising their borrowing capacity.
Building approvals a telling sign for investors
Despite the soft property market, building approvals for medium density houses in Perth have grown, highlighting the continued shift in buyer’s attitudes towards these dwelling types.
The number of medium density housing building approvals in Western Australia increased 0.4% to 8,001 in the year ending November 2015.
Although the growth was only minor, the number of approvals was still higher following a 35% increase in medium density approvals a year earlier and amid a slower property market in the state.
The growth in the medium density housing segment also came at a time when approvals for stand-alone dwellings dropped by 12.9%.
The new figures were released last month in Bankwest’s Housing Density Report. Bankwest said the resilience of the medium density housing space would be underpinned by Perth’s population growth over the next decade.
“Perth’s population is forecast to grow by 33% to 2.8 million in 2025, bringing an extra 700,000 people into the city,” Bankwest said.
Medium density housing has become more popular in Perth in recent years as residents increasing want to live closer to their places of work, specifically the CBD, as well as the Swan River, coastline and established amenities, such as café and retail strips and train stations.
The shift towards medium density housing highlights the importance of acquiring investment properties in Perth’s inner metropolitan ring.
As the city’s population continues to grow, so too will the demand for properties within this zone.
Properties that have large land components in suburbs with restricted supply capacity are likely to perform the best in the long term.
While the move to medium density housing has increased in Perth in recent years, the city is still lagging behind its capital-city counterparts.
Medium density building approvals comprise just 30% of total building approvals in Perth compared to 57.9% in Melbourne, 64.5% in Brisbane and 69.4% in Sydney, according to the report.
Concerted and coordinated approach maximises returns
When it comes to designing your property development, a coordinated effort between builders, architects and town planners is needed to optimise your site.
During the design process of a property development, many investors will either engage a builder or architect to help determine the size and number of dwellings to build.
This stage of a development is highly important because the decisions made now will have a big influence on the final yield of the project.
As such, a better approach is to incorporate both building specialists and architects into the design process, as well as town planners, who have a firm understanding of the residential design codes that govern what can and cannot be built.
For example, a client recently engaged Momentum Wealth’s developments team with a 1,000 square metre development site located in a north-east suburb in Perth.
With a zoning code of R40, the site was, on face value, suitable for the development of 8 multi-dwellings.
However, particular to this site was a 5.5 metre slope to the rear.
Typically, sloping blocks can be more costly to develop because they present unique challenges in terms of drainage, excavation and building height.
Subsequently, more site and earthworks typically need to be completed.
In this case though, our in-house town planners and development specialists worked with designers to utilise the natural contours of the site to the client’s advantage.
The final design, which recently received building approval, comprised a 2-storey building on the street front and a 3-storey building at the rear with car parking in between.
The sloping block meant the height variation between the front and back building was negligible, despite the extra storey at the rear.
Adding the extra storey also allowed us to include 10 dwellings, compared to the original design of 8, and an additional 150sqm of floor space.
Using the innovative design, the projected yield for the client has increased by more than 30%.
This project is an excellent example of why it’s important to incorporate building specialists and architects as well as town planners into the design process.
This approach will help to ensure you utilise your development site to its fullest potential and, in turn, optimise your returns.
Legal risks and liabilities: the real cost of self-managing
Are you considering self-managing your property portfolio? The decision to do so may prove significantly more costly than you think.
It’s not uncommon for novice investors to consider managing their own portfolios, particularly if they only own 1 or 2 properties.
However, by taking on the responsibility to self-manage, you’re also likely to be taking on more risk, not only financially, but legally as well.
So what are the risks if you decide to forego professional property management?
Firstly, and perhaps most importantly, self-managing landlords are susceptible to legal action if they don’t fully understand the legal requirements for leasing a property.
This can include the requirements for installing smoke alarms or ensuring minimum security obligations, among many other issues.
Furthermore, self-managing landlords may also be vulnerable if they don’t understand their own rights and the rights of the tenant.
It’s not uncommon to hear stories of tenants who stop paying their rent or who’ve trashed their rental property.
In such circumstances a professional property manager will mitigate the risk of this occurring by compressively screening applicants and understanding the legal recourses should such incidents occur.
Self-managing landlords who haven’t followed proper procedures may find that their landlord insurance company either discounts or refuses to pay a claim.
Should the need arise to go to court, a good property manager is able to act on the owners behalf, will know how to adequately prepare for a hearing and have supporting evidence and information to back up their case.
It’s important to remember, also, that the cost of hiring a property manager is tax deductable, so any perceived savings from self-managing are likely to be negligible.
Subsequently, the real savings made from self-managing don’t outweigh the benefits of engaging a professional property manager.
Eden Hill: Old suburb provides affordability
Eden Hill: This suburb was first developed nearly a century ago and provides an affordable option for property buyers.
Eden Hill is located 11 kilometres north-east of the Perth CBD and comprises about 3,500 residents.
It’s bounded by Morley Drive East to the north, Walter Road East to the south, Wick Street to the west and Lord Street to the east.
The housing stock in the area dates back to the 1920s when the first significant residential development occurred.
However, with the suburb being rezoned in recent years, more infill development has since occurred.
The stock comprises approximately 88% stand-alone houses, 7% duplexes, villas and townhouses and 5% flats, units and apartments.
As well as its proximity to the CBD, the suburb’s main drawcard is its relative affordability.
With a median house price of $477,500, according to REIWA, the suburb sits below Perth’s median price.
This is reflected in the suburb’s demographics with about 14% of resident identifying as professionals, compared to the state average of about 20%.
About 18.5% of residents also identify as technicians and trades workers (WA 16.7%) and 17.9% as clerical and administrative (WA 14.7%).
The Eden Hill Primary School is located within the suburb and Hampton Senior High School is directly to the west.
Morley Galleria Shopping Centre is also 4km to the west and the Bassendean Shopping Centre is 2km to the south.
Its closest train stations are Bassendean and Success Hill, also located about 2km to the south.
Property syndicates’ popularity grows amid planning changes
Property syndicates have increased in popularity in recent years, but why have they suddenly become a more prominent investment strategy?
It’s not uncommon to see media reports touting the success stories of “average investors” who’ve joined a property development syndicate.
Less than a decade ago, though, property syndicates in Perth were all but unheard of and usually the domain of sophisticated investors with the right connections.
So what’s changed in that time for syndicates to be more commonplace?
Perhaps the biggest catalyst has been the Western Australian government’s planning blueprint, Directions 2031, which was released in 2011.
The report outlines the government’s planning strategy for metropolitan Perth including the identification of key activity centres and transport links.
One of the document’s key goals is to achieve a 47% infill target – that is 47% of new dwellings need to be built in established suburbs, rather than developing new land estates on the urban fringe.
As such, many local councils are updating their town planning schemes to comply with the state government’s objectives and meet set population targets.
This includes increasing housing density, for example from R20 to R40, particularly around key activity centres and public transport nodes.
These zoning increases have led to a more conducive environment for the construction of medium density residential developments, such as boutique apartment complexes between $3 million and $20 million.
These types of developments are generally too large for single investors to bankroll and too small for the consideration of big state and national developers.
Therefore, property syndicates, whereby a number of investors pool their money, are a great avenue to fill this gap in the market and have proven to be highly lucrative for investors.
This development activity is also supported by rising demand for medium density housing, which is increasingly attractive to buyers for its affordability advantages, lower required maintenance and proximity to key amenities, such as transport links, employment hubs and retail and café strips.
Bigger isn’t necessarily better in commercial property
Many investors envisage city skyscrapers and large shopping complexes when commercial property comes to mind, particularly those unfamiliar with the market. However, bigger isn’t necessarily better in commercial.
Given that much of the mainstream media focuses on these segments of the market, it’s understandable that many investors only think of the big end of town.
Of course, individual investors wouldn’t be able to afford an office tower, for example, as these large assets typically cost a minimum of $20 million and are owned by big institutional and superannuation funds.
But that doesn’t mean individual investors can’t afford a high-quality commercial property.
Indeed, investors should think small when it comes to commercial property, and look to the suburbs.
Commercial space within smaller suburban shopping centres can make a good starting point.
Although retail has suffered with the rise of online shopping in recent years, service providers, such as hairdressers, will continue to need bricks and mortar stores to operate.
Investors should consider suburban shopping centres that are anchored by a large supermarket and also comprise other specialty stores, such as a baker, butcher and chemist, for example.
Similarly, specialty medical spaces, for chiropractors, physiotherapists and general practitioners, will continue to see demand over the long-term and can make great investments.
Investors must be aware of vacancy rates and market rents, though, as these can vary widely between suburbs and property types.
Unfortunately, most of the published statistics on the commercial property market relate to the CBD statistics, so it can pay to engage a buyer’s agent who will hold a firm understanding of the local suburban markets.
Finance Newsletter – April 2016
RATE CRASH!
Do you have the best rate available?
If your interest rate is over 3.98% variable then you may be able to save thousands per year by changing loans and or banks. I have access to a bank that is currently offering customers a 3.98% variable rate .This NOT a honeymoon rate, discount is for the life of the loan. Conditions apply – owner occupied homes, principal and interest payments, 80% LVR maximum – includes redraw facility. If you are interested in saving thousands per year call Mercia finance to see if we can show you how to benefit from a better rate.
Investors will have read that most banks are increasing the rate on investment loans. This includes current investment loans. If you are a property investor check your rates and find out if these increases apply to you. If you are not sure Ask Mercia finance for an obligation free loan check. Some institutions are not increasing the rates for investors. So this is a good time to make sure you have the best loan for your circumstances.
If you have questions regarding any type of loan, call Dan Goodridge on 04144 233 40. Our service is free of charge to you the borrower and we have access to all the major lenders in WA. Call us anytime. After hours is OK.
Tax Newsletter – April 2016
Deadline looming for SMSF collectables compliance
The ATO has reminded trustees of self managed super funds (SMSFs) that if they have investments in collectables or personal-use assets that were acquired before 1 July 2011, time is running out to ensure their SMSFs meet the requirements of the superannuation law for these assets. Assets considered collectables and personal-use assets include artwork, jewellery, antiques, vehicles, boats and wine.
From 1 July 2011, investments in collectables and personal-use assets have been subject to strict rules to ensure they are made for genuine retirement purposes and they do not provide any present day benefit. SMSFs with investments held before 1 July 2011 have until 1 July 2016 to comply with the rules.
The ATO says SMSF trustees have had since July 2011 to make arrangements, and it expects that they will take appropriate action to ensure the requirements are met before the deadline.
TIP: Appropriate actions may include reviewing current leasing agreements, making decisions about asset storage and arranging insurance cover.
Overseas student debts: repayment thresholds
From 1 July 2017, anyone with a Higher Education Loan Programme (HELP) or Trade Support Loans (TSL) debt who is living overseas and earning above the minimum repayment threshold will be required to make loan repayments to the Australian Government, just as they would if they were living in Australia. The HELP minimum repayment threshold for 2016–2017 is $54,869.
TIP: If you have a student loan debt and are planning to move overseas for longer than six months, you need to provide the ATO with your overseas contact details within seven days of leaving Australia. You should also factor in potentially having to make repayments from 1 July 2017.
ATO data-matching for insured “lifestyle” assets
In January 2016, the ATO advised it was working with insurance providers to identify policy owners on a wider range of asset classes, including marine vessels, aircraft, enthusiast motor vehicles, fine art and thoroughbred horses. The ATO has since formally announced the data-matching program that covers these “lifestyle” assets, and will acquire details of insurance policies for these assets where the value exceeds nominated thresholds for the 2013–2014 and 2014–2015 financial years.
The ATO said it will obtain policyholder identification details (including names, addresses, phone numbers and dates of birth) and insurance policy details (including policy numbers, policy start and end dates, details of assets insured and their physical locations). The data-matching program will provide the ATO with a more comprehensive view of taxpayers’ accumulated wealth, as well as assist in identifying possible tax compliance issues.
TIP: It is estimated that records of more than 100,000 insurance policies will be data-matched. The ATO has released a list of insurers involved with the data-matching program. Please contact our office for further information.
Market value of shares is not the selling price
The Administrative Appeals Tribunal (AAT) has ruled that the “market value” of a parcel of shares in a private company that a taxpayer sold in an arm’s-length transaction (together with the other two shareholders’ shares in the company) was not the proportion of the sale price he received from the sale of all the shares. Instead, the AAT agreed it was a discounted amount; the taxpayer was a “non-controlling” shareholder, so the market value was less than simply his one-third share of the sale price.
As a result of this AAT decision, the taxpayer passed the $6 million “maximum net asset value test”, allowing him to qualify for small business capital gains tax (CGT) concessions, where otherwise he would not have.
The Commissioner has appealed to the Federal Court against this AAT decision.
TIP: This decision demonstrates that the actual selling price of an asset may not always represent its “market value”. In this decision, the AAT agreed with the taxpayer’s valuer that “all other things being equal, the average price per share of a controlling shareholding will be higher than the average price per share of a non-controlling shareholding because of the value of control”.
Individual not a share trader
The Administrative Appeals Tribunal (AAT) has found that a taxpayer (a childcare worker) was not carrying on a business of share trading, and accordingly was not entitled to claim a loss resulting from her share transactions. In the year in question, the taxpayer turned over approximately $600,000 in share transactions (including both purchases and sales).
In deciding that the taxpayer was a share investor and not a share trader, the AAT considered each of the key indicators established in case law. The AAT decided that a lack of regular and systematic trade, especially in the second half of the income year, when only 10 transactions were made, went against the taxpayer’s contention that she was conducting a share trading business.
TIP: The AAT weighs up all the relevant factors in cases like this. There have been cases where the AAT has found that a taxpayer was carrying on a business of share trading, and has therefore allowed them to claim a deduction for their losses.
Small business restructures made easier
The Government has made changes to the tax law to provide tax relief for small businesses that restructure. The tax law changes provide an optional rollover for small business owners who change the legal structure of their business on the transfer of business assets from one entity to another. The effect of the rollover is that the tax cost of the transferred assets is rolled over from the transferor to the transferee.
This optional rollover is in addition to existing rollovers available where an individual, trustee or partner transfers assets to, or creates assets in, a company in the course of incorporating their business.
The changes to the tax law will take effect on 1 July 2016.
TIP: You must meet strict eligibility requirements in order to access the rollover. Among other things, the rollover must be part of a genuine business restructure that does not change the ultimate economic ownership of the assets. There are also tax consequences you should be aware of.
Tax law changes to treatment of earnouts
The Government has recently amended the tax law concerning the capital gains tax (CGT) treatment of the sale and purchase of businesses involving certain earnout rights.
Specifically, the changes provide for a “look-through” treatment. Under the amended tax law, capital gains and losses that arise in respect of look-through earnout rights will be disregarded. Instead, payments received or paid under the earnout arrangements will affect the capital proceeds and cost base of the underlying assets to which the earnout arrangement relates when they are received or paid (as the case may be).
The changes apply from 24 April 2015.
TIP: These changes to the tax law do not apply for events that occurred before 24 April 2015. However, transitional protection is provided, subject to conditions, for taxpayers who have reasonably anticipated these changes to the tax law, which were originally announced by the former Government.
Finance Newsletter – March 2016
RATE CRASH!
Do you have the best rate available?
If your interest rate is over 3.98% variable then you may be able to save thousands per year by changing loans and or banks. I have access to a bank that is currently offering customers a 3.98% variable rate .This NOT a honeymoon rate, discount is for the life of the loan. Conditions apply – owner occupied homes, principal and interest payments, 80% LVR maximum – includes redraw facility. If you are interested in saving thousands per year call Mercia finance to see if we can show you how to benefit from a better rate.
Investors will have read that most banks are increasing the rate on investment loans. This includes current investment loans. If you are a property investor check your rates and find out if these increases apply to you. If you are not sure Ask Mercia finance for an obligation free loan check. Some institutions are not increasing the rates for investors. So this is a good time to make sure you have the best loan for your circumstances.
If you have questions regarding any type of loan, call Dan Goodridge on 04144 233 40. Our service is free of charge to you the borrower and we have access to all the major lenders in WA. Call us anytime. After hours is OK.