Reactivating old debts: new guidelines for government agencies

In response to the ATO’s recent actions on reactivating or offsetting old tax debts, the Commonwealth Ombudsman/ACT Ombudsman and the Inspector-General of Taxation and Taxation Ombudsman (IGTO) have jointly issued new guidelines aimed at improving how Australians are notified about debts they owe to the government. The guidelines report outlines principles designed to ensure that the process of debt notification is handled with transparency, clarity and sensitivity towards the people and businesses affected.

The guidelines propose five key principles for the ATO and other government departments to consider when conducting programs:

• Transparency and accountability – agencies should communicate clearly why the debt has arisen, to foster trust and confidence in the process.
• Clarity on the debt’s origin – individuals and businesses should be given the information they need to understand the source and nature of the debt, and this information should be tailored to their circumstances.
• Clear pathways for review – information on how to request a review of the debt, apply for waivers and arrange repayments should be readily accessible, helping people to understand their rights and options.
• Accessible support – contacts for further assistance must be provided, acknowledging that people may have additional questions or need personalised support.
• Commitment to improvement – the process of debt recovery should be viewed as an opportunity to learn and enhance future practices, based on oversight recommendations and past experiences.

The ATO has welcomed the report, saying it is committed to applying the five key principles when communicating about old tax debts in future.

Taxpayers who have an unresolved complaint or dispute with the ATO can lodge a dispute with the IGTO to receive independent assurance. The IGTO will conduct an independent investigation of the actions and decisions that are subject to dispute, and can help taxpayers better understand the actions taken by the ATO and/or independently verify whether shortcomings exist in the ATO’s actions or decisions which should be rectified, as well as identifying other options taxpayers may have to resolve their concerns.

Serious Financial Crime Taskforce targets false invoicing

The ATO-led Serious Financial Crime Taskforce (SFCT) is warning businesses against using illegal financial arrangements such as false invoicing to avoid tax obligations and/or inflate their deductions. The SFCT is a multi-agency taskforce which combats financial crimes like tax evasion and fraud. It was established in 2015 as a collaborative effort among various law enforcement and regulatory agencies, including the Australian Federal Police, Australian Criminal Intelligence Commission and Australian Securities and Investments Commission (ASIC), among others.

The taskforce aims to address the most complex and detrimental forms of financial crimes, such as fraud, tax evasion, and money laundering by employing a unified approach that combines expertise, intelligence-sharing, and advanced technological methods.

Currently, the SFCT is turning its focus on some businesses using false invoicing arrangements where no goods or services are provided.

The ATO and Australian Federal Police have already executed search warrants at seven residential and business properties in various Sydney suburbs in relation to an investigation into a cheque-cashing entity suspected of false invoicing. The suspected criminal operation is believed to have laundered more than $1 billion to facilitate tax fraud for about 1,200 businesses from a range of industries.

Businesses that use these types of arrangements are usually caught either by data-matching programs (as used by the ATO), which indicate anomalies in expenses compared to previous periods, or from tip-offs from the general public. Businesses that have been persuaded into these types of arrangements by promoters are encouraged to make a voluntary disclosure to the ATO, which may reduce the penalties involved.

Penalties resulting from investigations by the SFCT can be severe, reflecting the serious nature of the financial crimes being addressed. The consequences for individuals and entities found guilty of serious financial crimes can include criminal charges which may lead to convictions and prison sentences, financial penalties such as fines, confiscation of proceeds of crime which may involve assets, and recovery of unpaid taxes, including interest and penalties.

ATO’s use of small business benchmarks

Recently, the ATO updated its small business benchmarks to encompass the 2021–2022 income year. While the ATO promotes these benchmarks as an aid for small businesses to enable them to compare expenses and turnover with other similar small businesses in the same industry, it is important to note that these benchmarks are also used by the ATO to identify businesses that may be avoiding their tax obligations.

According to the ATO, it uses small business benchmarks along with other risk indicators to select businesses for further compliance activities.

The benchmarks themselves are divided into nine broad business categories: accommodation and food; building and construction trade services; education, training, recreation and support services; health care and personal services; manufacturing; professional, scientific and technical services; retail trade; transport, postal and warehousing; and other services. These categories split into additional subcategories; for example, bakeries, chicken shops, coffee shops, kebab shops and pubs all have their own separate subcategory under accommodation and food.

There are five tax return benchmark ratios calculated by the ATO, each expressed as a percentage of turnover (excluding GST). These consist of total expense/turnover, cost of sales/turnover, labour/turnover, rent expenses/turnover, and motor vehicle expenses/turnover. To calculate the turnover, the ATO generally uses the amount reported at the “Other sales of goods and services” label on the tax return or, if that figure is not present, the figure from the “total business income” label.

Small businesses can use the Business Performance Check tool on the ATO app to work out their own personal ratios and then compare them to the benchmarks, or manually calculate the various ratios and compare to the benchmarks. For businesses with ratios inside the benchmark ranges for their industry, the ATO notes that nothing else needs to be done. However, businesses with ratios outside of benchmarks are encouraged to look to see if there are any factors that can be improved.

FBT: alternatives to employee declarations

Employers that provide certain fringe benefits to their employees can now use appropriate alternative statutory evidentiary documents to satisfy FBT requirements from the FBT year ending 31 March 2025. This has come about with the registration of ATO legislative instruments that specify acceptable record-keeping obligations for certain FBT benefits. These instruments, along with complementary legislation passed in 2023, seek to reduce FBT compliance costs for employers.

Under the FBT law, employees are required to provide information to employers about fringe benefits received, and employers are required to prepare declarations in an approved form. As a part of record-keeping obligations, information and declarations are required to be kept for five years and the ATO may request these records for compliance purposes at any time.

The ATO website currently offers some 20 different approved employee declarations for various fringe benefits including expense payment fringe benefits, LAFHA, property fringe benefits, residual benefits, loan benefits, car and fuel, holiday transport, temporary accommodation, and relocation. There are also two employer declarations and a travel diary requirement currently used as statutory evidentiary documents for FBT purposes.

The requirement for certain records to be in ATO approved form to comply with FBT record-keeping obligations means that some employers and employers may have needed to create additional records despite the required information already being captured through other processes such as corporate record-keeping. From 1 April 2024, employers will have the option to rely on existing or other alternative records, as determined by the ATO by way of legislative instrument, for some types of fringe benefits. However, these instruments do not generally change or reduce the information employers need to hold or support their FBT return; they only alter the prescriptive formats and processes for obtaining and holding that information.

While the option to use alternative records will generally reduce the FBT record-keeping burden for employers, the ATO will not necessarily specify alternative record-keeping options for all available fringe benefits or situations. Where records are extensively defined within legislation, such as log-books or odometer records, employers will generally need to continue to meet their record obligations under those current arrangements.

In circumstances where the ATO is not “reasonably” satisfied that adequate alternative records are available for certain fringe benefits, employers will be expected to continue using existing approved forms to ensure that statutory evidentiary documents that meet record-keeping obligations are retained.

More information: super on paid parental leave

In a bid to improve retirement outcomes for Australian women, the government has recently announced that from 1 July 2025 it will commence paying super on government paid parental leave (PPL), along with making other changes to expand the PPL scheme. This follows appeals from unions and women’s rights groups, and a growing body of research which highlights a significant disparity in retirement savings between genders. Data indicates that women, on average, retire with 25% less in their superannuation accounts compared to men, a gap attributed to periods spent out of the workforce for child-rearing.

“[Paying super on government parental leave] helps normalise taking time off work for caring responsibilities and reinforces Paid Parental Leave is not a welfare payment – it is a workplace entitlement just like annual and sick leave”, Minister for Social Services Amanda Rishworth has said.

Currently, subject to meeting eligibility conditions, a family can receive up to 20 weeks (or 100 payable days) of government PPL at the rate of $176.55 per day before tax, or $882.75 per five-day week (at the national minimum wage for children born or adopted from 1 July 2023). Two weeks out of the 20 available weeks is reserved for each parent.

With the passing of recent legislation, the PPL scheme will be expanded from 1 July 2024. From that date, individuals and families will have access to an extra two weeks of leave, giving 22 weeks in total, which will increase to 24 weeks from 1 July 2025 and to 26 weeks from 1 July 2026. This means a total of six additional weeks of PPL for new parents, and by 2026, a total of four weeks will be reserved for each parent on a “use it or lose it” basis, which will help encourage greater sharing of the care responsibilities.

The number of PPL days that a family can take together at the same time will also be increased from the current two weeks to four weeks from 1 July 2025, which will increase flexibility for families and support parents to take time off work together. The government hopes that these changes – along with reforms to child care and parenting payments – will mean a more dignified and secure retirement for more Australian women.

Changes proposed for annual super performance test

The annual super performance test was introduced in 2021, by the previous Coalition government, as a way to hold registrable superannuation entity (RSE) licensees to account for any super fund underperformance through enforcing greater transparency. The annual test, conducted by the Australian Prudential Regulation Authority (APRA), also allowed members of funds and products to move to better-performing funds and improve their retirement outcomes.

Essentially, APRA assesses the performance of super investment options every year against tailored benchmarks. This has applied to MySuper products since 2021 and was recently extended to trustee directed products (a subset of the choice sector) in 2023. According to estimates, the annual test covered 80 MySuper products, which accounted for 14 million member accounts containing $900 billion in assets, and around 805 trustee directed products consisting of a further four million member accounts and $360 billion in assets.

Products that fail the test are subject to clear legislated consequences. Where the test is failed for one year, the trustees must write to affected members notifying them that the product they have invested in has failed the test. Where a product fails the test two years in a row, it is closed to new members until it passes a future test. In addition, funds that fail the test will often be subjected to heightened supervision from APRA to ensure that trustees are delivering better outcomes for their members.

However, the current government has initiated a review of these performance tests after receiving feedback from the industry that the tests may have unintended consequences, including focusing on investment implementation over other measures of performance, encouraging short-term decision making, incentivising super funds to “hug” benchmarks, reducing investment flexibility, and reducing choice, diversification and active management.

Moving to mitigate this, the government has released a consultation paper which considers improvements to the performance test to improve its sophistication while still ensuring the test holds trustees to account for delivering the best outcomes.

Revised stage 3 tax cuts now law

With the revised stage 3 tax cuts now law, it’s a good time to understand how these changes will affect you and how to plan your taxes for the future more effectively. The new rates will apply from 1 July 2024.

For the current income year, an individual who earns $67,600 annually (the median income from the latest Australian Bureau of Statistics data) will be expected to pay around $12,437 in income tax. With the new tax rates coming in for the 2024–2025 income year, assuming they earn the same amount, they will be paying $11,068 in income tax – a tax saving of around $1,369 for the year, or around $26 per week.

An individual who earns $98,176 annually (the average income from the latest average weekly ordinary time earnings data) will have an income tax bill of around $22,374 for the 2023–2024 income year. However, this will drop to $20,240 when the new rates come into force for the 2024–2025 year, leading to a tax saving of around $2,133 for the year, or $41 per week.

Similarly, an individual who earns $180,000 can expect to see a tax saving of $3,729 for the year, or $71 per week; they will pay income tax of $51,667 for 2023–2024 versus $47,938 in 2024–2025.

These revised tax cuts were introduced as a cost-of-living relief measure by the government to put more money back in the pockets of Australian workers so they can deal with recent skyrocketing inflation. By also giving a proportional tax cut to working holiday makers and foreign residents the government is banking on more spending from that segment which will boost the economy overall.

In association with the revised income tax cuts, the government has also lifted low-income Medicare levy thresholds for eligible singles, families, seniors and pensioners to apply for the current income year, meaning more low-income earners can avoid paying the Medicare levy of 2% on top of their tax, or will pay a reduced amount of levy.

Refresher on deductibility of self-education expenses

With the return of international conferences for various occupations, the deductibility of expenses such as accommodation, meals and course fees related to self-education will once again come into play at tax time. Generally, work-related self-education expenses are tax-deductible if they enhance skills and knowledge, or lead to an income increase related to current income-producing work, for the person claiming the deduction.

Self-education expenses include the costs of courses at an education institution (whether leading to a formal qualification or not), courses provided by a professional organisation or an industry organisation, attendance at work-related conference or seminars, self-paced learning and study tours (whether within Australia or overseas).

Self-education expenses are tax-deductible if your income-earning activities are based on the exercise of a skill, or some specific knowledge, and self-education enables you to maintain or improve that skill or knowledge; and/or the self-education objectively leads to, or is likely to lead to, an increase in your income from your income-earning activities in the future (eg through a real opportunity of promotion, or eligibility for a higher pay grade or bonus).

You cannot deduct self-education expenses if the education is undertaken or designed to obtain employment, obtain new employment, or open up a new income-earning activity (whether in a business or in current employment).

A deduction is also not available if you weren’t undertaking income-earning activities to derive assessable income (either by employment, carrying on a business or other means) at the time you incurred the self-education expense. Additionally, you can’t claim a deduction for any government assistance you receive in the form of rebatable benefits (eg Youth Allowance, Austudy, ABSTUDY).

For self-education expenses that are only partly deductible, you need to apportion the amounts spent and claim only the part that relates to an income-earning purpose.

ATO scrutinising novated leases

The ATO will once again be running its data matching program on novated leases in 2024, covering the 2023–2024 to 2025–2026 income years. This program first commenced in 2021, collecting data from the 2018–2019 income year.

Novated lease data will be collected from various fleet and leasing groups, including McMillian Shakespeare Group, Smartgroup Corporation, SG Fleet Group, Eclipx Group, LeasePlan, Toyota Fleet Management, LeasePLUS and Orix Australia.

The data collected from providers will consist of a range of lessee/employee identification details, employer identifying details and lease transaction details, and it’s estimated that around 240,000 individuals will be affected by the latest data matching program each financial year. The program will allow the ATO to identify and address tax risks such as employers claiming GST credits incorrectly for paying the GST on the purchase of  vehicle, risks related to FBT compliance, and employees incorrectly claiming motor vehicle related tax deductions.

The ATO also uses data from this type of program to provide tailored advice and guidance through online messaging prompts when people are completing their tax return, and for targeted prompter campaigns to identify any taxpayers with novated leases who have claimed work-related expenses on their tax returns.

Paying super on expanded government paid parental leave

The Treasurer has announced that the Federal Government will pay superannuation on paid parental leave from 1 July 2025. The intention is that the superannuation will be administered by the ATO, meaning that employers will not have to process these payments on the government’s behalf. Further details of this measure, including cost, will be released in the Federal Budget due to be handed down in May 2024.

The Treasurer has said that this reform builds on the government’s work to “modernise” paid parental leave and expand the payment to cover a full six months by 2026. The expansion to Australia’s Paid Parental Leave Scheme will give families an additional six weeks of paid parental leave in total: an extra two weeks of leave (for 22 weeks total) from 1 July 2024, increasing to 24 weeks from July 2025 and 26 weeks from July 2026.

Employers will continue to be involved in the administration of payments if an employee elects to take eight or more weeks of their entitlement consecutively. For any shorter periods, Services Australia will pay the individual directly.

Small Business Superannuation Clearing House and SMSF bank account validation

To safeguard retirement savings held in self managed superannuation funds (SMSFs) from fraud and misconduct, the ATO is rolling out new security features. One new feature consists of checking for a match between an employee’s SMSF bank account details and the SMSF record when electronic payments are made via the Small Business Superannuation Clearing House (SBSCH). Where there’s a mismatch, the SBSCH cannot accept payments to an employee’s SMSF until the error is resolved.

The SBSCH is a free, online superannuation payments service (part of ATO Online Services) that small businesses can use to pay their super contributions in one transaction. It’s designed to simplify the process of making super contributions on behalf of employees, and is available to small businesses with 19 or fewer employees, or businesses with an annual aggregated turnover of less than $10 million. This service helps reduce the time and paperwork associated with making super contributions for multiple employees across different super funds.

The new security feature, from 15 March 2024, will check whether an employee’s SMSF bank account details match their SMSF records. Where there’s a mismatch, or where an employee has not listed their bank account details, the employer will receive an “invalid super fund bank details” error on the SBSCH payment instruction. According to the ATO, where this error occurs, the SBSCH cannot accept payments to an employee’s SMSF until the issue is resolved.

Once the discrepancy is resolved, employers will be able to update the employee’s SMSF bank details in SBSCH and submit payment instructions. To avoid delays for other employees, however, the ATO notes that SBSCH payment instructions can still be submitted for employees with valid super fund details ahead of resolution of any individual discrepancy.

This security feature is just one of many that the ATO has been rolling out recently to safeguard retirement savings in SMSFs. For example, the ATO now sends rollover alerts to members of SMSFs when a super fund uses the SMSF verification service to verify a fund’s details with the intention to roll super benefits into an SMSF. This can alert members of SMSFs to an unauthorised rollover so they can act to stop it.

Are you receiving personal services income?

Do you earn personal services income (PSI)? While most people may think that it only applies to builders or tradies, the truth is that may also apply to any instance where individuals work and earn income using their personal effort or skills.

PSI generally only applies to individuals who receive more than 50% of their ordinary or statutory income from a contract as a reward for their personal effort or skills. An example that most people would be familiar with is a sole trader tradesperson using their skills to earn income, either directly or through an interposed entity (a PSE). However, PSI can apply to any industry, trade or profession where individuals use their personal effort or skills. This includes so-called “white collar” professionals in IT, finance and medicine, in addition to the construction industry and related trades.

If you earn PSI during the income year, the deductions that can be claimed will be limited to the deductions that you could have claimed if you were an employee (rather than someone earning PSI) and the income earned was salary and wages. This means that, for example, you would be unable to deduct rent, mortgage, interest, rates or land tax in relation to a residence or part of a residence that you use to gain or produce your PSI. This rule applies to all PSI, regardless of whether it is earned as a sole trader or through a company, partnership or trust. To avoid that outcome, individuals/personal services entities (PSEs) can generally self-assess whether they conduct a personal services business (PSB) against four tests. If any one of the four tests is met during an income year, the PSI rules will not apply to limit the deductions available to the individual or PSE.

How much does negative gearing really cost?

Since the government’s announced changes to the Stage 3 tax cuts to give lower income earners more benefits, the chorus of voices advocating for changes to other aspects of the tax system, such as negative gearing, has grown steadily stronger. So how much does negative gearing actually cost the nation each year? The answer to this can be gleaned from the 2023–24 Tax Expenditures and Insights Statement (TEIS) which, somewhat confusingly, contains figures relating to the 2020–2021 financial year.

Put simply, a tax expenditure arises where the tax treatment of a class of taxpayer or an activity differs from the standard tax treatment or the tax benchmark. These expenditures include tax exemptions, some deductions, rebates and offsets, concessional or higher tax rates applying to a specific class of taxpayers, and deferrals of tax liability.

The TEIS contains detailed breakdown of various categories, including rental property deductions. The ATO estimates that some 2.4 million rental property investors claimed deductions for expenses associated with maintaining and financing property interests, including interest, capital works and other deductions. Collectively for the 2020–2021 financial year, $48.1 billion worth of rental deductions were claimed, resulting in a total tax reduction of $17.1 billion.

Only around half, or 1.1 million, of these rental property investors had a rental loss (negative gearing), which added up to total rental losses of $7.8 billion and provided a tax benefit of around $2.7 billion for the 2020–2021 income year. The other rental deductions category (eg property maintenance, council rates etc) accounted for more than 50% of the amount claimed, with the next largest deduction being interest expenses, coming in at 39%.

Further analysis of the $2.7 billion negative gearing tax benefit (or tax reduction) reveals that 80% went to individuals with above median income (those earning above $41,500) and 37% went to individuals in the top income decile (those earning over $128,000).

Although the TEIS doesn’t provide data on the status of those claiming rental deductions, this can be somewhat inferred by the ages of those claiming the deduction. According to the ATO, more than half of the total negative gearing tax reduction went to individuals between the ages of 40 and 59 years old. Presumably a majority of individuals in this cohort have families, and a good proportion may be either the sole income earner or the primary income earner in their family. This means the bulk of the commentary regarding negative gearing benefiting the rich may be on shaky ground.

However, these contentions aside, with the tax reduction on rental deductions expected to blow out to $28.2 billion by the 2026–2027 income year (from $17.1 billion in the 2020–2021 income year) and it being the second largest tax expenditure (second only to concessional taxation of employer super contributions), it’s likely the calls for changes to negative gearing will only grow stronger in time.

Estate planning considerations

Estate planning is a complex area which requires careful consideration of tax implications. Many issues that affect the distribution of assets to beneficiaries will need to be considered before an individual dies, to ensure undesirable tax consequences are avoided for both the individual and their potential beneficiaries. These include the timing on the transfer of the assets, potential gifts, transfer duties and the use of testamentary trusts.

Typically in terms of capital gains tax (CGT), the transfer of assets upon the death of an individual does not immediately trigger a CGT event; rather, a CGT “rollover” applies. This means that the beneficiaries of the estate do not have to pay CGT at the time of inheritance. Instead, CGT implications are deferred until the beneficiary decides to dispose of the asset.

Generally, beneficiaries inherit the deceased’s assets at their market value as of the date of death, which becomes the cost base for future CGT calculations when the asset is eventually sold. One important exemption to note is the main residence exemption, which can fully or partially shield the deceased’s primary home from CGT, provided certain conditions are met.

While gifts can be made as a part of estate planning before an individual dies, remember that if the gift is an asset (eg property, cryptoassets, shares, etc), CGT will still apply.

Another consideration in terms of the timing of transfers (in particular, of property) is the transfer duty involved at the state or territory level. For example, in New South Wales, if property is received from a deceased estate in accordance with the terms of a will, the beneficiary will pay transfer duty at a concessional rate of $100. However, if the transfer occurs before an individual’s death or not in accordance with a will, normal rates of transfer duty will apply. In that scenario, it would be better to wait to transfer the property. The rules for each state and territory differ, so it’s important to check before making decisions.

For individuals looking to exert more control after their own death, a testamentary trust may be one way of providing a flexible and tax-efficient way to manage and distribute the assets of the estate to beneficiaries. Generally, the terms and conditions of the testamentary trust are outlined in the will of the deceased, including the appointment of trustees and beneficiaries and how the trust assets are to be managed and distributed. The trust itself comes into existence upon the death of the person making the will, and it is separate from the deceased estate for legal and tax purposes.

However, establishing and managing testamentary trusts can involve significant costs, and there is a requirement to carefully draft the trust deed so it includes clear instructions for the establishment and operation of the testamentary trust, in order to avoid possible future disputes. There may also be ongoing legal, accounting and administrative expenses, making testamentary trusts the most complex route to head down.

The specific tax implications of estate planning can vary widely depending on individual circumstances and the state or territory in which an individual lived. This is a complex area where seeking professional advice tailored to the situation is crucia.

FBT electric vehicle home charging rate

With the rise in businesses purchasing electric vehicles (EVs) for the use of their employees, the ATO has finalised its guidelines setting out the methodology for calculating the cost of electricity for FBT purposes when an eligible EV is charged at an employee’s or an individual’s home. The rate of 4.20 cents per kilometre now applies (from 1 April 2022 and for later FBT years). To use this rate, employers will need to keep a record of the distance travelled by the car, and a valid logbook must be maintained if the operating cost method is used.

In terms of FBT, the employer now has the choice of either using the methodology outlined in the guidelines or determining the cost of the electricity by determining the actual cost incurred. Once made, this choice applies to each vehicle for the entire year, although the choice can be changed from one FBT year to another.

Tip: These ATO guidelines only apply to zero emission EVs and not to plug-in hybrid vehicles which have an internal combustion engine, or to electric motorcycles or electric scooters.

A transitional approach applies for the 2022–2023 and 2023–2024 FBT years, whereby if odometer records have not been maintained, a reasonable estimate may be used based on service records, logbooks or other available information. After the transitional period ends, employers will need to keep a record of the distance travelled by each car and a valid logbook must be maintained if the operating cost method is used.

Employers are reminded that even if an EV is eligible for an FBT exemption, the benefit must still be included in an employee’s reportable fringe benefits amount. Therefore, the taxable value must be determined, and where the employee home-charged the EV throughout the year and paid their electricity bills and provided the employer with the necessary declaration for electricity costs, the home charging electricity cost will form a part of the recipient contribution amount.

Superannuation: pension transfer balance cap 2024–2025

The transfer balance cap which limits the amount of capital that can be transferred into a tax-exempt retirement phase will not increase for the 2024–2025 income year, based on the release of December 2023 consumer price index (CPI) numbers from the Australian Bureau of Statistics (ABS). This means the figure will remain at $1.9 million for the 2023–2024 and 2024–2025 income years.

The transfer balance cap was originally introduced in 2017 as a way to limit the amount of capital that can be transferred into a tax-exempt retirement phase. This was implemented in response to criticism that the superannuation system was being used by the wealthy for estate planning purposes rather than for retirement, and that the soaring cost of tax concessions for fund members threatened the sustainability of the entire super system.

The transfer balance cap was originally set at $1.6 million, and indexation has applied to that cap from 1 July 2021 in line with the CPI in $100,000 increments. As a result, the current transfer balance cap for the 2023–2024 income year is $1.9 million. Based on the release of CPI index numbers from the ABS, this figure of $1.9 million will also apply for the 2024-25 income year, as the CPI figure for December 2023 was not large enough to trigger a $100,000 increase.

The transfer balance cap is a lifetime limit on the amount an individual can transfer into one or more retirement phase accounts. Individuals will have a personal transfer balance cap equal to the general transfer balance cap when a retirement phase income stream is commenced for the first time. For example, if an individual commences a retirement stream in the 2024–2025 income year, their personal transfer balance cap will be $1.9 million.

For individuals who started their retirement phase income stream in an earlier year with a lower general transfer balance cap, if the full amount of the personal transfer balance cap was never used, proportional indexing may apply. This means the individual’s personal transfer balance cap will be indexed based on the highest ever balance in the transfer balance account.

Where an individual exceeds their personal transfer balance cap, the excess is required to be commuted and excess transfer balance tax needs to be paid.

Australia’s love affair with SMSFs continues

Establishing a self managed superannuation fund (SMSF) offers a variety of benefits, so it is perhaps no surprise that in the latest data released by the ATO, the number of SMSFs in Australia continues to grow as more people seek to take advantage of the control and flexibility offered.

In the five years to 30 June 2023, the ATO estimates that there were on average 24,000 establishments and only 13,800 wind-ups of SMSFs, leading to an overall growth rate of 9%. As at 30 June 2023, there were 610,000 SMSFs holding roughly $876 billion in assets, which accounts for around 25% of all super assets.

It’s important to be aware of the challenges and considerations that can significantly impact this type of fund’s suitability for individual retirement planning. One of the primary concerns is the complexity and responsibilities involved in managing an SMSF: trustees must navigate a maze of financial, legal and tax regulations to ensure compliance with the ATO. This complexity is compounded by the potentially high costs associated with setting up and running an SMSF, including auditing, tax advice, legal advice and investment fees, which can erode investment returns, especially in funds with smaller balances.

The autonomy in investment decision-making, while a key advantage, also introduces significant investment risks – trustees’ lack of experience or knowledge can lead to poor investment choices. SMSFs also need to meet the sole purpose test, which means the fund’s investments are required to be for the sole purpose of providing retirement benefits to the fund’s members.

There is also a time commitment required to research investments, monitor fund performance and stay updated on regulatory changes. Taxpayers thinking about starting an SMSF should consult qualified advisers for further advice.