October 2018
PENSION AGE
On 5.9.2018, the Morrison Government announced that the Pension Age will remain at 67 and will not be raised to 70.
The increase to age 67 was legislated by the previous Labor Government.
This decision builds on recent Government measures to support older Australians including the decision to retain the energy supplement.
AUSTRALIA’S VERSION OF A DEATH TAX
On occasion we are asked If Australia has an Estate Tax.
This question often comes from “new” Australians as many O.E.C.D. nations have these taxes.
In the United States there is a federal estate tax, with some states imposing a further death tax. In Australia there is a potential death tax of 15 per cent (or 17 per cent when it includes the Medicare levy) that can apply to superannuation death benefits.
While not a “death duty” as such, the effect is the same. This tax can be minimised or eliminated with some careful planning.
This tax only applies to any taxable portion of your superannuation fund that is given to a non-dependant; a spouse is always a dependant whether they have a separate income or not.
It does not apply to the tax-free portion of your super, so those over 60 and still eligible to contribute to super could consider adopting a withdrawal and re-contribution strategy. This involves withdrawing some of your super tax-free, then contributing it back as a non-concessional contribution.
There is no 15% entry tax on the re-contribution, this converts the amount re-contributed into a tax-free component. Always consider the contribution limits as there are penalties for exceeding the caps.
The next thing to understand is that you cannot elect to withdraw just from the taxable component. If your balance is partly taxable and partly non-taxable, the components of the withdrawal will be in the same ratio as your existing balance.
This tax of up to 17% is deducted by your superannuation fund before paying your beneficiary the death benefit. The tax paid is recorded on a PAYG payment summary and when your beneficiary lodges their personal tax return, the assessable amount received and PAYG withheld must be included.
If you are considering a binding nomination as to who gets your super benefits, it is essential to clearly understand the implications before setting it up. Once a valid binding nomination is in place, the trustee may lose the discretion to distribute the proceeds of the deceased’s superannuation fund in the most tax-effective manner.
One way to avoid the death tax is to give a trusted person an enduring power of attorney, with instructions to withdraw your superannuation in full if it appears that death is imminent. There will be no tax on the withdrawal, and the money could then be distributed in accordance with the terms of your will after your death.
MIDDLE INCOME AUSTRALIANS FACE A TAX HIT OVER NEXT DECADE
The federal government may need to consider offering low- and middle-income earners another tax cut or workers will have to fork out thousands of dollars extra in tax by 2027.
The Parliamentary Budget Office has found that the 6 million Australians earning between $23,000 and $64,000 a year will be pushed into higher tax brackets at five times the rate of the 2.6 million earning more than $100,000 by 2027.
Even after the Coalition’s decade long $144 billion tax cut plan was passed by Parliament in June, an adult full-time median salary earner currently on $66,000 a year would be handing over up to $1000 a year extra to the Tax Office by 2026.
The independent parliamentary body found:
“the second and third quintiles are projected to experience the largest increases in average tax rates over this period,” rising 5 percentage points, compared to only 1 percentage point for the highest earners or fifth quintile.
CRACKING DOWN ON THE BLACK ECONOMY
On 18.9.2018, the Federal Government outlined its commitments to tackle the black economy and further protect the integrity of the tax system, with the passage of tough new laws that ban software allowing businesses to understate their sales and income.
Electronic sales suppression tools allow businesses to falsify electronic record keeping systems for the deliberate purpose of reducing their tax liability and dodging their tax obligations.
The new laws introduce penalties for the production, supply, possession or use of this software which understates sales and income. The penalty for the production of the software is in excess of $1 million.
The Treasury Laws Amendment (Black Economy Taskforce No.1) Bill 2018 also extends the Taxable Payments Reporting System to the courier and cleaning industries, delivering on the Coalition Government’s response to the finding by the Black Economy Taskforce that contractors in these industries are at high risk of not disclosing income. This means from 1 July 2018, businesses that operate in the cleaning and courier industries will need to annually report to the Australian Taxation Office (ATO) payments they make to contractors for cleaning and courier services.
The Taxable Payments Reporting System will be further expanded to three new industries next year. From 1 July 2019, businesses will also be required to report payments made to contractors providing services in the road freight, information technology and security industries.
The Government is taking a number of decisive actions to tackle the black economy, including:
- boosting the ATO’s capabilities to combat the black economy;
- creating a new multi-agency Black Economy Standing Taskforce;
- new measures to tackle illicit tobacco;
- stronger integrity for Commonwealth procurement processes; and
- the introduction of a $10,000 economy-wide cash payment limit.
$20,000 INSTANT ASSET WRITE- OFF EXTENSION PASSES PARLIAMENT
On 12.9.2018, the Federal Government announced with the Senate passing legislation to extend the $20,000 instant asset write-off for small business.
The legislation delivers on the Coalition Government’s 2018-19 Budget announcement to extend the $20,000 write-off for a further 12 months to 30 June 2019.
Across Australia, there are around 3.3 million small businesses with an annual turnover of less than $10 million that are eligible to access the write-off.
As a result of the successful passage of this legislation, these businesses will now have additional opportunities to reinvest in their business and replace or upgrade their assets.
The extension of this initiative is part of Federal Government’s package for small and medium business, including:
- cutting the company tax rate for businesses with an annual turnover less of than $50 million from 30 per cent to 25 per cent, with businesses already benefiting from a 27.5 per cent rate;
- abolishing $5.9 billion worth of red tape and introducing a simplified BAS (business activity statement);
- signing free trade agreements with China, Japan and South Korea as well as the Trans-Pacific Partnership.
WORKING FROM HOME
A high number of mistakes, errors and questionable claims has prompted the Australian Taxation Office to increase attention, scrutiny and education for home office expenses this tax time.
According to Assistant Commissioner Kath Anderson:
With the rising trend of employees working from home, the ATO understands there are extra costs involved.
They are seeing increasing evidence that many taxpayers don’t know what they can and cannot claim. While these extra costs are usually deductible some taxpayers are either over-claiming or claiming some of their personal costs.
When claiming working from home expenses, taxpayers must keep supporting records such as receipts, diary entries, and itemised phone bills.
One of the biggest issues they are seeing is people claiming the entire amount of expenses like their internet or mobile phone, not just the extra bit related to work.
If you are planning on claiming deductions, make sure you follow the three golden rules:
- You must have spent the money yourself and not have been reimbursed;
- it must be directly related to earning your income, not a personal expense;
- and you must have a record to prove it.
The ATO expects to disallow a lot of claims where the taxpayer hasn’t kept records to prove that they legitimately incurred the expense and that the expense was related to their work.
When claiming working from home expenses you should remember that the ATO may also contact your employer to confirm your claim.
Case studies
Over-claiming mobile phone and internet expenses
An architect claimed 80% of the cost of his private mobile phone and home internet as a work-related expense.
When asked, the taxpayer provided his non-itemised phone and internet bills for the year as evidence for his claim. However, he had not maintained a diary or other record demonstrating how he calculated that 80% of his costs related to his work. His employer was also unable to verify the extent to which he was required to use his private mobile and internet connection for work.
Although the taxpayer had not maintained or provided appropriate records, the ATO did accept that he was required to incur these expenses and allowed a claim of $50 – the maximum phone/internet claim that can be allowed without supporting evidence.
Incorrectly apportioning expenses
A teacher who was promoted to school principal in the income year claimed home office expenses for electricity and phone of $2,400.
When the ATO contacted the tax agent, the agent provided a letter from the employer to confirm that the taxpayer was required to work from home out of school hours. However, neither the taxpayer nor their agent could demonstrate how they calculated the claim.
The taxpayer submitted a voluntary disclosure, explaining that they had made an incorrect claim and lacked records to substantiate it, and should have instead used the fixed rate of 45 cents per hour. Based on the hours the taxpayer had worked at home over the school year, the claim was reduced by 70%.
A penalty was applied for not taking reasonable care when preparing the return. However, the penalty was reduced because the taxpayer provided the voluntary disclosure before an audit commenced.
Incorrectly claiming occupancy expenses
An advertising manager claimed a deduction for her rent and electricity costs. When asked why she made these claims, the taxpayer explained that she was required to work at home outside regular hours because a lot of business was generated from overseas clients and provided the calculations for her claims.
However, the area used by the taxpayer did not have the character of a ‘place of business,’ (e.g. a hairdresser’s home salon, caterer’s home kitchen or a photographer’s home studio). This meant that while her claim for electricity costs (running expenses) was allowed, her claim for rent (occupancy expense) was disallowed. A penalty was also applied for failing to take reasonable care.
LOWER COMPANY TAX RATE ELIGIBILITY CHANGES NOW LAW
From the 2017–18 income year, the lower 27.5% company tax rate applies to companies that are base rate entities.
To be considered a base rate entity, a company must have both:
- a turnover less than $25 million in 2017–18 ($50 million from 2018–19);
- 80% or less of their assessable income as base rate entity passive income; examples include interest, dividends or rent (this replaces the ‘carrying on a business’ test).
If a company is not a base rate entity, then the general company tax rate of 30% will apply.
If you have already lodged a 2018 company tax return using the incorrect rate you will need to make an amendment.
Note: Treasury Laws Amendment (Enterprise Tax Plan No. 2) Bill 2017, which sought to gradually extend the lower company tax rate to all companies, is not proceeding.
Franking credits
When working out the rate to use for 2017–18 franking distributions, you should use the company’s previous year’s turnover, assessable income and base rate entity passive income.
If your company issued distribution statements using the incorrect rate, you should amend your annual dividend reports and tell your shareholders of the correct dividend and franking credit amounts as soon as possible. This can be done by letter, email or by issuing an amended distribution statement with the correct amounts.
DATA MATCHING
Rental Bond 20 September 1985 to 2019-20 financial years
The ATO will collect data under notice to identify individuals that have income tax reporting obligations for income producing properties or have a Capital Gains Tax (CGT) event arising from the sale of real property for the period 20 September 1985 to the 2019-20 financial year.
Department of Human Services – specified benefits and entitlements 2017-18 to 2019-20 financial years
The ATO will acquire details of individuals in receipt of Paid parental leave payments and Medicare entitlement statements from the Department of Human Services (Centrelink and Medicare) for the 2017-18, 2018-19 and 2019-20 financial years.
Sharing Economy Accommodation 2016-17 to 2019-20 financial years
The ATO will collect data under notice to identify individuals that have, or may be, engaged in providing accommodation services through an online platform. The ATO will also acquire details of all payments made by the platform/s to accommodation providers including payments made by international entities. The data will be acquired for the 2016-17 to 2019-20 financial years.
PAYG withholding variation for performing artists
The ATO has issued a legislative instrument which continues the withholding arrangements for performing artists that are paid for performing in a promotional activity by varying Pay As You Go (PAYG) withholding to a flat rate of 20 per cent.
FUEL TAX CREDIT RATES INCREASE
Fuel tax credit rates increased on 1 August 2018 in line with fuel excise indexation.
Fuel tax credit rates change regularly. If you claim fuel tax credits for fuel used in your business, make sure you use the new rates to calculate your claim on your next business activity statement (BAS).
Supporting your fuel tax credit claims
Keeping accurate records of your business transactions can make it easier for you to claim correctly. If you claim less than $10,000 in fuel tax credits each year, you can use simplified methods to keep records and calculate your claims.
Please note: Our Newsletters are not the place for the giving or receiving of financial advice concerning investment decisions or tax or legal advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Any ideas and strategies should never be used without first assessing your own personal needs and financial situation, or without consulting or engaging with us as your professional advisors.