July 2018
BARNABY AND TAX
We are all aware of the political and domestic travails of former deputy P.M. Barnaby Joyce.
Many of us watched the Channel 7 “Sunday Night” interview with Barnaby and his partner Vikki Campion for which they were paid $150,000.
We will confine our comments to the taxation issues. Prior to this, some commentators gave the parents’ commitment to put the money into a trust fund for their son Sebastian short shrift. They said the reason was to avoid tax.
These ill-informed comments arise from a misunderstanding of personal exertion income, constructive receipt, taxation of minors and trust structures.
The Taxation of Trusts
In all likelihood, the $150,000 income will be assessed equally ($75k each).
The recipients have done something. i.e. given an interview to earn the payment. An interview was planned, organised and a payment negotiated.
In the event payment is made to a trust fund account for Sebastian they cannot argue that they as individuals have not received the money. Under constructive receipt, a taxpayer is taken to have received an amount as soon as it is applied or dealt with in any way on the taxpayer’s behalf (S6-5(4)).
Without knowing their exact tax circumstances, we are going to assume an average tax rate of 40% for the couple which means $60,000 will be payable in tax.
In the event a trust is set up for their son, the tax rates on income are punitive under Division 6 AA “unearned income of minors” effectively this would be at 45%.
Insurance or friendly society bonds (30% tax) may be a solution if certain conditions are met. Alternatively, the money could be invested in Vikki’s name if she is not in the workforce to take advantage of lower marginal tax rates.
The parents as trustees will have a fiduciary duty and cannot intermingle trust money with their own.
So, the comments about the use of a trust to avoid tax in this instance would appear to be ill informed. However discretionary trusts do have flexibility in allowing the distribution of income in the most tax effective manner among beneficiaries including family members, and beneficiary companies (30%).
As far as minor beneficiaries are concerned two main types of trusts are worth discussing. If properly established and dealt with income on these is taxed at adult marginal rates and not the division 6AA 45% rate mentioned above.
Child Maintenance Trusts
While child maintenance payments are not tax deductible, the establishment of a child maintenance trust will result in the payment of maintenance out of pre-tax income. If properly established and administered, trust income will be taxed at normal individual rates and should avoid the operation of Div 6AA penalty rates of tax.
It will be necessary to settle the trust with investment capital, with earnings on this capital being the relevant trust income.
Testamentary Trusts
These are established under a Will, but the trust does not come into effect until after the death of the person making the Will.
A trust describes a structure whereby assets are managed by one person (or persons) i.e. a Trustee, for the benefit of others (the beneficiary or beneficiaries)
Here the Trustee has the discretion to distribute capital and income between a group of beneficiaries nominated in your Will.
There is no standard format for a Testamentary Trust and they are adapted to suit the needs of a particular person/family.
Taxable income generated by the trust can be tax effectively allocated to the beneficiaries of the Trust. Under the Trust, the Trustee has the power to distribute the Trust income to any of the persons nominated as potential beneficiaries under the Trust. Therefore, for example if the spouse, partner or dependant of an intended beneficiary is not working or receiving an income, the Trust may allocate income to such a person (provided they are nominated as a potential beneficiary under the Trust). A child (minor under the age of 18 years) is currently entitled to receive a tax free annual income from a Testamentary Trust of $20,542 (this is tax free only if the child has no other income).
Asset protection
As well as tax benefits there are asset protection advantages.
The Trustee may distribute capital and income to any nominated beneficiary at any time and in any proportion. A Testamentary Trust gives the beneficiaries both flexibility and control over when and how they take their inheritance.
High Risk Beneficiaries – if an intended beneficiary is in a high-risk profession or business where negligence claims are likely, a Testamentary Trust will protect the inheritance.
Creditor protection – to protect the bequest from creditors of a beneficiary. If an intended beneficiary had a number of creditors and/or is likely to be at risk of being made bankrupt, the Will maker can protect the bequest of monies under a Will to them, so that the inheritance will not be at risk of being required to be given to the Trustee in bankruptcy or creditors.
Divorce/breakdown in relationship of a beneficiary – if an intended beneficiary is in a “shaky” relationship (such that the marriage or de facto relationship will dissolve in time), then if the assets are held in a Testamentary Trust, they are not classed as assets of any individual and therefore the Family Court cannot make an order requiring the distribution of those funds. In other words, the spouse or partner of an intended beneficiary will not reap the benefits of an inheritance.
Vulnerable Beneficiaries – if one of the intended beneficiaries is either a spendthrift or has gambling/drug addictions, you can provide for such a beneficiary through a Trust ensuring that his/her share of your estate is kept intact.
Will challenges – if an intended beneficiary receives monies in your estate via a Trust then, as it is not in that beneficiary’s estate, it cannot be subject to a Will challenge when they die.
In the May 2018, Federal Budget a significant integrity measure was introduced for testamentary trusts and we quote directly from the Budget papers:
“From 1 July 2019, the concessional tax rates available for minors receiving income from testamentary trusts will be limited to income derived from assets that are transferred from the deceased estate or the proceeds of the disposal or investment of those assets.’’
Currently, income received by minors from testamentary trusts is taxed at normal adult rates rather than the higher tax rates that generally apply to minors. However, some taxpayers can inappropriately obtain the benefit of this lower tax rate by injecting assets unrelated to the deceased estate into the testamentary trust. This measure will clarify that minors will be taxed at adult marginal tax rates only in respect of income a testamentary trust generates from assets of the deceased estate (or the proceeds of the disposal or investment of these assets).
SBEs AND THE CASH ECONOMY
A significant budget which change could affect small businesses that use small contractors is aimed at cutting down the cash economy. The proposed provision will put the onus on businesses to make sure that all subcontractors provide an ABN. If this becomes law, tax deductions for contractors’ payments may be denied unless the business has withheld PAYG from the payment when a contractor fails to provide an ABN.
Also, deductions will be denied for wages if businesses do not withhold and remit PAYG when there has been a requirement to do so. This added burden on a business over and above the existing penalties for not properly accounting for PAYG, will effectively use good businesses to police the cash in hand contractors.
TAX CHANGES EFFECTIVE 1.7.2018
GST
Purchases of new residential properties or new subdivisions will be required to remit the GST directly to the ATO on settlement from 01/07/2018.
This is an integrity measure as there had been concern some developers were failing to remit GST on the sale after claiming GST credits on the building costs.
GST On Low Value Imported Goods
The Goods and Services Tax (GST) has been extended to low value imports of physical goods imported by consumers from 1 July 2018.
Businesses that meet the A$75,000 registration threshold need to have taken action to make changes to their business systems to ensure that they are able to comply.
The existing processes to collect GST on imports above $1,000 at the border are unchanged.
In summary, the reforms:
- make supplies of goods subject to GST that are valued at A$1,000 or less at the time of supply connected with Australia if the goods are purchased by consumers and are brought into Australia with the assistance of the supplier
- treat the operator of an electronic distribution platform (EDP) as the supplier of low value goods if the goods are purchased through the platform by consumers and brought into Australia with the assistance of either the supplier or the operator
- treat re-deliverers as the suppliers of low value goods if the goods are delivered outside of Australia as part of the supply, and the re-deliverer assists with their delivery into Australia as part of a shopping or mailbox service that it provides under an arrangement with the consumer
- allow non-resident suppliers of low value goods that are connected with Australia to elect to access the simplified registration and reporting system
- prevent double taxation.
Reforming the R&D Tax Incentive
From 1 July 2018, the Government will:
· Introduce a $4 million annual cap on cash refunds for R&D claimants with aggregated annual turnover less than $20 million. Amounts that are in excess of the cap will become a non-refundable tax offset and can be carried forward into future income years;
· Exclude R&D tax offsets for clinical trials from the $4 million cap on cash refunds, recognising the critical role of R&D expenditure on clinical trials in developing life changing drugs and devices; and
· Amend the refundable R&D tax offset so it is a premium of 13.5 percentage points above the claimant’s company tax rate for that year.
Immediate $20,000 write-off of depreciable assets
The Government has extended the immediate deductibility of assets costing less than $20,000 for small business entities (those with an aggregated annual turnover of less than $10 million) to 30 June 2019.
Incentive for over-65s to downsize by permitting extra super contributions
From 1.7.2018, Australians aged 65 years or over will be able to contribute the proceeds of a house sale (up to $300,000 for an individual, or $600,000 for a couple) without having to satisfy a work test, and without having to worry about the annual $100,000 non-concessional contributions cap. In addition, individuals with a total superannuation balance of more than $1.6 million will still be able to make a superannuation contribution under this downsizing policy.
Introduction of the First Home Super Saver Scheme
From 1.7.2017, eligible individuals can make voluntary superannuation contributions of up to $15,000 a year, and up to $30,000 in total, which can be saved for the purposes of buying a first home. The contributions are treated as concessional (before-tax) contributions and taxed at 15%. Withdrawals (which include earnings) are permitted from 1 July 2018 and will be taxed at the person’s marginal tax rate less a 30% tax offset, alternatively, an individual can make non-concessional (after-tax) contributions, and such contributions are not taxed when withdrawn from the super fund.
ATO to administer compassionate early release of super
The ATO will take responsibility from the Department of Human Services (DHS) for administering early release of superannuation on compassionate grounds from 1 July 2018.
Super fund members will continue to apply for early release of superannuation on compassionate grounds via the DHS portal until 30 June 2018.
From 1 July individuals must apply through the ATO via their website. In early July the ATO will inform when the ATO application portal is live so Super Funds can direct members to the new application portal.
From 1 July, when the ATO approves an application they’ll send Super Funds an electronic copy of the approval notice via the Bulk Data Exchange (BDE) service. Further information will be released throughout July.
SUPERANNUATION
If the contributions caps are indexed, why aren’t they increasing for the 2018/2019 year?
Several clients have asked us this question…
The annual $25,000 concessional contributions cap is indexed, in $2,500 increments, rounded down to the nearest multiple of $2,500. Indexation is in line with the annual increase in full-time average weekly ordinary time earnings (AWOTE).
The annual $100,000 non-concessional contributions cap is indexed in $10,000 increments, in line with the indexation of the concessional (before-tax) contributions cap.
Since wages growth has been minimal, and wages would need to grow 10% for the concessional contributions cap to increase to $27,500, as confirmed by the ATO Australians are still subject to a $25,000 concessional cap, and hence still subject to the $100,000 non-concessional cap, for the 2018/2019 financial year.
Wages growth has been static in Australia, and indexation for the contributions is based on the previous calendar year’s movements in AWOTE (June 2017, and December 2017 movements). So, AWOTE has only increased 2.36%, which means if this level of wages growth continues, we will have a $25,000 concessional cap for at least 3 more years. We note the recent 3.5% increase in the minimum weekly wage.
SUPER UPDATE
A step-by step guide is now available to help small businesses set up Manage ABN Connections and use their myGov login to access the Small Business Superannuation Clearing House (SBSCH) in the Business Portal.
SBSCH troubleshooting
This page helps users of the Small Business Superannuation Clearing House (SBSCH) with issues they may face.
PROPOSED SUPERANNUATION GUARANTEE AMNESTY
The deductibility and removal of the administration component proposed in the Amnesty depend on the passage of legislation. Until this occurs, the current law applies.
The Amnesty is a one-off opportunity for employers to self-correct past super guarantee(SG) non-compliance without penalty.
Subject to the passage of legislation, the Amnesty will be available from 24 May 2018 to 23 May 2019.
Employers who voluntarily disclose previously undeclared SG shortfalls during the Amnesty and before the commencement of an audit of their SG will:
- not be liable for the administration component and penalties that may otherwise apply to late SG payments, and
- be able to claim a deduction for catch-up payments made in the 12-month period.
Employers will still be required to pay all employee entitlements. This includes the unpaid SG amounts owed to employees and the nominal interest, as well as any associated general interest charge (GIC).
The Amnesty applies to previously undeclared SG shortfalls for any period from 1 July 1992 up to 31 March 2018.
The Amnesty does not apply to the period starting on 1 April 2018 or subsequent periods.
Employers who are not up-to-date with their SG payment obligations to their employees and don’t come forward during the Amnesty may face higher penalties in the future.
Accessing the Amnesty is a simple process. If you can pay the full SG shortfall amount directly to your employees’ super fund or (funds), then complete a payment form and submit it to the ATO electronically through the business portal.
If you are unable to pay the full SG shortfall amount directly to your employees’ super fund or (funds), then complete and lodge a payment form and the ATO will contact you to arrange a payment plan. If you chose to, you can start payment before the ATO contacts you. This will reduce the GIC you would otherwise have to pay.
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.