Excess Non-Concessional Superannuation Contributions Gets a Fairer Tax Treatment

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A legislation to amend the treatment of surplus non-concessional superannuation contributions has recently been passed by the Government. Under the new measures, the double taxation on after tax contributions put into superannuation over the maximum limit (presently at $180,000 annually) has been removed. This affects any surplus non-concessional contributions made beginning 1 July 2013.

The old system required that non-concessional contributions made in excess of the cap be taxed at the highest marginal tax rate. This had caused small, unintended violations leading in unevenly high tax assessments and people essentially paying taxes two times.

Under the new system, new members who violate the caps get an option to have the surplus non-concessional contribution and a related earnings amount (computed by the ATO) withdrawn from their superannuation and the payment returned to them. The related earnings will be added in the person’s personal assessable income and general interest charges will also apply. If the person doesn’t take up the option to withdraw the excess, then the highest marginal tax rate will be applied to the amount.

There will be some charge if the contribution caps are topped, but members are now given an option. There will no longer be an automatic penalty applied to minor violations, thus giving more peace of mind to individuals using contribution plans to make the most out of their retirement benefits.

If you need any help in finalising your year to date superannuation contributions, please talk to one of our team members at PJS Accountants.

Important Things to Know About SMSF Property Issues

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Real residential property makes up 3.5% of the value of all assets maintained in SMSF’s according to the latest SMSF figures from the Australian Taxation Office (ATO). This has been the level of investment since 2009, with a high proportion of properties valued between $200,000 and $1 million. Commercial property represents about 12% of SMSF investment. However, there has been a change in the number of investors, with an average 1,200 new investors utilising their SMSFs to buy residential property annually. And, the limited recourse borrowing arrangements have soared by 1758% between June 2009 and June 2014.

However, many SMSFs face some very massive risks if the borrowing arrangements and property purchases are not set up properly. If there is a breach in compliance requirements, your SMSF is in danger of being charged with non-compliance and may lose concessional tax status. In addition, the trustee may also be penalised under ATO’s new penalty authority that became effective on 1 July 2014.

Is Buying Property with your SMSF Right for you?

Liquidity, diversification and cash flow. Under the Superannuation Industry (Supervision) Act (SIS Act), trustees are required to watch out for these three elements when investing. For SMSF investment in real property, there may be issues if trustees place the fund’s entire “investment eggs” in one basket. If this is the case, the return will be inadequate to meet the fund’s commitments.

When in pension phase the fund has to meet the minimum requirements for pension drawdown. There is an issue of whether the rental yield can meet the fund’s current expenses including pension payments. Money is needed to raise the minimum pension drawdown through the years: 4% at age 64 and 6% at age 75. The number is up 50% in drawdown commitments. Will rent jump by 50% to keep up with payments.

However, what happens if a member prefers a lump sum over a pension? Where can the fund get the money? What happens upon the death of a member? How would the fund pay out the benefits? It would be a challenge as selling one part of the investment property is not permitted.

Can My Investment Property Be Purchased by my SMSF?

A typical question that is frequently asked is, can I use my SMSF to purchase a residential rental home, holiday home, or house from me or a relative of mine? The answer is you can’t, except if the property is a business real property, or a property utilised fully and solely for business. And, more often than not, a residential property will fail to meet the criteria to be a business real property. Don’t forget that the penalty for violating the related property investment law is imprisonment of a maximum of 12 months.

Upgrading a Property

If your SMSF used loaned money to acquire property, it is barred from using any portion of the loan to upgrade that property. In addition, an SMSF is not allowed to borrow money to fix a property that it owns.

But an SMSF can utilise its own funds to upgrade or fix a property bought with borrowings, provided the upgrades do not turn the property into a different property. For instance, a residential property cannot be converted into a children’s centre. Or, develop a vacant land into an investment property.

Consider a SMSF that takes out a loan to purchase a residential home on a big block of land ready for development. It is not legal for the fund to subdivide the lot and construct a new house as the borrowing policies do not allow a modification in the character of a property purchased using borrowed money pending the termination of the loan.

Committing Mistakes on Important Matters

SMSF Trustees often commit simple mistakes as a result of rushing the moment or just bad structuring.

Here’s the most noticeable example: putting the names of the members when a property is bought by the fund. There are times people get excited and proceed with the transaction without carefully considering the details. Or, when a related entity is involved, like a unit trust, but the unit trust was not created prior to the acquisition of the asset or the wrong name is typed into the contract or filed with the titles office.

Are you considering investing in a self-managed super fund (SMSF)? There are strict laws that govern the management of SMSF. PJS Accountants can help you determine if it is the right investment option for you. For enquiries about SMSF and how we can help you start a good investment strategy, contact PJS Accountants.

Having a Vision for your Business

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It is essential to have a vision for your business. Your team can use this as a guide so they know what they are a part of and what direction they are going. The team’s goals and duties/ responsibilities will align to this so that all members are going in the same direction with a well-defined, cohesive objective. Business culture can also be shaped over time to make sure it is helping you achieve the vision.

Based on our experience, business owners from small to big may or may not have a vision. Those with vision, range from expressing it in a babble of sentences, to a few expressing something that is clear and intelligible.

If a clear vision is present, those businesses that can also draft a written document that is updated, easily available and supported within the organisation are certainly few.

Don’t worry if the vision for your business is not clear; you are one in many businesses out there. However, there is no better time to start than now. But remember that you may not be able to sit down for an hour and come with a perfectly polished vision. The process will take time and several versions before you can come up with something that you can take pride in.

What’s the starting point? You have to get into a mindset of thinking strategically to establish a business vision. Pick a time frame to work with, maybe 5 or 10 years from now, or maybe a time period that corresponds with a scheduled event, and consider how you want your business to be described when that time comes.

Here a few perspectives you can use to describe your future business:

  • Yours as the owner
  • Your customers
  • Your team members

It will benefit you to ask questions frequently during this process. Why? It’s because it helps you reach the heart of what your purpose really is and see beneath the window dressing of what sounds pleasant.

PJS Accountants offers expertise in supporting business owners in attaining clarity for their vision and in creating a plan to shift to it. If you need help in obtaining clarity of your business’ future, contact PJS Accountants.

A Pair of Australian Taxpayers Evaluated Against Each Other

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Case study: You could be an investment property owner too for $35 per week

Becoming an owner of an investment property can be within easy reach, especially when prospective investors claim all tax deductions they are entitled to.

To find out how claiming all these deductions can help an investor acquire a property, let us study the case of two ordinary Australian taxpayers – Bill, who thinks he cannot afford to buy at this time, and Kate, who is already an owner of an investment property.

The Deductions you can Claim.

Income generating property owners are allowed under Australian Tax Office rules to claim several deductions for costs that are related to owning and maintaining a property including repairs and maintenance, interest, rates and property management fees.

A non-cash deduction for the wear and tear of the property that can occur over time can also be claimed by investors. This type of deduction is referred to as property depreciation.

The Situation of Bill and Kate.

Bill wants to own an investment property but he thinks that he cannot afford to purchase one at this time

The amount of taxes he pays out of his $85,000 salary is $20,707. This is after deducting basic expenses like donations, clothing allowance and general accounting fees.

Kate has the same salary as Bill. However, she was able to buy a $600,000, three –bedroom rental property over a year ago after saving for a deposit. She rents her property for $545 weekly, earning her a rental income of $28,340 a year. Taxes are also paid for the rental, so Kate’s earns a total income of $113,340.

Kate claims the same basic expenditures as Bill, plus she is also entitled to deductions for costs relating to owning a rental, including repairs and maintenance, rates, insurance, interest and management fees. The expenditures for a standard three bedroom property would reach about $39,067. She also consulted with a tax professional and got a depreciation schedule stating that she is entitled to claim another $14,200 representing depreciation deductions in the initial financial year.

The table below shows a comparison between Bill and Kate relating to their before and after scenarios:

Bill&Kate

To calculate Kate’s depreciation deductions, the diminishing value method and figures from the first financial year of ownership were used. Note that this is just a general example. The scenario is different for each person. It is recommended that you seek advice from a professional.

As shown above, Bill’s income after taxes is $63,293. Though Kate earns the same wage and her financial status is the same as Bill’s, her income generating rental allows her to claim the amount of $53,267 in deductible expenses including depreciation. As a result, Kate’s taxable income is reduced to only $59,073, letting her pay an income tax of only $11,814.

By claiming all deductions she is entitled to, Kate wage after taxes is just a difference of $1,834 annually. Thus, it is costing her $35 weekly to own a rental after tax.

Prospective investment property owners should seek professional guidance from Specialist Quantity Surveyor to find out what depreciation deductions they can claim when they have bought a property.

The information contained in this article is not meant to be offer financial or taxation advice. Investors should meet with a financial expert and an accountant to obtain a full before and after scenario of their own tax position based on their own situation.

If you need tax advice or guidance, contact PJS Accountants. We offer expertise in managing your tax affairs with a complete range of compliance, corporate and individual tax services. Our clients include large companies, SMEs, family businesses and individuals. The ever-changing tax laws and requirements could put businesses and individuals at risk. Putting nothing to chance! Talk to one of our team members now!

A Guide to Claiming your Rental Property Taxes

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Do you know that you can claim certain tax deductions as an owner of a rental property? It is important to claim as many deductions as you can because your rental income, and your overall financial well-being, will greatly benefit from the tax dollars you save from your investment property.

But before filing that claim, know some essential rules and criteria relating to property taxes.

Firstly, owners can only claim expenses associated with their rental property for the period the property was leased or available for lease. An example of this expense is advertising costs. Secondly, owners can only claim tax deductions on the part of the property that is being rented. In this case, you have to come up with a reasonable basis to divide up the claim. But as a general rule, a floor-area basis is used for apportionment.

Common Rental property Expenses you Can Claim

Interest Expenses

In negative gearing property investment, the largest tax deduction is interest expenses. You can claim tax deductions on the interest you pay on the loan you used to purchase the property, including the money you paid to acquire the property, make repairs and renovations, or spend on tenant-related issues.

These are tax deductible only if the loan was used for income generating purposes. If it was used for both private and income generating purposes, you need to apportion the interest to come up with the tax deductible amount.

Tenancy Costs

These include the monies paid to advertise for tenants, to property managers for procuring tenants on the landlord’s behalf, and any cost related to preparing or modifying the lease agreement. Also tax deductible are landlord insurance premiums, legal costs incurred for evicting a tenant, and travelling expenses related to inspecting the rental property or collecting rent.

Repairs and Maintenance

Landlords can claim a tax deduction on expenses they incurred from restoring an area or feature in the property to its original condition as a result of tenant wear and tear. However, initial repairs, or pre-existing damages in the property, are not tax deductible.

Depreciating Assets

These include carpets, dishwashers, clothes dryers and other stand-alone functional units that are not normally attached to the property that decline in value over time.

Capital Works

These are extensions, structural upgrades or changes and other works done on elements that are attached to and become part of the land and property. Capital works are typically not tax deductible upfront. Generally, construction expenses on capital works can be claimed at 2.5% per annum on a straight-line basis over 40 years.

There are timing conditions attached to construction works deduction. The construction expenses on the property itself can only be claimed if work commenced on or after July 18, 1985. The cost of structural upgrades, extensions and modifications can only be claimed if work began on or after February 27, 1992.

Other Holding Costs

Body corporate fees, cleaning costs, gardening costs, building and contents insurance premiums, rates, security monitoring costs, pest control, property manager’s fees and commissions and other expenses related to owning the property are considered holding costs and are typically deductible upfront.

Other Tax Deductible Property Expenses

These can include:

  • bank charges
  • borrowing expenses
  • council rates
  • land tax
  • phone
  • stationery and postage
  • water charges

Expenses that are not Tax Deductible

Owners cannot claim tax deductions on the following expenses:

  • Costs related to the personal use of the rental property
  • Utility bills such as water or electricity paid by the tenant
  • Borrowing costs associated with borrowing against the equity in the investment property for private use
  • Costs associated with the acquisition or sale of the investment property, including conveyancing and advertising fees and stamp duty

The information provided above is general and is merely a guide.  Conduct further research and seek professional advice from PJS Accountants who will help you make an informed decision for your investment property.

SME’s: Business Can Avoid Unnecessary Risks

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Small businesses are in for some great incentives under the 2015 Federal Budget presented by Treasurer Joe Hockey in May.

Businesses having a yearly turnover of below $2 million are now eligible for tax deductions on purchases below $20,000. This is a great confidence boost for small businesses and the retail sectors.

Business owners can add assets worth more than $20,000 into a depreciation pool and immediately claim the deduction if the value drops to $20,000 or below prior to 30 June 2017 when this program terminates.

It’s an incentive that can be enjoyed long term by some, but those thinking of capitalising on the new budget policy should be cautious.

Organisations must be calculated and deliberate when deciding whether their business would benefit from going after it.

Mulling over Purchases

First, determine whether you are in a stable financial position before making additional expenditures.

Australian small enterprises are still experiencing difficulty and many of them are concerned about cash flows. The new incentives are tempting, but businesses should exercise prudence in their purchases and take into account the effect it may have on their business as a whole.

If your primary reason for making purchases under the new measure is because of the tax deduction, you could be opening yourself up to needless risks.

Making new purchases means you are taking money out of the business, even though you can claim the amount back. The business should be able to pay for the new expense. If it affects its capacity to meet other monetary obligations, the tax deduction may not be worth it.

Ensure that you know and have a good working capital cycle, including the ways you can turn debtors and stock into cash and the terms of your creditor agreements. This will allow you to know the amount of money you have at all times.

If companies are considering taking out a loan to make more investment, it is essential to use appropriate debt facilities. Don’t use high interest credit cards and overdraft facilities. Instead, use longer term fixed loans instead. Also make sure you are able to meet all existing interest charges and principal repayments.

Make sure to find out whether you are eligible for the $20,000 asset write-off because the immediate tax deduction is only open to small businesses. More specifically, you will be able to keep the annual turnover below the $2 million threshold.

You may need a more in depth examination of your business’ turnover during the course of the year, in particular when the purchase intended to be written off will be made, since you may be clueless about whether you will surpass or fall below the $2 million turnover threshold at year-end.

Seek the Appropriate Advice

On the whole, don’t forget that while you have to take into account various things before making any new purchase, support networks are available to help you choose the right path.

It’s very important to consult with a bank and other financial experts so you are sure that any new investment or purchase – whether it is tax deductible or not – you make will not impact the most critical aspect of your business – your bottom line.

According to financial professionals, there has been an increased demand from businesses searching for the expertise of advisers when they fall into financial difficulty, in the hopes of stabilising its financial status.

Any company that is targeting to implement the right structure and strategy to flourish as an organisation, instead of fighting help, is setting themselves up for the best chances of continued development.

As advisors, we are aware of the amount of hard work, passion and sacrifice needed to build a business, and it can be disheartening when they fail.

However, what we often find out is that many company owners are so attached to the business they have founded that they find it difficult seeing a different manner of doing things, which is sometimes a necessary evil they have to deal with.

This situation is where an independent, expert point of view can be the difference between returning to the right path and closing shop permanently.

Don’t expose your thriving business to taxation pitfalls by not employing financial professionals to advise and guide you. PJS Accountants offers a full complement of compliance, corporate and individual tax services. For enquiries on how we can help you manage your tax affairs, contact PJS Accountants.