Menu

Genuine redundancy payment: age increase

With everyone retiring later in life and working longer, the government has been playing catch up to align some outdated age provisions in the tax law to today's standards. One such change brings into line the genuine redundancy payment's qualifying age with the age pension age. In real world terms, it means the qualifying age has been increased from 65 to between 66 or 67 depending on the year you were born. So, if you're dismissed on or after 1 July 2019, and are between 65 and 67, you may potentially qualify for more of your redundancy payment to be tax-free depending certain eligibility conditions.

Apart from the age requirement, to receive a part of the payment as a tax-free genuine redundancy payment the following conditions must also be met:

  • payment must be received in consequence of an employee's termination;
  • termination must involve the employee being dismissed from employment;
  • dismissal must be caused by redundancy of the employee's position;
  • redundancy payment must be made genuinely because of redundancy;
  • if dismissal was not arm's length, the payment must not exceed the amount that could reasonably be expected to be made on an arm's length basis; and
  • at the time of dismissal, there was no arrangement between employee or employer or employer and another person to employ the employee after the dismissal.

In the context of a genuine redundancy payment, "dismissal" usually involves a termination by an employer without an employee's consent. It also includes constructive dismissal if the employee has little option other than resigning. However, an employee can be "dismissed" even in circumstances where they have expressed an interest in accepting a redundancy package, provided that the final decision to terminate employment remains solely with the employer.

As each workplace is different, the circumstances of dismissal will also vary wildly. The determination of whether a payment qualifies as genuine redundancy will depend on the facts in each case. This area of law is quite complex and there are many factors that could sway the decision one way or the other, especially in instances of company restructures.

If a payment does qualify as a genuine redundancy payment, then the amount that will be tax-free depends largely on your years of service and the year in which the redundancy was paid. For example, if you received a genuine redundancy payment in the 2019-20 income year and you had 10 years of service with your employer, then potentially $63,838 of any payment that you receive will be tax-free. Any amounts in excess of that will be taxed as an Employment Termination Payment.

Crowdfunding: is it income?

You may have heard the ridiculous story of a man who wanted to raise US$10 for a potato salad and ended up with US$55,000 from complete strangers. Or perhaps you've heard stories of shameless couples who wanted to people to fund their lavish weddings or honeymoons? Crowdfunding has fast become the go to place for people in need of large amounts of money quickly, but is the money raised taxable?

If you're unfamiliar with crowdfunding, it is where individuals or businesses (ie the promoter) upload a description of the campaign along with the amount they want to raise to a third-party internet platform. Other netizens can then choose to support the campaign or cause through pledging money (ie contributors).

There are several types of crowdfunding and each may attract different tax consequences for the promoter of the campaign. A large number of campaigns are what can be described as donation-based. This is where a contributor to the campaign pledges an amount of money without receiving anything in return. If you're a contributor in this case, you will not able to deduct an amount contributed in a crowdfunding campaign as a "donation" in your tax return unless the cause you've donated to is a Deductible Gift Recipient (DGR). An exception is if you carry on a business, and the cost of contributing to the campaign falls under business expenses such as sponsorship or marketing.

There are other campaigns which can be referred to as rewards-based in which the promoter provides a reward including goods, services or rights to contributors in return for their payment. An example of this may be differing levels of campaign-related merchandise that can be received depending on the amount pledged by the contributor. Usually, the acquisition of goods or services by the contributor is considered to be private in nature and not deductible.

As the promoter of a campaign (either donation-based or rewards-based), whether or not the money you receive is considered to be taxable depends on the circumstances. In general, if the money received is to be used to further your business or is a profit-making plan, then it is considered to be income. Remember, the hurdle for something to be a profit-making plan is much lower than that of a business. Therefore, if you as a promoter launch a crowdfunded project with intention of making a profit, and then carry out the project in a business-like way, the money raised could very well be considered to be income.

The difference between whether or not the money is classified as income can be minor and will be determined by the facts in each case. For example, money received from crowdfunding the making of a movie may or may not be income for the promoter depending on factors such as: whether the promoter draws a personal salary from the crowdfunded income; whether the promoter will keep any of the funds raised; or whether the movie made will be widely distributed.

Insurance within superannuation has always been a mixed blessing, good for some who enjoy having cheaper insurance, while others see as an erosion of their super balances. It doesn't matter which camp you fall into, the recent changes to the way super funds provide insurance may impact you depending on your super balance, age, and when your last contribution was.

Since July this year, super funds have been required to cancel insurance on accounts that have not received any contributions for at least 16 months unless the member elects to continue the cover. In addition, inactive super accounts with balances of under $6,000 will either be automatically consolidated by the ATO with other accounts you may hold or transferred to the ATO. If your super is transferred to the ATO, any insurance will also be cancelled.

Before cancelling your insurance, your super fund will most likely notify you, although if you're worried about your insurance being cancelled, you can contact your super fund to discuss your options. Remember, once your insurance is cancelled, you can no longer make a claim and it doesn't matter how long you had held the policy previously. Whilst this change is designed to stop people from paying unnecessary insurance premiums, it can have unintended consequences for those on longer periods of leave such as parental leave and long-term sick leave.

Another change coming to super funds in the not too distant future of 1 April 2020 is opt-in insurance for members under 25 years old and those with account balances of less than $6,000. From that date, members under 25 who start to hold a new choice or MySuper product will need to explicitly opt-in to insurance. Currently, the onus is on the member to opt-out of insurance if they do not want it.

For members with active super account balances less than $6,000, super funds will be required to notify them of the change in the opt-in insurance requirements by 1 December 2019. This will give members plenty of opportunity to opt-in to the relevant insurance policies by 1 April 2020 if they choose to do so.

However, if you work in a "dangerous occupation" such as a member of the police force, fire service or ambulance service, among other occupations, the change in the opt-in insurance requirement will not apply to you even if you're under 25 years or have balances below $6,000.

The insurance changes may be good for some and not so for others, it is difficult to strike the right balance between the two. The best thing you can do for yourself is have an awareness of your superannuation, including fees, insurance and other outgoings. After all, it is your hard-earned money and you want it to be working hard for your retirement.

As this year's tax time comes to a close, the ATO has warned that it will scrutinise every individual tax return lodged to seek out incorrect claims. In particular, it will be on the lookout for under reported income as indicated by third party data, and deductions that appear high compared to people with a similar job and income level.

As a part of its focus on closing tax gaps, every year, the ATO contacts around 2 million taxpayers regarding their returns. In a majority of cases, an audit is not the first course of action, most of the time when the ATO contacts you or your agent about your tax return, it will be looking for documentation or evidence to support your deductions or claims. It may even contact third parties such as your employer to verify certain deductions (ie clothing/uniform, possible reimbursed expenses, or whether the expense was related to earning your income). Therefore, good record keeping throughout the year is essential to defend against any audit.

You may be wondering why the ATO is targeting such small fry when multinational companies get away with paying minimal tax. According to the ATO, it understands that most taxpayers over-claim by a little, but small amounts of overclaiming by a large number of people adds up to $8.7bn less each year in revenue collected. So, by its thinking, it really is a case of a every little bit counts.

If you're subject to an audit, it's not always doom and gloom. In some cases, you may get a higher deduction if the ATO discovers that you haven't claimed something you're entitled to. For example, you may be entitled to a deduction for depreciation on a laptop or other technology used for work but had incorrectly calculated the claim or omitted it altogether.

In the event of an audit and you're found to have over-claimed, the ATO may apply penalties depending on your behaviour. If you're found to have over-claimed based on a genuine mistake, for example, if you've claimed the costs which are private and domestic in nature that are sometimes used for work or study (eg sports backpack or headphones), the ATO may choose not to apply penalties.

However, in cases of fraudulently claimed deductions, the ATO will apply penalties in addition to requiring the repayment of any refunds issued. It notes in extreme cases, prosecution through the courts may be pursued. If this all sounds scary, don't worry, we can help you get your income and deductions right the first time, so you'll have nothing to worry about.

Selling shares: how does tax apply?

Did you know that when you sell your shares, the size of your capital gains tax (CGT) bill is affected by how long you've held the shares, and how you offset your capital gains and losses? Knowing the tax rules can help you plan your trades effectively.

Each time you sell a parcel of shares, you trigger a "CGT event" and you must work out whether you've made a capital gain on that parcel (where the proceeds you receive exceed the cost base) or capital loss (where the cost base exceeds the proceeds). You also trigger a CGT event if you give the shares away and you're deemed to have disposed of them at their full market value on the date of the gift.

Here's how the CGT rules work: all of your capital gains for the income year are tallied and reduced by any capital losses. This includes your gains and losses from all of your assets that year, not just shares. If you have an overall "net capital gain", this is included in your assessable income and taxed at your marginal tax rate. If you have a "net capital loss", you can't offset this against ordinary income like salary or rental income. Instead, it can be carried forward to apply against future capital gains.

The 12-month discount rule

As an individual, you can reduce your capital gain by 50% if you've held the shares for at least 12 months. This "discount" is also available to trusts (also 50%) and super funds, including SMSFs (33.3%), but not companies.

It's applied after you subtract any capital losses for the year and any carried forward from earlier years. Importantly, you can choose which gains to offset losses against, to give you the best tax outcome.

Working out the "cost base"

Where you bought the shares at market value, your cost base includes what you paid for the shares and also incidental costs like brokerage fees. If you reinvest dividends as additional shares, the amount of reinvested dividends is included in those shares' cost base.

What if you inherited shares from a deceased estate? If the deceased acquired the shares before 20 September 1985, you must adopt the market value on the date of death. But if the deceased acquired them after that date, you inherit the deceased's own cost base for the shares as at the date of death.

Contact our office for expert advice on managing your share portfolio to achieve the most tax-effective investment returns.

The government is getting tough on employers' unpaid compulsory super guarantee (SG) contributions that may be affecting more than 2.8 million workers. Fortunately for businesses, it has recently announced a revised "grace period" to rectify past non-compliance. All businesses should review their super compliance to consider what action they may need to take.

Compliance changes for businesses

The launch of Single Touch Payroll (STP) will dramatically improve the ATO's ability to monitor employers' compliance with compulsory super laws moving forward. This electronic reporting standard is now mandatory for all Australian businesses, and gives the ATO fast access to income and superannuation information for all employees.

What about past unpaid super you might already owe? You may have previously heard about an "amnesty" for coming forward and voluntarily disclosing historical underpayments of SG contributions without incurring penalties. After many hiccups with implementing this policy in 2018 and 2019, the returned Coalition government has finally taken steps to relaunch the policy. Under proposed legislation currently before parliament, the amnesty will work as follows:

  • The scheme applies to any unpaid super you still owe dating back to 1992 until the quarter starting on 1 January 2018.
  • To qualify, you must not only disclose but also pay the outstanding contributions – including interest.
  • You must make this disclosure to the ATO before it begins a compliance audit of your business (or informs you it will do so).
  • If you qualify, the ATO will waive certain penalties that would usually apply. You will also be able to deduct your catch-up payments, provided they are made before the amnesty ends.

If you don't come forward and you're later caught out, the ATO will be required to apply a minimum penalty of 100% on top of the amount of unpaid super you owe (although this can be as high as 200%).

The timing of your disclosure is important. The proposed new amnesty will cover both previous disclosures made since 24 May 2018 (under the old amnesty scheme that the government failed to officially implement) and, importantly, disclosures made up until six months after the proposed legislation passes parliament.

While there's a risk the laws may never pass, be aware that with or without an amnesty, businesses do face significant penalties if they're caught by the ATO without voluntarily coming forward.

Contact us to help you review your business' compliance and whether you may qualify to make a disclosure under the proposed amnesty.

Health insurance and your tax: uncovered

If you don't hold private hospital cover – or are thinking about dropping it – make sure you understand the financial consequences. You could be hit with an extra tax surcharge of up to 1.5% or cost yourself extra premiums in future. Don't get stung!

Medicare levy surcharge

The Medicare levy surcharge (MLS) is a tax penalty you must pay if you earn above a certain amount and don't take out a sufficient level of private hospital cover for you and all of your dependants. It's designed to give you a financial incentive to insure privately.

If you're a very high income earner, holding private hospital cover to avoid the MLS makes tax sense. If your income is lower but still above the relevant singles or families threshold (outlined below), you may want to find a hospital cover policy (not "extras only") that suits your budget.

Income for MLS purposes    

Singles                                 Families                              Rate of MLS

$90,000 or less                                                                nil

$90,001 – $105,000             $180,001 – $210,000           1%

$105,001 – $140,000               $210,001 – $280,000         1.25%

$140,001 or more                     $280,001 or more               1.5%

Note that the MLS is separate to the "Medicare levy", a 2% levy on your taxable income that most Australians must pay – regardless of whether they have private health cover. So, if you have an MLS liability, you'll pay this as well as the Medicare levy!

Lifetime health cover loading and the rebate

Lifetime health cover (LHC) loading encourages Australians to maintain private health cover from an early age. If you don't take out private hospital cover by the year you turn 31, then if and when you take out cover in future, you'll have to pay an extra 2% of your premium for every year that you're aged over 30. This penalty is charged annually until you've had 10 years of continuous cover.

LHC loading can affect your tax return as any LHC loading portion of your premium doesn't attract the private health insurance rebate. The rebate is available to singles with income for MLS purposes of $140,000 or less, and families with income of $280,000 or less.

So, if you're over 30 and don't have private hospital cover, it's time to consider how much each year that you remain uninsured may end up costing you in future premiums.

Come and talk to us about your health coverage. We can help you calculate how much you'll get back in rebate or how much your uninsured status may be costing you.

Under the "downsizer" contribution scheme, individuals aged 65 years and over who sell their home may contribute sale proceeds of up to $300,000 per member as a "downsizer" superannuation contribution (which means up to $600,000 for a couple).

These contributions don't count towards your non-concessional contributions cap and can be made even if your total superannuation balance exceeds $1.6 million. You're also exempt from the "work test" that usually applies to voluntary contributions by members aged 65 and over.

However, if you don't qualify for the scheme, your contribution could count as a non-concessional contribution and cause you to breach your contributions cap. Here are some areas where the ATO is seeing mistakes with the eligibility rules.

10-year ownership

You, your spouse or a former spouse must have owned the property for the 10 years prior to the sale. The ATO explains that it's not necessary for the same person to hold the property during those 10 years, just some combination of the above three. However, the property must also be owned by you or a current spouse (not a former spouse) just before you sell.

Another thing to watch is that the ownership period is generally calculated from the date of settlement of purchase to the date of settlement of sale. For example, if you signed a contract to purchase "off the plan", the settlement might occur much later and that's when your ownership period starts.

Main residence exemption

Another key requirement is that the capital gain from the sale must be wholly or partially exempt from capital gains tax (CGT) under the "main residence exemption". If your home is a "pre-CGT asset" (ie acquired before 20 September 1985), it must be the case that the capital gain would hypothetically qualify for the main residence exemption, in whole or in part, if it had been acquired on or after 20 September 1985.

You won't qualify for any main residence exemption where you've never used the property as your main residence. But thankfully, even a partial main residence exemption will allow you to make downsizer contributions, eg where you use your home to generate income (in addition to living there).

The main residence requirement is not related to the 10-year ownership requirement, so it's not necessary that the property was your main residence during that 10-year period.

The key to a successful downsizer strategy is to plan ahead. Contact our office to ensure you'll meet all the relevant requirements.

Financial Abuse of Older People

An incidence of financial abuse of an older person may be intentional and clearly wrong, perhaps involving illegal activity, in which case it is likely to be easier to identify. Abuse is not always easy to identify however. Sometimes arrangements, originally motivated by good intentions, gradually erode into financial abuse, as the perpetrator succumbs to the temptation of opportunity, misguided feelings of entitlement, or even perhaps revenge for perceived past injustices.

Although recognising the potential for financial abuse of an older person may not always be easy, there are a number of factors which, if present, may indicate a heightened danger of abuse and encourage the practitioner to ask more questions and to be more alert.

Consider whether they appear to be: vulnerable

                                                          displaying reduced capacity

                                                          dependent

                                                          isolated

WHAT IS FINANCIAL ABUSE?


There are a number of definitions of what constitutes financial abuse of older people.

The World Health Organisation defines financial abuse of an older person as, "The illegal or improper exploitation or use of funds or other resources of the older person". The definition includes acts with adverse outcomes committed not only by people known to and trusted by the victim, but also acts perpetrated by strangers and by institutions.

Abuse may be intentional or unintentional. Intentional financial abuse is defined in Monash University's Protecting Elders' Assets Study, as "the separation of a person from the benefit of their assets for the benefit of another, involving deliberate intention". Unintended abuse is "the inadvertent or uninformed financial mismanagement or neglect of financial assets which causes the deprivation of benefits to be derived from those assets".

The following are given in the study as common examples of financial abuse:

  • theft
  • misappropriation or misuse of money, property or assets
  • exerting undue influence to give away assets or gifts
  • putting undue pressure on the older person to accept lower-cost or lower-quality services in order to preserve more financial resources to be passed to beneficiaries on death
  • carrying out unnecessary work or overcharging for a service
  • misuse of powers of attorney
  • denial to access funds
  • failure to repay loans
  • living with the older person and refusing to contribute money for expenses
  • forging or forcing an older person's signature
  • promising long-term care in exchange for money or property and then not providing the promised care
  • getting an older person to sign a will, contract or power of attorney through deception, coercion or undue influence
  • abusing joint signatory authority on a blank form
  • getting an older person to be a guarantor for a loan where the benefit of the loan is for someone else without sufficient information or knowledge to make an informed decision.
 

INDICATORS OF POTENTIAL FINANCIAL ABUSE


It is common for close family and friends to be well intentioned in their planning for care of an older person. Their intentions may stem from over protectiveness or a sense of obligation.

The range of acts or omissions that constitute abuse occur along a continuum: at one end, harm results from a poor understanding of an older person's needs; at the other, harm results from aggression and serious physical assault. In different circumstances, different sorts of interventions are required.

Abuse may occur as a result of an inability to cope, frustration, ignorance or negligence. Abuse can be unintentional or deliberate. Some forms of abuse are criminal acts, for example, physical and sexual abuse. Other types, such as financial misappropriation, may not reach the level of criminality, but may require redress through guardianship or civil proceedings. Other situations might be best regarded as forms of domestic violence, with interventions shaped accordingly. Economic abuse is included in the definition of family and domestic violence.

Remember, in most cases you will be looking at potential elder abuse and your objective will be to ensure that the older person is making an independent and informed decision and has considered and canvassed the full implications of any transactions and possible changes in circumstances into the future.

WARNING SIGNS AND INDICATORS

Senior Rights Victoria has listed the following signs and risk factors, which may indicate potential financial abuse.

  • promises of "good care" in exchange for transferring property or money to the carer
  • gear, stress or anxiety expressed by the older person
  • unfamiliar, new or forged signatures on cheques and documents
  • the older person has given their bank PIN number to another person
  • the older person is unable to access bank accounts or statements themselves
  • large, unexplained withdrawals from bank accounts
  • sudden transfer of assets at a time when the older person may no longer be competent to manage their own affairs
  • accounts suddenly switched to another financial institution or branch
  • drastic changes in the types of banking activities – erratic or uncharacteristic
  • drastic changes to a will, power or attorney or other legal documents
  • valuable assets, such as a car, jewellery or artworks go missing
  • signs of physical or psychological abuse of the older person
  • no money available for aged care bond when there should be money available
  • no money to pay bills when there should be, for example, older persons complains of no heating when in fact they can afford it
  • an increase in the number of unpaid bills handled by a family member
  • an absence or lack of amenities when the older person seemingly can afford them, for example, television, clothes, clean linen
  • secretiveness of the older person
  • secretiveness of the "carer" – siblings not being informed
  • a family member is borrowing against a major asset owned by the older person
  • older person is regularly paying someone else's bills
  • the "carer" is an adult child, living with the older person, who does not appear to be contributing to the housekeeping expenses
  • older person expresses concern about missing funds
  • older person complains of no longer receiving any mail.

RISK FACTORS

The following factors, if present, indicate the person may be at risk of financial abuse. The practitioner should be vigilant for signs of abuse, such as:

  • physical frailty
  • lacking self-confidence
  • dependency on others for basic needs
  • reduced capacity to understand information or make decisions
  • isolation from neighbours, family or the community
  • a trusting relationship with a person who has influence over decisions
  • appearance of not being in control of their affairs
  • evidence of undue influence of a family member
  • unkempt or unclean appearance
  • lack of formal arrangements for care and management of financial affairs
  • history of physical or other forms of abuse
  • apparent lack of a loving relative who clearly cares for the older person's welfare
  • impatience or secretiveness of person purporting to manage the older person's affairs
  • language difficulties, requiring a family member to translate
  • the older person suffers from dementia and is aggressive and difficult to manage.

SIGNS OF POSSIBLE LACK OF CAPACITY

The following factors, if present, may indicate a lack of capacity on behalf of the older person:

  • poor concentration – limited ability to interact with practitioner or to repeat advice and ask key questions
  • appears overwhelmed
  • difficulty with recall or memory loss
  • ongoing difficulty with communications – difficult to understand
  • lack of mental flexibility – not open to even hearing about options or risks
  • poor insight or judgment
  • problems with simple calculations which they did not have previously
  • sense that "something about the client has changed".

Financial abuse of older people is usually accompanied by other forms of abuse. Where there is a history or evidence of physical, psychological or sexual abuse, or where a beneficiary appears to exercise undue influence over the older person, or where the older person appears fearful and reluctant to speak in the presence of a person with influence over their affairs, financial abuse should also be suspected.

 

When you're starting a new business venture, it may take some time before the business becomes profitable. Or, your business may simply operate at a loss in a particular year.

What does this mean tax-wise? If you're a sole trader or individual partner, you may be able to use your business tax loss to offset other assessable income you earn personally. This includes salary from employment and income from personal investments.

But watch out: if the loss is "non-commercial", you can't use it immediately. Instead, you must defer it (see below). To pass the non-commercial loss rules, you generally must meet two requirements. First, your adjusted taxable income must be less than $250,000. For these purposes, you ignore your business losses, but must add any reportable fringe benefits, salary sacrifice or personal super contributions, and total net investment losses. Second, you must pass one of these four tests, designed to measure whether your business activities are sufficiently "commercial":

  • your business activity's assessable income is at least $20,000;
  • your business has made a tax profit in three out of the past five years;
  • you use real estate valued at $500,000 or more in your business on a continuing basis; or
  • the value of "other assets" (excluding vehicles and real estate) you use in your business on a continuing basis is at least $100,000.

If you don't pass any of these tests (or fail the $250,000 income requirement), you must defer the loss. You can use it against future business income when the business starts making a profit, or against other income sources when you start satisfying the non-commercial loss rules. Your losses can be deferred indefinitely until then.

There are special rules for primary production and professional arts businesses. If your income from other sources (excluding any net capital gain) is less than $40,000, you can use your business tax loss against that income and not worry about the non-commercial loss rules.

What if you satisfy the non-commercial loss rules but don't have income against which you can offset your tax loss? Sole traders and individual partners can carry forward tax losses to a later year to apply against future income. While losses can be carried forward indefinitely, you must use them to offset income at the first opportunity.

Whether you're setting up a new business or need advice about using existing losses, contact our office to discuss tax loss planning to help your business succeed.

Management Consulting

We have the know-how and experience to offer advice that helps you run your business more effectively.

FIND OUT MORE

Self-Managed Superannuation Funds

At LBA Partners we provide the professional advice you need to manage your own fund and greatly simplify the process for you.

FIND OUT MORE

Taxation

At LBA Partners we offer a full range of taxation services.

FIND OUT MORE