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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.

Have you heard about the salary sacrificing loopholes that can adversely affect your retirement savings plans? Under current laws, employees who sacrifice some of their salary in return for additional super contributions may end up receiving less than they expected because of these two legal loopholes:

  • Employers may choose to count the salary sacrifice contributions they make towards satisfying their obligation to make minimum compulsory super guarantee (SG) contributions of 9.5%.
  • Also, employers may calculate their 9.5% contributions liability based on the employee's reduced salary after deducting sacrificed amounts, rather than the pre-sacrifice salary.

The following example demonstrates how this can adversely affect a worker's savings strategy:

Kayla earns $100,000 p.a. from her employer. This means she's entitled to compulsory SG contributions of 9.5% of her $100,000 salary (ie $9,500). She therefore earns total remuneration of $109,500.

Kayla now arranges to salary sacrifice $10,000 of her salary as extra contributions, reducing her salary to $90,000. But under current laws, her employer is now only required to make compulsory SG contributions of 9.5% of $90,000 (not $100,000), ie $8,550.

Another problem is that her $10,000 salary sacrifice contributions can count towards her employer's obligation to pay SG contributions. She could receive only $10,000 in total contributions plus $90,000 salary (meaning total remuneration of $100,000) and her employer wouldn't be in breach of SG laws.

These loopholes possibly exist because salary sacrificing was not a widespread strategy when the SG laws were written.

In practice, many employers aren't taking advantage of the loopholes. However, evidence suggests some employers are applying the rules differently. They may even do this inadvertently through their payroll processes.

Proposed new laws before Parliament will close the loopholes by requiring employers to pay compulsory SG contributions at 9.5% of the pre-sacrifice amount of salary (that is, the salary actually paid to the employee plus any sacrificed salary). Also, any salary sacrifice contributions will not count towards satisfying the employer's obligation to make compulsory SG contributions.

If passed, the proposed new laws will only apply to quarters beginning on or after 1 July 2020. All salary-sacrificing workers should check their arrangements now to ensure they're receiving the full benefit. They may need to specifically check the amounts going into their fund.

Contact us for assistance in checking your current arrangement or approaching an employer who may be paying less than you expect. We can also help you review your affairs to ensure you're implementing the most tax-effective sacrificing strategy.

Do you have any amounts of offshore income you haven't declared to the ATO – perhaps interest from a foreign bank account? International data-sharing arrangements are making your overseas financial affairs increasingly transparent, so don't get caught out. Failing to report foreign income can attract penalties and ATO scrutiny of your broader tax affairs.

If you're an Australian resident for tax purposes, you're taxed on your worldwide income, so you must declare all foreign income sources in your return. You should consider whether you've earned any amounts from overseas investments, pensions, employment or the sale of offshore assets.

You still need to declare overseas income to the ATO even if you've already paid foreign tax on it. You may be entitled to an offset for foreign tax already paid. Your tax adviser can help you with this, as well as applying the rules for converting amounts to Australian dollars.

You're only taxed on your foreign income if you're an Australian resident for tax purposes. If you're a non-resident, you generally only pay tax on your Australian-sourced income.

Being an Australian resident for tax purposes is different to immigration concepts of residency, and your nationality is generally not relevant. So even if you aren't an Australian citizen or permanent resident, you could be a resident for tax purposes.

The main test for tax residency is whether you "reside" in Australia. There's no single factor that determines whether you meet this test.

Instead, it requires a weighing up of all relevant circumstances, including things like your intentions, your family and living arrangements, business and employment ties, and so on.

However, even if you don't currently "reside" in Australia for tax purposes, you may still be a resident for tax purposes under several alternative tests (including where both your "domicile" and permanent place of abode are maintained in Australia). Seek professional advice if you're in any doubt about your tax residency status.

If you think you may have omitted some foreign income from a previous tax return, you can make a voluntary disclosure to the ATO and pay any tax you owe. You'll often receive a reduction in ATO penalties and interest that would otherwise apply, especially if you make the disclosure before the ATO audits you.

Contact our office if you have any questions about tax residency, foreign income or making a voluntary disclosure. We'll help you navigate the rules to ensure your offshore financial affairs are sorted.

If your business has outstanding tax debts, watch out for a proposed new tool in the ATO's debt recovery arsenal. New laws before Parliament will allow the ATO to report some debts to credit reporting bureaus, who will then be permitted to use this tax debt information in preparing credit worthiness reports. This could adversely affect your credit status and spell trouble when it comes to getting approval for finance.

Under the proposed new laws, the ATO will be able to report a business' tax debts to credit reporting bureaus where the taxpayer:

  • has an ABN, meaning only business taxpayers are affected; and
  • has total tax debts of at least $100,000 that have been due and payable for more than 90 days and where the taxpayer is not actively managing or disputing the debt with the ATO; and
  • does not have an active complaint with the Inspector-General of Taxation (IGT) in relation to the disclosure.

Importantly, a tax debt will not count towards the minimum $100,000 threshold if your business has entered into a payment plan with the ATO to pay the debt in instalments – provided you are complying with that arrangement!

Therefore, if you default and you don't attempt to remedy this within a reasonable timeframe, your debt will start counting towards the $100,000 threshold and your business may become subject to the debt disclosure regime.

What happens if you disagree with the ATO about a particular debt? Your debt will not count towards the threshold if you have an objection pending with the ATO, if you're seeking review by the Administrative Appeals Tribunal or Federal Court, or if you have an active complaint with the IGT in relation to the debt. However, once those actions conclude – and if the debt remains outstanding as a result – the debt will start counting towards the threshold.

The ATO will need to give you 21 days' notice of its intention to make a disclosure. So, what are your options? In addition to those outlined above, the ATO has indicated it will allow you to have the opportunity to request an internal ATO review and also to request temporary relief based on "exceptional circumstances" that affect your ability to pay your tax debts.

If you have an outstanding tax bill, we'll help you explore all your options from negotiating payment arrangements to disputing tax debts, and help you find a solution to minimise the stress on you and your business.

Claiming work trips for business owners

Do you sometimes take work trips for your business – perhaps to overseas conferences or interstate clients? When a trip is clearly for business purposes only, the rules for deducting your expenses are fairly straightforward. You can claim airfares, taxis and car hire (and fuel). You can also deduct accommodation and meal costs for overnight travel if the business requires you to be away from your home overnight. But if you've planned a holiday to coincide with your work trip, you must keep records showing which expenses are business-related and which are private. If you combine business and private travel, can you claim your full return airfares? The ATO says that if the primary purpose of the trip is for business, you can claim the whole cost of the return airfares as a business deduction, as well as related costs like travel to and from the airport. If the primary purpose of the trip is not just the business activity, you may need to apportion your airfares. And if the primary purpose is clearly private with some incidental work activities, you generally couldn't deduct the airfares. How is accommodation treated? Your deductions for accommodation are limited to those nights that you're required to be away for the business purpose. So, if you stay some extra nights after a long conference for some brief sightseeing, you couldn't claim your accommodation for those extra nights, even though you might be able to deduct your full airfares. On the other hand, if you have to be away for an extended period and some days within that period don't involve work activities, you may still be able to claim your full accommodation costs. Of course, personal activities during that private time would not be deductible. Watch out! Other expenses that are not allowed as deductions include: travel before you start carrying on your business; visas, passports and travel insurance; and the costs of family members on your trip. Record-keeping requirements If you're a sole trader or partner you must keep a travel diary if you travel for six or more consecutive nights to record all details about each business activity undertaken. If your business is run through a company or trust structure, the ATO says it's not compulsory to keep a diary, but it's strongly recommended. Don't attract unwanted ATO attention to your business. Talk to us to ensure you're getting the maximum deduction for your business trips while staying within the ATO guidelines.

Investment property owners should heed the ATO's warning that it will target mistakes with rental property deductions this tax time – especially with over-claimed interest. In our last instalment on rental deductions, we looked at the rules for purchase costs, repairs and improvements. Now, we consider expenses associated with a loan to buy the property.

The general rule is that you can deduct interest expenses on a loan you've taken out to buy the property to the extent the property is used for generating rental income. You can generally deduct these interest expenses in the year you incur them. You can also deduct interest expenses on loans to fund repairs and renovations, or to purchase depreciating assets.

But beware: traps arise when you start using the property for even minimal private purposes or you use part of the loan for private purposes (eg to buy a car). In these cases, you'll need to keep records to show the different uses and you'll only be able to claim a portion of your interest expenses.

What about other loan costs? The good news is you can deduct costs like loan establishment fees, mortgage brokerage fees and costs of other necessary services that are directly related to taking out the loan for the rental property (eg title searches).

In some cases, you'll need to carefully distinguish between costs of taking out the loan, and costs of buying the property:

  • Legal services of preparing and lodging mortgage documents are deductible as loan costs, but conveyancing fees for purchasing the property are not.
  • Similarly, any stamp duty on a registered mortgage is deductible, but stamp duty on the purchase of the property is not.

While you can't claim any premiums for insurance you take out to pay out the loan in the event of your death, disablement or unemployment, you can deduct any lender's mortgage insurance. Watch out for special timing issues. Unless your total deductible loan costs are below $100, you'll need to claim these costs over five years (or the term of the loan, whichever is the shorter period). And as with interest expenses, you can only deduct a portion of your loan costs if the loan will also be used partly for private purposes.

Whether you're planning finance for a new investment property or already paying off an existing loan, talk to us for expert assistance in planning tax-effective rental property investments and getting your annual deductions right.

Over 17,000 SMSFs that are heavily invested in one asset class will soon receive a "please explain" from the ATO to check whether they can justify their diversification risk. Diversification is just one of five key matters that all SMSF trustees must regularly review as part of their legally required investment strategy. Know the essential requirements and ensure your fund's strategy is airtight. So, what exactly is required? There's no prescribed format for what your strategy must look like, but it must be in writing and must be "reviewed regularly". The ATO recommends reviewing the strategy when a member joins or leaves the fund or when the fund begins paying an income stream to a member. By law, SMSF trustees must have regard to all relevant circumstances of the fund when setting the investment strategy. However, there are five specific matters that trustees must take into account. (a) Risk Trustees must consider the risk involved in making, holding and selling the fund's investments, and the likely return they're expected to generate (having regard to the fund's objectives and expected cash flow requirements). (b) Diversification Trustees must consider whether inadequate diversification will expose the fund to unnecessary risk (eg the event of a market downturn or other investment risk). This is particularly important in light of the ATO's planned SMSF contact. (c) Liquidity and cash flow requirements Liquidity means how easy it is to sell an asset and convert it to cash. Trustees must consider their liquidity needs in light of the fund's cash flow requirements (see more on "liabilities" below.) If your fund has "lumpy" assets like real estate and minimal cash, this could present a cash flow problem. (d) Liabilities Trustees must consider their ability to meet both existing and future liabilities, including things like the SMSF's operating expenses and tax liabilities. Two important liabilities that trustees often need to consider when planning fund investments are annual income stream payments to members and loan repayments on any "limited recourse borrowing arrangement" undertaken by the fund to buy an asset. (e) Insurance It's possible to hold various types of insurance within superannuation. The trustees must consider whether the SMSF should hold cover for its members, which requires the trustees to consider the particular circumstances of the members. The ATO's warning about diversification is a timely reminder for SMSF trustees to review their strategies. Contact our office if you have any questions about investment strategy requirements or for assistance documenting your fund's strategy.

Did you know that a random audit by the ATO last year revealed nine out of ten rental property owners made a mistake with their rental deductions? In this first of a two-part series, we share some tips on what you can and can't claim. This article assumes you own a 100% rental property with no private use.

Purchase expenses

Buying an investment property carries a host of upfront expenses, but not all of these are deductible straight away. Stamp duty is not deductible, and neither are conveyancing or legal fees for the purchase. Instead, these expenses will be included in the asset's "cost base" for capital gains tax (CGT) purposes when you later sell the property. On the other hand, ongoing land tax (and other charges like council and water rates) are deductible.

Another trap that can arise is initial repairs. If you need to remedy damage that already existed when you bought the property, the repair costs are not immediately deductible in the year you incur them. Instead, these can be claimed gradually over time as capital works deductions.

You also can't deduct costs associated with selling the property, like advertising and conveyancing expenses (which instead form part of the CGT cost base). You can, however, claim advertising costs for finding tenants while you own the property.

Repairs or improvements?

While initial repairs aren't immediately deductible, ongoing repairs and maintenance costs for damage and wear that arises while the property is leased (or available for lease) are deductible in the year you incur them. This includes costs not only to remedy direct damage or deterioration, but also for preventative maintenance to keep the property tenantable, such as oiling a deck. Gardening, lawn-mowing, cleaning and pest control are also deductible.

It's vital to distinguish between a repair and an improvement. This is because unlike ongoing repairs, improvement costs are not immediately deductible. The ATO says that if the work doesn't relate directly to wear and tear (or other damage) from leasing the property, it's not a repair.

Some improvement costs are claimed over time as capital works deductions (where they are structural improvements) and in other cases as capital allowances (where they involve a depreciating asset such as carpets, timber flooring and curtains).

With the ATO promising to double the number of audits of rental property claims this year, it's important to get good advice. Contact us for expert assistance to ensure you maximise your deductions while staying within the rules.

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