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.

Super “opt out” choice for high earners

If you're a high income-earner with multiple employers, you may be aware of potential traps with compulsory super contributions that can lead to some hefty and unfair penalty taxes. Fortunately, proposed new laws will give those high income-earners the opportunity to take proactive steps to overcome any penalties.

A person's concessional contributions (CCs) are capped at $25,000 per annum and include compulsory superannuation guarantee (SG) contributions; any additional salary-sacrifice amounts; and any personal contributions made by the member for which they claim a deduction.

However, an individual with multiple employers, such as a doctor working for a number of surgeries, can inadvertently breach their $25,000 CC cap because they receive compulsory contributions from each of these employers. While an employer is only required to make compulsory contributions of 9.5% on the worker's earnings up to $55,270 per quarter (or $221,080 per financial year), this applies on a per employer basis.

Excess CCs incur penalty tax at the individual's marginal tax rate less a 15% offset, plus additional interest charges.

Fortunately, under proposed new laws before Parliament, affected employees who may be at risk of breaching their CC cap will be able to "opt out" of receiving compulsory contributions from a particular employer (or multiple employers) by obtaining a certificate from the Commissioner of Taxation. (However, you must always have at least one employer to make SG contributions for you.)

The certificate will name the relevant employer and a particular quarter of the financial year, and will exempt that employer from having to make SG contributions. You'll need to apply for a certificate at least 60 days before the beginning of the relevant quarter.

The Commissioner will only be able to issue you a certificate if you're likely to have excess CCs if the certificate is not issued. To make this assessment, the Commissioner can rely on evidence such as past tax return data and employer payroll data. Once issued, the certificate cannot be varied or revoked. If you choose this opt-out, you'll be able to negotiate with the exempted employer(s) to receive more pay in lieu of the contributions (and you won't be required to show proof of this to the Commissioner).

The legislation to enable the opt-out is likely to pass this year, creating some opportunities for 2020 planning. If you're receiving SG contributions from multiple sources, contact us to begin your remuneration planning and to explore whether the opt-out may benefit you.

Until recently, a company that had experienced a significant change in ownership or control could only carry forward its earlier tax losses to a later income year if the company carried on the "same" business after the change. However, a new alternative test that applies retrospectively from 1 July 2015 means that now companies only need to carry on a "similar" business.

What exactly does "similar" mean? The legislation outlines several factors you must consider when assessing whether your business is "similar". This is a non-exhaustive list, and it requires a weighing-up of all relevant factors. The ATO unpacks the legislation as follows:

  • First, you must consider the following three things and compare them before and after the significant change in control of the company: the assets (including goodwill) used in the business, the activities and operations, and the "identity" of the business.
  • Then, where there have been some changes, you must identify to what extent these can be explained by natural development or commercialisation of the business that existed before the change in control. Natural development suggests a similar business is now carried on. But if those changes arose merely from a commercial decision, it's less likely the business is similar.

The ATO gives the example of a parcel courier company that expands its services to include food delivery. If this new activity commenced because the company undertook R&D to improve its bicycle design in order to improve efficiency, and as a result developed a new bicycle that it realised was suitable for transporting food, the service expansion results from development of the earlier business, so the similar business test is satisfied.

In contrast, if the company commenced this activity because it noticed a growing demand for food delivery services and purchased a new type of bicycle to embark on that opportunity, that would weigh against the current business being similar.

The ATO also emphasises that goodwill is an important asset to consider. For example, if a business adopts a new brand name and transforms from budget to "premium" products, it won't pass the similar business test as it hasn't used the goodwill of its former incarnation. This isn't the result of any natural development of the old business (but rather a commercial decision to present a new identity).

Planning a share sale or equity capital raising? Contact our office today for expert advice on getting the most out of your business' prior losses.

There's nothing as certain as death and taxes, but tax on death is not so clear. Generally, the law says there is no CGT liability for the deceased on the transmission of an asset, specifically a dwelling, to a beneficiary.

The beneficiary is considered to be the new owner of the inherited asset on the day the deceased person died and CGT does not apply to that asset. This applies to all assets, including a dwelling. The exception is where the beneficiary is a "tax advantaged entity" (TAE), such as a charity, foreign resident or complying superannuation entity.

If the beneficiary subsequently sells the asset, in this case a dwelling, this may create a CGT "event", depending on the status of the property, when it was purchased, when the deceased died and whether the sale qualifies for the CGT "main residence" exemption.

CGT liability on the sale will be determined by whether:

  • the deceased died before, on or after 20 September 1985 (when CGT was introduced); and
  • the dwelling was acquired before, on or after 20 September 1985; and if acquired post-CGT, whether the deceased died before or after 20 August 1996.

If the dwelling had been acquired by the deceased pre-CGT and the deceased died pre-CGT, then there is no CGT to pay (unless major improvements had been carried out post-CGT and the dwelling had produced assessable income).

Other situations are less straightforward. If the asset is a post-CGT asset, it's still possible there will be no CGT on the sale of the inherited dwelling but it depends on certain conditions being met. For example, if the asset has been used since the date of death as the main residence (and not to produce income) of the beneficiary, the deceased's spouse or someone with a right to occupy the dwelling, no CGT will apply on the sale.

In some limited cases where the dwelling has not been used as a main residence, CGT also won't apply if the sale occurs within two years of death – but the qualifying rules are tricky, so seek advice about any dwelling you've recently inherited.

If CGT applies to the sale of the inherited dwelling, then the relevant cost base needs to be identified, eg whether it's the cost base or the market value of the dwelling at the date of death. 

If you have inherited a dwelling and are in the dark about the CGT impact of hanging onto it or selling it, we can guide you through the minefield and minimise any tax consequences.

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