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Firm News

November 13, 2019

Proactive consolidation with ILBAs

Inactive low-balance accounts (ILBAs) are a new category account that needs to be reported and paid to the ATO. This was introduced in the Treasury Law Amendment (Protect Your Superannuation Package) Bill 2019 that came into effect on 1 July 2019 after first being announced in the 2018-19 Federal Budget.

ILBAs are designed to protect accounts from fee erosion. Where possible, the ATO will proactively consolidate super on behalf of an individual.

A superannuation account is considered an ILBA if the following criteria are met:

Funds are required to identify ILBAs on 30 June and 31 December each year, then report and pay them to the ATO by the statement date.

Individuals that have an account that they do not want to be transferred to the ATO as an ILBA, can consolidate super accounts using ATO online services through myGov, contact their super fund for more information or authorise their super fund to provide a written declaration to the ATO.

Time limit on GST refunds

Small businesses entitled to refunds of GST may not be aware of the four-year time limit on claiming those refunds. Your entitlement to a GST credit ends four years from the due date of the earliest activity statement in which you could have claimed it.

GST refunds are claimed under the indirect tax concession scheme (ITCS), which also covers luxury car tax (LCT), wine equalization tax (WET) and excise. They are a form of “outstanding indirect tax refunds”, which are tax refunds that are entitled to the taxpayer but are yet to be claimed. “Outstanding indirect tax refunds” can be claimed in the following cases.

Refund of a net amount for a tax period:
This applies to those that have yet to lodge an activity statement for a tax period. Small businesses that have GST entitlements that amount to $2,000, (which exceeds the net GST, WET and LCT liabilities for that period $1,500), are able to claim an outstanding indirect tax refund of $500.

Refund of an overpayment of a net amount:
Due to a clerical error, a business owner reports and pays $4,600 net GST for a tax period instead of the actual amount of $4,060. The excess amount of $540 is an outstanding indirect tax refund which the business can claim.

Refund due to an underreported initial net refund entitlement:
A business claims a net GST refund of $3,000 for the tax period and receives the refund. Afterwards, however, it is realised that the actual refund entitlement was $3,200, the excess $200 represents an outstanding indirect tax refund that can be claimed.

November 7, 2019

Commutation authorities for SMSFs

Commutation authorities are issued by the ATO when a member of a SMSF has exceeded their transfer balance cap. A commutation authority will be issued after the member has received an excess transfer balance determination alerting them they have passed the cap.

The transfer balance cap is currently $1.6 million and is applied to the combined total of all superannuation accounts held by an individual. To receive a commutation authority, a SMSF member has either;

After receiving a commutation authority, individuals must then;

This will need to be done within 60 days of receiving the commutation authority. Though the Commissioner of Taxation issues the authority, they do not have the power to grant an extension of time to respond. If you fail to commute or respond to the ATO regarding the authority, the income stream will stop being in retirement phase, affecting the fund’s entitlement to exempt current pension income. You may also be liable for penalties or subject to compliance action.

Limiting tax deductions for holding vacant land

On the 28 October 2019, The Treasury Laws Amendment (2019 Tax Integrity and Other Measures No.1) Bill 2019 received royal assent. The new tax law creates limitations for deductions related to the expenses of holding vacant land from 1 July 2019. This is likely to affect those who acquire land for investment purposes and begin developing for rental investment purposes.

The amendments will only apply to holdings on ‘vacant land’, meaning that it will not apply to any land that has a substantial and permanent structure in use or ready for use, or is a residential premise that is lawfully able to be occupied. Land is considered vacant if both of these are not true.

The changes will not apply to vacant land held by ‘excluded entities,’ which are:

The law will also be inapplicable if:

The land is in use or available for use for business purposes under an arm’s length rental arrangement.

October 30, 2019

Travels with my SMSF

Travelling overseas for an extended period of time is an exciting adventure and a chance to have a break. However, SMSFs do not take a break when you do, which is why it is important to ensure everything remains in line while you are away. SMSFs that breach the residency rules are taxed at the marginal rate of 49% rather than the concessionary rate of 15%. Before travelling, trustees must consider the implications to their SMSF.

Fund recognised as an Australian fund:
The SMSF will be recognised as an Australian super fund provided that the setup of and initial contributions have been made and accepted by the trustees in Australia, however, the trust deed does not have to be signed and executed in Australia. An SMSF that has been established outside Australia will also satisfy the test if at least one of the fund’s assets are located in Australia.

Management and control of the fund carried out in Australia:
The central management and control of the fund must usually be in Australia. This means the SMSF’s strategic decisions are regularly made, and high-level duties and activities are performed in Australia, such as formulating the investment strategy, reviewing the performance of the fund’s investments and determining how assets are to be used for member benefits. Generally, funds will meet this condition even if its central management and control is temporarily outside Australia for up to two years.

Active member test:
An “active member” is a contributor to the fund or contributions to the fund have been made on their behalf. To satisfy this test, the fund will need to have active members who are Australian residents and hold at least 50% of the total market value of the fund’s assets attributable super interests, or the sum of the amounts that would be payable to active members if they decided to leave the fund.

Amendment to Housing Affordability Measures introduced

The Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019 was re-introduced to parliament on 23 October 2019. This comes after it was first announced in the 2017-18 Federal Budget.

The amendment introduces a new system where the government will provide up to an additional 10% capital gains tax (CGT) discount for resident individuals who invest in qualifying affordable housing from 1 January 2018. This increases the maximum CGT discount to 60%.

For the discount to be received, housing investments must meet qualifications and provide proof of eligibility. Tenants must have low to moderate incomes and landowners must charge rent at a discounted rate below the private market rental rate.

A registered community housing provider (CHP) must manage the properties and the investment is to be held for at least three years before the discount applies. The discounts will go through managed investment trusts (MITs). CHPs determine the tenant eligibility criteria, including the rent charged, consistent with state and territory affordable housing policies.

Investors who already have invested in affordable housing with the National Rental Affordability Scheme (NRAS) will not receive the additional 10% discount as they already get a yearly financial incentive.

October 23, 2019

Do you need to pay superannuation for contractors?

A contractor can turn into an employee for legal and financial obligations, so when working with contractors, employers need to test whether they count as an employee or contractor for superannuation purposes according to the rules stated in the Superannuation Guarantee (SG).

The ATO states that even if contractors quote an Australian Business Number (ABN), they are identified as employees for superannuation guarantee purposes if they are paid mainly for their labour. Employers must make superannuation contributions to these workers if they are being paid:

If any of the above criteria are not met, then employers may not have to pay superannuation. The minimum amount of super that needs to be paid is 9.5% of each worker’s ordinary time earnings (OTE), which is what employees earn for their ordinary hours of work such as commissions, allowances, bonuses, and shift loading.

Employers who attempt to avoid financial and legal obligations to workers by disguising an employment relationship as an independent contracting arrangement can be held liable for ‘sham contracting’ under the Fair Work Act 2009. This can incur fines up to $54 000.

What are the tax implications for different business structures?

The structure of your business determines how you would pay tax and other business obligations you would need to consider. Whilst you are able to change your structure as your business develops, business owners must keep up with the changing tax responsibilities that may occur as a result. There are four major business structures in Australia that come with different tax implications.

Sole trader:
An individual running a business will declare revenue received from the business as part of their personal income tax return and will be taxed at the same rate as an individual. This means the more the income the business earns, the more tax the sole trader will have to pay. If their income is $18,200 or under for the 2018-19 financial year, then they are under the tax free threshold and do not have to pay tax. They can also receive a discount on Capital Gains Tax (CGT).

Partnership:
When more than one person runs a business and distributes income or losses between themselves, each partner must pay tax at the individual tax rate on their share of the business’ net income. They also need their own Australian Business Number (ABN) and Tax File Number (TFN) to use when lodging their annual business income tax return. An annual partnership return showing the income and deductions of the business must also be lodged.

Company:
A company is a separate legal entity with higher set-up and administration costs. They must apply for a company TFN and ABN if they are registered under the Corporations Act 2001. They must also be registered for GST if the annual GST turnover is $75,000 or more. There is no tax free threshold and no discount on CGT. Companies are responsible for paying income tax on their profits at the company tax rate, which is currently 30% under 2019-20 tax rates, or 27.5% for base rate entities.

Trust:
Businesses run through a trust must also have their own TFN and ABN, and register for GST if annual GST turnover is $75,000 or more. They are are not liable to pay tax because their beneficiaries who receive the trust net income are individually assessed for tax. If the trust generates net trust income and does not distribute it, they are assessed on this accumulated income at the highest individual tax rate. Each year, all the revenue earned by the trust and the income distributed to each beneficiary must be shown on their tax returns.

October 16, 2019

Super law changes to NALI and LRBA

Integrity measures included in Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2019 have now been enacted with an effective date of 1 July 2018. There have been amendments made to non-arm’s length income (NALI) provisions and Limited recourse borrowing arrangement (LRBA) amounts will now be included in total superannuation balance (TSB) calculations.

NALI provision amendments:
From the 2018-19 income year onwards, the ordinary or legal income of a super fund will be NALI and taxed at the top marginal rate. This has been introduced to ensure SMSFs and other complying superannuation entities cannot evade the NALI rules by entering into schemes involving non-arm’s length expenditure, including where expenses are not incurred. Any capital gains from a subsequent disposal of an asset may also be treated as NALI.

LRBA amounts included in TSB calculation:
Where an SMSF has an LBRA that was made under a contract that has been entered into on or after 1 July 2018, the calculation of an individual’s TSB will now include any outstanding LRBA amount attributable to each member’s interest. This will apply if:

If you’ve already lodged your 2019 SMSF annual return and are affected by these new measures, you may need to amend your return.

GST margin scheme

The margin scheme is a way of working out the GST you must pay when you sell property as part of your business. The amount of GST normally paid on a property sale is equal to one-eleventh of the total sale price. If the margin scheme is used, the GST is calculated on the difference between the sale price and your purchase price of the property or the property’s value. You can only apply the margin scheme if the sale of the property is taxable.

When purchasing a new residential property with the margin scheme being apart of the property transaction, withhold 7% of the contract price, including GST and the market value of non-monetary consideration. This amount will then be paid to the ATO at settlement. The margin scheme is not an automatic concession and the sale must be eligible for it to be applied.

The margin scheme can be applied to subsequent property sales depending on the original date of purchase and how GST was applied at that time. Property purchases prior to 1 July 2000 are eligible, as the property had not been subject to GST previously. For property purchases after 1 July 2000, the margin scheme may only apply to a subsequent sale when:

There are limitations to the margin scheme in some situations such as; inheritances, the supplier being a member of a GST group or the property is GST-free (going concern or farmland). In these situations, if the supplier wasn’t eligible to use the margin scheme, the scheme cannot be used when selling the property.

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