Tag: CGT

The Attraction of Superannuation

Contrbuting to superannuation is still as popular as ever. Personal (voluntary) contributions in the December 2016 quarter (the latest available statistics) were $4,616 billion, up from $4,437 billion in the same quarter a year earlier. Superannuation assets in aggregate were $2,199 billion at the end of the December 2016  quarter, up from the previous quarter which was $2,145 billion, and are now at an all time historical record level. Over the 12 months to December 2016, there was a 7.4% increase in total superannuation assets.

This section details why, even in spite of recent unfavorable changes, contribution to superannuation is still so popular.

Tax Concessions
Superannuation is a concessionally taxed environment. This was highlighted in early 2017, when the Government released its Tax Expenditiurs Statement which stated that in total superannuation tax concessions cost the Government $38.85 billion in revenue in the previous financial year. These tax concessions which make superannution so attractive as an investment include:
CONCESSIONAL TAXATION OF EARNINGS
Superannuation earnings (such as interest, dividends, rent etc.) are taxed at 15% when your account is in accumulation mode (i.e. not in pension mode). These earnings are txax-free when your account is in pension mode. This concessional taxation cost the Government $16.85 billion in foregone revenue in 2015/2016. By contrast, investment earnings on assets (such as shares,property, term deposits etc.) held outside of superannuation are taxed at your marginal tax rate.
Note that your tax liability outside of superannuation may be further reduced by tax offsets such as those for low-income earners and pensioners.

CONCESSIONAL TAXATION OF CAPITAL GAINS
Capital gains made by superannuation funds are likewise taxed at 15% when your account is in accumulation mode. Where a CGT asset supports a pension, any capital gain made when those assets are sold is tax-free. On the other hand, if the CGT asset was held by one of the following entities it would be taxed as follows:
  • Individual – marginal tax rate
  • Company – 30% (or 27.5% for a Small Business Entity)
  • Trust – marginal tax rate of individual.
The tax on a capital gain made by your superannuation is reduced to 10% (a 33% discount) where the asset has been held for 12 months or more. Although this is a lesser discount than the 50% discount available to trusts and individuals, this is negated by the base CGT superannuation taxation reate being so low at 15%.

Cut Your Income Tax
TAX DEDUCTION FOR CONCESSIONAL CONTRIBUTIONS
Subject to age limits, from 1 Jly 2017 almost all individuals can now claim a tax deduction for their personal concessional (after-tax) contributions that they make to superannuation. Before this date, most employees were unable to do this.

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TAX AUDITS – Behaviours To Avoid

The ATO has recenty published a list of behaviours and characteristics that may attract its attention. In order to minimise the chances of ATO scrutiny, this section provides the details.

Capital Gains Tax

CAPITAL LOSSES
Broadly, the ATO is focussed on capital losses that on the face of it appear to be exaggerated, fabricated or misclassified; all with the aim or reducing taxable income. Specifically, the following attract the ATO’s attention:
  • For companies, if from the time the losses were incurred to the time they are used, other information indicates that the company had a change in ownership or there was a change in the type of activites being conducted
  • Capital losses that are artificially generated (for example, non-arm’s length transactions or through ‘wash sales’ where loss-making shares are sold and then bought back) with the express purpose to offset capital gains
  • Reclassifying capital losses as revenue losses with the aim of reducing taxable income
  • “Loss washing” whereby a taxpayer deliberately triggers a CGT event (e.g. sale) in order to bring to account an unrealised loss in a year in which a capital gain is made.
DISPOSAL
The ATO focusses on your reporting and payment obligations resulting from a disposal of a capital asset. It has particular concerns where the amount of a net capital gain reported on a tax return is less than the ATO believes it should be based on their external data sources. The following specifically attract ATO attention:
  • Entities that fail to meet their lodgement obligations
  • Companies claiming the 50% CGT discount (other than life insurance companies, the discount for holding a CGT asset for 12 months or more is not available to companies)
  • Entities that receive cash through a partial scrip-for-scrip rollover. By way of background, you may be entitled to a scrip-for-scrip rollover and avoid CGT where a company in which you owned shares was taken over and you received new shares in the takeover company
  • Entities which dispose of high-value assests but record small capital gains or losses on their tax retun
  • Entities that incorrectly access the Small Business CGT Concessions. (Note that despite the increase of the Small Business Entity turnover threshold from $2 million to $10 milliion (effective 1 July 2016) this does not apply for the purposes of accessing the CGT concessions. To access the concessions, generally businesses must have an aggregated turnover of less than $2 million, or have net assets to the value of less than $6 million).
Fringe Benefits Tax

MOTOR VEHICLES
The ATO focuses on situations where an employer-provided motor vehicle is used or made available for use. This may constitute a fringe benefit and require an FBT return to be lodged. Note that an employer-provided vehicle will be deemed to be avalable for private use – and therefore a fringe benefit may arise – where an employee keeps it at their residence overnight (even if it not used).
EMPLOYEE CONTRIBUTIONS
An employee contribution is an amount paid to an employer by an employee in relation to a fringe benetit, The contribution reduces the taxable value of a fringe benefit, and must be made by the employee from their after-tax income. These contributions will normally be assessable in the hands of the employer. The FBT legislation describes three types of employee contributions: 

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Tax Relief on Changing Business Structures

Whilst the ability for a small business to change their legal structure without attracting a tax liability has been available for a little over 15 months, it may be one of those areas that small business and tax practitioners are still coming to terms with. This tax tip considers:
The eligibility criteria;

  • How the provisions work; and
  • What are the impacts. 

Is My Business Eligible 

To be eligible and to gain access to the rollover provisions, a number of tests must be satisfied as follows: 

  1. Both the transferor and the transferee must be small businesses 

This means that both the transferor and the transferee must be businesses each with an aggregated turnover of less than $10 Million.  Note that this aggregated turnover not only relates to the subject entity, but also to entities that may be affiliated or connected with the subject entity. Care is required in determining the applicability of this test as the affiliated or connected with test can be quite complex. 

  1. The restructure must be part of a genuine restructure and not part of a tax driven scheme 

Whether or not a restructure is “genuine” will depend on the specific circumstances surrounding the restructure. The guidelines that accompanied the restructure legislation provide some details on what may be considered a “genuine restructure” and include:

  • A bona fide commercial arrangement has been undertaken to enhance business efficiency;
  • The business continues to operate following the transfer, through a different entity structure;
  • Transferred assets continue to be used in the new business structure;
  • The new structure that has been adopted has taken professional advice when setting up the business;
  • The restructure is not artificial or unduly tax driven; and
  • The restructure is not a divestment of assets or a preliminary step to facilitate the disposal of assets outside the business. 
  1. Ultimate economic ownership must be maintained before and after the restructure 

The ultimate economic owners of an asset are the individuals who, directly or indirectly, own an asset. Where there is more than one individual with ultimate economic ownership, there is an additional requirement that each individual’s share of ultimate economic ownership be maintained. Where a discretionary trust is involved, this means that there is no practical change to the individual beneficiaries who ultimately benefit from the assets before and after the transfer. 

How The Provisions Work 

A business can be operating either as a sole trader, a partnership, a company or as a trust. There may be a time when the business owners believe that they have “outgrown” their current trading structure and that the structure no longer meets their needs. This could involve asset protection issues, commercial requirements, public perception, etc.  The Rollover Provisions provide opportunities for a business to restructure from one legal entity to another without incurring a range of tax liabilities that would normally arise when such a transaction is performed. 
It is important to note however that the rollover provisions only apply to certain “active assets” of a business. Such assets are normally CGT assets, depreciating assets, trading stock and other assets that form part of the operating business being restructured.  The rollover does not apply to certain assets such as shareholder or beneficiary loans or  passive assets held in a structure. 

What Are The Impacts 

There are a number of impacts that you should consider before applying the restructure rollover measures including:

  • Assets are taken to be transferred at their tax cost and as such will not result in an income tax liability to either the transferor or the transferee.
  • There is no requirement for any consideration (market value or otherwise) to be provided by the transferee in exchange for those assets.
  • In relation to specific asset classes, the following should be considered:
  • Pre-CGT assets retain their pre-CGT status.
  • Post-CGT assets are taken to be acquired by the transferee at the date of transfer for their cost at that time. This means that to be eligible to claim the CGT discount on any subsequent sale from the new structure, you will need to wait at least 12 months.
  • Access to the 15 year exemption however as part of  the small business CGT concessions is not affected as the transferee will be taken to have acquired the asset when the transferor acquired it (different to the CGT discount).
  • Trading stock can either be transferred at the transferor’s cost or at the market value of that stock held by the transferor at the start of an income year.
  • Revenue assets take the cost which will result in no profit or loss to the transferee.
  • Depreciating assets will be transferred at the written down value of those assets at the date of the transfer and then continue to depreciated using the same method and effective life that the transferor was using. 
  • There may also be issues to consider in relation to GST or stamp duty on the restructure so professional advice should be sought when utilising the rollover measures. 
  • The restructure provisions can have a very positive outcome for small businesses looking to restructure their affairs, but ensure you seek appropriate professional advice as there may also be some other implications that result in unwanted outcomes..

SBE Opportunities


CGT

Small Business Restructure Rollover

The increased SBE threshold of $10 million also applies to the rollover for restructures of SBEs. To recap, this measure allows SBEs to change their operating structure without incurring capital gains tax or other income tax liabilities. It does this by providing an optional rollover (deferring any CGT liability or income tax liability until the asset is eventually sold) where an SBE transfers an active asset of the business to another SBE as part of a genuine business restructure, without change the ultimate economic ownership of the asset. The rollover may also be available for assets that are used by the SBE but held by an entity connected or affiliated with the SBE or, if the SBE is a partnership, a partner of that partnership. This ensures that partners and other ‘passive entities’ within an SBE that are not themselves SBEs (because they do not carry on a business themselves) can access the new rollover. Under the rollover, specifically, from a CGT standpoint:

  • No capital gain or loss will accrue to the Transferor. The Transferee will be treated as acquiring the asset on the date of transfer for an amount equal to the cost base of the asset.
  • Pre-CGT assets will retain their pre-CGT status post-transfer.
  • For the purposes of the 50% CGT discount, the ’12-month clock’ will be reset, such that the Transferee will need to hold the asset for a further 12 months following the restructure to avail themselves of this discount.
  • For the 15-Year Exemption however, the Transferee will be taken to have acquired the asset back when it was originally acquired by the Transferor.


As the $10 million increased threshold is backdated to1 July 2016, tax returns may need to be amended in respect of capital gains made and declared from restructures after this date. Amendments may result in refunds where any capital gains liabilities have been paid. 

CGT Small Business Concessions – No change


Unfortunately, the increased $10 million SBE threshold does not apply to the CGT Small Business Concessions (i.e. the Active Asset Reduction, Retirement Concession, Rollover, 15-Year Exemption). To access these concessions, the standard criteria must be met, namely you and connected entities must be met, namely you and connected entities must have net assets to the value of less than $6 million or your annual turnover (including connected entities and affiliates) must be less than $2 million.



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Non-Resident CGT Withholding Rules…. REBOOTED!

Are you buying or selling property? If so, you need to be aware of the newly adjusted withholding rules, which are now set to impact a much wider range of property sales.

Background
Last year Federal Parliament passed legislation designed to collect gapital gains tax (CGT) from non-residents selling certain Australian property from 1 July 2016.
Although the law is targeted at foreign Sellers, given the way the legislation was drafted, all Sellers of property (resident or non-resident) may be impacted. The new law required that for all property sales of $2 million or more, the Buyer was required to withhold 10% of the sale proceeds and remit that amount to the ATO without delay – unless the Seller obtains a Clearance Certificate from the ATO before settlement.
The legislation doesn’t just apply to individuals but also Companies, Trusts, and Superfunds. Further to this, it is the Buyer that can then be penalised by the ATO for failing to withhold and remit the withholding tax.

What’s Changed?
In the May 2017 Federal Budget, the Government made the following two changes:
  • Increasing the CGT withholding rate for non-residents from 10% to 12.5% from 1 July 2017, and
  • Reducing the real property exemption threshold from $2 million to $750,000 from 1 July 2017.
These changes mean that many more txpayers will be impacted by the new regime. Given this, we now examine the law in detail.

Conditions
The new withholding regime applies to contracts entered into on or after 1 July 2016 where the following three conditions are met:

1. THE BUYER ACQUIRES CERTAIN ‘TAXABLE AUSTRALIAN PROPERTY’
This includes
  • Real property in Australia – land, buildings, residentail and commercial property
  • Lease premiums paid for the grant of a lease over real property in Australia
  • Mining, quarrying or prospecting rights
  • Interests in Australian entities whose majority of assets consist of the above such property or interests (e.g. shares in a company or units in a trust) or
  • Options or rights to acquire the above property or interest.

2. THE SELLER IS A NON-RESIDENT OR HASN’T PROVIDED A CLEARANCE CERTIFICATE FROM THE ATO
Note that where there are multiple Sellers in the one tansaction, this condition will be met where any of the Sellers is a non-resident.
This condition is the ‘kicker’. The rules can catch Australian resident Sellers if they do NOT obtain a Clearance Certificate from the ATO.

3. NONE OF THE FOLLOWING EXCLUDED TRANSACTIONS ARE THE SUBJECT OF THE SALE
(a) Real property transactions with a market value of less than $750,000 (downd from $2 million). As well as sales of real property, this exemption………..

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ATO Focus on Rental Property Owners

With Tax Time now here, the ATO is encouraging rental property owners to ensure that their deduction claims are accurate. It will be paying close attention to:

Excessive Interest Expense Claims
Your interest claim must be limited to interest you have actually paid from 1 July to 30 June on borrowed funds used to purchase the rental property.

Incorrect Apportionment of Rental Income and Expenses Between Owners
The way that rental income and expenses are divided between co-owners varies depending on whether the co-owners are joint tenants or tenants in common or there is a partnership carrying on a rental property business.
Co-owners who are not carrying on a rental property business (generally, it is very unlikely that a business is being carried on) must divide the income and expenses for the rental property in line with their legal interest in the property. If they own the property as:

  • Joint tenants, they each hold an equal interest in the property (therefore 50% of income, and 50% of expenses)
  • Tenants in common, they may hold unequal interests in the property. For example, one person may hold a 20% interest and the other an 80% interest.
Rental income and expenses must be attributed to each co-owner according to their legal interest in the property, irrespective of any agreement between co-owners, either oral or in writing, stating otherwise.

Homes That Are Genuinely Not Available For Rent
To claim rental property deductions, your property must either be being currently rented out, or be genuinely available for rent. In the case of the latter, the property must be habitable (for example, if you were carrying out major renovations this may render the property uninhabitable), and it would also be expected that you could produce evidence to show it being genuinely made available for rent (e.g. advertisements in newspapers, or listings with local real estate agents).

Incorrect Claims For Newly Purchase Properties
You cannot claim as a deduction acquisition costs such as Stamp Duty, conveyancing expenses, legal expenses). These costs form part of the property’s cost base and can only be taken into account for capital gains tax (CGT) purposes when you dispose of the property.
The other common expense that is not claimable as a deduction is initial repairs made to the property. If the repairs are performed just after the purchase of the property in preparation to rent it out, then they are considered to be initial repairs. These cannot be claimed as a rental property expense on your tax return. Instead they will form part of the cost base of the property and will reduce your capital gain (or increase your capital loss) when you sell the property.

REAL LIFE ATO CASE
Nancy recently purchased a rental property and had her tax return amended by the ATO to remove deductions for repairs, capital works and incorrectly apportioned borrowing expenses. Nancy had inappropriately claimed a deduction for repairs to defects present in a newly purchased property and the capital works, and borrowing expenses should have been spread over several years. Nancy also provided false receipts for property management fees undertaken by a family member.
Nancy was required to pay more than $57,000 back to the ATO as well as over $10,000 in penalties for making a false statement in her tax return.