The Federal Government’s 2006 Budget certainly took the superannuation industry by surprise.

The changes represent the largest overhaul of the superannuation system in over a decade.

While we have outlined in this newsletter many of the announced changes, we are yet to receive any legislation to confirm the proposed changes.

Furthermore, the industry has been requested to forward submissions on the changes by early August2006 before the legislation is released so that many of the finer details can be clarified.

Below is a summary of the proposed changes:

No tax on super payments from July 1, 2007, for those aged 60 or over, is without doubt the most significant proposed change. Once you reach 60 years of age, you can withdraw a pension, a lump sum, or the entire balance of your superannuation and pay absolutely no tax thereon.

Prior to this change there were limits on the amount of pension or lump sum withdrawals a retiree could make tax free. It should be noted that these rules continue to apply for people accessing their superannuation between the age of 55 and 60.

This proposed changed will no doubt have the effect of simplifying the system and encouraging more contributions into superannuation; whilst at the same time provide incentives for people to work till age 60 rather than age 55, which has been popular in the past.

Our aging population and historically low birth rates have significantly contributed to our shortage of skilled labour and this proposed change will encourage many to retire a little later.

Abolition of Reasonable Benefit Limits (RBL’s) is a major change to the system. The lump sum RBL of approximately $650,000 and pension RBL of approximately $1.3million have historically capped or reduced the benefits for retiree’s who wished to fund their superannuation beyond these levels.

Now people can accumulate as much as they like within superannuation with the knowledge that

a) No RBL, or cap, exists restricting taxation benefits, and

b) Once you reach the age of 60, and retire, you can access all your superannuation tax free

65 year olds no longer working will not be forced to commence withdrawing their superannuation funds as a pension or lump sum.

There are considerable estate planning opportunities which arise as a result. Essentially the kids will be left more as the tax take on your superannuation will be a lot less for a lot longer.

Changes to contribution limits mean that from July 1, 2007 a limit of $50,000 p.a. will apply to tax deductible contributions.

This universal limit replaces the current age based limits which allow those over 50 to contribute up to approximately $100,000 per annum and still obtain a tax deduction.

There is transitional relief for those aged 50 or more who can continue to make tax deductible contributions until 2012.

Un-deducted superannuation contributions will be capped for the first time from Budget night. A limit of $150,000 per annum per member will apply and it is proposed that you may be able to group 3 years worth of $150,000 into a single year and achieve a one off un-deducted contribution of $450,000.

This change will significantly alter the current practice of placing large amounts of money or assets into superannuation just prior to retirement, to utilise the concessionally taxed superannuation environment throughout retirement.

Planning will need to commence at an earlier age, as a result of all these changes.

Self Employed people who have not incorporated their business into a private company will no longer be penalised.

Under the current system unincorporated businesses were restricted to claiming as a tax deduction, contributions of $5,000 per annum plus 75% of any excess above the $5,000.

This contrasted with incorporated businesses who could claim 100% of all superannuation contributions.

This unfair anomaly has now been rectified from July 1, 2007.

Self-employed people will be able to access the Government co-contribution from 1 July, 2007 there will be no maximum pension allowed as is now the case but there will be a minimum pension.

Pension payments from superannuation will be simplified. From July 1, 2007 there will be no maximum pension allowed as is now the case but there will be a minimum pension.

Once this minimum pension is commenced the tax rate within the superannuation fund will become zero as is now the case.

The proposed minimum annual pension amounts are outlined below for pensions purchased on or after July 1, 2007:

• 4% of the account for age 55-64
• 5% of the account for age 65-74
• 6% of the account for age 75-84
• 10% of the account for age 85-94
• 14% of the account for age 95 and beyond

Preservation Ages to remain the same. That is access to super can commence from age 55 but progressively increasing to age 60 for those born after July 1, 1960.

Changes to personal income tax rates will apply from July 1, 2007.

The existing and proposed rates are outlined below:

Retirement Planning of any sort needs to consider carefully the personal income tax rates applicable to investment earnings outlined above as compared to the income tax rate within the superannuation environment which are set at 15% during the accumulation phase.

Importantly you need to remember that it is the after-tax-return to the investor which is critical in analysing investments and hence the name or structure within which to hold the investment.

Centrelink asset test exemptions for complying income streams acquired after September 20, 2007 will be removed.

The 50% asset test exemption will still apply for complying pensions purchased between 20 September 2004 and 20 September 2007.

The 100% exemption will still apply for those complying pensions acquired prior to September 20, 2004.

There are proposed changes in relation to the aged pension test. Currently the pension is reduced by $3 for every $1,000 over the relevant threshold. From 20 September 2007 this will be halved, so that the pension will be reduced $1.50 for every $1,000 over the threshold.

Tax deductible superannuation contributions have been extended and are now allowed for people for up to the age of 75 years. This was previously capped for those still working to age 70.

Transition to retirement pensions will continue to be available (purchased after 1 July 2007) for those who have reached preservation age (currently 55) and have not retired. The pension will continue to be non-commutable under the current rules and will be subject to a maximum payment of 10% of the account balance (as well as the 4% minimum account balance).

Pre 1 July 2007 transition to retirement pensions under the current rules can continue.

Other changes announced in the Federal Budget which are not related to superannuation are outlined below:

Small business capital gains tax (CGT) concessions have been extended from July 1, 2006.

For the 2006/2007 and subsequent income years more small business owners will be eligible for

a) The “active asset” CGT concession

b) The “15 year exemption” to CGT

c) The retirement exemption

d) The small business rollover relief

The amendments focus on extending the eligibility criteria to 20% ownership interests (down from 50%) and “looking through” ownership structures at the shareholder level in group entities.

Furthermore the asset test threshold will be increased from $5million to $6million from July 1, 2007.

Fringe Benefits tax rate will be reduced to 46.5% (from 48.5%) to align with the top marginal income tax rate.

In addition the minor benefits exemption threshold will increase from $100 to $300.

The Senior Australians Tax Offset will be increased from July 1, 2006. Senior Australian’s will be able to earn more income without paying tax. Singles will be able to have taxable income up to $24,867 (up from $21,968) and couples up to $41,360 (up from $36,494)

Depreciation rates for business equipment will be increased for acquisitions after May 10, 2006 under diminishing value methodology.

The rate will be 200% (up from 150%) of the prime cost rate.

Family Tax benefit Part A will from July 1, 2006 now start to reduce once income is above $40,000 as opposed to the current $33,361.

Family Tax Benefit Large Family Supplement will be extended from July 1, 2006 to families with 3 or more children. The payment of $9.52 per fortnight will be paid for the third and each subsequent child.

The full tax free threshold of $6,000 will be allowed for all tax payers ceasing full time employment. This is an improvement to the current part-year pro-rata arrangements.

Carer Payment recipients will receive a one off payment of $1,000 and recipients of Carer’s Allowance will receive a $600 payment for each eligible person in their care. Child support payments will be calculated differently and based on the costs of raising children, the combined taxable income of parents and after having taken into account an amount for self-support which will be the same for each parent.

Mezzanine Finance was tipped in our last newsletter to experience some difficulties and no sooner had we gone to press than the Westpoint collapse in Perth occurred leaving mum and dad investors out of pocket to the tune of approximately $400 million.

It will be interesting to see how successful ASIC is at prosecuting the directors and promoters.

The Markets – Australian and International shares have experienced increased levels of volatility over the last two months. This volatility has been caused by increasing interest rates both domestically and internationally. Furthermore some investors have taken profits following the strong run over the past 12 months for equities.

We believe this volatility will continue for some time to come and buying opportunities may well present themselves.

Advice – Should you or a friend or colleague require some financial advice please feel free to make an obligation free appointment.

Often the concept of an accountant is somewhat blurred and people don’t really understand what type of work we often become involved in.

Accordingly I thought I would outline just some of the things we here at Level One have been up to lately:

SELLING A BUSINESS is often a difficult task.

Determining the value of a business as well as the component parts of stock, goodwill, plant & equipment, restrictive covenants, payment terms and conditions is difficult enough. Then the taxation treatment of each of these items varies as well as the vendor’s eligibility for a variety of Capital Gains Tax (CGT) exemptions.

Recently we advised a client on their position with regard the above matters and once that was done we assisted with the preparation of an Information Memorandum to assist with the sale.

This Information Memorandum was a comprehensive document covering products and services, market segments, market penetration, pricing structure, staffing levels, staff experience, current and proposed marketing activities, potential growth strategies, margin analysis and the list went on.

Having completed this work our client was in a much better position to understand the true value of their business and the appropriate asking price. Similarly potential purchasers were presented with a detailed presentation of both the financial and non-financial aspects of the business, which made for an efficient analysis and sale process.

Finally and importantly when determining the final sale price, through our financial planning arm Level One Financial Planning Pty Limited, we were able to advise our client on what financial position they would be in in retirement and how critical or not achieving the final sale price would be to their retirement lifestyle.

Given our ageing population there appears to be a growing number of sellers and a dwindling number of buyers in the market place generally and accordingly planning needs to commence early for anyone contemplating a sale. early for anyone contemplating a sale.

TAX EFFECTIVENESS AND ASSET PROTECTION are critical issues in today’s business environment.

Recently we were asked to review a business structure put in place by another accountant some years ago. Your business structure is critical to the tax effectiveness and degree of asset protection achieved.

The taxation system is far from static in nature. Continual changes are made in response to varied internal and external factors. This may mean that a business structure that was once appropriate, no longer has the taxation effectiveness that it did in years gone by.

Accordingly we made some recommendations which will result in significantly less capital gains tax payable on the eventual sale of the business than under the existing structure.

A SHAREHOLDERS AGREEMENT for business owners is a critical issue.

We have recently had to assist 3 clients with this issue.

What happens when one shareholder or business partner wants to exit the business or alternatively what happens when one shareholder or business owner dies?

IN THE EVENT OF DEATH – the deceased no doubt bequeaths the shareholding to family and the surviving shareholders are now in business with potentially the wife/ spouse and or the children of the deceased.

Issues which arise include:

• What say or input will the new shareholder have in the running of the business day to day operations?

• Does the new shareholder want to keep the shareholding or sell it? • If the decision is to keep the shareholding, what dividends would be expected in future years?

• If the decision is to sell – who will be offered the shares and at what price?

• Do the continuing shareholders have enough cash/wealth to afford to be able to acquire the deceased’s shareholding?

• Who will be advising the benefactors of the deceased’s estate on the above matters?

IN THE EVENT OF EXIT – that is one party wants to leave the business after numerous years of business operation we had to advise on the value of the business. Because nothing had been put in place in earlier years the owners of the business had vastly different views on an appropriate value or valuation method.

As a result shareholder A acquired shareholder B’s interest when at the beginning of the process it was in fact shareholder A who wanted to sell.

Unfortunately the process took a considerable amount of time and caused much angst to all parties involved. Had the details of such a valuation and the process involved been sorted out much earlier with less emotion involved the process would have proceeded much more easily for everyone concerned.

WORKER’S COMPENSATION AND PAYROLL TAX AUDITS have been increasing at a consistent rate of late as the NSW State Government increase their audit activities.

Accordingly we have had to work through numerous client records to ensure; all employees are included in the calculation; all relevant grouping provisions to associated entities are considered; contractors are reviewed to determine whether they would be “deemed” to be employees; all allowances & benefits are considered for inclusion.

COMMERCIAL PROPERTY OPPORTUNITIES are regularly reviewed for clients throughout the year.

Some clients are looking for a passive investment while others are looking at acquiring their business premises. Obviously the real value of any property varies greatly depending upon your own circumstances.

As a passive investor you may demand a net yield of 7.5% – 8% per annum. This yield exceeds traditional residential yields because of the increased level of risk (vacancy). Understanding the existing leases and the wider market rental rates are critical in making a good investment.

Alternatively an acquisition by an “owner – occupier” is motivated by a completely different set of factors such as certainty of location or exposure – not just yield and potential capital growth.

Obviously any future development of the proposed site needs to be considered and factored into “your” value assessment.

Debt structuring is a critical issue here as is the ownership structure of the property.

An analysis of the different structures is required to determine whether the property is owned individually or via a unit trust, discretionary trust, company or superfund.

Tax effectiveness, asset protection, flexibility and retirement planning are all significant issues to be reviewed as well.

FEDERAL BUDGET CHANGES each year keep us on our toes at Level One as well.

In the 2006 Federal Budget there were many changes to our taxation and superannuation system.

In one particular case we advised a client to postpone the signing of a contract until after June 30, 2006. As a direct result the client saved over $300,000 in Capital Gains Tax (CGT).

In addition to this case numerous clients revisited their superannuation funding and decided to increase their contributions given the abolition of Reasonable Benefit Limits (RBL’s).

By abolishing RBL’s the tax office has effectively opened the gate for people to increase funding within their superannuation fund significantly.

By allowing people over the age of 60 to access these funds completely tax free has simplified the system also.

FAMILY LAW matters become very emotional and when a couple decide to part company an independent view is often invaluable before agreements are made.

Recently we had someone approach us to review their financial position and suggest a fair and equitable split of the assets.

While we cannot provide legal advice we can express an opinion on the financial value of assets held and what is often overlooked, being the taxation implications of dividing up assets.

For example if a couple have a family home worth $500,000 and a rental property worth $500,000 you could be forgiven for assuming that if each person took one property they were effectively splitting the assets on a 50 / 50 basis.

Unfortunately this is not the case and the person who takes the rental property would be subject to Capital Gains Tax (CGT) on sale where the other party would receive the CGT exemption on the family home.

The ‘after tax’ position always needs to be determined and this is ever so important in any property settlement, particularly when significant assets and possibly businesses are involved.

BUSINESS PLANS are always considered a bit of an elusive concept.

Most small to medium sized businesses don’t have one and couldn’t tell you what one looked like. Over the past year we have become involved in developing a business plan for a client which has generated significant benefits.

Firstly a general manager was promoted from within the business, the spouse was “sacked” as the administration officer and an office manager was employed.

Accordingly the business principal has spent more time on marketing and looking at new products and areas the business could expand into.

With less time spent on day to day operations the business principal was able to further develop strategic alliances which became critical to growing the business and future potential sale strategies were examined in more detail. Importantly the business principal spent more time on what he enjoyed doing.

The senior employees were given clear operating procedures and systems with specific Key Performance Indicators (KPI’s) to help measure performance and improve their job satisfaction and the spouse was so happy she didn’t have to help out in the office anymore she got a part-time job somewhere else which she actually enjoys. She also spends more time shopping.

In addition the business owner really understands his business, its systems, strengths and weaknesses and his focus is on ensuring future profitability whereas his managers are focusing on achieving this years budgeted profit and KPI’s.

YEAR END TAX PLANNING is conducted throughout the year with many clients.

You often hear about businesses doing year end tax planning in June each year but if you’re managing your business correctly planning should ideally start at the beginning of the year.

The advent of quarterly BAS statements and the production of quarterly management accounts greatly assists with tax planning on trading income.

Remember it is never too early to review your position and know what options are available.

SYSTEMS AND PROCESSES are what make our businesses run efficiently.

Recently we conducted a complete review of the internal procedures and systems of a client and identified potential weaknesses and improvements thereto.

Furthermore we discussed and outlined the benefits of building an Intranet. By doing this it becomes a lot easier for people to know exactly what system is in place, to update that system of processes easily and efficiently and to train new staff in an efficient and uniform manner.

Essentially your Intranet can be used to build and convey a culture as well as detailing “how we do it here”.

Accordingly, consistency in the delivery of services and products is enhanced and employees are more certain as to what is expected of them.

UNPAID SUPERANNUATION for an employee can be a costly issue.

Recently we had a client approach us because his employer had not paid his superannuation for a considerable period of time. We wrote to the employer involved and the Australian Taxation Office is pursuing the money. Often business owners don’t realise that they can become personally liable for unpaid superannuation and that it is a requirement of the law to pay each employees superannuation each quarter and to note the details of the amount paid and the name of the superannuation fund on the employees pay slips.

TAXATION

Obviously keeps us busy as well with the need to prepare income tax returns and quarterly BAS statements as well as attending to land tax, payroll tax, stamp duty, capital gains tax, fringe benefits tax and the list seems to go on and on.

ADVICE

Should you or a friend or colleague require some advice on these or any other matters please feel free to make an appointment.