HELP! I’ve put too much in my Super Fund

One of the great things about superannuation is the concessional tax rates. Concessional contributions, which come from pre tax income, are taxed at 15%.

There are caps imposed on how much you can put into super and still get the concessional tax rate. In the 2007/2008 and 2008/2009 financial years, the concessional contributions cap was $50,000 for those under 50 years of age and $100,000 for those who were 50 or older on 30 June 2007. The concessional contributions cap for the current financial year is $25,000 for those under 50 and $50,000 for those 50 or over on 30 June 2009. The non-concessional contributions threshold is $150,000 (which can be averaged across three years – allowing you to exceed the cap in one year and reduce your contributions in others giving you a total of $450,000 over three years). Further changes will apply from 1 July 2012 when the concessional cap will reduce to $25,000 per annum, although by that time the amount may have been subject to increase due to indexation.

Excess contributions are not uncommon and many taxpayers inadvertently breach their contribution limits. The problem is that if you breach the concessional contributions cap, the tax on the contributions over the cap is an additional 31.5% on top of the initial 15% paid by the super fund. And, it’s very difficult to do anything about it once you have put the cash into the superannuation account. Where both the concessional and non-concessional caps are breached, the excess contributions tax could be as high as 93%.

The exception is when you breach the contributions limit in one transaction, for example, if you wrote a cheque for $1 million and deposited in your superannuation fund account. Superannuation funds have a fund capped contribution limit to prevent unwanted excess contributions. By law, they must refund the excess contribution to reverse it. No excess tax applies in these circumstances. The problem is, the fund acceptance cap only applies when the contributions limit has been breached in one transaction.

The problem with making excess contributions is that under the law, once the contribution has been accepted by the fund the preservation rules apply (meaning that you can only get the money out once you meet the conditions of release – for example, you turn 60).

In some cases, where an honest mistake has been made, the amount can be refunded. However, if you are over the contributions cap, have changed your mind about the contribution, or you have had a change in income levels so that you cannot utilise the tax deduction, then it is unlikely your excess contribution would be called an honest mistake. However, if you inadvertently banked money into the wrong account (and that account was the superannuation funds account) then that might be an honest mistake if you can prove it. A few adventurous taxpayers have tried to get around the contributions cap by amending their trust deeds. Under these arrangements, a clause is inserted into the SMSF trust deed to restrict the trustee from accepting all or part of a contribution if it would cause the member to exceed a contributions cap. If the trustee does accept the contribution the trust deed directs the trustee to hold the contribution in a separate trust, even though the amount has been treated as a contribution and mixed with other assets of the super fund. But the Commissioner is onto this scheme and has stated that he considers the schemes “ineffective” and tax is still likely to apply to the excess contributions.

The important thing is to be aware of what your contributions caps are, the total amounts that have been contributed, and what’s contained in your trust deed.

Those most likely to breach the cap are those with multiple employers and those who have entered into salary sacrifice arrangements in past years and have not reviewed the amounts being paid into their superannuation fund. This includes those utilising the transition to retirement strategy.

For advice on managing your SMSF and getting money in and out of your fund, speak to us today.

SELLING UP? WATCH OUT FOR CGT

If you’re selling your business, the CGT small business concessions have the capacity to reduce your capital gains tax liability to $0. Understandably, the tax savings that can be achieved make the concessions very popular with business owners. However, the extent of the tax savings also means that the concessions come under close Tax Office scrutiny. Quite a few taxpayers have been stung with very large and unexpected tax bills because they claimed the concessions but did not pass the eligibility tests.

There are a number of rules and conditions that a small business and their owners need to meet to be able to access the concessions. One of the main eligibility requirements is the $6 million maximum net asset test (although an alternative $2 million turnover test is available in some circumstances). This test requires that the combined value of the assets of the business, any connected entities, any affiliates and any entities connected to the affiliates, is less than $6 million.

The $6 million maximum net asset test applies at the time when the CGT event occurs (generally when the contract of sale is entered into), so you need to satisfy yourself, and be able to substantiate to the Commissioner if you are audited, that your net assets were less than the $6 million threshold at that time. Certain assets such as the family home, some personal assets, and your superannuation are not counted toward the threshold. With some of your assets it should be reasonably easy to calculate their value. Other assets such as privately held businesses or listed securities can provide greater problems.

The risk with listed securities is where there is volatility in their value and you are near the $6 million threshold. Because your position is counted at the time of the CGT event, if you hold listed securities and there is a spike in their value at this time, then you could breach the threshold. The value of these assets is on public record and this is an area you need to be careful about if you are near the maximum limit.

Private businesses create a different risk. In the majority of cases there is no ready market for these businesses and so their value is not readily identifiable. Without a formal valuation you may underestimate the value of your businesses. It is not uncommon for the ATO to ask for evidence of your eligibility for the concessions. If they have doubts about the value you have assessed then they may substitute their own valuation. Keep in mind that the value of your business is not necessarily what is recorded in your financial statements. Where the business holds unrealised goodwill or other intangible assets, the value of the business can be substantially greater than is recorded in the financial statements. Clearly, the more valuable your business is, and the closer your other assets are to the $6 million threshold, the greater your risk. If you are contemplating selling your business or want to make sure you have the right structure in place, contact us today for a review.

Why the Tax Office is looking at your Facebook profile

A recent article published in the online small business magazine SmartCompany will have many people reviewing what they say and expose on Facebook and other social networking sites.

Tax Office staff are the last people you expect to be looking at your Facebook profile but according to a lecturer at Latrobe University’s Faculty of Law and Management cited in the SmartCompany article, the popular social networking site is being used to build prima-facie cases against investors using offshore tax havens.

Our compulsion to share our every movement on online forums is being used by the Tax Office as a tool to build profiles on high net wealth individuals. So, if you’re telling the tax office that you have a modest income but are constantly posting pictures of yourself in your floral board shorts in Barbados, or your latest shopping expedition in Paris, then you can expect a call from the Tax Office very soon.

Offshore tax havens are a particular focus and this compliance program has claimed the scalps of many high profile taxpayers through Project Wikenby.

The accessibility of the information available to the Tax Office to investigate and build cases against taxpayers is increasing every day. Your Facebook profile is just another avenue.

The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.

10 THINGS YOU MUST DO BEFORE THE END OF THE FINANCIAL YEAR!

We understand. Having your accountant tell you how to prepare for the end of the financial year is a bit like your dentist telling you to floss every day or that recent advertising campaign extolling the virtues of eating an apple a day. We know we should but…So, we’re making it easy for you with these top tips to save your business cash and make sure you don’t pay more tax than you need to.

1. Got bad debts?

Very few businesses survived the GFC without having a few bad debts. You know those customers who moved through the cycle from being friendly and upbeat “yes, we’ll pay that by the end of the week” to being downright cranky “we’d said we’d pay you!” to just being unavailable “…he’s not here right now.” You know it’s been tough to collect your payments when your Office Manager gives you a high five when a payment comes in. When did getting paid move from a normal part of business to an achievement? If you have tried everything to recover the debt and you are sure there is no hope of being paid, you can write off the debt this financial year and claim it as a deduction.

2. Taking stock of your stock

Here’s some good news for small business. You might not need to do a stocktake (…and the angels sing, hallelujah). If your business has a turnover under $2 million, you might be able to use the simplified trading stock rules if the difference between your opening stock balance and your closing stock balance is less than $5,000. For everyone else, you still need to do a stocktake but you can use the stocktake to take care of any obsolete or damaged stock that is unnecessarily sitting around. Once identified, you can choose to value the stock at the lower of cost, replacement, or market sale price. This means that stock that is completely obsolete or damaged can effectively be written off for tax purposes if it has no value in the market and claimed as a deduction.

3. Have you made a profit on any assets or has the value tanked?

If the business has made a profit on the sale of any assets during the year it’s likely you’re going to be hit with capital gains tax. If you have not entered into a contract of sale yet, think about deferring the sale contract until after the end of the financial year to defer the capital gains tax. On the flip side, if your business has any CGT assets that are worth less than what you paid for them, think about selling them pre 30 June and crystallise the loss. You can use the loss to offset against any capital gains you made throughout the year and reduce the tax you are likely to pay on those gains. You need to make sure the sale contract is entered into before 30 June to claim the loss this financial year. The second is when you actually started using the asset. If you want to claim the Investment Allowance in your return this financial year, you need to either have actually used the asset by 30 June or have it installed and ready to use by this date. If you miss this date, you have until 31 December this year to be using the asset otherwise you will not be able to claim the Investment Allowance. The Tax Office is likely to be looking closely at Investment Allowance claims to make sure the correct amount has been claimed and that the asset meets all the conditions. Make sure you have your paperwork in order to back up your claim. There would be nothing worse than buying a big ticket item with the expectation that the cost will be partly offset by the Investment Allowance only to find you don’t qualify.

4. Making the most of plant & equipment deductions

If you operate a small business with a turnover under $2 million, you might be able to claim an immediate deduction for the cost of certain assets under $1,000. For everyone else, take a look at your asset register. If you have redundant or damaged plant & equipment that has no value and you are unlikely to use in the new financial year, you might be able to claim the remaining tax written down value.

5. Investment Allowance – will the Tax Office reject your claim?

The Investment Allowance was advertising Viagra for almost every business-to-business product last year. Depending on the size of your business, the Investment Allowance offered an additional deduction of up to 50% on the purchase of deductible assets for use in your business. But, to be able to claim the investment allowance there are conditions. The first is the timing of the purchase (or when you entered into the contract). You had to have purchased the asset or entered into the contract by 31 December 2009.

6. Paying bonuses to your team or directors’ fees?

If you intend to pay Directors’ fees or bonuses to your team, you can claim the deduction in this financial year if you let the people affected know, before 30 June, that the fee or bonus will be paid. Just make sure that you have proof that you advised them pre 30 June and you have a minute noting that the fee or bonus will be paid. The payment does not have to be made this financial year to claim the deduction. If the payment is not made until July, the person will not have to declare the income until the next financial year.

7. Making the most of related entities

If you’re charging management fees between related entities, make sure the fees are raised pre 30 June (and minuted) to claim the deduction this year. You also need to make sure that the charges are commercially reasonable as this is an area that the Tax Office is looking very closely at! We’re sure you’re brilliant but unless your last name is Trump charging $500,000 for your input into the other business just might not be reasonable.

8. Bringing forward deductions for things you are going to buy anyway

You can bring forward deductions and increase your refund (or reduce your tax debt) simply by taking a look at what you need to spend money on in the New Year and acting on it now. For example, you might need repairs to be done, want to replenish your stock, or need to make trade gifts or corporate donations. It’s not always necessary to pay for the items this financial year, as long as you have the invoices and purchase orders for this financial year to support the deduction. For small businesses with a turnover under $2 million, if you prepay expenses this financial year, the prepayment might be fully deductible this year as long as the prepayment is for something that is for 12 months or less and ends by 30 June 2011.

9. Taking cash out of the company

If you have paid any cash to Directors or shareholders or paid any expenses on their behalf then these ‘debts’ need to be repaid to the company by the lodgement date for the company’s tax return or an agreement needs to be in place to repay the debt. If existing agreements are in place make sure that the minimum repayments due by the end of the financial year have been made. If the payments are being made from distributions, the dividends need to be declared and documented before the end of the financial year.

10. Accelerate super

If you have the cash available, think about paying your employees’ superannuation contributions for the June quarter before the end of June. This way, you can claim the deduction now rather than waiting another 12 months. If you’re a Director of the company, you can also top up your own super contributions. Just make sure you don’t breach the contribution cap limits. Superannuation contributions are deductible in the year that the contribution is received by the trustee. Be sure to check how long your payment method takes to process – if you’re paying just before the end of the financial year the payment may not be received by the Trustees until the new financial year – therefore, the deduction for the contribution cannot be claimed this financial year. You can save a lot and often defer the tax you need to pay if you get your timing right. If you want to know how you can take advantage of any of our top tips, talk to us today.

Quote of the month

“Of course I am minimising my tax. And if anybody in this country doesn’t minimise their tax, they want their heads read, because as a government, I can tell you you’re not spending it that well that we should be donating extra!”

Kerry Packer speaking at a Senate enquiry

The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.

Contractors vs employees: Can you tell the difference?

A recent decision by the Administrative Appeals Tribunal (AAT) should serve as a warning for any employer who employs independent contractors. In a case brought by the Tax Commissioner, a company that employs over 1000 contractors to provide interpretation and translation services is now potentially liable for superannuation guarantee payments to all of its contractors – now and retrospectively.

So what went wrong? The problem is that there is no conclusive definition of who or what an independent contractor is. The fact that an agreement might state that someone is a contractor is considered merely a ‘label’ by the court. Where the contractor primarily supplies their personal labour, the dividing line between an employee and a contractor is even harder to distinguish as the tools of the contractor’s trade is their knowledge and expertise. The case before the AAT, Associated Translators and Linguists Pty Limited and Commission of Taxation [2010] AATA 260 is a case in point.

Associated Translators and Linguists Pty Limited (ATL) provide interpretation and translation services in 90 different languages across the country. ATL has two full time interpreters and translators but the bulk of the service is managed through a ‘panel of consultants’. The panel of over 1000 interpreters and translators fulfil between 1300 and 1500 client assignments per month. The panel of consultants are predominantly individuals who contract back to ATL when a job comes up in their area of expertise that cannot be fulfilled by the full time staff.

In this case, the Tax Commissioner singled out one panel member from ATL’s pool, Mr Sani, who started contracting to the company in 2003. The Tax Office was of the view that Mr Sani was an employee of ATL not a contractor and issued ATL a superannuation guarantee assessment for a shortfall in superannuation guarantee payments to Mr Sani. ATL objected. The ATO held firm on its view.

The Superannuation Guarantee Assessment (SGA) Act requires that superannuation guarantee payments are made by the employer for employees (using the ordinary term for employee). Then, the Act goes one step further stating that “if a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract.”

The case before the AAT first had to determine if Mr Sani was an employee under its ordinary meaning. If not then the tribunal had to decide if Mr Sani was an employee under the extended definition of employee in the SGA Act. As it turned out, the case didn’t get that far with the AAT deciding that Mr Sani was in fact an employee of ATL under its ordinary meaning. Previously the courts have looked at a number of factors to determine if an independent contracting relationship exists:

Whether the work involves a particular profession or skill set Panel members also need to report back to ATL within 24 hours of the completion of the assignment. ATL argued that the code of conduct was consistent with the ethics for all interpreters and translators as part of their professional membership and that the administrative requirements are merely for efficiency. It was argued that these same arrangements would apply to a totally independent interpreter engaged for a one-off assignment.

Complaints were not dealt with by the panel member but by ATL. The Tax Commissioner argued that complaints affected ATL’s goodwill not the contractors. The Commissioner also noted that the panel member did not have the capacity to develop goodwill with the client or generate business. Panel members had to refer any assignments requested by clients back to ATL.

The payments and invoices were managed by ATL. In the event of a complaint or poor conduct, panel members may be subject to some sort of warning or sanction. Where payment was withheld, it was generally because the client had withheld payment. In effect, the panel member did not bear the risk of the assignment.

Panel members carry ATL business cards, or identification cards, with their name, confirmation that they are an ATL panel member, and their NAATI accreditation number. ATL pointed out that the identification cards are simply a way of confirming to the client that the interpreter is an ATL panel member and properly accredited. The Tax Commissioner saw that the panel members were represented as being part of ATL not independent to it. Commercially, this issue would pose a problem for many businesses if they followed the Commissioner’s logic as it would mean diluting the prominence of their own brand by exposing their client base to and developing the contractor’s personal profile.

ATL also noted that panel members were free to accept and generate business in their own right including from competitors. This fact however was disregarded by the tribunal.

ATL also noted that it does not place controls over how the panel member completes an assignment. However, the tribunal saw that employees also did not face these controls and the company’s capacity to review all of the assignments was limited.

Weighing up the case, the tribunal saw that ATLs panel members were not `only part and parcel of the business, they were the business. ATL has no capacity to deliver their services across the range of languages and geographic locations without them. Following this decision it would be hard to see how any business that relied predominantly on independent contractors to fulfil its services could establish the independence of those contractors.

But it was two other factors that tipped the scales in favour of the Tax

Commissioner:

Control – while panel members can decline an assignment, once they have accepted they are under fairly tight control by ATL. The view of the tribunal was that a contractor would generally not be expected to report back to the contracting organisation within 24 hours.

Are you making the right moves?

Superannuation

Our experienced Financial Planners will review your current superannuation arrangements, and advise to whether you are on track to meet your future needs. We will help you understand the various options you have, and answer your questions about Industry Funds, Master Funds and Self Managed Superannuation Funds. Perhaps your superannuation funds are currently invested in a portfolio selected by your employer, or a default portfolio selected by your superannuation fund. We will review your current portfolio, and help you make an investment selection, which manages the level of risk you are comfortable with.

Retirement Planning

Did you know that something as simple as the date on which you retire can have a significant impact on your cash flow in your first your of retirement. Whether you plan to retire in thirty years or in the very near future, you need to question whether you have the best strategies in place to maintain a lifestyle you’re comfortable with, upon retiring. How much do you have now? How much will you need in retirement? Our team will work with you to build strategies to bridge the gap. We will ensure you are fully informed when it comes to your use of property investments, superannuation or other alternative investments which may better suit your needs and personal situation. Estate Planning

Your working life is long, and you work hard to build a collection of assets of which you are immensely proud. You know that your loved ones will be well taken care of when you die, though that is a long way off, you hope. Sometimes, estate planning can be as simple as leaving everything to your spouse. However these days, estate planning can be incredibly complex, there are previous relationships which need to be considered, and dependants from previous relationships. Tax Treatment on inherited assets varies, depending on the recipient. Although you’re sure your family will work it all out ‘in the end’ why not ensure your estate is distributed without any further trauma suffered by your loved ones. Our in-house tax advisers will work closely with your Financial Planner, to ensure you are given adequate advice in the area.

Wealth Accumulation

Many people overlook the power of the simple budget. On the other hand, many people aren’t quite sure how a budget even works. Let us work with you to improve you understanding of your current situation, and get your financial situation under control. Once you have a full understanding of where you are now, and where you want to be, we can look at such options as a simple savings plan, additional superannuation contributions, property, shares, gearing. There are many options available to you to help you grow your wealth, we just need to work together to find the best solutions for your situation.

Gearing & Finance Unfortunately, gearing and debt has become a popular topic of conversation at BBQ’s across the country. A lot of bad financial advice had been inadvertently given, by personal investors, to other personal investors across flaming sausages. Understanding good debt, bad debt, and how debt will work for, or potentially against you, is absolutely critical. Your friendly neighbour has wonderful intentions when the tell you about their investment properties are ‘negatively geared’, and how they’re ‘saving thousands on tax and you can to!’, however, it’s likely that they don’t have a thorough understanding of your financial position, income and all the other variables which must be considered when looking at gearing strategies and the use of debt. If you were to try the same strategy as them, you could possibly lose thousands.

Personal Insurances Investment properties have become increasingly popular, particularly over the last ten years. Various grants by Governments past and present, low interest rates, low and no doc loans, and a generally competitive lending environment, have propelled the popularity of the investment property, and made the investment property a very realistic option for investors, regardless of age and background. Unfortunately, the aforementioned BBQ Adviser has resulted in many individuals throwing themselves into the property market without seeding suitable financial advice. For example, consideration should be given to the structure under which you acquire the property, as this will ultimately impact on income tax rates, land tax, capital gains tax, GST and asset protection considerations. Where an acquaintance purchased their property in joint names with their spouse, a more suitable strategy for you may be to purchase a property through a Family Trust, or perhaps a Self Managed Superannuation Fund. Our experienced team could save you many thousands of dollars should you decide to follow the Investment Property path.

Direct Shares While not everybody’s cup of tea, a direct share investment can help maintain a well diversified investment portfolio. We ensure our clients have a thorough understanding of where their funds are currently invested, whether it be in quality blue chip companies, or speculative risk taking businesses. We recommend diversified portfolios, containing thoroughly researched, quality blue chip stocks which pay strong dividends. Our regular review of your portfolio and your personal situation, ensure a sensible balance is maintained throughout the life of your investment.

Redundancies

Should you take a redundancy? Can you afford to take it? Can you afford not to take it What are the tax and Centrelink ramifications? Facing a significant change in your working life can be extremely traumatic. We can help you be analysing your situation, and assisting you in the decision making process. Be informed, and comfortable with your final decision.

Centrelink

Dealing with Centrelink can, for some be quite an intimidating experience. Understanding the myriad of rules, and then wading through all the paperwork is a daunting prospect for most. Let us advise you on your entitlements. We can help with paperwork and we can advise you how best to optimise your position.

Self Managed Superannuation Funds (SMSF’s)

Our area of specialty since 1994. SMSF’s are the fastest growing sector of the superannuation industry with over 420,000 funds now in existence nationwide. YOU select the investment strategy, with guidance from your qualified Financial Adviser. Having complete control of your superannuation with transparency on costs, provides a lot of peace of mind.

Tax Planning

Income tax, capital gains tax, land tax, franking credits, superannuation, gearing, trusts….. and this list goes on. Really, your investments, and generally speaking, your financial affairs, should be viewed as a business. As with any business, taxation is usually one of the most significant overheads. Our in-house tax advisers will work closely with your Financial Planner to minimise tax payable. Minimising tax payable, will obviously, ultimately improve your final position. And that is our business. Taking you through a structured financial journey, with an improved final position.