Ever wondered where the most tax money comes from? Or once in the government’s coffers, where it might be spent, eventually? The revenue comes from individual income tax, and most expenditure is directed to social security and welfare. The two graphs below were included in the 2012-13 Federal Budget papers, and show revenue sources, and expenditure, for 2011-12 on an accrual basis.

Click the Image Below to See where your tax dollars are spent.

Taxation of superannuation

Several changes have already been announced to the taxation of superannuation. Under the change, from July 1, 2013, individual superannuation accounts in their pension phase that have more than $100,000 annual earnings will be taxed at 15% on their earnings above that amount instead of being tax-free. The change applies only to earnings and does not apply to pension payments.

Also announced as part of the superannuation changes:

• pension deeming rules (which deem minimum rates of interest) will be applied to superannuation account-based income streams. All products held by pensioners before January 1, 2015 will be grandfathered indefinitely and continue to be assessed under the existing rules for the life of the product “unless they choose to change products”
• deferred lifetime annuities will receive the same concessional tax treatment that superannuation assets supporting income streams receive. This reform will apply from July 1, 2014.

Not previously announced however are some “minor” amendments including:

• a technical amendment to the Low-Income Superannuation Contribution – which provides up to $500 for people earning less than $37,000 to compensate them for tax paid on super – means it will now be paid to individuals with an entitlement below $20
• additional funds have been allocated to compensate members of the APRA-regulated super funds that suffered losses due to the Trio Capital debacle. These funds will be recovered through levies on these super funds.

Concessional contribution caps

Concessional contribution caps for people aged over 60 will increase from $25,000 to $35,000 from July 1, 2013. The higher limit will also be made available to those aged 50 and over from July 1, 2014, and all other super contributors from July 1, 2018. The government had previously said it would increase the cap to $50,000, however this is no longer on the table.

Council of Superannuation Custodians

The government will establish a Council of Superannuation Custodians to advise whether future changes in super rules are consistent with a proposed Charter of Superannuation Adequacy and Sustainability.

Health

Net Medical Expenses Tax Offset phased out

The government will phase out the Net Medical Expenses Tax Offset (NMETO) with transitional arrangements for those currently claiming the offset.

The NMETO will continue to be available for taxpayers for out-of-pocket medical expenses relating to disability aids, attendant care or aged care expenses until July 1, 2019 when DisabilityCare Australia is fully operational and aged care reforms have been in place for several years.

This measure is estimated to provide savings to the budget of nearly $1 billion over four years.

From July 1, 2013 those taxpayers who claimed the NMETO for the 2012-13 income year will continue to be eligible for the NMETO for the 2013-14 income year if they have eligible out of pocket medical expenses above the relevant thresholds. Similarly, those who claim the NMETO in 2013-14 will continue to be eligible for the NMETO in 2014-15.

Medicare levy low-income threshold

The government will increase the Medicare levy low-income threshold to $20,542 for individuals, $32,279 for pensioners eligible for the Seniors and Pensioners Tax Offset, and $33,693 for families, with the additional family threshold amount for each dependent child or student increasing to $3,094.

This measure is estimated to have a cost to revenue of $38 million over the forward estimates period. These measures apply from July 1, 2012.

Fighting cancer

The budget invested $226 million to help fight cancer. This includes $55.7 million to expand BreastScreen Australia’s target age range for free breast screening by five years – to include women aged 70-74. It is estimated that 145,000 additional women taking up the screenings every two years (from 2016-17) will mean more than 1,100 more breast cancers will be picked up every two years.

It also includes additional funding for screening in both cervical and bowel cancer. Also the government will invest more to prostate cancer research with an $18.5 million package to fund three Prostate Cancer Research Centres across the country to further their critical research work. The budget will also include funding for Cancer Australia to improve the outcomes for people with lung cancer and additional funding for cancer data to better track and record treatment efforts.

The budget also provides further support for critical chemotherapy medicines, and invests $23.8 million for life-saving bone-marrow transplants, funding of $18.2 million to expand CanTeen – a support program for teenagers undergoing treatment for cancer – and $19.5 million to expand the McGrath Breastcare Nurses program.

Increased medical funding

The government will spend an extra $2.2 billion in the Medicare Benefits Schedule across five years and $33.8 million is being invested in the General Practice Rural Incentive program in 2013-14. New medicines in the Pharmaceutical Benefits Scheme will receive $691 million over five years. Drugs will help in the treatment of Parkinson’s, chronic nerve pain and chronic hepatitis C.

Education

Gonski schools funding reforms

Over six years from 2014-15, there will be $9.8 billion invested in school reforms – in an effort to deliver greater equality in school funding, enhanced teacher selection, training, mentoring and more assistance for schools facing disadvantages. This came on the back of the Gonski review which proposed a more equitable and consistent system for school funding.

From January 1, 2014, schools will be funded per student – with primary schools getting

$9,271 per child and high schools getting $12,193 per child. Students with a disability, from a low socio-economic status, non-English speaking or indigenous background, or students from a regional, remote or small school will benefit from the additional funding.

Investment in higher education and early childhood education

Investment in higher education funding is expected to be $51 billion over five years while the government will provide $314.2 million over five years to boost the quality of early childhood education and support workplace reform. The government has also allocated an extra $97 million from 2014 to 2017 for extra Commonwealth-supported places for sub-bachelor and postgraduate courses.

Reforms to work-related self-education expenses

The government will clamp down on work-related self-education expense deductions through an annual $2,000 cap on these expenses from July 1, 2014. Deductible education expenses are costs incurred in undertaking a course of study or other education activity, such as conferences and workshops, and include tuition fees, registration fees, student amenity fees, textbooks, professional and trade journals, travel and accommodation expenses, computer expenses and stationery, where these expenses are incurred in the production of the taxpayer’s current assessable income.

Employers are generally not liable for fringe benefits tax for education and training they provide or fund for their employees, in order to support employers investing in the skills of their workers. This treatment will be retained, unless an employee salary sacrifices to obtain these benefits.

HECS-HELP discount and voluntary HELP repayment bonus discounts to end

From January 1, 2014, the following discounts relating to the Higher Education Loan Program will be removed:

• the 10% discount available to students electing to pay their student contribution up-front, and
• the 5% bonus on voluntary payments made to the ATO of $500 or more.

Establishment of tax studies institute

The government will establish a Tax Studies

Institute (TSI) as a centre for excellence in tax research at the Crawford School of Public Policy at the Australian National University by providing a one-off endowment payment of $3 million in 2012-13.

Disability

Increase in the Medicare Levy to fund DisabilityCare Australia

As announced before the budget, from July 1, 2014, the Medicare levy will increase by 0.5 percentage points. This will raise $20.4 billion between 2014-15 and 2018 19, to be spent on DisabilityCare Australia to provide certainty to Australians with a disability, their families and their carers.

Low-income earners will continue to receive relief from the Medicare levy through the low-income thresholds for singles, families, seniors and pensioners. The current exemptions from the Medicare levy will also remain in place. The revenue raised by the increase in the Medicare levy will be invested in DisabilityCare Australia.

The states and territories will also contribute to DisabilityCare Australia, and will be allocated $9.7 billion over 10 years from the increase in Medicare levy revenue. The money raised will be placed in a special fund for 10 years and only used for the additional costs of DisabilityCare Australia.

The budget provides $19.3 billion over seven years from 2012-13 to roll out DisabilityCare Australia across the country. This brings the government’s total new investment in DisabilityCare Australia to $14.3 billion over the period.

Other measures

Increase in defence funding

The government will provide $585.7 million over four years for the net additional cost of continuing Operation Slipper, Australia’s contribution to international efforts in Afghanistan and the Middle East.

Increased funding towards crime prevention

The government will provide $434.1 million over four years to fund the Royal Commission into Institutional Responses to Child Sexual Abuse. It will also provide $64 million over four years to establish a National Anti-Gang Taskforce

to fight gang-related crime across Australia, and a new Australian Gang Intelligence centre. Further, it will provide $40.9 million over four years towards the establishment of a National Crime Prevention Fund to target street crime and gang violence.

Increase in public broadcasting funding

There will be triennial funding of $90 million to the ABC for news and current affairs, triennial funding of an additional $20 million to SBS, plus a $90 million loan to the ABC to consolidate staff at its Southbank facility in Melbourne.

Foreign aid target deferred

Australia will again delay reaching its foreign aid spending target in the budget which will again be used to fund services for asylum seekers in Australia and offshore, with the amount capped at the same level as last year. The millennium goal, of having the aid budget equal 0.5% of gross national income, which was supposed to be attained in the 2015-16 financial year, has now been pushed out twice and will be budgeted for the 2017-18 financial year. Aid spending will still be increased by around $500 million in 2013-14. The slowing of growth in overseas aid will save $1.9 billion.

Public service cuts

The government confirmed reports that $580 million will be cut from the public service, with the reduction to take place over four years. The cuts will focus on reducing jobs and office space. More than 1,000 public servants will be gone by 2016, and it is expected the cuts will target the middle and senior management. Several agencies such as Foreign Affairs will suffer additional cuts, although Prime Minister and Cabinet will receive a funding increase.

Anzac Centenary Public Fund to be listed as a deductible gift recipient

Part of the Anzac Centenary Program 2014-18, the Anzac Centenary Public Fund is to be listed as a deductible gift recipient (DGR).

Update in the list of specifically listed deductible gift recipients (DGRs)

The following organisations have been approved as DGRs where taxpayers may claim an income tax deduction for certain gifts of money or property:

• Australian Peacekeeping Memorial Project Incorporated
• National Boer War Memorial Association Incorporated
• National Congress of Australia’s First Peoples Limited
• Philanthropy Australia Incorporated
• United Way Australia.

All Client Newsletter Library material is of a general nature only and is not personal financial or investment advice. It does not take into account one individual’s particular objectives and circumstances.

No person should act on the basis of this information without first obtaining and following the advice of a suitably qualified professional adviser.

To the fullest extent permitted by law, no person involved in producing, distributing or providing the information through this service (including Taxpayers Australia Incorporated, each of its directors, councillors, employees and contractors and the editors or authors of the information) will be liable in any way for any loss or damage suffered by any person through the use of or access to this information.

Increase in ASIC fees

The government has revealed an increase in the cost of registering a business name, with the Australian Securities and Investments Commission (ASIC) increasing fees from $30 for one year and $70 for three years to $32 and $74 respectively. Some of the revenue from the move will be used by the corporate regulator to upgrade its call centre infrastructure to better cope with increasing demand from small business.

Increase in 457 visa application charges and compliance scrutiny

From July 1, 2013, the application fee for 457 visas will almost double from $455 to $900. The four-year 457s are temporary residence visas offered to skilled workers and their dependants who are sponsored by an Australian company. The measure is expected to raise $198 million in revenue over four years. The Fair Work Ombudsman is also set to receive $3.4 million over the next four years in new funding to monitor and enforce employer activity among 457 visa holders.

Increase in funding for Innovation Investment Fund and Fair Work Commission

The Innovation Investment Fund has been allocated fresh cash of $350 million, and the Fair Work Commission will receive $21 million specifically aimed at policing workplace bullying.

Allowing businesses in a net refund position to continue to use the GST instalment system

In the 2011-12 budget, the government announced a measure which would allow businesses in a net refund position to access the GST instalment system. The government has now announced a revision to the previously announced measure so that only those businesses already using the GST instalment system will be allowed to continue to use it if they move into a net refund position.

National Broadband Network

Funding of $12.9 million has been pledged to help small businesses take advantage of opportunities from the National Broadband Network, although the ICT Centre of Excellence will be scrapped.

Increase competitiveness

Dubbed the Enterprise Solutions Program, nearly $30 million has been promised over five years to aid small business become more competitive when bidding for government contracts and tenders. Grants of up to $100,000 for feasibility studies and $1 million for proof of concept will be made available, the government said.

The government is also providing $135 million for 150 four year Future Fellowships to attract and retain the best Australian and international mid career researchers “in areas of national importance”.

No word on loss carry-back measures

No mention seems to have been made to the loss carry-back tax measure, which was announced in last year’s budget, and is yet to be legislated.

Compliance

Trusts targeted

The ATO has been allocated an additional $68 million in the 2013-14 budget to target trust misuse. It will focus on the exploitation of trusts to conceal income, misrepresent transactions and artificially reduce trust income amounts to avoid or reduce tax.

It will also focus on what the government dubs “contrived loan arrangements” and the promoters of tax avoidance and evasion schemes.

The ATO will target known tax scheme designers, promoters, individuals and businesses who participate in such arrangements through its compliance activity. “This measure will tackle the issue of abusive trust schemes in the wider community and encourage active compliance by taxpayers,” the budget papers said.

The crackdown is expected to bring in an additional $311 million in revenue. Assistant Treasurer David Bradbury said in a statement announcing the additional funding that “emerging evidence” showed a significant increase in the level of trust-based non-compliance.

Bradbury also indicated there will be further reform of the tax law surrounding trusts and said the government will use intelligence gathered by the ATO to guide the next phase of its consultation on trust taxation law reform.

Tightening measures

Business taxation changes introduced in the 2013-14 budget include a tightening of measures that aim to prevent multinational businesses shifting tax-deductible loans to Australian subsidiaries. The government said it will “address aggressive tax structures that seek to shift profits by artificially loading debt into Australia”.

Other “loopholes and abuses” include tightening the thin capitalisation rules and removing the interest expense deduction for deriving certain foreign exempt income. This and related measures will apply from July 1, 2014.

Dividends

Investors with franking credit tax offset entitlements of more than $5,000 will be prevented from engaging in “dividend washing”, thus claiming two sets of franking credits on effectively the same parcel of shares.

The measure will ensure that when an investor sells shares ex-dividend and then immediately buys equivalent shares that still carry the right to a dividend (known as cum-dividend shares), they will only be permitted to claim one set of franking credits. The changes will be targeted to the special two-day period after a shares goes ex-dividend. This will apply from July 1, 2013.

Data matching and third party information

The government will provide $77.8 million over four years to the ATO to improve compliance by expanding data matching with third party information.

Treasury said the information provided will also improve the pre-filling of tax returns. The measure will establish new and strengthen existing reporting systems for:

• taxable government grants and specified other government payments
• sales of real property, shares (including options and warrants), and units in managed funds
• sales through merchant debit and credit services
• managed investment trust and partnership distributions, company dividend and interest payments, and
• transactions reported to the ATO by the Australian Transaction Reports and Analysis Centre.

Capital gains tax (CGT)

The principal asset test for foreign resident CGT will be amended and a non-final withholding tax will be introduced. This will ensure that indirect Australian real interests are taxable if disposed of by a foreign resident.

Where a foreign resident disposes of certain taxable Australian property, the purchaser will be required to withhold and remit to the ATO 10% of the proceeds of the sale as a non-final withholding tax. This will not apply to residential property transactions under $2.5 million or disposals by Australian residents. This measure applies from July 1, 2016.

Also, native title rights transfers will not involve any CGT implications where the transferee is an Indigenous person or holding entity. This last measure retrospectively applies from July 1, 2008.

All Client Newsletter Library material is of a general nature only and is not personal financial or investment advice. It does not take into account one individual’s particular objectives and circumstances.

No person should act on the basis of this information without first obtaining and following the advice of a suitably qualified professional adviser.

To the fullest extent permitted by law, no person involved in producing, distributing or providing the information through this service (including Taxpayers Australia Incorporated, each of its directors, councillors, employees and contractors and the editors or authors of the information) will be liable in any way for any loss or damage suffered by any person through the use of or access to this information.

Many key announcements were made pre-budget and confirmed by the government in the budget papers, including:

• wide-ranging changes to superannuation such as the 15% tax on certain earnings in pension phase, the increase in the concessional contribution cap to $35,000 for older Australians and the changes to the excess contributions tax regime;
• the deferral of tax cuts due for the 2015-16 year which were to be funded out of carbon tax receipts;
• an increase in the Medicare levy of 0.5% to contribute to the cost of the proposed National Disability Insurance (NDIS) scheme.*

Announcements which were unexpected and which will have a significant impact on middle-Australia were:

• the removal of the Baby Bonus, to be replaced by a significantly reduced payment which will only be available to taxpayers who qualify for Family Tax Benefit Part A; and
• the phase out of the Net Medical Expense Offset (which will in fact be immediate for some taxpayers).

An announcement of interest from the Assistant Treasurer was titled “ATO taskforce to target trust misuse”. It is to be hoped that the activity undertaken by the taskforce is targeted

at what would be considered by a reasonable person as “misuse” (which should not be tolerated) and not merely the use of trusts as part of ordinary family or commercial dealings.

* Note that for all other taxation imposts that are tied to the Medicare levy, the costs of that impost will also increase by 0.5%.

Individuals, families

Carbon tax-funded tax cuts “deferred”

Changes to the personal tax-free threshold announced in the 2012-13 budget as part of the carbon tax compensation package will not proceed (see table on page 2). As a result, the proposed 2015-16 increase in the tax-free threshold from $18,200 to $19,400 has been deferred. The tax-free threshold, which was raised from $6,000 to $18,200 from July 1, 2012 as part of the carbon tax compensation package, is not affected by the government’s announcement. This measure is part of the variations to the Clean Energy Future package due to the lower than projected carbon price estimates.

Personal income tax rates

The 2013-14 budget confirmed the income tax cuts for the 2012-13 income year, however the government has decided to defer the subsequent tax rate changes contained in this legislation that were to commence on July 1, 2015. A summary of how the resident personal rates will apply is set out in the table below.

Baby Bonus abolished, family payment boost abandoned and “work test” under the Paid Parental Leave scheme extended

The Baby Bonus will be abolished from March 1, 2014 in favour of new support for families of newborns through the Family Tax Benefit Part A (FTB Part A).

The government will increase these payments by $2,000, to be paid in the year following the birth or adoption of a first child or each child in multiple births, and $1,000 for second or subsequent children. The additional FTB Part A will be paid as an initial payment of $500, with the remainder to be paid in seven fortnightly instalments.

The measure will save $1.1 billion over five years, in addition to the $1.8 billion generated by the decision not to proceed with the increase in FTB Part A. The increase to the FTB Part A was to be funded by the mining tax and was detailed in the 2012-13 budget. The payment increase would have gone to 1.5 million families, with families with one child receiving the maximum rate of FTB Part A, an extra $300 a year, and those with two or more children to receive $600.

The Baby Bonus currently cuts out at an earnings threshold of $150,000, but the earnings cut-off for FTB Part A is $94,316 so the government’s move effectively limits a high proportion of top earners’ access to the financial assistance for newborns.

Families accessing the government’s Paid Parental Leave (PPL) scheme, which remains unchanged, will not be eligible for the additional FTB Part A component. However, the work test under the PPL scheme will be extended so that parents will be able to count periods of government PPL as “work”, just like employer-funded PPL.

Investments to improve childcare quality

Although the maximum amount of the Child Care Rebate will be frozen at $7,500 a year until June 30, 2017 – saving the government $105.8 million – the government will provide up to $300 million in a two-year program to allow day care centres to pay workers with Certificate III qualifications an extra $3 an hour. The government will also provide $12.9 million over three years to trial flexible child care arrangements for families who require care outside standard operating hours.

Price of cigarettes to rise

The indexation of excise and excise-equivalent customs duty for tobacco and tobacco products will be charged to average weekly ordinary time earnings (AWOTE), instead of the consumer price index (CPI). The duty rates will be indexed bi-annually, on March 1 and September 1 each year. This measure will apply from March 1, 2014.

Based on the average historical difference between annual AWOTE and CPI movements, this measure would result in the cost of a typical packet of 25 cigarettes increasing by an additional 7 cents in the first half of 2014. Indexing tobacco excise and excise-equivalent customs duty to wages will ensure that tobacco excise keeps pace with incomes.

Work concessions for Newstart Allowance recipients

From July 1, 2015, people on Parenting Payment Partnered, Newstart Allowance and Widow, Sickness or Partner Allowance will be able to earn $100 a fortnight, up from $62, before their income support starts to fall. The government said about 150,000 people on income support who are earning more than $62 a fortnight are expected to benefit immediately, with an average increase of $19 a fortnight to their payments.

The benefit is available to a further 650,000 people on income support if they take up work. The income-free area will be indexed by annual percentage changes in the consumer price index from July 1, 2015.

From January 1, 2014, single parents studying while on the Newstart Allowance will also receive up to $62.40 a fortnight or $31.20 a fortnight for a concessional study load under the Pensioner Education Supplement (PES), to help with the costs of study while they gain an additional qualification to assist them to re-enter the workforce.

Single parents who are no longer eligible for the Parenting Payment because their youngest child has turned eight nor qualify for income support due to their earnings will have their eligibility for the Pensioner Concession Card extended from two to 12 weeks.

Exempting certain disaster payments from income tax

Disaster Income Recovery Subsidy (DIRS) payments provided between January 3, 2013 and September 30, 2013 are to be exempted from income tax. The DIRS provides financial assistance to employees, small business persons and farmers who experience a loss of income as a direct consequence of a natural disaster occurring in Australia. This measure is estimated to have no revenue impact over the forward estimates period.

Ex-gratia payments to New Zealand non-protected Special Category Visa holders affected by natural disasters that occurred in 2012-13 will also be exempted from income tax. These ex-gratia payments are equivalent to the tax-exempt Australian Government Disaster Recovery Payment (AGDRP) and assist New Zealanders who would otherwise have been eligible for the AGDRP if it were not for their visa status.

Help for seniors

The government will invest another $127 million in supporting senior Australians to continue their active engagement in society – including $9.9 million to extend their broadband support, $4.6 million for a new ageing policy institute, and a $112 million pilot program to assist them to downsize their home without affecting their pension From July 1, 2014, pensioners who have owned their family home for at least 25 years and who decide to downsize

will have the option to invest surplus funds (up to $200,000) in an account. The funds invested in the account and earned interest will be exempt from the Age Pension means test for up to 10 years. Also a new seniors’ Work Bonus is intended to ensure pensioners keep more of their pension while working.

Road and rail infrastructure projects

The government will spend $24 billion in road and rail infrastructure projects from 2014-15 to 2018-19, including $4.1 billion for the Bruce Highway, $715 million for Brisbane’s Cross River Rail bridge, $1.8 billion towards Sydney’s M4 and M5, $718 million on the Gateway Motorway, $525 million on the M80 ring road in outer Melbourne, $500 million on Perth public transport, $500 million for Tasmania’s Midlands Highway, and $448 million on the South Road upgrade in Adelaide.

The government will also continue its investments in the Swan Valley Bypass in WA, the Bruce Highway in Queensland, the Pacific Highway in NSW, the Midlands Highway in Tasmania and the Tiger Brennan Drive in the Northern Territory.

Indexation pauses

Other than the Child Care Rebate, the following items will also be subject to a pause on their indexation:

• FTB end of year supplements
• the higher income tests for family payments, and
• the income threshold for the dependency tax offsets

These will be extended for a further three years.

All Client Newsletter Library material is of a general nature only and is not personal financial or investment advice. It does not take into account one individual’s particular objectives and circumstances.

No person should act on the basis of this information without first obtaining and following the advice of a suitably qualified professional adviser.

To the fullest extent permitted by law, no person involved in producing, distributing or providing the information through this service (including Taxpayers Australia Incorporated, each of its directors, councillors, employees and contractors and the editors or authors of the information) will be liable in any way for any loss or damage suffered by any person through the use of or access to this information.

Registrations to cancel

As part of the process, you need to cancel your registrations with the ATO when you sell or cease trading. You are required to notify the Australian Business Register within 28 days of ceasing business and cancel, where applicable, registrations for the following:

• Australian business number (ABN)
• goods and services tax
• fuel tax credits
• luxury car tax
• pay-as-you-go (PAYG) withholding.

A note of caution however — it’s best to make sure all activity statements are lodged (even if there is “nil” to report) as well as PAYG withholding reports before cancelling your ABN. Your GST registration needs to be cancelled 21 days from ceasing trading, and the final activity statement will need to show any sales or purchases for that period (including the sale of the business, if applicable).

Final tax returns

A final tax return will need to be prepared for the business if operating from a structure such as a company or trust.  The return will need to cover the portion of the financial year up to when the business folds. Further, you should still keep your records. The tax law says they need to be kept for five years for all sales, purchases, and payments to employees and other businesses.

GST loose ends

The sale of a “going concern” will generally be GST-free, subject to certain conditions. One of these conditions is that “all things necessary for the continued operation of the enterprise” is made. If not all assets are sold as part of the continuing business (for example, essential plant and equipment are sold separately), there is a risk is that you may lose the going concern GST exemption.

If this particular exemption is unavailable, an asset that is “real property”, such as land and buildings will attract GST when sold. This is set at one-eleventh of the sale price. For example, if you sell land for $88,000, the GST will be $8,000. But there is a “margin scheme” for real property you might be able to use, which sets the GST at one-eleventh of the difference between the sale price and typically how much you paid for it.  Again, there are specific conditions which apply to access this scheme. GST issues involving the sale of a business are complex; see this office for more details.

CGT loose ends

Capital gains tax (CGT) will likely come into play in the course of your business sale transaction.  Don’t forget to account for any capital losses that have been previously carried forward.

There are various CGT concessions available for the “small business” owner. For example, if you are retiring and have been in business for at least 15 years, the profits from the sale of assets may be CGT-free. Alternatively, your super fund could get a helpful boost. If the proceeds of the sale of a business CGT asset are rolled over into a super fund, the capital gain is exempt from CGT. This “retirement exemption” applies to the gains made on the sales of as many business CGT assets as you like, subject to a total lifetime limit of $500,000. And if you’re at least 55 years old, you don’t even need to put the money into a super fund to qualify for the tax exemption (ask this office for more details).

For those operating from a company, beware of doling out payments or benefits to shareholders and their families, as such distributions could trigger a tax liability for them under the “Division 7A” provisions. This section of tax law means (among many other things) that if a company makes a payment to a shareholder or associate, or even “forgives a debt”, the ATO can deem it to be a “dividend” and require tax to be paid by the recipient.

(See separate article in this newsletter on Division 7A, however this can be a complicated tax area, so tailored and specific advice will be advisable.)

DISCLAIMER: All information provided in this publication is of a general nature only and is not personal financial or investment advice. It does not take into account your particular objectives and circumstances. No person should act on the basis of this information without first obtaining and following the advice of a suitably qualified professional advisor. To the fullest extent permitted by law, no person involved in producing, distributing or providing the information in this publication (including Taxpayers Australia Incorporated, each of its directors, Councillors, employees and contractors and the editors or authors of the information) will be liable in any way for any loss or damage suffered by any person through the use of or access to this information. The Copyright is owned exclusively by Taxpayers Australia Inc (ABN 96 075 950 284).

What is Division 7A?

Division 7A exists as an integrity measure, and deals with benefits such as payments, loans, or even debt forgiveness made by private companies. The Division 7A law prevents private companies making tax-free profit distributions to shareholders (and their associates).

Such transactions can include:

• Amounts paid by a private company to a shareholder (or associate), including transfers or uses of property for less than market value
• Amounts lent to the same without specific loan agreement (not loans fully re-paid by lodgement day*)
• Debts the business forgives.

Through the Division 7A rules applying, such loans, debt forgiveness or other payments are treated as assessable unfranked dividends to the shareholder (or associate), and taxed accordingly in their hands.

Who does it apply to?

“Private companies” are covered by Div 7A. The rules thereby apply to the shareholders of such companies (typically, the principals of the business) and their “associates”.  This last term is widely defined and can include family members and related entities. Employees may be affected if they are shareholders (although fringe benefits rules may also apply in preference).

If you find yourself in circumstances where there is a possibility of Div 7A provisions applying, and the tax consequences that go along with it, consult this office.

What commonly triggers Division 7A?

Most commonly, Div 7A applies where there is a loan by the company to the business’s owners (that is, shareholders). A loan will generally be treated as a dividend if a company lends money to a shareholder (or associate) in an income year and the loan is not fully repaid by the lodgement day* of the same income year.

Another example, which is not all that uncommon, is where an asset of the company is made available for use of the shareholders — a holiday house owned by the company is a typical example.

Where shareholders of the private company use that holiday house for free over a certain period, this will likely trigger Div 7A as a “payment”, as this use is viewed as having a commercial value. That value is deemed to be a distribution to shareholders that would otherwise be tax-free were it not for the Div 7A provisions.

What can be the consequences?

Any loans, payments and debt forgiveness from the business to its shareholders (or associates) may be deemed to be an assessable dividend to tax in the hands of the shareholder (or their associates) typically at their marginal tax rate, under the Div 7A rules. The dividend is “unfranked” meaning that there are no franking credits available to the recipient (unless the Commissioner exercises his discretion to the contrary).

But one important aspect of Div 7A, broadly speaking, is that there needs to be “profits” from which the business can make payments. This is referred to as a “distributable surplus”.

In general terms, provided there is a sufficient distributable surplus in the company, all payments made by a private company to a shareholder (or their associate) to which Div 7A applies are treated as dividends at the end of the income year.

Can you avoid Division 7A?

To avoid the Div 7A provisions, such transactions must be arranged correctly and at “arm’s length”. In particular there are certain payments, loans and debt forgiveness that are not always treated as dividends.

Certain payments are not always treated as dividends:

• The repayment of a genuine debt owed to the shareholder
• A payment to a company (not acting as trustee)
• Any payment that is otherwise assessable for tax
• A payment made to a shareholder in the capacity of an employee (including their associates)
• A liquidator’s distribution.
• The following loans are not treated as dividends:
• A loan fully repaid within an income year
• Loan to a company (if it is not acting as a trustee)
• Loans made “in the ordinary course of business” on commercial terms
• A loan made to buy shares or rights under an employee share scheme
• Any loan that is otherwise assessable for tax
• A loan that is put under a special type of loan agreement called a “Division 7A loan agreement” before the lodgement day of the company’s tax return*
• Other types of loans that meet the definition of “excluded loans” for Div 7A (see this office).

And not all debts that are forgiven end up being treated as dividends, such as:

• Where the debtor is a company
• If the debt is forgiven because the shareholder becomes bankrupt
• Where the loan that created the debt is itself treated as a dividend
• If the Tax Commissioner exercises discretion due to being satisfied that the shareholder would otherwise suffer undue hardship.

Borrowing money from a private company, even if it is your own business, can have serious pitfalls if not carried out correctly.  It may be necessary to put in place a Div 7A loan agreement. Seek advice from this office if you find yourself in such circumstances.

*the earlier of the due date for, or actual date of, lodgement of the company’s return.

DISCLAIMER: All information provided in this publication is of a general nature only and is not personal financial or investment advice. It does not take into account your particular objectives and circumstances. No person should act on the basis of this information without first obtaining and following the advice of a suitably qualified professional advisor. To the fullest extent permitted by law, no person involved in producing, distributing or providing the information in this publication (including Taxpayers Australia Incorporated, each of its directors, Councillors, employees and contractors and the editors or authors of the information) will be liable in any way for any loss or damage suffered by any person through the use of or access to this information. The Copyright is owned exclusively by Taxpayers Australia Inc (ABN 96 075 950 284).

LAFHA is intended to compensate for the additional expenses incurred when an employee is required to live somewhere other than their usual home in order to carry out their employment duties (although the term ‘additional expenses’ does not include expenses that they would be able to claim as tax deductions anyway).

The Tax Office considers that an employee is living ‘away from home’ when they have a usual place of residence at which they would otherwise continue to live but for the fact that work commitments require them to temporarily live in a different locality.

What is a ‘usual place of residence’?

While it may seem straightforward to determine if a worker is living at their usual place of residence or not, the current interpretations have been developed over years of case law decisions, and ultimately depend on the facts of each case.

Factors such as the lifestyle of the employee, residency status, type of profession, location of family members and the type of industry can often be part of Tax Office considerations, should they investigate claims. Other relevant details may include, for example, whether electoral enrolment has changed, or driver’s licence details, or whether the former residence is under a ‘house-sitting’ arrangement or is being rented out while the employee is working at the other locality.

LAFHA concessions may not be available, for example, where it can be shown that an employee has a more transitory lifestyle, such as following shearing work from wool shed to wool shed, and so strictly does not have a ‘usual’ place of residence. Also certain kinds of occupations bring with them locational transfers as part and parcel of the job, such as members of the defence forces, certain law enforcement officers or project managers.

Although ‘usual place of residence’ is not defined, and so takes on its ordinary meaning, it is stipulated that the residence must be one that the taxpayer (or their spouse) has an ‘ownership interest’ in and that continues to be available for their use while living away from it.

The interpretation of ‘ownership interest’ means that, for example, adult children living in the family home who move away from that home for work are not entitled to LAFHA. And the stipulation that the residence must be ‘available for use’ means a taxpayer cannot rent out the premises, for example, while they are away from it and still claim the allowance.

But there are straightforward LAFHA situations, such as where an employee is appointed for a specified time to a branch office in another state, and in some situations employees who are construction workers living in camps, barracks or huts, and oil industry employees living on offshore oil rigs.

Reforms and the new regime

In November 2011, the government’s Mid-year Economic and Fiscal Update contained announcements regarding LAFHA. Under the reforms announced at the time:

• Access to the tax exemption for temporary residents will be limited to those who maintain a ‘usual place of residence’ for their own use in Australia, which they are living away from for work purposes, such as under ‘fly-in/fly-out’ arrangements (a separate reform extends the fly-in/fly-out exemption to ‘resident’ employees working overseas)
• Individuals will be required to substantiate their actual expenditure on accommodation and food beyond a statutory amount.

A new 12-month limit

A further set of reforms was announced following the release of the Federal Budget in May 2012, which included clarification about how employment arrangements will be affected by the previously announced LAFHA changes. Another limitation was added in that the government will provide the tax concession for a maximum period of 12 months in respect of an individual employee for any particular work location.

This 12 month period:

• Commences the first day the employee begins living away from home
• Pauses if the employee temporarily relocates to their usual place of residence
• Restarts if the work location changes, and it would be unreasonable for the employer to expect the employee to commute to the new location from the earlier location
• Does not apply to fly-in/fly-out workers
• Does not recommence if the employee takes up employment with a connected entity.

Reforms that affect everyone

LAHFA is primarily designed to cover food and accommodation expenses. In its previous incarnation food costs up to a ‘statutory’ amount, which was for example $250 per week for one adult or $400 for two adults, and accommodation costs which were ‘reasonable’, incurred no fringe benefits tax.

This has now been changed, and allowances for food and accommodation are part of further reforms relating to the concession which will affect anyone already receiving the allowance.

•          the requirement to substantiate expenditure against the allowance came into effect on October 1, 2012 for all employees

•          LAFH allowances will transfer from the fringe benefits tax regime to the income tax system.

The last point will bring with it further consequences:

1. The allowance will be assessable income to the employee and reported on their year-end payment summary
2. Food expenses that exceed $110 per adult and $55 per child under 12 (per seven day period) will be deductible up to a reasonable amount
3. Substantiation of food expenses which exceed an amount specified by the Commissioner of Taxation will be required (the threshold amount is yet to be announced)
4. Provided the eligibility criteria is met, the employee will be able to deduct expenditure for accommodation and food on their income tax return
5. Accommodation expenses can be substantiated by lease agreements, mortgage documents or other accommodation receipts.

The new regime: What the reform involve

LAFHA arrangements entered into after 7.30pm AEST, May 8, 2012, come under the new regime from October 1, 2012 (initially slotted to start on July 1, 2012, the regime has been delayed by three months to allow both employers and employees to prepare for the changes).

There are limited transitional rules for employees with LAFH employment arrangements in place before 7.30pm on May 8, 2012:

• permanent residents — will not be required to maintain a home in Australia and the 12 month maximum period will not apply until the earlier of July 1, 2014, or a new employment agreement is entered into
• temporary residents — the 12 month maximum period will not apply until the earlier of July 1, 2014 or a new employment agreement is entered into, however the employee must be maintaining a home in Australia that they are living away from.

DISCLAIMER: All information provided in this publication is of a general nature only and is not personal financial or investment advice. It does not take into account your particular objectives and circumstances. No person should act on the basis of this information without first obtaining and following the advice of a suitably qualified professional advisor. To the fullest extent permitted by law, no person involved in producing, distributing or providing the information in this publication (including Taxpayers Australia Incorporated, each of its directors, Councillors, employees and contractors and the editors or authors of the information) will be liable in any way for any loss or damage suffered by any person through the use of or access to this information. The Copyright is owned exclusively by Taxpayers Australia Inc (ABN 96 075 950 284).

Businesses that have bought a vehicle in the last two years are likely to be affected by this data matching program, with the ATO emphasising that its program targets compliance in three key areas — FBT, the luxury car tax, and fuel schemes (such as fuel tax credits) which are administered by it.

The ATO said that common issues found in some of the more high-risk cases involving cars and FBT obligations include employers failing to correctly identify private use, and failing to keep supporting documentation, including log books and odometer records. It has flagged the fact that it is using information obtained from various motor vehicle registration bodies in each state and territory to identify employers who have bought a business registered vehicle but have not, for example, registered for FBT.

The ATO’s vehicle data matching efforts also identifies all motor vehicles sold, transferred or newly registered in the 2011-12 and 2012-13 financial years where the transfer and/or market value is $10,000 or greater. Data from income tax returns, at the category for motor vehicle expenses, will also be matched.

The ATO said that employers who make a car available to employees for “private use” will most likely have an FBT liability. Cars are made available to an employee/associate when the car is not at the employer’s premises and the employee is allowed to use it for private purposes.

Business owners should be aware that:
• If a car is garaged at an employee’s home, it is taken to be “available for private use” (regardless of whether they have permission to use if for private purposes), and
• As a general rule, travel to and from work constitutes private use of a vehicle.

There are only limited circumstances where an employee’s private use of a vehicle is exempt. For example, no FBT is payable where all of the following conditions are met:

• a work-related vehicle (being either a taxi, panel van or certain utility vehicles) is provided
• the car is used for work-related travel and for travel between home and work only
• there is minimal private usage of the vehicle (the ATO cites an example of occasional use of the vehicle to remove domestic rubbish).

Please consult our office if you feel at all concerned about your obligations related to FBT and motor vehicles.

DISCLAIMER: All information provided in this publication is of a general nature only and is not personal financial or investment advice. It does not take into account your particular objectives and circumstances. No person should act on the basis of this information without first obtaining and following the advice of a suitably qualified professional advisor. To the fullest extent permitted by law, no person involved in producing, distributing or providing the information in this publication (including Taxpayers Australia Incorporated, each of its directors, Councillors, employees and contractors and the editors or authors of the information) will be liable in any way for any loss or damage suffered by any person through the use of or access to this information. The Copyright is owned exclusively by Taxpayers Australia Inc (ABN 96 075 950 284).

Changes to Superannuation 

Information sheet: ‘Changes to super for super funds, including self-managed super funds’

Published on 25 March 2013, this information sheet contains information to keep super funds, including SMSFs, up to date on new super announcements by the Government and on any changes to the law which may affect them.  The Tax Office says that this information will be updated regularly.

Information on the following topics is covered in this edition:

• Consolidating multiple accounts and reuniting lost super
• Securing super
• MySuper
• Data and e-commerce standard
• Changes for SMSFs
• Operation of certain super trust deed clauses, and
• Other SMSF issues.

Employer’s Obligations to New Superannuation Changes

Information sheet: ‘Getting employer clients ready for changes to super’

Published on 19 March 2013, this information sheet advises that in April 2013 the Tax Office will be sending information out to employers with Superannuation Guarantee (SG)obligations.  Some of them may be clients of tax agents.

Employers across Australia will have new super obligations under a range of reforms that are being implemented from 2013 to 2019.

From 1 July 2013, employers must:

• increase the minimum rate for SG payments on behalf of their employees from 9% to 9.25%
• start making SG contributions for employees aged 70 years and over with the removal of the existing upper age limit.

Superannuation Rates and Thresholds 

Updated factsheet: ‘Key superannuation rates and thresholds’

On 13 March 2013, the Tax Office published an updated factsheet that contains key superannuation rates and thresholds that apply in relation to contributions and benefits, employment termination payments, SG and co-contributions for the 2013-14 financial year.

DISCLAIMER: All information provided in this publication is of a general nature only and is not personal financial or investment advice. It does not take into account your particular objectives and circumstances. No person should act on the basis of this information without first obtaining and following the advice of a suitably qualified professional advisor. To the fullest extent permitted by law, no person involved in producing, distributing or providing the information in this publication (including Taxpayers Australia Incorporated, each of its directors, councillors, employees and contractors and the editors or authors of the information) will be liable in any way for any loss or damage suffered by any person through the use of or access to this information. The Copyright is owned exclusively by Taxpayers Australia Inc (ABN 96 075 950 284).