New rules for properties worth $2 million or more

From 1 July 2016, those who purchase a residential or commercial property in Australia that is worth more than $2 million must withhold 10 per cent of the price.

Buyers are then required to remit this amount to the Tax Office unless they obtain a tax clearance certificate from the property vendor.

The new rule is designed to put a stop to foreign property owners who sell Australian homes without paying capital gains tax by transferring some of the responsibility to home purchasers.

Most property transactions will not be affected by the change; only 2.26 per cent of homes in Australia are estimated to be affected.

Clearance certificate forms are available on the ATO website and are valid for 12 months from issue. While no fee applies for clearance certificate applications, penalties and interest may apply when vendors make false declarations to the ATO or if a purchaser fails to withhold and remit the 10 per cent of the purchase price.

All Australians sellers of $2 million-plus properties will be classified as overseas investors unless they obtain a special tax clearance that confirms the 10 per cent withholding amount does not need to be withheld from the transaction.

The vendor must provide a clearance certificate to the purchaser by the settlement. Otherwise, the buyer must withhold 10 per cent of the sales price and pay this to the ATO.

ATO simplifies business activity statements

The Taxation Office has recently announced that it is working towards making a simpler BAS to reduce GST compliance for small businesses and also make GST record keeping and reporting easier.

This is a result of tax professionals, small businesses and industry associations expressing their concerns to the ATO over current BAS requirements. From 1 July 2017, the ATO is reducing the number of labels on activity statements. Small businesses will only need to report:

• GST on sales

• GST on purchases

• Total sales

The ATO will remove the requirement to report export sales, capital purchases, non-capital purchases and other GST free sales. The changes are designed to reduce GST record keeping costs, save time and simplify account set up, bookkeeping processes and BAS preparation.

Tax deductions that are often forgotten

A quick scan of the average taxpayer’s wallet of receipts or documents in the home office can result in quite a few expenses they can claim as tax deductions. However, some of the most obvious get forgotten on a regular basis.

While not all available tax deductions will apply for every individual (since claimable items vary based on the work they do and other personal circumstances), there are some frequently-used items professionals say people often overlook.

iPhones and iPads
Those who use their iPhone or iPad for work and have to pay for it may be able to claim a tax deduction for work-related data usage or calls. If their employer pays for their phone calls but they have purchased a cover for the phone or iPad to protect it, they may be able to claim that.

Electricity, internet and rent
Those who have a small business can claim a portion of their electricity bill, internet bill and even rent. Individuals can also claim depreciation on new computers, phones and printers up to the value of $300.  However, these tax deductions do not apply to people who work from home one day a week.

Driving expenses
Those who drive to see clients as part of their job can save on tax in that area. The two methods used to claim a deduction are cents per kilometre, where individuals can claim 66 cents per kilometre travelled, or through a log book. Individuals must keep receipts for petrol, insurance, registration, servicing and lease costs for the whole year.

Self-education courses
Those who have done a self-education course in the past year to improve their job skills can claim a tax deduction. However, if the reason a person does the course is because they’re sick of their current job and want to get a new one, they cannot claim a deduction.

Charity
Those who keep their receipts from donating to a registered charity can claim it as a tax deduction.

ATO targeting SMSF tax avoidance

The Australian Tax Office has its sight set on an emerging tax avoidance tactic being taken up by a number of self-managed superannuation funds.

The ATO has warned trustees not to use a strategy known as personal services income (PSI) through their SMSF to pay little or no tax. Even though only a handful of cases are currently being investigated, the Tax Office believes the strategy could become more widespread.

Consultants and contractors often receive a personal services income (PSI) which is paid via a trust, partnership or company for legitimate tax advantages. PSI is common in professions such as finance, IT, engineering, construction and medicine, as it is distinct from salary income paid by an employer.

The ATO had become aware of instances where PSI was placed into an SMSF so that the income was taxed at a concessional rate rather than full marginal rates.

The Tax Office has released a statement that seeks to make it clear that individuals who are avoiding paying income tax by directing their earnings into their self-managed superannuation fund are breaching the law.

Those that are found to be promoting these or similar arrangements will leave themselves open to the possibility of penalty under the promoter penalty laws.

The ATO has issued guidance for SMSFs about related-party loans and dividend stripping, where a private company channels franked dividends into an SMSF, instead of the company’s original shareholders, to escape tax.

Crackdown on superannuation tax may create borrowing spike

Tougher superannuation rules may create an unintended spike in risky property borrowing by those with a self-managed super fund, with experts suggesting that the changes will force SMSFs to load up on debt in an attempt to increase returns.

While there are still incentives for people to wanting to own property within their SMSF, under the new rules announced in the 2016 Federal Budget, rather than being able to fund investments through their own equity, many SMSFs will be forced to take on more debt to do so.

Most of the superannuation changes are due to take effect from 1 July 2017. They include a $1.6 million limit on the amount that can be transferred from a super accumulation account into a retirement account and a new lifetime limit on non-concessional (after-tax) contributions of $500,000, backdated to 2007, which took effect on budget night.

In most cases, super funds are not allowed to borrow. The exception is the limited recourse borrowing arrangement, which is only allowed in Australia’s SMSF sector.

Since 2013, the Reserve Bank of Australia has expressed concerns over the number of SMSFs taking on debt to invest in property. More recently, the ATO has cracked down on SMSFs that don’t qualify for bank finance turning to related-party loans to buy property.

Federal Budget – individuals

The Government is now giving individuals a greater incentive to work without being taxed more by making a start to personal income tax relief.

The changes will take place from 1 July 2016 and will prevent average full-time wage earners from moving into the second top tax bracket until 2019-2020, by increasing the 32.5 per cent tax threshold from taxable incomes of $80,000 to $87,000. This will affect around 500,000 taxpayers who will no longer face the 37 per cent marginal tax rate.

The policy objective is designed to keep those earning average wages in the middle tax bracket for longer. This measure will reward hard working Australians for doing more overtime, picking up more shifts, taking a promotion or a better new job, without being penalised by paying more tax through the higher rate.

In addition, the Government will increase the low-income thresholds for the Medicare levy and surcharge from the 2015/16 income year, so that low-income taxpayers can continue to be exempted from paying the Medicare levy.

ATO identifies industries targeted for potential tax audits

The ATO has identified certain businesses it plans to target for potential tax audits. These businesses include the supermarket, bakery, computer system design and car retailing industries that often need more help to meet their tax and super obligations.

In response to this, the ATO has begun an education campaign for business owners in these industries to assist them better understand their responsibilities such as superannuation, pay as you go (PAYG) withholding and FBT.

From July 2016, the ATO will be undertaking audits of employers who continually fail to meet their obligations, particularly those who do not correctly meet their superannuation obligations.

The tax office will be examining:
– how much employers are required to pay
– if employers are meeting their quarterly deadlines
– if employers pay super for contractors
– if employers are keeping accurate records
– if employers pass on an employee’s TFN to their super fund within 14 days of receiving it

ATO cautions SMSF trustees about transition to retirement streams

The ATO has issued a statement expressing its concern over recent misrepresentations of transition to retirement income streams (TRIS) and how they are meant to operate.

In its statement, the ATO said that under special circumstances a member can select under regulation 995-1.03 of the Income Tax Assessment Regulations (ITAR) 1997 to treat a TRIS payment as a super lump sum and access the low rate cap.

Members who choose to make this election for income tax purposes must recognise that the nature of the payment from the SMSF does not change for the purposes of the super regulatory law.

The tax office has warned that the complexity surrounding these transactions give rise to a number of issues that trustees need to consider to ensure their SMSF’s compliance with superannuation regulatory and income tax laws.

In particular, the ATO reminds trustees that:

• it is the nature of a TRIS payment for superannuation regulatory law purposes that is relevant to a trustee’s compliance with the 10 per cent TRIS payment annual limit

• if the TRIS payment is not a lump sum for super regulatory law purposes, it cannot be paid by an in-specie asset transfer

• electing for a TRIS payment to be treated as a super lump sum for income tax purposes may affect the amount of the SMSF’s exempt current pension income for an income year and whether particular fund assets are segregated current pension assets

• electing for a TRIS payment to be treated as a superannuation lump sum for income tax purposes will affect which super-related tax offset/s may apply to the payment

ATO teams with insurance policies to identify artworks and collectibles

The ATO has begun working with insurance companies to assess artworks and collectibles owned by taxpayers and identify the owners of these kinds of assets.

There have been many instances where the tax office has identified ‘lifestyle assets’ that were not being properly accounted for. Since some assets may be subject to capital gains tax (CGT) on disposal, it is fundamental taxpayers are aware of properly accounting for their assets to avoid being hit with a CGT bill.

The ATO has advised taxpayers to be aware that:
– items purchased for more than $500 on or after September 20, 1985 are subject to CGT, even if they are kept for the personal use or enjoyment
– special CGT rules apply to items that form part of a deceased estate
– the date of an asset’s purchase or auction needs to be accounted for; not the asset’s settlement date

From July 1, 2016, the rules regarding any collectible and/or artwork owned by an SMSF include:

• the collectibles cannot be stored at an SMSF trustee’s residence

• an SMSF trustee or a related party is not permitted to lease or use any of the collectibles

• the collectible must be insured by its own separate policy

• the storage decisions by the trustees must be documented and minuted

• if the collectible is to be sold to an SMSF trustee or related party, then a valuation by a qualified independent valuer may be required to determine the market value

Tax-free insurance policy bonuses

After a taxpayer has held a life insurance policy for ten years or longer, the reversionary bonuses received on that policy become tax-free.

Life insurance policies are issued by life insurance companies and friendly societies.

A reversionary bonus is profit earned annually on traditional life contracts on top of the sum insured that is added to the amount of an insurance policy payable at the maturation of the policy or the death of the person insured.

For taxpayers with policies that are less than ten years old, stipulated amounts are included in that taxpayer’s assessable income and a tax offset is available.

A bonus is not considered to be assessable income if it is received:

• At least ten years after the policy was first acquired

• Under a life assurance policy that was part of a super fund or scheme when the person on whose life the policy was effected passes away, has an accident, falls ill or becomes disabled

• As a result of severe financial difficulties provided the policy was not taken out with a plan to mature or be terminated within ten years