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February 2022 Newsletter

 

Single Touch Payroll 2: The time has come

Consolidate your super

What does Temporary Full Expensing (TFE) of assets mean for me?

Topping up your concessional contributions

Your Business Structure

Tax and property price increases

Benefits of a corporate trustee structure for your SMSF

 

 

In the May 2019 Federal Budget, the Government announced that Single Touch Payroll (STP) would be expanded to include additional information, building on the first stage of STP which was made compulsory for most employers from 1 July 2019.

For background, the STP regime is a government initiative which is designed to reduce an employer’s burden when reporting to Government agencies such as the ATO. Under the regime, employers report employee payroll information to the ATO each time they are paid via STP-enabled software.

Start date

The start date for Phase 2 reporting was 1 January 2022, however the ATO has advised that employers who provide the additional reporting required under Phase 2 by 1 March 2022 will be accepted as having met the deadline.

Digital service providers (DSPs) can apply for a deferral if they need more time to make changes and update their solutions. Such a deferral then automatically applies to customers of that provider. For example, Xero have advised that they have been granted a deferral until 31 December 2022. This means that all customers using Xero Payroll will also have until that date to report their first STP Phase 2 pay run. Check with your provider if a deferred start date applies.

For businesses that need more time to transition, you may apply for an extension beyond your software provider’s deferral. Registered accountants and bookkeepers will also be able to apply on your behalf.

On the compliance front, under Phase 2, genuine reporting mistakes will not be penalised in the first year until 31 December 2022.

ATO: Benefits for employers

  1. TDN Declarations

Employers will no longer need to send employee TFN declarations (they will still need to be collected and filed in employee records, however).

  1. Closely held payees

For businesses using concessional reporting, such as is the case for closely held payees, this can be communicated through income types.

  1. Lump Sum E Payments

When making Lump Sum E payments, employers won’t need to provide Lump Sum E letters to employees.

  1. Payroll Data Integrates with Services Australia

Payroll information employers provide to the ATO will be shared in near real-time with Services Australia, who can use it to streamline requests.

What isn’t changing?

The way you lodge, pay and update events

  • The due date for lodging events
  • The types of payments that are needed
  • Tax and super obligations
  • End of financial year finalisation event requirements

In practice

Once your STP 1 solution is upgraded to offer phase 2 reporting, you can transition at any time throughout a financial year. The way you transition from STP 1 to STP Phase 2 reporting will depend on your circumstances and the solution you use.

You should follow your digital service provider’s instructions to upgrade your solution. 

Checklist

  • Commence reporting from 1 March 2022
  • No penalties for genuine mistakes apply until the start of 2023; the main thing is to commence reporting
  • Consult with your existing STP 1 provider about the transition to STP 2
  • Seek input from your accountant or bookkeeper around the reporting itself.

WARNING: STP 2 IS NOT JUST A SOFTWARE UPGRADE

The sheer volume of additional data is perhaps the most notable feature of STP 2. Phase 2 requires employers to develop an understanding of what data is required, in the multitude of STP 2 labels and codes in order to properly drive STP 2 software.

All told, there are 16 new reporting labels and approximately 100 different codes and reporting options. STP2 reported data will help shape employee social security, Child Support Agency and income tax outcomes.

It may the case that the complexities around STP 2 will be too great for many small business owners, and they will need input of their accounting or bookkeeping advisor.

 

Did you know that there are approximately 10 million unintended multiple super accounts, which represents around 35% of all member accounts held by funds?

While in some cases this outcome may be intended, more often than not the creation of multiple accounts is unintended and mainly occurs when employees change jobs and do not nominate the same (or any) account for their super guarantee to be paid into.

These multiple super accounts are costing Australians an extra $690 million in duplicated administration fees and $1.9 billion in insurance premiums per year, which is eroding many Australians’ hard earned super benefits.

If you are one of these individuals with multiple super accounts, there may be benefits to rolling your accounts onto one super fund. 

 

The benefits of consolidating funds

 

There are a number of benefits of rolling your accounts into one fund, including:

  • Prevent duplicated fees – having one super fund means one set of fees, potentially saving you hundreds and thousands of dollars over your lifetime.
  • Easier to manage – having all your super in one account makes it easier to manage as there is less paperwork and administration to worry about.
  • Maximise your investment returns – once you have consolidated your funds, it will be easier to manage your investment strategy and you’ll be able to maximise the funds to invest.

Things to consider before consolidating

Before you consolidate your funds, there are a few things you should consider, including:

  • Check whether you have any insurance cover – you may hold life, total and permanent disability cover and income protection through your super funds. When changing funds, you may lose this cover or not receive the same level of cover in the new fund. Individuals with pre-existing medical conditions and those aged over 60 need to be particularly vigilant.
  • Compare your super funds – it is important to compare your super funds to check on things like fees, insurance premiums, variety of investment options available, performance data, etc before you choose a super fund that meets your needs.
  • Check if you can rollout of your current fund – it may not be possible for you to transfer your money out of your account eg, if you have a defined benefit fund.
  • Speak to your licensed financial advisor to help you make the right decision, particularly if you’re not sure about the adequacy of your new or existing insurance coverage.

How to consolidate

Consolidating your super is now easier than ever, using ATO online services or your myGov account.

If you’re not sure whether you might have other super accounts, you can also search for lost or unclaimed super via the ATO or by logging into your myGov account linked to the ATO and clicking on Manage my super. 

 

What does Temporary Full Expensing (TFE) of assets mean for me?

As Australia looks to get back to work and continue its recovery, the Temporary Full Expensing (TFE) measures are available to support business and encourage investment. Eligible businesses can claim an immediate deduction for the business portion of the cost of most assets in the year they are first used or installed ready for use.

Businesses (in this case with an aggregated turnover less than $5 billion) can deduct the full cost of eligible assets acquired after 6 October 2020 (Budget night) in the 2020-21 and 2021-22 income years. Legislation is currently before Parliament to extend this to the 2022-23 income year as well. Small businesses that use the simplified depreciation rules will also claim a deduction for the balance in their small business pool during this time.

Can I deduct any assets?

There are some assets that are excluded from the TFE measures, the main ones being:

  • certain assets in low-value or software development pools
  • capital works (building improvements) that are deducted under Division 43, and second-hand assets used to produce income from residential property
  • Primary production assets that fall under Subdivision 40-F and 40-G and horticultural plants
  • assets leased on long term hire arrangements
  • trading stock and CGT assets, and
  • assets not used or located in Australia.

How does it work?

Consider the following example of a tour bus business:

⇒ EXAMPLE

On 1 February 2021 it purchases a coach for $160,000. The business can claim the entire amount as a deduction under TFE.

In March 2021 it constructs a customer wait lounge at its office for $50,000. Because the expenditure is on capital works, the business can’t claim a deduction under TFE (it will be subject to a claim under Division 43 instead).

On 15 April 2021 it incurs $10,000 while improving an existing depreciating business asset. The business can claim a deduction for these costs under TFE.

On 20 June 2021 it purchases a work vehicle (SUV) for $65,000 which will be used solely for business use. This asset is eligible for TFE, but the deduction will be subject to the car limit ($59,136 in the 2020-21 income year). The excess is not available as a tax deduction. This is in contrast to the earlier example where a $160,000 coach was purchased. Such a vehicle is not a car for depreciation purposes and therefore a full deduction can be claimed because it is not subject to the car limit.

At the end of the 2020-21 income year, it had a balance in its small business pool of $100,000.

The business will deduct the balance of the pool under TFE.

What are my benefits?

As these examples show, the brought-forward deductions available under TFE can be substantial.

It’s important to note though, that the main benefit to businesses of TFE is one of timing. It brings forward the deduction on assets that would normally be spread over several years. This means the business may pay less tax, or no tax, now (but more in the future). All told, the immediate benefit is that TFE can assist cash flow.

The business can then potentially use that extra cash flow to make further investment or support operations.

We note that it is possible for some businesses to opt out of TFE (for example, for a number of reasons, it may not be advantageous from a tax perspective to generate substantial tax losses that TFE may generate). Ultimately, any decision to opt out will usually rest with you and your Trumans accountant. 

 

Thinking about making up for lost time and making extra contributions to top up your super? The good news is that the “catch-up” concessional contribution (CC) rules can help individuals who feel they have missed out on building their retirement savings to make extra before-tax contributions.
Remember, CCs can include super guarantee contributions from your employer, salary sacrificed amounts and tax-deductible personal contributions.
 

What are catch-up CCs?

You can carry forward any unused CC cap amounts that have accrued since 2018/19 for up to five financial years and use them to make CCs in excess of the general annual CC cap (currently $27,500 in 2021/22).

You can then make a CC using the unused carry forward amounts provided your total super balance at the end of the previous financial year is below $500,000.

Once you start to use some of your unused cap amounts, the rules operate on a first-in first-out basis. That is, any unused cap amounts are applied to increase your CC cap in order from the earliest year to the most recent year. So, when you use some of your unused cap from prior years, the unused cap from the earliest of the five-year period is used first.

And remember, if you don’t use your accrued carry forward amounts after five years, your unused cap amounts will expire. So it’s best to use it before you lose it!

 

⇒ Example: Stephanie’s accrued unused cap amount over three years

During 2018/19, Stephanie’s employer made super guarantee contributions of $10,000 into her super fund. No other CCs were made that year.

As a result, Stephanie has an unused cap amount for 2018/19 of $15,000 ($25,000 – $10,000).

Assuming Stephanie accrued unused cap amounts of $15,000 three years in a row (ie, for 2018/19, 2019/20 and 2020/21), she could make CCs in 2021/22 of up to $72,500 ($45,000 unused cap amounts + $27,500 annual cap for 2021/22) without exceeding her CC cap.

 

 

2018/19

2019/20

2020/21

2021/22

CC cap

$25,000

$25,000

$25,000

$27,500

CCs made

$10,000

$10,000

$10,000

$72,500

Unused CC cap

$15,000

$15,000

$15,000

$0

Unused CC cap amount used

N/A

N/A

N/A

$45,000

Cumulative unused CC cap amount remaining at year end

$15,000

$30,000

$45,000

$0

Note, for Stephanie to utilise her unused cap amounts, her total super balance at 30 June 2021 must be below $500,000. 

Who can benefit from catch-up contributions?

Catch-up contributions may assist individuals who:

  • Previously couldn’t afford to make additional contributions
  • Have spent time out of the workforce to study, look after children or elderly family members
  • Work part-time or are casual employees
  • Have interrupted or non-standard work patterns (ie, self-employed people) 
  • Dispose of an asset and want to reduce their tax and further maximise their contributions to super 
  • Receive a windfall/inheritance and want to contribute the funds to super.

If you finally have capacity to make extra contributions and want to build your super, utilising the catch-up CC rules can allow you to make up for lost time and be an easy way boost your super for retirement.

 

At the start of each year, business owners typically review their affairs, including at times their trading structure. Others may be going into business and choosing their initial structure. There are four main business structures – sole trader, company, trust, and partnership (or a combination of these).

Sole trader

This is how many businesses commence. Under this structure, an individual operates the business and is liable for all aspects of the business including income, debts and losses. These can’t be shared with any other individual. Advantages of this structure include simplicity, and minimal set up or ongoing costs. Disadvantages include personal liability, and also an inability to take on a business partner, noting however that as a sole trader you can still employ workers.

Company

Here, the directors (and mainly in the case of small businesses, shareholders) run the business. The company itself pays tax on the income at a reasonably low company tax rate of 25%, though directors can be personally liable for tax if they are caught by the personal services income (PSI) rules. These rules can come in to play where the business income is a result of your personal effort, expertise or skills.

Subject to any personal guarantees or any director penalty notices being issued, companies provide asset protection for the owners, potential legal tax minimisation, they easily allow the admission of new business partners, and they can trade anywhere in Australia. On the downside, companies are not eligible for the 50% CGT discount, are highly scrutinised and regulated, and are reasonably expensive to establish, maintain and wind up.

Trust

This is quite a common business structure whereby the trustee holds your business on trust for the benefit of the beneficiaries (usually the business owners, but can include other parties such as family members, companies etc). The trustee can be a person or a company and is responsible for the operation of the trust including compliance with its deed. In practical terms, the beneficiaries pay tax on the trust income that they receive from the trust at their own tax rate. Note however that trust income may be caught by the PSI rules, see earlier.

The advantages of a trust include asset protection (even more so when there’s a corporate trustee), potential legal tax minimisation, and for family trusts compliance is relatively straightforward. On the downside, trusts can be complex, costly to establish, and on the tax front losses are trapped inside the structure and can only be used to offset future income. Trusts are also a strong focus of the ATO.

Partnership 

A partnership is a group or association of people who carry on a business and distribute income or losses between themselves (between two and up to 20 people). The partners themselves are liable for tax on the income from the partnership commensurate with their share of the partnership, however this is again subject to the PSI rules – see earlier. The losses and control of the business are also personally shared. Partnerships are governed by a partnership agreement which should be in writing and deal with all aspects of how the partnership operates.

Some of the advantages of operating a partnership is that they are easy to understand, reasonably inexpensive to set up and maintain, and other individuals can easily be admitted. On the other hand, there is no real asset protection, in that each partner is ‘jointly and severally’ liable for the partnership’s debts (that is, each partner is liable for their share of the partnership debts as well as being liable for all the debts). Each partner is also an agent of the partnership and is liable for actions by other partners.

Closing comment

Aside from tax, there are many factors to consider when determining the best structure for your business, including ease of understanding, set up and compliance costs, the ability to admit new owners, asset protection etc.

You can change your business structure at any time, however there may be costs involved such as capital gains tax and stamp duty. Talk to Trumans if you are considering changing your structure or if you are going into business and choosing your initial structure.   

 

Tax and Property Price Increases

With residential property values on a sharp upward trajectory, from a tax standpoint, what does this mean for owners and investors of this style of dwelling?
 

Introduction

Domain's End of Year Wrap revealed that in 2021, Australian house prices rose an astonishing 21.9%, the fastest annual rate of growth on record! Viewed through a taxation prism, these increases mean practically nothing unless the owner is selling or otherwise disposing of their property. If the property is retained, then the increases are merely a “paper gain”. By holding onto the property there generally won’t be any CGT consequences. 

The obvious question then arises, what are the consequences from a tax perspective where an owner does decide to cash in on the boom and sell their residential property? 

Rental Property

If an owner has a typical rental property that they have not lived in, then 100% of the property will typically be subject to CGT upon the sale. It follows that sellers will be paying more CGT as property prices increase (but of course enjoying more sale proceeds at the same time).

Broadly, the legal owner of the property (the party whose name is on the title deed) will be liable for any capital gain made from the property when it is sold. 

If a property is owned as tenants in common – whereby the co-owners’ agreement specifies equal or unequal shares in the property co-ownership (e.g. 30% and 70) – the taxation consequences will be shared in those proportions. 

If a property is owned as joint tenants, then the taxation consequences are generally shared 50/50.

Tax Rate 

Where individuals own the property, any capital gain or revenue earned from the sale will be assessed at individual marginal tax rates, plus Medicare levy. Consequently, net capital gains can be taxed at up to 47% before applying any discounts. For this reason, it is more tax effective for lower income earners to have the property in their name solely. For example, a spouse who does not work.  

On the other hand, if an owner is negatively gearing a property, then it is more beneficial from a tax perspective for a high-income earner to own the property. Put very simply, this is because their taxable income (which is reduced by negative gearing) is taxed at a higher rate and therefore they will get more bang for their deduction. Be mindful that where a negative gearing strategy is being considered, the owner needs to be able to sustain the losses that come from this. With negative gearing, the property expenses are more than the rent…can the owner sustain these losses long-term?   

Tax Tip

Aside from tax, there are other key factors to consider when determining whose name or which tax structure (for example, company etc.) the property should be in, including asset protection.  These factors should be discussed with Trumans. 

Family Home

If the property being sold is the family home and it qualifies for the main residence exemption, then the owner can cash in on the current property boom with no CGT consequences upon sale!

To recap, the main residence exemption offers a full exemption from CGT where the following conditions are met:

  • The owner is an individual
  • The dwelling was the individual’s main residence throughout the period of ownership
  • The individual did not acquire the ownership interest either as a beneficiary or trustee of a deceased estate.

Note that there is a two-hectare limit on the area of land that is covered by the exemption. Further, spouses (and also an individual) can generally only have one main residence at any one time. 

Partial Exemption

However, only a partial exemption from CGT will be available where the dwelling was a person’s main residence for only part of their ownership period. This can occur where:

  • The dwelling was not occupied as a main residence when it was first practicable to do so after its acquisition
  • In renting out the property, the six-year rule was exceeded (under this rule, an owner can rent out their main residence for up to six years at any one time and maintain the full main residence exemption provided they  do not claim another dwelling as their  main residence during this time – other conditions also apply)
  • The four-year period for building a dwelling on vacant land has been exceeded 
  • The home was used to produce income, such as part of it was used as a place of business, or it was rented out in part or in full.  

If an owner is only eligible for a partial exemption, any capital gain or loss is pro-rated by reference to the part of the ownership period in which the dwelling was not their main residence.
 

Key Points  

  • While property prices are on a steep incline, no CGT consequences arise from this unless the property is disposed of.
  • Be mindful of the 50% CGT discount for owning a property for 12 months or more. If an owner was nearing the 12-month ownership threshold, they may wish to consider if possible delaying any planned sale until this time requirement is met.
  • If an owner inherited a main residence, to dispose of it tax-free, they must do so within two years of inheriting it. Various conditions apply.
  • If a potential owner was contemplating purchasing residential property to rent out, it would be prudent for them to discuss the ownership structure and the tax consequences with Trumans.

Benefits of a corporate trustee structure for your SMSF

Thinking about setting up an SMSF? Or do you already have an SMSF with an individual trustee structure? If so, now might be the time to consider adopting a corporate trustee structure for your fund. 

With over 60% of all SMSFs having a corporate trustee structure, there are many benefits in setting up a company to be the trustee of your SMSF. 

For background, each member of an SMSF is required to be a trustee of the fund. Alternatively, you can choose a corporate trustee model (ie, a company to act as the trustee of the fund), which means each SMSF member must also be a director of the trustee company. 

Benefits of corporate trustee structure 

  • Greater asset and trustee protection – as companies are subject to limited liability, a corporate trustee will provide improved protection for the directors where a party sues the corporate trustee for damages. For example, if a SMSF owns a property and a tradesperson suffers an accident on the property, the trustees can be sued and held liable for accidents on their property. However if the trustee is a company, your personal liability is generally limited to the assets held in the SMSF (rather than your entire wealth). This means assets that you own outside of your SMSF are protected. That same protection does not apply to SMSFs with individual trustees.  Thus, individuals acting personally as trustees of an SMSF are jointly and severally liable for any actions taken against their SMSF.
  • Continuous succession – a company has an indefinite lifespan as it does not die. This means a corporate trustee can ensure control of an SMSF remains certain following the death or mental or physical incapacity of a member.
  • Administrative efficiencies – when changes occur to the membership of the fund, eg, new members join the fund, or members die or become incapacitated which affects their mental capacity and leaves them unable to be a trustee, or members get divorced/separate and one member wants to leave the fund, etc, the corporate trustee does not change as a result. All that is required is for the member to cease to be a director of the corporate trustee. Thus, when a SMSF has a corporate trustee, the change is relatively simple and can be managed by the remaining directors.  By contrast, if the trustees are individuals, it’s much harder as the legal names on all of the investments have to change to the new individuals/members.  
  • Sole member SMSF – having a corporate trustee allows an SMSF to have one individual as both the sole member and the sole director. Conversely, single member funds with an individual trustee structure cannot have just one individual trustee (other than under certain circumstances). Thus, a single member fund with individual trustees must have at least two trustees. This means you will need a corporate trustee if you want your own SMSF with yourself as sole member/director of the fund.
  • Six member SMSF – the case for a corporate trustee is arguably made even stronger if you wish to increase the membership of your SMSF to six members. There are many reasons for this, but one key reason is that the Trustee Acts of most Australian States and Territories still only allow a maximum of four individual trustees for SMSFs. So if you want to take advantage of the increased membership in your fund, you will need to have a corporate trustee (rather than individual trustees) in order to satisfy the trustee limit in the relevant Australian State or Territory legislation.
  • Complete separation of SMSF and personal assets – the super rules require that an SMSF’s assets must be kept completely separate from the members’ own assets. This requirement is easy to achieve and prove to auditors and the ATO when there is a completely separate legal owner, being the corporate trustee.   

Warranty Disclaimer

All Newsletter 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 in this Newsletter (including Trumans Chartered Accountants, each of its partners, managers and staff members or 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.         

 

 

Latest News & Alerts

June Newsletter

now out!

 

 

  • 30 June Tax Planning

  • 2022 Election Washup

  • Four priorities for the ATO this Tax Time

  • The SMSF annual audit 

    ... and more


 

 
         

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