Access super before retirement

Are you approaching retirement? Are you still working but want to access some of your accrued superannuation?

Superannuation is money that is meant to be accessed upon retirement but if you’ve met your preservation age which, depending on when you were born could be between 56 and 60, you can draw out a portion of your money early. This is generally known as a transition to retirement strategy.

What are the advantages?
– Access super while still working
– Reduce work hours and maintain lifestyle
– Potentially pay less tax overall
– Improve your families position if you pass away through effective tax planning.

Pro Tip

Be aware that accessing your super monies early can have implications for tax, social security entitlements and life insurance. You should check all of these things with your accountant or financial advisor before entering into a transition to retirement strategy.

How do you start a retirement pension?
Get in contact with the administrators of your industry fund or if you are a member of a SMSF get in contact with your advisor or accountant.

If you need advice regarding tax planning or thinking about setting up a Self Managed Super Fund then get in contact with one of our FAJ specialists.

Author: Nick Vincent
Email: nick@faj.com.au

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Home Office vs Place of Business

If you operate your business from home you may be able to claim deductions for running costs and occupancy costs.

Occupancy Costs:
These are the costs of owning or renting your home e.g. mortgage interest, house insurance, council rates and rent.

Running Costs:
Include the following – electricity, cooling, lighting, cleaning and depreciation on furniture and equipment.

You can only claim a deduction for your occupancy costs if your home is considered your main place of business. This is generally the case where you carry out most of your business’ work at home or your business does not own or rent any premise other than the home.

Generally a section of the home is dedicated to the place of business if the following factors are satisfied:
1. The area is clearly identified as a place of business.
2. The area is not suitable for private use.
3. The area is used exclusively or almost exclusively for carrying on the business.
4. The area is used regularly for visits of clients or customers.

To work out the proportion of occupancy costs and running costs you can claim you can use the area of the floor space which the business work takes place. The ATO says you can use any method as long as it is accurate and reasonable.

Where a section of the home is not considered a place of business that section is considered a home office. This is where you perform work at home but your main place of employment is on another premises. If this is the case only running costs can be claimed as an expense and proportioned the same way as if it was a place of business.

Pro Tip
Please be aware if you are considering using part of your home as a place of business and claiming occupancy costs that part of the home is subject to capital gains tax when you sell your home. The market value of your home at the point of when you first start to produce income is the cost base for capital gain purposes. It would then be a good idea to get a valuation of your home when it starts as your place of business, so when you sell your house you don’t pay more capital gains tax than necessary.

Author: Rhys Frewin
Email: rhys@faj.com.au

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Methods to Claim Motor Vehicle Expenses

There are four methods you can use when claiming work-related motor vehicle expenses.

Cents per kilometre
This method allows you to claim a set rate for each work related kilometre travelled for the financial year. The set rate is based on the car engine size. You do not need evidence to show the business kilometres travelled, but a reasonable estimate is required. A maximum of 5,000kms is allowed. This is the most popular method to use and is therefore explained further in another blog.

12% of original value
This method involves claiming 12% of the original value of your car. (12% of the cost if you bought the car or 12% of the market value of the car if you leased it). The value of the car to which you can claim the 12% of is subject to a $57,466 car limit. If the cost of your car is over this limit you must multiply 12% by the $57,466 as your deduction.
To use this method, you must have travelled more than 5,000 work related kilometres during the financial year. You do not need evidence to show that you travelled over 5,000kms, just proof of a reasonable estimate.
Example – I have a vehicle costing $30,000. I have owned the vehicle for the full year and have travelled over 5,000 work related kilometres. Using the 12% method I can claim $3,600 (12% x $30,000) deduction.

One-third of actual expenses
This method allows you to claim one-third of all your car expenses throughout the financial year (excluding costs such as the car purchase price or principal loan repayments). To use this method you must have travelled over 5,000 business kilometres and maintained written evidence of all your car expenses throughout the year. However, your fuel and oil costs can be estimated based on odometer records if receipts were not maintained. Some examples of the car expenses for which you should record are:
• Fuel and oil
• Registration and insurance
• Interest on the vehicle loan
• Repairs and maintenance
• Depreciation or lease payments.
Once you have calculated the total of all your expenses for the year, you divide it by 3 to calculate your deduction.

Logbook
This method is most advantageous if you travelled a significant number of kilometres for work purposes. If you are using this method you must maintain a log book of your cars usage in order to work out the percentage for which your car was used for work. However, you are only required to keep a continuous log book for a 12 week period. This will then represent your travel throughout the financial year and is a valid representative for up to five years. Your log book must contain:
• When the logbook period begins and ends and the cars odometer readings at the start and end
• The total number of kilometres travelled during the period
• A record of the kilometres travelled for each journey and the respective odometer readings and also the reason for the journey
At the end of the financial year you can use your logbook to work out what percentage of your car expenses will be claimed for work related purposes.
Example:
At the end of the financial year my logbook records show a total of 10,000kms travelled, 7,000 of which were for work related purposes. My business use percentage is therefore is 70% (7,000/10,000). Throughout the year I had expenses of $8,000 (including depreciation); therefore I can claim $5,600 (70% x $8,000) as a deduction.

Looking forward:
For the 2015/16 financial year, the government has announced to discontinue the 12% of original value and one-third of actual expenses methods. They have also announced that a flat rate off 66c will be introduced across all engine sizes for the cents/km method. This is unfortunate news for those who use this method with larger sized vehicles.

Pro-tip
It is possible to claim up to 5,000kms on more than one car.

Author: Allan Edmunds
Email: allan@faj.com.au

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Can You Hold Artwork in Your Super Fund?

One way to diversify your self-managed super fund (SMSF) portfolio is investing in Artwork. Artwork includes paintings, sculptures, drawings, engravings and photographs. Some trustees find this asset class more attractive as it is generally less volatile than shares.

Investments in Artwork held by SMSF’s must satisfy the ‘Sole Purpose Test’. The sole purpose of a SMSF is essentially to provide genuine retirement benefits and must not give any ‘present day benefit’ for the SMSF trustees and members.

Artwork held by a SMSF cannot be:
– Leased to a related party*
– Used by a related party*
– Stored or displayed in the private residence of a member or related party* (Trustees generally keep their artwork collection with trusted storage companies)

*A related party is defined under section 10 of the SIS Act 1993 as:

  1. a) A member of the fund;
    b) A standard employer-sponsor of the fund;
    c) A Part 8 associate of an entity referred to in paragraph a) or b)

In addition to the above, the following rules also apply:

– Trustees must document their decision on where the Artwork is to be stored (e.g. in the minutes of a meeting of trustees) and the written record kept for 10 years.
– The Artwork must be insured in the name of the SMSF trustee within seven days of the fund acquiring it.
– If the Artwork is sold to a related party, trustees must have the item valued by an independent, qualified valuer to ensure the transaction is a market rates.

Note:

  • For any Artwork held before 1 July 2011, trustees had until 30 June 2016 to comply with these rules.
  • The ATO can impose a range of penalties on SMSF trustees who breach their compliance obligations in relation to investments of Artwork in their fund. The extent of the penalty will depend on the seriousness of the breach.

Author: Natasha Piccoli
Email:natasha@faj.com.au

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Claiming Motor Vehicle Expenses Using Cents Per Kilometre

When using the cents per kilometre method your claim is based on a set rate for each work related kilometre travelled. It is an easy claim to make as it does not require you to maintain a log book or receipts for car expenses. However, you need to make a reasonable estimate on how many work related kilometres you have travelled throughout the financial year.

Example of a reasonable estimate:
I travel from the office to a client twice a week which covers a total distance of 10km. Then I estimate a total of 960km for the year (20km x 48 weeks = 960km). In this example I used 48 weeks due to 4 weeks of annual leave. Use how many weeks are appropriate for you.

It is important to understand that your estimate for work related kilometres does not include the kilometres you travel from home to work. It is generally the travel from one place of work to another or between home and an unusual place of work, such as a seminar.
Then after you make your reasonable estimate you can work out how much you can claim by multiplying the number of work related kilometres by the appropriate number of cents allowed based on your car’s engine size. This figure will take into account all the running costs of your vehicle. The maximum number of kilometres you can claim is 5,000km. If your reasonable estimate goes over 5000kms, you can still claim based on 5,000kms or you can use the other methods available (12% of cost method or 1/3 expenses).

Pro Tip

You can claim the kilometres that you travel to visit your tax agent each year to have your income tax return prepared.

Author: Allan Edmunds
Email: allan@faj.com.au

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Income Protection Insurance – where to save money

Income protection insurance replaces the income lost through your inability to work due to illness or injury. It is an important consideration for anyone who relies solely on an income.

Each income protection policy is different but most income protection insurance will cover up to 75% of your income when you are unable to work. You receive the insurance monies after you wait a defined period (wait period) and are paid for a defined period of time (benefit period). There are a few important considerations that can affect the cost of the insurance so here are our tips on where to save money:

Any occupation verses own occupation.
This is important. You should always use your own occupation. This means that your inability to work is in the job you are currently carrying out. Any occupation means you do not receive any funds if you’re capable of doing any other occupation.

Wait Period
This is an area where you can save money. It is worth determining how long you can survive without an income by considering your individual situation and entitlements such as your sick leave entitlement with your employer. In essence the longer the wait period, the cheaper the insurance and the difference can be substantial.

Benefit Period
This is not the area to save money. While a shorter benefit period will reduce premiums we recommend setting your benefit period to age 65. It doesn’t cost that much extra to extend the period to age 65 and you are then covered for all the nasty long term events. You may have some income protection insurance inside your super fund which normally will only have a 2 year benefit period.

It is also worth noting that Income Protection Insurance is tax deductible because in event of a claim the proceeds are taxable.

If you would like further information or have any queries regarding the above please do not hesitate to contact the office, we can put you in touch with a financial planner who can assist with your insurance needs.

Author: Adrian Wardlaw
Email: adrian@faj.com.au

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Personal Services Income (PSI)

Watch out for the personal services income (PSI) rules which aim to tax business profits in the name of the person doing the work. They can often apply to contractors, consultants and professionals. Do they apply to you?

If you are running a business it is important to establish if the PSI rules apply. PSI is income produced mainly from your personal skills or efforts as an individual.

There are 4 steps in determining if the PSI rules apply

1. Have you received PSI?
In this step you need to establish what percentage of income earned from each contract/job performed was for your labour, skills knowledge & expertise, as well as what percentage relates to materials supplied and/or tools equipment used.
• If more than 50% of the income relates to labour, skills and/or expertise, then all your income for that job/contract is PSI.

• If less than 50% of the income was for labour, skills and/or expertise then none of the income for that job/contract is PSI.

If any of the income you received is PSI proceed to step 2, if not then the PSI rules do not apply.

2. Results Test
The results tests focuses on establishing the nature of your contracted performance and the basis you are paid. To pass the results tests you need to meet the following conditions:
• You are paid to produce a specific results or outcomes
• You are required to provide equipment or tools.
• You are required to fix mistakes at your own costs.
Your business contracts must meet these conditions for at least 75% of your PSI for the year in order to pass. If you pass the test your business is a personal services business and the PSI rules don’t apply.
If you don’t pass, move on to step 3.

3. The 80% rule
This test requires you to work out the PSI that comes from each client and their associates in an income year.
• If less than 80% of your PSI comes from one client continue to step 4.
• If 80% or more of you PSI income comes from one client then the PSI rules apply.

4. The remaining tests
• Unrelated clients test: To pass this your PSI must be earned from two or more unrelated clients and contracts must be sourced through offers/advertising to the public
• Employment test: To pass this your employees or contractors must perform at least 20% of the principal work
• Business premises test: To pass this your business premises must be used for personal services work, must be used exclusively for your business, is physically separate from your home and is separate from your clients

Pro Tips

Don’t be fooled! The use of more complex business structures does not stop your income from being assessed as PSI.
You can receive PSI in almost any industry trade, or profession, so be sure to work through the steps even if your profession isn’t synonymous with PSI.

Author: Heather Cox
Email: heather@faj.com.au

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Margin Scheme – Selling Property as Part of a Business

Selling a property as part of a business? You may be able to apply the margin scheme to reduce the GST payable on the supply of the property.

The margin scheme is a method of determining the GST payable when property is sold as part of a business. The margin scheme only applies where the sale of the property is a taxable supply.

Normally the amount of GST paid on the sale of a property is 1/11th of the sale proceeds, whereas under the margin scheme the GST to be paid is 1/11th of the margin.

The margin is the difference between the sale price and
• the purchase price of the property, or
• an approved valuation of the property as at 1 July 2000 (if certain conditions are met)

The margin scheme can be very useful for reducing GST payable where GST was not charged on the purchase of the property and also where the purchase price of the property is significantly lower than its market value as at 1 July 2000.

The margin scheme cannot be used if you were charged the full rate of GST upon purchasing the property, as you would have been entitled to claim the GST credits back. It also cannot be used when the seller you purchased the property from applied the margin scheme to the sale of the property.

If the margin scheme is going to be used it is important that this be written in as part of the terms of selling the property. The ATO requires written evidence of the decision.

Pro Tips

Get your facts together. Knowing whether you were charged GST on the purchase of your premises could cut down your GST liability upon to selling the property as part of a business.

Compare the market value of your property as at 01 July 2000 to the cost you paid, the higher of the two will give you the best outcome when using the margin scheme.

Author: Heather Cox
Email: heather@faj.com.au

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Change to Super Guarantee Rate

Superannuation Guarantee (SG) is the official term for the compulsory super contributions that employers must make for their employees. The rate was previously 9.25%. As of the 1 July 2014, the new minimum SG contributions rate is 9.5%.

When does an employer have to pay SG?

Employers have to pay SG for full time and part time employees and some casual employees. Super is paid on:
• ordinary wages or salary
• annual leave & long service leave – provided the employee has not ceased employment prior to being paid these entitlements
• workers compensation (in certain circumstances)

When does an employer not have to pay SG?

Under the SG legislation, employers are not required to pay SG contributions for employees who are:
• earning less than $450 month
• under 18 years of age and working less than 30 hours per week
• taking parental leave and leave without pay

The SG rate is expected to increase to 12% by 2025, but will stay at 9.5% until 2021.

Author: Heather Cox
Email: heather@faj.com.au

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End of Year Payroll Procedure for an Employer

At the end of each year, every business undergoes a procedure with regards to payroll. There’s nothing to fear about the process and things will run smoothly if you go through these steps.

Step 1 – Process final pay runs.
Ensure all pay runs are complete for the financial year.

Step 2 – Reconcile end of year payroll to your accounting ledger.
For this step review all the earnings, superannuation and tax amounts recorded in your payroll software and match them to the amounts in the general ledger.

Step 3 – Review & check employee Payment Summary amounts.
This is where you check the placement of amounts on the payment summary. You should review each employee’s payment summary and pay particular attention to:
• Allowances
• Reportable employers superannuation contributions
• Reportable fringe benefits; and
• Union fees (if they are deducted from earnings)
You should also check that the authorised person, employer details (e.g. ABN) and the payment period are correct
This is the information that employees will use in preparing their tax return to proper care must be taken in completing this step to ensure information is accurate.

Step 4 – Distribute Payment Summaries to employees.
After ensuring all payment summaries are completed correctly, you can then distribute them to employees by mail, email or whichever way preferred. It is important to have security on the file when sending payment summaries via email to ensure privacy of TFN. This can be done by having passwords needed in order to open the file. Employers are required to distribute payment summaries by the 14th of July each year.

Step 5 – Send annual payment summary report to the ATO.
An annual payroll report must be sent to the ATO. This can be done through the ATO business portal or with the tax agent through BAS. This report is due on the 14th of August each year.

Author: Heather Cox
Email: heather@faj.com.au

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