Total Super Balance vs Transfer Balance Cap

Total Super Balance (TSB) is relatively simple to understand and is essentially the total value of your super fund interests. Your TSB includes your accumulation phase accounts, and pension phase accounts, as well as some amounts relating to any outstanding limited recourse borrowing arrangement (LRBA) in a SMSF. All individuals will have a TSB, whether they are in accumulation phase or pension phase, and generally it will be the amount that shows on your super statement(s). All income and expense transactions in a super fund will affect an individuals TSB.

A Transfer Balance Cap (TBC) is the total amount that an individual can transfer from their accumulation account, to increase or support their retirement income stream. The cap was introduced to limit the amount of tax-free income available to individuals in retirement phase. A TBC is usually only relevant when you are near receiving or currently receiving a retirement income stream.

The general TSB cap is currently $1.7 million, as is the TBC. The two capped amounts are separate and different transactions will affect the two different caps individually.

It is important to understand each individuals TSB, as this amount affects the annual concessional and non-concessional contributions caps. An example of this being that a TSB must be $500,000 or less to access carry forward concessional contributions (also known as catch-up contributions). Another example is that your TSB must be lower than $1.7 million to make non-concessional contributions.

In comparison, the general TBC is more related to the retirement phase of super. It caps the amount you can use to start a tax-free pension to a maximum of $1.7 million, although been an indexed amount, all individuals with existing retirement income streams will have their own cap. A personalised TBC can be equal to the general cap, or partially indexed. In understanding the TBC, it is also important to understand what kinds of transactions can increase or decrease an individual’s cap.

Increase In TBC Decrease in TBC
Commencement of retirement income streams, including reversionary and non-reversionary death benefit income streams

 

 Structured settlement contributions

 
When a transfer to retirement income stream (TRIS) moves into full pension phase

 

 Pension commutations

 
Repayments from certain LRBAs

 

 Family law splits

 
Excess transfer balance earnings

 

 Losses due to fraud

 

 

In short, it is important to understand the difference between a total super balance (TSB) and transfer balance cap (TBC) and how different transactions will affect the amount contributed towards your cap. TSB is a reasonably simple concept, but TBC is a more complex concept and you should seek advice before making superannuation decisions. Understanding the difference will ensure that individuals do not face penalties and extra tax if the caps are breached. It will also allow individuals to maximise tax advantages when making personal contributions into super, or when moving into retirement phase.

Related blogs:

Carry forward concessional contributions – What are the rules?
New Super Contribution Limits
How much do I need in super to retire?

Author: Molly Ingham
Email: molly@faj.com.au    

 

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Barefoot Investor Principles

You may or may not have heard of the Barefoot Investor but he has become quite popular in recent years with his simple approach to generating long term wealth. This blog is not a recommendation as to the right investment approach for you, but merely provides a summary of a popular view.

The barefoot approach in simple terms is to allocate 60% of your income to live day-to-day on, with the other 40% going towards paying off debt, saving and building your long term wealth. There are three theoretical buckets to split your income. Your income flows through these ‘buckets’, once one fills up, the overflow fills the next one.

The Buckets 

  1. The Blow Bucket: 100% of your income enter the blow bucket which is then spit into four categories:
  • Daily expenses: 60% of your income is allocated to your daily expenses bucket. This bucket  is as simple as the name implies, dedicated to paying daily/fixed expenses such as rent, food, bills, fuel, and the like; the costs in your life that are unavoidable and constant.
  • Splurge:  10% of your income is allocated for you to splurge. The Splurge bucket is used to buy the things you want or want to do, fun purchases, social actives, and nights out.
  • Smile: 10% of your income is allocated to your smile bucket. This bucket account is similar to spurge however is used for long term savings goal, bigger purchases such as holidays, a new car, things that make you smile.  
  • Fire extinguisher:  20% of your income is allocated to fight financial fires, like an existing debt or bigger non- regular bills.   Money does not sit in this account. It moves through on its way to paying the bills you have; after debts are paid the money spills over to the Mojo bucket.
  1. The Mojo bucket

The Mojo bucket is your emergency fund i.e saving for unexpected expenses. The idea is that the Mojo account will replace the need to take on debt or the need for a credit card.  It is suggested the Mojo bucket should be a minimum of $2,000 and is considered “full” when there is 3-6 Months of income accumulated in the account.

Once your Mojo Bucket is “full”, the tap is turned off and the excess flows to your Grow Bucket.

  1. The Grow Bucket

Your Grow bucket is for your long term wealth, this bucket could be used to increase your super fund, long-term savings accounts, shares, currencies or property investments. The important thing to remember here is that this money is for your future.

The goal of The Barefoot Investor approach is to generate long-term wealth while still enjoying a certain level of lifestyle. However, this is just one approach it is important to determine what works for you. You really should read the barefoot book in full as well as other resources so that you have a rounded view. The main thing is to have an approach of some sort.

This blog provides general information that is not personal, financial or investment advice, and does not take into account your personal circumstances. Do not act based on this information without first obtaining the advice of a suitably qualifies and licenced professional.

Author: Georgia Burgess
Email: georgia@faj.com.au

 

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Early Stage Investor Tax Offset

This blog is about a tax offset that is not well known by most people, the Early Stage Investor Tax Offset, or ESITO for short.

This tax offset was first available from 1st July 2016 and was introduced to encourage investment in Australian Early Stage Innovation Companies.

The hope is that by offering tax incentives to investors, more investment will be made in innovation Companies who can, over the long term, reduce Australia’s reliance on the mining industry and open up new industries and income sources for Australia as a Country.

Companies involved in new innovations can often find it difficult to source funding for risky projects. They rely on investors willing to take a chance on a project, rather than banks who tend not to lend in those circumstances.

The difficulty is that, while the investors are often open to risk, they also may not see cash flows for many years, which can be a deterrent to providing capital to Early Stage Innovation Companies.

The Early Stage Investor Tax offset allows investors to receive a return on their investment (in the form of a tax offset) in the earlier years, thereby encouraging further investment in this area.

So How Does it Work?

The ESITO provides a 20% tax offset to an individual or entity who buys shares in an Early Stage Innovation Company (ESIC).

So, for example, if an investor buys $1,000,000 worth of shares in an ESIC, they can receive a $200,000 non-refundable, carry forward tax offset that they can use to reduce tax payable on their income.

How Does a Company Qualify as an Early Stage Innovation Company?

Without going into all the details, there are three main areas that a Company must satisfy to be able to offer the ESITOs to shareholders:

  1. Must be an Australian Company under the Corporations Act
  2. Must pass the ‘early stage test’ – which involves running a business within Australia which has limited income and expenses and is not listed on any stock exchange.
  3. Must meet either the 100 point innovation test or a principles-based innovation test. This part is about proving the Company’s business is involved in innovations, research and development.

Who can invest in an Early Stage Investment Company?

Given that these investment tend to be risky, the ATO does not want to encourage investors to invest too much if they cannot afford the potential loss.

As such there are limits on the amounts that can be invested in order to receive the offset.

Sophisticated Investors are not limited on the amount they can invest in an ESIC, but the tax offset they are entitled to is capped at $200,000 annually.

Sophisticated Investors must meet certain income, asset and/or experience criteria to be issued with a ‘Sophisticated Investor’ certificate that allows larger investments in financial products.

For investors who do not hold a Sophisticated Investor Certificate, investments in qualifying ESICs must be less than $50,000 per year (or they will not receive the tax offsets).

What happens when you sell the shares in an Early Stage Innovation Company?

The ATO has special rules for calculating capital gains and losses on shares in ESICs.

These rules further provide incentives for investors to buy shares in an ESIC and hold them for a minimum 12 months. Shares held for more than 12 months are CGT free until 10 years after the initial purchase at which time they become subject to CGT with the cost base of the shares being market value at the 10th anniversary date.

However the losses on shares in ESICs are limited and if a loss is made on the shares no tax loss will be allowed. This does make sense in that the offsets claimed during the years the shares were held provide the tax relief that the losses would otherwise have provided.

Further Information

If you would like further information on Early Stage Investor Tax Offsets and Early Stage Innovation Companies have a look at the ATO website at:

https://www.ato.gov.au/business/tax-incentives-for-innovation/in-detail/tax-incentives-for-early-stage-investors/

Or contact your Accountant at FAJ on 9335 5211 if we can be of assistance.

Other related blogs:

How to provide tax incentives for early stage investors

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

 

 

 

 

 

 

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Tax Deferred Employee Share Schemes

Employee share schemes (ESS) give employees shares in the company they work for or the opportunity to purchase shares in the company they are working for. One of the main reasons employers offer this incentive is to attract and retain good employees.

2 Methods of taxation for Employee Share Schemes:

–           Taxed Upfront Scheme

–           Tax Deferred Scheme

Under both methods tax is payable on the discount amount given by the employer to the employee to be able to obtain the shares. The discount amount is the market value of the ESS less any amount paid by the employee to obtain the shares.

For example, Core Bank Ltd offers its employee Matt 600 shares under an ESS. The total market value of the shares is $10,000. Core bank offers the shares to Matt for a cost of $6,000.

The discount amount is $4,000 (the market value less the cost to the employee). Matt will include the $4,000 of income in his tax return and pay tax on this amount at his marginal tax rate. If Matt didn’t pay anything for the shares and they were all given to him for free he would include $10,000 in his tax return as income.

Employees using the taxed upfront scheme will receive a tax concessions of $1,000 provided they pass an income test. In Matt’s first example he would only need to include $3,000 in his current tax return if he was taxed upfront. The $1,000 concessions does not apply to the tax deferred scheme.

Tax Deferred Scheme:

Where the taxation of the ESS is deferred the discount will be included in the employee’s income tax return at the earliest of the following times:

–           When the employee ceases employment (however employment ceasing after 1/7/22 will no longer be a deferred taxing point)

–           The date in which there is no longer any risk of forfeiture and the restrictions regarding disposal are lifted or

–           Seven years (15 years from 1 July 2015) after the shares/rights were granted.

The above are known as the “deferred taxing point” which is when the ESS discount received becomes taxable to the individual and also becomes the date of purchase for CGT purposes. Note that the date that the employee share scheme arrangement was made is not considered the acquisition date.

In most cases the deferred taxing point is when the employee has the shares registered in their own name and can choose to dispose of the shares.

30 Day Rule:

Where an employee disposes of their shares or rights within 30 days of the deferred taxing point, the deferred taxing point becomes the date of sale. Consequently, the capital gain or loss on disposal is disregarded and the amount of the discount is included in your assessable income in the income year the deferred taxing point occurred.

 

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

 

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What is your rental property earning or costing you after tax?

A rental property is a popular investment amongst Australians, but some may be unaware of what return their investment is providing them. Calculating the total profit or loss after tax can provide insight to the actual monetary return.

Rental profit (income is greater than expenses) is treated as ordinary assessable income and is taxed at your marginal tax rate, whereas a rental loss (expenses are greater than income) will reduce your overall taxable income and tax payable (depending on your marginal tax rate).

An example is provided below which shows the total rent profit or loss after tax for a property that has a loan with deductible interest and one without. Calculating the profit or loss after tax can be broken down into 3 steps, which are set out below:

  1. Calculate net rental profit or loss

The net rental profit or loss is calculated as rental income received less rental expenses incurred. Some additional expenses which you may not know can be included are interest on loans used to fund the purchase of the investment property and a deduction for the construction cost of the building (depreciation). For the purposes of this example, depreciation has not been included.

  1. Calculate the tax payable or refundable

Calculating the tax payable or refundable is calculated as your marginal tax rate multiplied by the net rental profit or loss. The marginal tax rate will depend on your individual taxable income for that particular year. You may need check the current ATO tax brackets to determine which tax rate applies to you or speak to your accountant to confirm. For this example, a marginal tax rate of 32.5% has been assumed (taxable income between $45k and $120k). In most circumstances an additional 2% Medicare levy will also be applicable, making the effective tax rate in this example 34.5%.

  1. Subtract any tax from the net rent

The final step is to subtract the tax payable or refundable from the net rental profit or loss. See the table below for a practical example.

 

Financed Not Financed
1 INCOME   INCOME  
  Rent  $          20,000 Rent  $           20,000
 
  EXPENSES   EXPENSES  
  Advertising  $                350 Advertising  $                 350
  Council Rates  $            2,200 Council Rates  $              2,200
  Insurance  $                950 Insurance  $                 950
  Interest on Loan  $          13,500 Interest on Loan   $                 0
  Land Tax  $                650 Land Tax  $                 650
  Management fees  $            2,700 Management fees  $             2,700
  Repairs and Maintenance  $            1,300 Repairs and Maintenance  $             1,300
  Water Rates  $            1,250 Water Rates  $             1,250
  Water Use  $                460 Water Use  $                 460
  Total Expenses  $          23,360 Total Expenses  $             9,860
 
  NET RENT $           ( 3,360) NET RENT  $           10,140 
 
2 Tax at 34.5% $            1,159  $             3,498
 
Net Rental Profit or Loss $            (3,360)  $           10,140
3 Tax on Rental Profit or Loss $            1,159  –  $             3,498
Net Rental Profit or Loss after Tax $           (2,201)  $             6,642

For the property with a loan and where an interest deduction is being claimed, there is a net rental loss of $3,360. The net rental loss will reduce overall tax by $1,159. Therefore the net rental loss after tax is $2,201. Essentially the investment is costing this individual $2,201 for the year, and it is hoped that this cost will be offset by growth of the investment over time.

For the property that has not been financed, there is a net rental profit of $10,140 resulting in additional tax of $3,498, therefore the net rental profit after tax is $6,642.

As you can see from the example above, tax will affect your overall return on your rental property. Working through the steps above can help you determine overall what your rental property is making you or costing you.

Related blogs:

Less known rental deductions
Pros and Cons of negative gearing
Changes to depreciation for rental properties

Author: Caleb Datson
Email: caleb@faj.com.au

 

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Tax consequences of short-stay accommodation

Over the past decade, short-stay accommodation sites such as Airbnb and Stayz have skyrocketed in popularity, prompting investors to consider the potential benefits of advertising their own property or room on a like-minded site. However, we here at Francis A Jones recommend that potential investors consider the tax consequences of short stay accommodations before doing so.

Similar to a residential or commercial rental property, an owner of a property rented out for short-stay accommodation must declare any rental income they have received in their tax return. They are also entitled to claim a deduction for expenses such as council rates, water rates, land tax, interest on investment loans, depreciation and capital allowances, to name a few.

Unlike a standard rental property, short-stay accommodation properties are sometimes used for private purposes. In this instance the owner must apportion the expenses to only claim the part that relates to income-producing activities. This is usually based on the number of days the property was available for rent during the year. For example, if a property is available for rent for 80% of the year, you can generally claim 80% of the total expenses incurred as a deduction. However, it’s important to note that expenses related entirely to the income, such as service fees and commission charged by short-stay accommodation sites are fully deductible. Further, the private portion of the expenses should not be overlooked, since these ‘holding costs’ can potentially be added to the cost base of the property, thereby reducing capital gains tax (CGT) owed when the property is sold by the investor.

Another common occurrence for holiday home owners is to rent the property to family and friends below market rates. The Australian Taxation Office (ATO) states, “If your holiday home is rented out to family, relatives or friends below market rates, your deductions for that period are limited to the amount of rent received”. This means you cannot claim a loss for the period you rented the property for below market rates, you can only breakeven. In comparison, if the property is occupied at no cost, it is considered to be 100% private and no deductions can be claimed. For more information and examples please refer to the ATO webpage https://www.ato.gov.au/Individuals/Investments-and-assets/Holiday-homes/.

Finally, it is worth mentioning if you are planning on renting out a room of your primary residence on a short-stay accommodation site, you will no longer be eligible for the full CGT main residence exemption which means when you sell your home, part of the sale will be subject to capital gains tax. For more information on the eligibility of the CGT main residence exemption please refer to the linked ATO webpage, https://www.ato.gov.au/Individuals/Capital-gains-tax/Property-and-capital-gains-tax/Your-main-residence-(home)/Using-your-home-for-rental-or-business/.

Other related blogs:

Holding costs and the impact on capital gains tax

Author: Amy Murphy
Email: amy@faj.com.au

 

 

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Can’t pay your tax bill?

Unfortunately, many of us have tax bills and sometimes we simply cannot pay the Australian Taxation Office by the due date. Whether it be an unexpected tax assessment or unforeseen cash flow problems, there are options available.

The first and best advice I can give you is – firmly implant in your mind that in one way or another, you are going to pay this tax debt.

So, what options do you have?

Option 1 – Borrow money from the bank to pay the amount owing to the ATO

  • This clears your ATO debt but creates another debt with the bank.
  • In many cases this might be considered to be ‘robbing Peter to Pay Paul’
  • If the bank charges a lower interest rate than the ATO (which is likely) and offers a longer repayment period, your cash flow may cope better and make the debt repayment more achievable.

Option 2 – Negotiate with the ATO and enter into a reasonable payment plan

  • Firstly, you should identify why and how you managed to be in this position of owing tax.
  • I won’t go into all the reasons why people owe tax, but what I will say, if you have been reckless, selfish, deceitful or intentionally created a tax debt the ATO will be less inclined to negotiate a payment plan.
  • If there are legitimate reasons that you are unable to pay your tax debt and you have a history of meeting your tax obligations on-time the ATO are likely to be reasonable and agree on a repayment plan.
  • The ATO want the debt repaid and they want you to continue meeting your ongoing obligations, so it’s in their best interests to assist with payment plans.
  • The ATO may remove the interest obligations on the debt if you stick to the payment plan and continue to meet your ongoing tax obligations.
  • Payment plans can vary depending on the amount payable and the circumstances. They can also be tailor made to coincide with your cash flow circumstances. The can be set for periods up to two years but not usually more than one year.

Option 3 – You can bury your head in the sand and hope that it will go away

  • Sorry, it’s not going away.

Option 4 – You could go bankrupt

  • However note that certain debt relating to employee PAYG withheld & employee superannuation will never be wiped from your slate.
  • Other amounts payable to the ATO can be cleared if you go bankrupt.
  • Going bankrupt has a whole lot of other implications that can be to your detriment, and should be your last option after you’ve considered everything else

The ATO website has further information about help with paying your tax.

Other related blogs:

What company debts can directors be personally liable for?

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

 

 

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Super contributions and changes to the work test

As of 1 July 2022 if you are aged between 67 – 74 and want to contribute to super, it may have just become a whole lot easier.

Under previous rules, if you were aged between 67 – 74 and wanted to make a personal contribution to super, you would have been required to meet the ‘work test’ in the year you were making the contribution. This includes salary sacrificed contributions.

This is no longer the case.

The ATO have now removed the ‘work test’ requirement on personal super contributions. However, if you are aged between 67 – 74 and wish to claim a tax deduction for your personal super contributions, the ‘work test’ will still apply.

So, what is the ‘work test’?

To pass the ‘work test’ you must have been gainfully employed for 40 hours or more in any 30 day period in the financial year you are making the contribution. Gainfully employed means you must be employed or self-employed and actually receiving payment; this does not include voluntary work.

The 30 day period does not have to be in the same calendar month. For example, you could work 4 hours every Monday, Tuesday and Wednesday for four consecutive weeks to reach the 40 hour threshold.

It is important to check your eligibility before making personal super contributions. It is a continually changing space with rules catered around age, amount and timing of these contributions.

If you need to speak to an accountant, please reach out to us on (08) 9335 5211.

Other related blogs:  

New super contribution limits
How much do I need in super to retire?

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

 

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New Super Contribution Limits

Welcome to a new tax year, and with all new years it is an opportune time to think about the future. And the future is Super. Superannuation are those savings designed to support us in our retirement, and we can make contributions to help our super balance grow. The main types of contributions to super are concessional and non-concessional.

Concessional Contributions

Concessional contributions are contributions into super for which a tax deduction has been claimed. This includes contributions by your employer as well as personal contributions.

  • Employer contributions consist of the super guarantee (SG) your employer is required to pay on your wage, as well as amounts they pay under a salary sacrifice arrangement you may have. From 1 July 2022 the SG payable by your employer is 10.5% of your wage (or ordinary time earnings).
  • Personal contributions are amounts you have paid into your super fund with the intention to claim a tax deduction in your personal tax return at the end of the financial year.

For 2022/2023 the annual cap on all concessional contributions made for you is $27,500. If you have more than one super fund all the concessional contributions made to all your funds are added together and counted towards your concessional contributions cap.

From 2019/2020 carried forward rules were introduced allowing you to make extra concessional contributions, above the annual cap, without paying additional tax. To be eligible your total super balance at 30 June of the previous financial year must be less than $500,000, and you must have unused concessional contributions from prior years.

Non-Concessional Contributions

Non-concessional contributions are contributions into super that are from your after-tax income, and are not taxed in your super fund. Non-concessional contributions can also include contributions made by your spouse into your super fund, transfers from foreign super funds and after-tax contributions from your employer.

For 2022/2023 the annual cap on all your non-concessional contributions is $110,000. As with concessional contributions if you have more than one super fund all the non-concessional contributions from all your super funds are added together and counted towards your cap.

If you exceed the annual non-concessional contributions cap you may be eligible to access future year caps. This is known as the bring-forward arrangement, and allows you to make extra non-concessional contributions without having to pay extra tax. Eligibility for accessing the bring-forward arrangement is dependent upon your age and your total super balance at 30 June of the previous financial year.

If your concessional and / or non-concessional contributions exceed the annual caps, and you are not eligible to access either the carried forward unused concessional contributions or the non-concessional contribution bring-forward arrangement you are liable for excess contributions charges and tax applied by the ATO.

If you have any questions about super contribution limits, including your eligibility for unused carried forward concessions and the non-concessional bring forward arrangement, then please do not hesitate to contact our us for assistance.

Other related blogs:

What is a withdrawal and re-contribution strategy?
Carry forward concessional contributions – what are the rules?

Author: Brigette Liddelow

Email: brigette@faj.com.au

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Land Tax – what’s mine is mine and what’s ours might not be mine

State Revenue WA imposes land tax based on the total unimproved value as determined by the Valuer-General on all land held by the same owners each year.

The assessment is based on your ownership of land at midnight 30 June of the previous assessment (financial) year. If you own more than one lot, your land holdings will be aggregated. That means the land valuations will be added together before the tax is calculated, and as land tax is a progressive tax, a bigger aggregated value results in a higher tax rate. If you own lots in a different capacity, these should be assessed separately.

The tax is assessed separately on any land you own solely, and opposed to any land you own with another person.  So if you own one house by yourself and one with your spouse, each should be assessed separately.  Your main residence is exempt.  If you hold land in trust for different persons (as trustee), tax is assessed separately on the land owned for each separate trust.

Sometimes when you own land personally and as trustee, these are inadvertently combined on one notice.  This is incorrect and may result in additional land tax being paid at a higher rate.

If your assessment includes land that is held by a trust, you should advise State Revenue in writing (an objection) to ensure your assessment is corrected.

To lodge an objection, it is advisable to provide proof of trust ownership, including the trust deed and Offer and Acceptance from the purchase of the land.  You can do this by letter to:

  • Commissioner of State Revenue
    RevenueWA
    GPO Box T1600
    Perth WA 6845

An objection against your assessment must:

  • be lodged within 60 days of the date of issue shown on your assessment notice
  • be in writing with OBJECTION clearly written at the top of the letter and
  • state fully and in detail the grounds of your objection.

Other related blogs:

How does WA land tax work?

Author: Stacey Walker
Email: stacey@faj.com.au

 

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