The term “dependant” can mean two different things in relation to superannuation and is defined differently under the SIS Act and under tax law. The SIS Act determines who can receive super directly from a fund without going through an estate (SIS dependants). Tax law determines who pays tax on the taxable part of such payment (tax dependants).

What is a tax dependant?

A person can be considered your tax dependant if they meet the criteria for one of the categories below:

• your spouse (in a relationship including de-facto, can be same gender)
• former spouse
• your child (under 18 only)
• any other person you are in an interdependent relationship with (not a spouse, but you live together and one or both provide financial and domestic support for the other)
• a person who is substantially financially dependent on you.

What is a SIS dependant?

A person can be considered your SIS dependant if they meet the criteria for one of the categories below:

• currently your spouse (in a relationship including de-facto, can be same gender)
• your child (any age)
• any other person you are in an interdependent relationship with (not a spouse, but you live together and one or both provide financial and domestic support for the other)
• ordinary meaning dependant

So what’s the difference?

• Your financially independent adult children are your SIS dependants, but not your tax dependants.
• A former spouse is not your SIS dependant – assuming they are not financially dependant on you and don’t live with you. But the tax law specifically lists a former spouse as a tax dependant. As a result, your former spouse can only receive your super through your estate, not directly from your fund.

If an individual is not a SIS dependant, the only way they can receive a member’s death benefits is via the deceased member’s estate (as directed by a valid Will).

Tax paid on benefits is different with reference to tax dependants that are not SIS dependants, therefore the impact of tax can be significant even though the dependant can receive the benefit from your super fund directly.

The table below summarises how the taxable component of a super death benefit is taxed in most common situations:

 

Type of death benefit	Age of Beneficiary	Age of Deceased	Tax on taxable component – taxed element	Tax on taxable component – untaxed element
Lump Sum
Paid to tax dependant	Any age	Any age	Tax free	Tax free
Paid to non-tax dependant	Any age	Any age	Taxed at a maximum of 15% plus medicare levy	Taxed at a maximum of 30% plus medicare levy
Account based income stream
Paid to tax dependant	60 years or older	60 years or older	Tax free	Taxed at marginal rates with a tax offset of 10%
Paid to non-tax dependant	Under 60 years	Under 60 years	Taxed at marginal rates with a tax offset of 15%	Taxed at marginal rates

As tax has already been paid on this money when it was contributed into your super account, the tax-free component of your super death benefit can generally paid to your beneficiaries without the need to pay further tax.

Under tax law, non-dependants are required to pay tax on some elements of the lump sum death benefit they receive.  The tax-free component of a lump sum super death benefit paid to a non-dependant is tax free, but tax is payable on the taxable component.

Other related blogs:

Do I need a binding death benefit nomination?
What is a withdrawal and re-contribution strategy?

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

 

 

Granny Flats have long been an option for aging parents, older children or those who require assistance with day-to-day activities due to a disability. However, when in the planning stages, it is important to understand the Capital Gains Tax (CGT) implications of such an arrangement. Granny flat arrangements give an eligible person the right to occupy a property for life.

A granny flat is most commonly a smaller, self-contained home built on a property, separate to the main house. They will most likely have their own kitchen, lounge room, bathroom and laundry. It will have a separate entrance but is not on a separate title and is built within the boundary of a property. The granny flat cannot be sold as a separate entity unless it is subdivided under a separate title.

While many granny flat arrangements are informal, it would be worth considering a more formalised arrangement to protect the interests of both parties. This would require a legal contract to be written up.

From 1^st July 2021 a granny flat arrangement is exempt from CGT when it satisfies the below conditions:

• the owner or owners of the property are individuals.
• one or more of the eligible individuals have a granny flat interest in the property.
• the owners and the individuals with the granny flat interest, enter into a written and binding granny flat arrangement which is not commercial in nature.

To be considered an eligible individual, and therefore be exempt from CGT, the person with the granny flat interest must either have reached pension age and/or require assistance for day-to-day activities due to a disability.

The parties to a granny flat arrangement do not have to be related, although often the property owners are the children, and the eligible individuals are the parents.

The exemption will only apply when creating, changing or termination a granny flat arrangement. The exemption from CGT will apply to CGT events that occur on or after 1^st July 2021, even if the arrangement was entered into prior to this date.

Other CGT events that are not related to the granny flat arrangement are subject to normal CGT rules and may be liable for CGT. For example, the sale of a property that was used in a granny flat arrangement, which has since been terminated.

For further information regarding formalising a granny flat arrangement and the CGT implications, please contact our office and we would be more than happy to assist.

Related Blogs

https://www.faj.com.au/subdividing-main-residence-selling-backyard/
https://www.faj.com.au/tax-consequences-of-short-stay-accommodation/
https://www.faj.com.au/four-year-construction-rule-buy-vacant-land-renovate

Author: Joanne Humphreys
Email: joanne@faj.com.au

 

 

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    

 

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 1^st 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 10^th 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

 

 

 

 

 

 

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.

2. 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%.

3. 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