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The thought of the Australian Tax Office (ATO) sharing up to 50% of any gain you make on an investment decision is enough to strike fear into the hearts of most people. Given Australia’s love affair with property, it is little wonder that we are often asked about the impact of capital gains tax (CGT) on property. This month, we explore the most frequently asked questions.

In general, CGT applies to any change of ownership of a CGT asset, unless the asset was acquired before 20 September 1985 when the CGT rules first came into effect.

Most questions about CGT on property are based on the main residence exemption that exempts your home (your main residence) from any CGT exposure when you sell the property.

I jointly own an investment rental property with my elderly mother. Neither of us has ever lived in the property. We’ve recently updated our wills. The lawyer says that if Mum’s will gifts her half of the property to me then this ‘gift’ will not attract capital gains tax. Is this correct?

Kind of. Tax law tends to work on the basis that if looks like a duck and walks like a duck then it’s a duck, not whatever your legal document calls it. Exposure to capital gains tax is a matter of fact and substance.

If you inherit your mother’s share of the property, there would generally be no tax liability until you sell the property. What is important here is how the CGT is calculated when you ultimately sell.

When the rental property transfers to you from your mother’s estate, the tax rules determine how CGT is calculated when you eventually sell. Basically, if the property was bought on or after 20 September 1985 then when you sell the property your taxable profit will be based on the original purchase price. That is, you will end up being taxed on the increase in value of the property since it was acquired, including the portion that accrued while your mother was still alive.

In general, if you jointly own an investment property, your individual exposure to CGT will depend on how the property is owned. If the property is held as tenants in common then any CGT exposure is in line with your ownership interest. For example, in your case, it is 50% owned by your mother and 50% by you but different people can own different ownership interests. If the property is owned as joint tenants then any CGT exposure is equally shared by the owners.

I bought a house in 2000, and lived in it until 2003. I was posted overseas with my job between 2003 and 2011. During that time my brother lived in the house rent free – he just paid for utilities. In 2011 to 2012, I rented the house out (no one I knew). I moved back into the property in 2012 and have just sold the house. Do I have to pay capital gains tax on the property?

The capital gains tax rules are more understanding about how people live their lives than other laws and in some circumstances allow you to continue to treat your home as your main residence even if you are not actually living in it.

While you are away overseas, if you leave the property vacant or let a friend or relative live in the property rent-free, assuming you do not claim any other property as your main residence, then you can continue to treat the property as your main residence for CGT purposes indefinitely.

If you rent the property out while you are away, the tax laws allow you to still claim the property as your main residence as long as the period you rent it for is not more than a total of 6 years. This 6 year period can actually be reset by moving back into the property again.

Effectively, you can move out and move back in as many times as you like and still claim the property as your main residence as long as it is your only main residence during that time and if you are renting it out, you do not rent it out for more than a total of 6 years across the period you are claiming the property as your main residence.

During the rental period you can also claim deductions against the rent, even though the property might still be exempt from CGT during this period.

I bought a property in 2008 and expected to move in straight away, but there were tenants still in the property and their lease still had 8 months to go. I waited for the lease to expire and then moved in. I have lived there ever since and plan to sell later this year. Can you just confirm that I would still qualify for a full CGT exemption on the sale as the property has significantly increased in value?

This is a very common situation but is probably overlooked much of the time. Unfortunately, you would not qualify for a full exemption in this case.

The main residence rules allow you to treat a property as if it has been your main residence since settlement date as long as you actually move into the property as soon as practicable after settlement. This is intended to cover situations where there is some delay in moving into the property due to illness or some other “reasonable cause”. The ATO’s view is that this rule cannot apply if you are waiting for existing tenants to vacate the property.

This means that you would only qualify for a partial exemption under the main residence rules. We will need to calculate your gross capital gain and then apportion it to reflect the period of time when it was actually your main residence (i.e., from when you actually moved in).

As long as you are a resident of Australia and have owned the property for more than 12 months we can also apply the 50% CGT discount to reduce the leftover capital gain.

It will be important in this case to gather as much evidence as possible of non-deductible costs that you have paid in relation to the property such as stamp duty, legal fees, commission paid to real estate agents, interest, rates, insurance, etc. This will help to reduce the gross capital gain that is subject to tax.

If you have any questions about Capital Gains Tax and what it means in your personal situation, please don’t hesitate to call MMT Accountants + Advisers on  02 9930-6100.

The top job has been once again changed mid-term meaning Australia has now seen six leadership changes in the last eight years! It is alarming to think John Howard was our last leader to serve a full term.

Like in any business, a change of the top dog can be a good thing or a bad thing. It can inspire confidence and creativity in the leadership team or it can create an environment of unease and resentment. Under Turnbull however, what does it mean for Small Businesses? Small Businesses do of course account for almost half of employment in the private sector.

“The Australia of the future has to be a nation that is agile, that is innovative, that is creative. We can’t be defensive, we can’t future-proof ourselves. We have to recognise that the disruption that we see driven by technology, the volatility in change, is our friend if we are agile and smart enough to take advantage of it. There has never been a more exciting time to be alive.” Turnbull said.

Turnbull has used similar language when talking at tech-start up conferences. Tech start-up companies are of course close to Turnbull’s heart, previously acting as chairman of ISP OzEmail and later selling his $500,000 stake in the business for a cool $57,000,000 (in only three years).

It would appear then that start-ups, not small businesses may be favoured by Mal and while it’s a little early to determine how Abbott’s economic policies which included generous small business tax incentives, will change under Turnbull. Already we are seeing a welcoming of the leadership change by businesses which should inspire business confidence.

Aussie entrepreneur Dick Smith seems to think so, “He’s a successful business man and I like the fact he’s middle of the road,” Smith says.
It is no secret that businesses need a clear vision for the economic future and plan on getting there (an area where Abbott failed).

“We need to have in this country, and we will have now, an economic vision, a leadership that explains the great challenges and opportunities that we face, that describes the way in which we can handle those challenges, seize those opportunities, and does so in a manner that the Australian people understand so that we are seeking to persuade rather than seeking to lecture,” Turnbull said.

Turnbull went on to say that, “The culture of our leadership is going to be one that is thoroughly consultative, a traditional thoroughly traditional Cabinet government that ensures that we make decisions in a collaborative manner. The Prime Minister of Australia is not a president. The Prime Minister is the first among equal”.

This approach, along with Turnbull’s close relationship with Senate cross benchers will hopefully assist the Turnbull government push through important reform.

Let us know what you think of the leadership change.

Image Source: GQ Australia

Fifteen years after the introduction of the GST in Australia debate still rages over what should be taxed and whether the GST rate should increase.

Unless the Government changes the GST Act, any change requires the approval of the States and Territories. The Treasurers’ workshop late last month resolved to keep the GST rate at 10% but enable a series of other changes. We look at the key areas of change:

GST on online products

From 1 July 2017, the GST will be broadened to apply to all goods purchased online and imported from overseas. Currently, GST does not apply to inbound goods under $1,000.

The latest NAB Online Retail Sales Index estimates that Australians spent $17.3 billion on online retail in the 12 months to June 2015 – around 7% of traditional bricks & mortar retail. It’s difficult to find an accurate measure of how much of this online trade goes to overseas retailers but the Productivity Commission report in 2011 estimated 7.5% – the rest is spent with Australian retailers. According to the same report, around 76.5% of all online sales are for goods made up of low value purchases under $100.

The Treasurers have opted for a vendor registration model which means that they are relying on businesses based overseas and selling into Australia to register and comply voluntarily with Australian tax law. The problem is how to collect the tax from businesses that have no obligation to comply and the Government has no jurisdiction to pursue tax owing. It is almost impossible to bring all but the largest of providers into the GST net.

An OECD report at the beginning of the year recommended that foreign suppliers register in the country they are supplying to – Apple for example, already does this in Australia. It will be interesting to see if, over time, this becomes the norm. While protecting the tax base it would be a major competitive disadvantage for small business looking to explore new markets.

The ‘Netflix tax’: GST on digital goods

Draft legislation released on Budget night broadens the GST to digital products and other imported services supplied to Australian consumers by foreign entities in a similar way to equivalent supplies made by Australian businesses.

Expected to generate $350m over 4 years, the tax treats streaming or downloading of movies, music, apps, games, e-books as well as other services such as consultancy and professional services in a similar way to local suppliers. In some cases the GST liability might shift from the supplier to the operator of an electronic distribution service where those operators have responsibility for billing, delivery and terms and conditions.

GST on digital products is intended to apply from 1 July 2017.

GST to remain on tampons

GST on feminine hygiene products generates around $50 million in revenue per year. It has been a political sore point for some time that highlights the inequities of a system that taxes essentials but not items such as personal lubricants. Toilet paper and nappies, other essentials of life, are also taxed.

At the Treasurers’ workshop, the State and Territory Treasurers rejected Joe Hockey’s proposal to remove the GST from feminine hygiene products.

When the GST was first introduced, to get the legislation through Parliament the Howard Government agreed to demands to make amongst other things food, health and medical supplies, and education GST-free. The rationale is that because the GST applies evenly across all things, it hits low-income earners the hardest as they spend a higher proportion of their income on basic necessities. On these grounds making feminine hygiene products, nappies and a range of other essentials GST-free sounds rational. The problem is that the wealthy benefit from GST-free products and the tax system becomes a quasi social welfare system that dramatically impacts on the revenue collected and revenue available to fund better targeted social welfare programs. It’s a touchy debate and one that the major parties are unlikely to want to enter anytime soon.

One of the most common questions from clients with a Self Managed Superannuation Fund (SMSF) is, can I buy property? Followed by the second question, can I buy property in the United States?

SMSFs provide investment flexibility for those that understand the rules. They can also be a significant liability if you get it wrong.

There are a few key things to check before purchasing a property:

Australian SMSFs can purchase property in the US if it is correctly structured (you will need good legal and structuring advice). The question is, should you invest your retirement savings in a market where you have limited visibility or knowledge?

A SMSF would not usually acquire US property directly. Generally, the fund would structure the property investment through a Limited Liability Company (LLC) where the SMSF (and its associates) own and control the majority of the “membership” (the shares). The US LLC is likely to be required to lodge a tax return and pay US federal and state taxes.

As the actual investment the fund holds is the interest in the company (with the company owning the property), there are in-house asset issues to consider. One issue is that the company bank account needs to be with an entity that is classified as an Authorised Deposit Institution (ADI) – not all foreign banks are. Fail this criteria and the investment held by the SMSF may become an in-house asset and require the fund to sell the asset.

If you are contemplating purchasing property in your SMSF, talk to us today about achieving the right structure and outcome.

What if you were going on a trip and you were offered the opportunity to fly on one of two air planes. The first was piloted by a paid and experienced pilot ; the other has no pilot, is cheaper and you are allowed to fly if yourself.

If you choose the plane without the pilot, a computer will be installed in the cockpit that is connected to an internet site that will tell you all you need to know about flying.

Which plane do you want to take for your journey? What you are paying for when you work with a business adviser is not information – you can get that anywhere. You are paying for an experience. I’ve been there in bad weather and I know how to make a safe landing if anything goes wrong.

Take a look at our business advisory services

Draft legislation has been released to amend the methods for calculating deductions for work-related car expenses from 1 July 2015.

In essence the changes are to simplify the way the deductions are claimed by removing two of the methods previously used. Additionally, the Cents per kilometre method is now reduced to 66c per kilometre and capped at 5,000 business kilometres.

What this means for you
If you currently use the ‘12% of original value method’ or the ‘one third of actual expenses method’ you must now either:

For example:
James Bond is a very busy employee at ‘Military Intelligence 6 (MI6). He isn’t the best at keeping paperwork and drives an Aston Martin which he travels roughly 6,000km per year for business.
In the past his accountant has calculated that the best method for James to be the 12% of original value method. This gives James a deduction of $6,895 per year and suits him because he hasn’t had to spend time keeping a log book or hanging on to receipts.

With the proposed changes they have removed the 1/3rd method and 12% method. In addition, the cents per km rate has been lowered to 66c per km. His accountant hasn’t advised him of the proposed changes and as such he hasn’t kept a log book.
James is now forced to use the ‘Cents per kilometre’ method which equates to $3,300 (5,000km x 66c). Therefore his deductible amount has decreased by $3,595!

What you need to do

Speak with MMT Accountants + Advisers and ask them about the proposed changes and how it will affect you. It may be worthwhile to keep a logbook which is only for a continuous period of 12 weeks and lasts for 5 years. You can read more about the logbook method here: ATO: Keeping a logbook

Before you register a business name with ASIC, there are a number of things you should consider in your planning.

Below are a few questions you will need to ask yourself before you start the registration process.

Do I need a business name?

Generally, you will need to register a business name with us if you carry on a business or trade within Australia and you are not trading under your own name.
Unless:
– you are operating as an individual and your operating name is the same as your first name and surname
– you are in a partnership and your operating name is the same as all of the partners’ names, or
– you are an already registered Australian company and your operating name is the same as your company’s name.

Okay, I need to register a business name but does it protect my name from being used by someone else?

Registering a business name with ASIC does NOT provide exclusive ownership of your business name. The process of registering a business name is a legal obligation if you carry on or trade in Australia. Also, registering a business name will not prevent the name being used by somebody who has registered it as a trademark. This is an important point – and one that every business owner should be aware of.

So how do I protect my business name?

Generally, the only way to gain exclusivity over a particular business name is to register it as a trade mark with IP Australia.
To assist new business start-ups, IP Australia has developed a new simplified online trademark search, called TM Check where you can search for existing trademarks to ensure your business name does not infringe on an existing registered trademark.

What information do I need to register a business name?

During the application process you will need to provide your ABN, individual and birth details, an email address, a residential address and an address for the service of documents.

What are the steps to register a business name?

Step 1: Go to ASIC Connect and log in to your account.
When you log in for the first time, you will be prompted to add any existing business names to your account. Select ‘No’ and then’Licenses and Registrations’.

Step 2: Enter your Australian Business Number (ABN)
You must have either an ABN or an ABN application reference number.

Step 3: Enter the proposed business name and registration period
Make sure the proposed business name is available to register. Registration periods are for either one year ($34) or three years ($79).

Step 4: Enter the proposed business name holder details
Enter the proposed business name holder details in the fields provided.

Step 5: Enter the addresses of the proposed business name
You must provide an address for service of documents, a principal place of business address
and an email address. An SMS address is optional.

Step 6: Confirm the eligibility to hold the proposed business name
Read the eligibility requirements of a business name holder.

Step 7: Review your application
Check that the information displayed is correct.

Step 8: Make your declarations
Read the declaration to ensure you agree with the conditions of the transaction.

Step 9: Make your payment
You can choose to pay your registration fee using a credit card, BPAY or alternatively you can request an invoice.

Step 10: Confirmation
This will confirm your transaction has been submitted with ASIC.

In a recent speech, Small Business Minister Bruce Bilson stated that a lot of his time talking about the $20,000 immediate deduction for small business was convincing people it was not a hand out.

“I have spent a lot of my time explaining that asset write-off mechanisms aren’t grants, they are not gifts, they are not cash backs. They are a way of expensing a purchase in an asset that can contribute to a functioning business. Now, if you are not making any income there is not a huge benefit in you being able to write-off additional expenses at a faster rate.”

Here are some of the common questions we are asked to help clear confusion.

If I spend $20,000 how much will I get back?

The instant asset write off is a tax deduction that reduces the amount of tax your business has to pay. It enables small business entities (businesses with annual aggregated turnover below $2 million) to claim a deduction for depreciating assets of less than $20,000 in the year the asset was purchased and used (or installed ready to use). For example, if your business is in a company structure the most you will ‘get back’ (reduce your tax by) is 30% (in 2014-15) or 28.5% (in 2015-16) of the cost of the asset. If the business made a $19,000 purchase in June 2015, the most the business would reduce its tax bill by is $5,400. It’s a much better deal than the previous $1,000 immediate deduction limit but there are still cash flow issues for the business that need to be considered. Remember also that the business would have been able to deduct the purchase anyway, just over a longer period of time.

If I signed a contract before Budget night but didn’t pay for the asset or receive it until after the Budget, can I still claim the deduction?

To be able to claim the immediate deduction, you had to “acquire” the asset on or after 7.30 pm AEST on Budget night (12 May 2015) and use it (or install it ready for use) before 30 June 2017.

Contracts are often tricky because the date you acquired the asset really depends on what the contract says and how it’s structured. Generally, if you signed the contract before Budget night and the contract made you the owner of the asset, then the asset would not qualify for the $20k immediate deduction.

We’ve invested in new equipment for just under $18,000. How soon can we claim the immediate deduction?

‘Immediate deduction’ is a bit of a misnomer. Immediate in this context means that your business can claim a tax deduction for the asset in the same income year that the asset was purchased and used (or installed ready for use). The deduction is claimed on the business’s tax return.

Requiring the asset to be used or installed ready to use is an interesting catch. It means that businesses cannot stockpile assets and claim the immediate deduction for those assets. For example, if a restaurant business bought three ovens in June 2015, those ovens would need to be in use or installed ready to be used before the tax deduction could be claimed. If only one oven was used or installed before the end of the financial year, then the business could only claim the immediate deduction for one oven in their tax return. Assuming the other ovens are used before 30 July 2017, the immediate deduction could be claimed in the year they were first used or installed ready for use on the business’s tax return.

Can I buy multiple items and claim the immediate deduction even though the total being claimed is more than $20,000?

Yes. As long as you acquired the asset on or after 7.30 pm AEST on Budget night (12 May 2015) and use it (or install it ready for use) before 30 June 2017, then an immediate deduction should be available if each individual item costs less than $20,000.

Don’t forget about the cash flow implications. Depending on when you purchase the assets it might be another year before you can claim the deduction.

What sorts of assets can I claim an immediate deduction for?

To be able to claim the $20,000 immediate deduction, the asset needs to be a depreciating asset. A depreciating asset is an asset whose value you expect to decline over time. Examples include computers, furniture, and motor vehicles. So, no investment assets.

We’ve had some very interesting questions from people wanting to know what they can and can’t claim the immediate deduction for. Take artwork being advertised by a local art gallery. The gallery tells you that your business can buy anything up to $20,000 and claim an immediate deduction for it. Is this correct? The answer is, it depends.

There has to be a connection between the artwork and your business for it to be a depreciating asset. For example, the artwork could be displayed in your office reception or waiting area.

The Tax Office says that the life of an artwork for tax purposes is 100 years. So, deducting the artwork immediately is a big tax bonus.

The same principle applies to items that relate to an existing asset, like machinery. If what you are purchasing qualifies as a depreciating asset in it’s own right, then you can claim it.

Whatever the asset is, the same principles apply. Your business needs to qualify as a small business entity, the asset needs to be purchased and used (or installed) after Budget night and before 30 June 2017, the asset must cost less than $20,000, and the asset must be a depreciating asset. Not everything will qualify.

Are you relying on negative gearing?

There has been a lot of negative conversation about negative gearing lately. But, if you are currently negative gearing your investment property, should you be concerned?

Negative gearing is when you claim more in deductions than you earn for an income producing asset that you have purchased using debt. It is not limited to property, you can for example negatively gear shares, but property is the dominant negatively geared asset claimed by Australians.

The latest Taxation Statistics show that we claimed $22.5 bn in rental interest deductions in 2012-13 against gross rental income of $36.6 bn. While these statistics are not as bad as previous years because of the low cost of borrowing ($1.6 bn less than 2011-12), it’s more than the total Defence budget in 2013-14 at $22.1 bn.

The use of these property deductions does not vary widely across income ranges – that is, it’s not just those on the highest income bracket using negative gearing. The highest proportional losses were experienced by those with incomes (net of the rental loss) between $55,001 and $80,000, where deductions exceeded rental income by more than 28%. Negative gearing makes owning an investment property accessible to those who potentially would not invest for the long term gain in property value alone.

The Reserve Bank has stated that the ‘hot’ property market, particularly in Sydney, is because “Investor demand continues to drive housing and mortgage markets, with low interest rates and strong competition among lenders translating into robust growth in investor lending.” In NSW, lending to investors now accounts for almost half of the value of all housing loan approvals. Demand drives price.

The tax policy experts we canvassed generally held the view that negative gearing distorts the market and – in combination with the CGT discount – provides considerable and unnecessary tax advantages to those who least need them. To quote one, “[Negative gearing] is a uniquely Australian phenomenon (no other country is so generous) and I would abolish it (and the CGT discount) immediately (and not be so generous as to grandfather existing owners). The suggestion that its (temporary) abolition in the early 1990s led to an increase in rent was based on spurious and incomplete evidence. More relevant research has subsequently debunked the suggestion that the spike that happened in Sydney house prices had little to do with the abolition and a lot more to do with other, unrelated market forces.”

At present, the Government and property investors want to keep negative gearing. It’s a lonely policy position.

The Government Tax White Paper is due out later this year and may provide a better indication of any potential risk for investment property owners. But, negative gearing is not something to bank on as a long term strategy. It’s just a question of which Government will have the support to remove it.

Friends, family and holiday homes

If you have a rental property in a known holiday location, chances are the ATO is looking closely at what you are claiming. If you rent out your holiday home, you can only claim expenses for the property based on the time the property was rented out or genuinely available for rent.

If you, your relatives or friends use the property for free or at a reduced rent, it is unlikely to be genuinely available for rent and as a result, this may reduce the deductions available. It’s a tricky balance particularly when you are only allowing friends or relatives to use the property in the down time when renting it out is unlikely.

A property is more likely to be considered unavailable if it is not advertised widely, is located somewhere unappealing or difficult to access, and the rental conditions – price, no children clause, references for short terms stays, etc., – make it unappealing and uncompetitive.

Repairs or maintenance?

Deductions claimed for repairs and maintenance is an area that the Tax Office is looking very closely at so it’s important to understand the rules. An area of major confusion is the difference between repairs and maintenance, and capital works. While repairs and maintenance can be claimed immediately, the deduction for capital works is generally spread over a number of years.

Repairs must relate directly to the wear and tear resulting from the property being rented out. This generally involves a replacement or renewal of a worn out or broken part – for example, replacing damaged palings of a fence or fixing a broken toilet.

The following expenses will not qualify as deductible repairs, but are capital:

– Replacement of an entire structure (for example, a complete fence, a new hot water system, oven, etc.
– Improvements and extensions

Also remember that any repairs and maintenance undertaken to fix problems that existed at the time the property was purchased are not deductible.

Travel expenses to see your property

If you fly to inspect your rental property, stay overnight, and return home the following day, all of the airfares and accommodation expenses would generally be allowed as a deduction. Where travel is combined with a holiday, your travel expenses need to be apportioned. If the main purpose of the trip is to have a holiday and the inspection is incidental, a deduction for travel is not allowed. In these circumstances you can only claim a deduction for the direct costs involved in inspecting the property such as the cost of taking a taxi to see the property and a proportion of your accommodation expenses.

If you drive a car to and from your rental property to collect rent or for inspections, you can claim your car expenses. Just keep in mind that you need to be able to prove that you needed to visit the property.

Redrawing on your loan

The interest component of your investment property loan is generally deductible. Take care if you have made redraws on your investment loan for personal purposes. A portion of the loan may be non-deductible.

Borrowing costs

You are able to claim a deduction for borrowing costs over 5 years such as application fees, mortgage registration and filing, mortgage broker fees, stamp duty on mortgage, title search fee, valuation fee, mortgage insurance and legals on the loan. Life insurance to pay the loan on death is not deductible even if taking out the insurance was a requirement to get finance. If the loan is repaid early or refinanced, the whole amount including mortgage discharge expenses and penalty interest become deductible.

Why using the 20k Budget tax deduction might be the wrong decision
So, your business has a turnover under $2 million and you want to know how to use the $20,000 immediate tax deduction that’s been all over the news?

Before you start spending, there are a few things you need to know.

Does your business make a profit?

Deductions are only useful to offset against tax. If your business makes a loss then a tax deduction is of limited benefit because you’re not paying any tax. Losses can often be carried forward into future years but you lose the benefit of the immediate deduction.

Small businesses with a turnover of $2m or below make up 97.5% of all Australian businesses. The latest Australian Taxation Office (ATO) statistics show that well under half of these businesses paid net tax. That means that the $20,000 instant asset write-off is useful to less than half of the Australian small businesses targeted.

So, if your business makes a loss and you start spending to take advantage of the immediate deduction, all you are likely to do is to increase the size of your losses with no corresponding offset..

Cashflow first!

Cashflow is more important than an immediate deduction. Assuming your business qualifies for the deduction, the most important consideration is your cashflow. If there are purchases and equipment that your business needs, that equipment has an immediate benefit to the business, and your cashflow supports the purchase, then go ahead and spend the money. The $20,000 immediate deduction applies as many times as you like so you can use it for multiple individual purchases.

But, your business still needs to fund the purchase for a period of time until you can claim the tax deduction and then, the deduction is only a portion of the purchase price.

Let’s take the example of a small bakery. The bakery is in a company structure and has a taxable income for 2014/2015 of $49,545. The owner purchases a new $13,750 oven on 2 June 2015 and installs it straight away. The cost of the oven is claimed in the bakery’s 2014/2015 tax return resulting in a tax deduction of $13,750.

So, for the $13,750 spent on the oven, $4,125 is returned as a reduction of the company’s tax liability (i.e., 30% company tax rate in the 2015 income year). For the bakery, they need the cashflow to support the $13,750 purchase until the businesses tax return is lodged after the end of the financial year. With the $4,125 reduction of the company’s tax liability, the business has fully funded the remaining $9,625.

From 1 July 2015, the bakery would also receive the small business company tax cut of 1.5%. If the business also had taxable income of $49,545 in the 2016 income year, the tax cut would provide a reduction of $743.

It’s important not to rely on the advice of the person you are purchasing from. There is a lot of misinformation out there in the market right now and it’s important to know how the concessions apply to you.

Is your business eligible

To use the instant asset write-off, your business needs to be eligible. The first test is that you have to be a business – not just holding assets for investment purposes.

The second is the aggregated turnover of your business needs to be below $2m. Aggregated turnover is the annual turnover of the business plus the annual turnover of any “affiliates” or “connected entities”. The aggregation rules are there to prevent businesses splitting their activities to access the concessions. Another entity is connected with you if:

You control or are controlled by that entity; or

Both you and that entity are controlled by the same third entity.

What has changed?

In general, a deduction is available for purchases your business makes. What has changed for small businesses under $2m turnover is the speed at which they can claim a deduction. Before the Budget announcement, small business could immediately deduct business assets costing less than $1,000. On Budget night, the Treasurer announced that the threshold for the immediate deduction will increase to $20,000 at 7.30pm, 12 May 2015 for small businesses with an aggregated turnover less than $2 million. The increased threshold is intended to apply until 30 June 2017.

For small business, assets above $20,000 can be allocated to a pool and depreciated at a rate of 15% in the first year and 30% for each year thereafter.

If your business is registered for GST, the cost of the asset needs to be less $20,000 after the GST credits that can be claimed by the business have been subtracted from the purchase price. If your business is not registered for GST, it is the GST inclusive amount.

How do I make the most of the immediate deduction?

There are a few tricks to applying the instant asset-write off:

Second hand goods are ok

It does not matter if the asset you are buying for your business is new or second hand. So, you could still claim the deduction on say, second hand machinery you have bought.

What is not included

There are a number of assets that don’t qualify for the instant asset write off as they have their own set of rules. These include horticultural plants, capital works (building construction costs etc.), assets leased to another party on a depreciating asset lease, etc.

Also, you need to be sure that there is a relationship between the asset purchased by the business and how the business generates income. For example, four big screen televisions are unlikely to be deductible for a plumbing business.

Assets must be ready to use

If you use the $20,000 immediate deduction, you have to start using the asset in the financial year you purchased it (or have it installed ready for use). This prevents business operators from stockpiling purchases and claiming tax deductions for goods they have no intention of using in the short term.

Business and personal use

Where you use an asset for mixed business and personal use, the tax deduction can only be claimed on the business percentage. So, if you buy an $18,000 second hand car and use it 80% for business and 20% for personal use, only $14,400 of the $18,000 can be claimed.

This is a highly targeted Budget that seeks to keep change within community tolerance levels. Most spending measures target productivity gains – although small businesses with turnover between $2m and $5m will be disappointed. Revenue measures target the asset or income rich, or just plain unpopular.

Small business tax cuts?

Treasurer Joe Hockey said that “…every small business will get a tax cut…” Well, that’s if your business’s aggregated turnover is less than $2m.  If not, bad luck.

Small businesses with a turnover of $2m or below make up 97.5% of all businesses in Australia.  The majority of taxpayers in this sector are not in a company structure – accounting for only 11% of the total company tax take despite the sheer volume of businesses represented.  Based on the lastest ATO statistics, well under half of these businesses paid net tax.

There are only 72,000 businesses with a turnover between $2m and $5m. Despite the small volume, these businesses contributed 10% of the total company tax take.   These businesses did not receive any additional benefits in the Budget to help them grow and develop (aside from primary producers).

Accelerated depreciation across multiple areas

– Micro business – immediate deductibility from Budget night for any assets purchased and used or installed and ready to use by 30 June 2017 that cost less than $20,000
– Start ups – immediate deductibility for professional expenses – cost of lawyers and accountants to get a business up and running
– Farmers – immediate deductibility for fencing and water facilities
Tax cuts for small business (under $2m) from 1 July 2015

1.5% company tax reduction

– 5% tax discount for unincorporated small businesses
– GST on digital supplies
– Similar GST treatment applied to supplies of digital products to Australian consumers – including consulting and professional services – regardless of whether they are supplied by a local or foreign supplier

Individuals

– Changes to work related deductions for car expenses – 12% of original value and one third of actual cost methods removed and simplification of cents per kilometre method

FBT changes

– Changes to salary sacrificed meal entertainment for not for profits
– Expansion of FBT exemption for work related electronic devices provided by small businesses

Multinationals targeted

– Changes to Part IVA target around 30 global companies with revenue in excess of $1bn

Accessing government benefits

– Changes to how superannuants’ income counted for social security
– Child care shake up – Collapses three current eligibility tests with one means and activity test
– Asset test changes mean 91,000 pensioners no longer qualify and 235,000 will have pension reduced
– ‘Double dipping’ Government and employer paid parental leave stopped

If you are a high income earner, earn income from overseas, or have a large asset base, then, if the rumours have any truth to them, you’re in the firing line in the 2015/2016 Federal Budget.

The Australian economy is coming off its resources boom ‘sugar hit’ and as Reserve Bank Governor Glenn Stevens said recently, “the government has little choice but to accept the slower path of deficit reduction over the near term.” The declining iron ore price has blown a $30bn tax receipts hole in the budget over 4 years. So, the question is, where can the Government get savings into the Budget that will pass the Senate while being palatable to voters?

Prime Minister Tony Abbott recently said, “There will be tough decisions in this year’s budget as there must be, but there will also be good news.” This Federal Budget is not about what the Government believes is necessary but what they can get through the Senate. Large structural reforms to tighten welfare, education and health have failed in the Senate in their current form. This budget will be about moving thresholds and imposing restrictions on the existing system.

Families

The Prime Minister calls the “families package” the centrepiece of the upcoming budget with child care facing “significant changes.” While the Government has stated that this will be a better deal it is likely to be a reformulation of how child care support applies. If the budget measures follow the Productivity Commission’s recent recommendations the Government will introduce a single means tested and activity based system.

The Minister for Social Services, Scott Morrison also recently released details of an in-home nanny program to support shift workers. The two year trial will support home care for children of shift workers, such as nurses and police, etc.

Your superannuation

Paving the way for the Government to change how superannuation is taxed, Australia’s leading body for the superannuation industry, the SMSF Association, recently stated that, “The tax treatment of very high account balances should be the starting point for discussions around adjustments to superannuation tax concessions, rather than blanket changes that impact on all members.” Their analysis of very high superannuation account balances found that 24,000 SMSF members in the pension phase with balances in excess of $2m received around $5.2bn in tax-free income stream payments, or an average of around $216,000.

The Labor Party also recently supported changes to how super is taxed recommending that earnings of more than $75,000 during the retirement phase are taxed at a concessional rate of 15% instead of being tax-free. And, the recent Tax Discussion Paper also stated that the Government should equalise the way savings and investments are taxed including superannuation.

In effect, the Government has the support of the leading professional body and the Labor party to change the way superannuation is taxed, particularly if change is targeted at high income earners.

From a policy perspective, it’s hard to argue that high income earners should access tax concessions on superannuation beyond the need to have certainty about superannuation policy. If the way super is taxed is not altered in this budget, it’s highly likely it will be reformed in the near future – most likely as part of the Government’s response to the Tax Discussion Paper.

Pensions

Like superannuation, the Government appears open to change that targets the asset rich. Currently, couples with a family home and assets up to $1.15m qualify for a part pension. The Australian Council of Social Services (ACOSS) has recommended a reduction in the assets test for home owners and an increase in the taper rate, effectively reducing the pension amount available once the threshold is passed.

Business

The Prime Minister recently announced that the planned 1.5% company tax rate reduction will be scrapped for all but small business. Small business is expected to be a focus in the upcoming Budget with a small business package.

It’s also likely that research and development to foster “innovative” start-up initiatives will receive a boost. Treasurer Joe Hockey has said that, “there are a number of things we can do to help start-ups and we’ll be saying more about that in the upcoming Budget.”

GST on online purchases and services

To increase GST revenue, the Government has the option of trying to force through a GST rate increase with State and Territory approval or broaden the base. High on the list is applying GST to revenue earned from online and digital businesses.

On 9 April, Treasurer Joe Hockey said, “GST should be charged at the source, so a company providing intangible services into Australia, such as media services or so on, wherever they are located they should charge GST on those services.”

That is, if you are an Australian resident and purchase a good or service then tax should apply in Australia as opposed to where the business is domiciled. This issue is likely to be broader than just the $1,000 threshold for goods purchased from overseas and Netflix but a review of how tax applies to intangibles. It’s a question of when these measures will apply – either in the Budget or as part of the broader tax review.

‘Googletax’ or Multinational tax crackdown

The Treasurer has said that, “It is vitally important, vitally important that a business, wherever it is located, pay tax in the jurisdiction where it earns the income.” In April, the UK introduced a 25% tax on diverted profits created by activity in the UK. The intent is to “target large multinational enterprises with business activities in the UK who enter into contrived arrangements to divert profits from the UK by avoiding a UK taxable presence and/or by other contrived arrangements between connected entities.” The new tax rules apply to entities with sales revenue in the UK greater than £10m.

If the Government acts on this issue in the Budget instead of waiting for the tax review, it’s likely we will see this UK style of tax apply.

Tax on bank deposits

The Assistant Treasurer has indicated that a bank deposits insurance tax will be introduced to create a fund to protect against a collapse of the banking industry. The concept was previously announced by Labor prior to the 2013 election.

We’ll keep you updated in our review released the morning after the Budget.

There is a lot being written about employee share schemes (ESS) right now. And rightly so. Reforms before Parliament will make these schemes more attractive with a common sense approach to how they are taxed and special incentives for start up companies to share the rewards of growth with the people who help create that growth.

As the reforms apply to shares and options issued from 1 July 2015, it’s important that employers do not issue new shares or options prior to this date if they want the new rules to apply to those shares or options. If the shares or options are issued prior to this date they will be caught under the current, more onerous rules.

What does an employee share scheme do?

Employee share schemes are a way for businesses operating through company structures to provide employees with an ownership stake and share in the growth of the company or its parent. The main purpose of employee share schemes is to align the interests of employers and employees as both parties will be working towards a common goal.

Under an ESS, employers issue shares (an ownership stake) and/or options (a right to acquire shares at a later date) to their employees at a discount to the market value of the shares or rights.

A range of conditions generally applies to determine when and how the employee can access those shares. For example, in many cases employees will not have full access to the shares until they have been employed by the company for a certain number of years or certain performance targets have been satisfied. These conditions can lead to reduced staff turnover and higher levels of productivity. This is because the employee would generally forfeit the shares if the conditions are not met.

A shareholders agreement may also be put in place to control when, how and who the shares can be sold to once the employee is able to exercise the rights.

The reforms before Parliament address how and when employees are taxed on those shares and the regulation of share schemes.

How will the new rules work?

At a very high level, when an employee receives shares or rights under an employee share scheme they are taxed on the discount they have received. The discount is taxed much in the same way as salary or wages. The discount is generally taken to be the difference between the market value of the share or right and any amount paid by the employee to acquire the share or right.

Depending on the way the scheme has been structured, the employee may be able to defer the taxing point until a later point in time (many years later in some cases) and concessions may also be available to reduce the amount that is subject to tax.

As with the current rules, it will still be necessary to work through a number of conditions to determine whether an employee is able to defer the taxation of the shares or rights they have received. If these conditions are met and the employee has been provided with shares, the taxing point will be the earlier of:
-When the employee leaves the employer;
-15 years after the shares were acquired; or
-The point where the employee can sell the shares without restriction.

If the conditions are met and the employee has been provided with options to acquire shares then the taxing point will be the earlier of the following:
-The employee leaving the employer;
-15 years after the right was acquired;
-The point where the employee can sell the rights without restriction; or
-The right is exercised and there is no real risk of the employee forfeiting the resulting shares and there are no restrictions on the employee selling the shares.

In general, the new rules enable the taxing point to be deferred for a longer period of time until the point at which it becomes clear that the employee will actually derive some economic benefit from the shares or options they have received.

The reforms also introduce special incentives for start up companies. Start up companies are unlisted companies that have been incorporated for less than 10 years and have an aggregated turnover of $50m or less in the income year prior to the introduction of the share scheme. Where the start up is part of a corporate group, all companies in the group must also meet these requirements. There is a carve out for certain venture capital funds from this turnover test and 10 year incorporation rules for start up companies.

One of the concessions that will be available for employees of these start-up companies is that small discounts received in relation to shares or rights are not taxed at all under the ESS rules. For shares, the discount offered cannot be more than 15% of the market value. For rights, the strike price must be equal to or greater than the market value of ordinary shares in the company at the time the right is acquired. If the relevant conditions are met the discount should not be taxed but it will still be necessary to deal with the capital gains tax implications on eventual disposal of the shares or rights.

The new rules also tidy up the interaction with the capital gains tax (CGT) system for employees of start-up companies to make it easier for them to access the 50% CGT discount. Normally, when someone exercises an option to acquire shares, the 12 month holding period rule is reset, which means the shares need to be held for another 12 months to access the CGT discount on sale. Under the new rules, the 12 month period will be measured from when the rights were acquired.

When should your company contemplate an employee share scheme?

Share schemes are typically used as an incentive to retain and attract key team members. They can be particularly useful in a start-up environment where there is not necessarily the cash available to attract top quality employees with high salaries. As team members cannot realise the value of the shares for an agreed period of time, the scheme locks them in for this period or they lose any benefit. Beyond the ‘golden handcuffs’, offering employees the ability to invest their talent in a tangible growth asset rather than just receiving a salary is a powerful incentive.

It’s important that there are strong rules and documentation around how share schemes are managed. For example, if an employee holds shares acquired through an ESS but then leaves the company, can they sell the shares to anyone or will they be restricted to selling the shares back to the company or existing shareholders based on an agreed valuation formula? The risks to the company of having a broad array of shareholders need to be carefully thought through.

How do you establish an employee share scheme?

It’s really up to the company and its current owners to determine how the ESS is structured. However, the scheme is more likely to be successful in aligning the interests of employers and employees if it is structured in a way that is tax effective for the employees who will be participating in the arrangement.

For example, in order to access many of the concessions that are available under the rules there are some common conditions that need to be met. These are:
-The scheme should not result in any one employee holding more than 10% of the shareholding or controlling more than 10% of the voting power of the company;
-The shares offered under the scheme need to be ordinary shares;
-The company’s main business must not be share trading; and
-The individual needs to be employed by the company issuing the shares or one of its subsidiaries.

Before implementing an employee share scheme it is important to ensure that both the commercial and tax issues have been fully considered. You will need professional support including commercially aware legal advice and documentation, tax advice and business structuring advice. Generally a valuation of the business would also need to be undertaken to establish the discount that is being offered. There is no one size fits all method.

The Australian Tax Office is working on standard employee share scheme documentation and valuation safe harbours. While companies do not have to rely on these documents they will go some way to standardising how these schemes are implemented and the minimum requirements and standards.

Sometimes the difference between a good business and a great business is simply having sufficient capital to execute your business plan. For many businesses, the owners have put everything they have into growing the business but there is still a gap. Investors offer an opportunity to close that gap but at what cost?

How do you know you need investors?

Unfortunately, most businesses seek investment funding at the point it is most critical or for the wrong reasons – seeking funding for a business when it is in financial distress is always going to be hard. Neediness is never a good negotiating position or very attractive. And, few will be prepared to invest to save you.

Funding from investors is used to fund growth where a major investment is required – where the business cannot service its growth or capital requirements and these requirements are greater than what the business can fund on its own.

On most occasions, investment is needed to build out scale and take advantage of the potential of the business. In many cases the owners can only afford to fund a portion of what is required but the scale they need will make the difference between an okay business and a great business.

What will investors expect?

Before seeking investors you need to get your house in order.

Every business operator knows that they should have a business plan in place. Most don’t. With a strategic business plan, you can track performance and growth, departures from the plan, etc., and this management information will tell you the point at which you need investment – either debt or another form. A strategic business plan will also inject reality into blue sky entrepreneurialism and flush out many of the issues that investors will inevitably question. It will shore up the business case and demonstrate that the growth path anticipated has been sufficiently thought through – a big issue for many entrepreneurs.

This planning stage is important because there are more ideas chasing capital than there is capital chasing ideas. You have one chance to pitch to investors and often you are competing with a range of unrelated or different opportunities.

Investment types

Investment can be debt or equity investment. A debt investment is paid back in some form. There are many ways to structure debt investment from traditional interest payments to profit sharing.

Equity investment however is what most people think of when they think of investors. Equity investment is where the injection of capital buys equity in the business and often a degree of management participation or control. There are many ways of structuring these arrangements depending on the motivation of the parties involved – everything from a direct injection of cash to the provision of essential infrastructure and knowledge.

Investor types

The most common investor for SMEs is family or friends investing out of loyalty and often a belief in the skill set of the business operators. The key problem with family and friends as investors is that often the details of the investment are loose. Trust is high and everyone has a belief, at the beginning, that the other party will act in their best interest. If family and friends are investing, you must put in place the same level of formality to the arrangement as if strangers were investing. It prevents confusion and upset.

Another reason for a high degree of formality is that on some occasions, the person looking to unwind or exit the arrangement in the future will not be the person who entered into it. It’s important to ensure that the exit provisions are clear in case someone dies.

Commercial investors come in many forms – angel investors, venture capitalists, private equity, or investment by associated parties. At the SME end of the market, angel and venture capitalists dominate.

Angel investors tend to operate at investment levels between $100k and $500k. Angels are generally individuals looking to for a great idea from a start up that they can capitalise on.

Private equity investors are at the other end of the scale and look to invest tens of millions – generally with established businesses reaching for another level and expectations of high growth. Private equity generally look for a compound internal rate of return on capital in excess of 30%. They look for high returns and an identified exit timeline. They want confidence in return on capital and ultimately, return of capital.

In general, commercial investors will seek a regimented approach – shareholders agreement, restrictions around what can be done without their consent, and a clear exit path. This is not an area you should approach without expert advice.

Some things to look out for

-Insufficient formality around the agreement – misunderstandings and boardroom battles over direction take the focus off achieving growth
-The wrong structure at the beginning – a bad deal won’t get better
-Exit clauses – look at what the deal looks like at the end of the investment not just at the beginning
-Not being able to fulfil the stated plan – be certain about what you’re offering
-What are you giving away? Often business owners are so keen to secure the investment they forget about what they are giving away.
-Control and how much the investor can achieve over time and the influence they have – you don’t want to be voted out of your own company once it’s successful
-The level of management control and influence exerted – infighting and debates about direction will only take the focus off the big picture

Former Prime Minister Paul Keating recently suggested that Self Managed Superannuation Funds (SMSF) should be restricted from investing in residential property.

Mr Keating told the Financial Review, “If I was treasurer today, I would be looking very hard at the whole entitlement or availability of debt to SMSFs. They have gearing available to them and, of course, many of them are taking the option of buying residential property.”

According to the latest Australian Taxation Office (ATO) SMSF statistics, real residential property represents 3.5% of the value of all assets held in SMSFs. This level of investment has been consistent since 2009 with the bulk of properties worth between $200,000 and $1 million. SMSF investment in commercial property is around 12%. However, what has changed is the number of investors with an average of 1,200 new investors using their SMSFs to purchase residential property each year. And, the explosion in limited recourse borrowing arrangements which have increased 1758% between June 2009 and June 2014.

For many SMSFs however, there are some very big risks if the borrowing arrangements and property purchases are not put in place correctly. If your SMSF breaches its compliance obligations, it is at risk of being deemed non-compliant and losing its concessional tax status and the trustees also risk being fined personally under the ATO’s new penalty powers that came into effect on 1 July 2014.

Here are the top SMSF property issues…

Should your SMSF buy a property?

Liquidity, diversification and cashflow. The Superannuation Industry (Supervision) Act (SIS Act) requires trustees to take heed of these elements when making any investment. When an SMSF invests in real property, there is a risk that the trustees are putting all of the fund’s ‘investment eggs’ in one basket and the rate of return will not be enough to meet the fund’s obligations.

Funds in, or entering, pension phase need to meet the minimum pension drawdown requirements. The question is, will the rental yield meet the ongoing expenses of the fund including pension payments? Funds are required to increase the minimum pension drawdown over time: 4% at age 64, and 6% at age 75. That’s an increase of 50% in draw down obligations. Will rent increase by 50% to keep pace?

But what if a member wants a lump sum and not a pension, where will the immediate cash come from? What about when a member dies? How will the benefits be paid out from the fund? You can’t sell one room of an investment property.

Can my SMSF purchase my investment property?

A common question that often comes up is, can my SMSF buy a residential rental property, holiday home, or house from me or someone related to me? The answer is no, not unless the property is business real property (a property used wholly and exclusively for business). And, in most cases, residential property will not meet the requirements to be business real property. It’s important to bear in mind that the penalty for breaching the related party investment rules is up to 12 months in jail.

Improving a property

If your SMSF has borrowed money to purchase a property, it cannot use any part of those borrowings to improve that property. Also, a SMSF cannot borrow money to repair an asset it already owns outright.

However, a SMSF can use its own money to improve or repair a property acquired with borrowings, as long as the improvements do not result in the asset becoming a different asset. For example, the trustees could not change a residential property into a childcare centre. Or, turn a vacant block of land into an investment property.

Take the example of a SMSF that borrows to buy a residential house on a large block of land ripe for development. The fund cannot subdivide the land and build another house because the borrowing rules prohibit a change in the character of an asset bought with borrowed money until the borrowings are extinguished.

Getting the essentials wrong

The common problem areas for SMSF trustees are often simple things in the rush of the moment or simply poor structuring.

The most obvious example is when a property is purchased by an SMSF but the contract is in the name of the individuals. Sometimes people just get carried away and make the purchase without thinking through the details. Or, where there is a related entity involved like a unit trust but the unit trust was not established before the property was purchased or the incorrect name is inserted on the contract or registered with the titles office.