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The Rise of the Virtual CFO in Sydney for Growing Businesses

In today’s age of real-time reporting, small-to-medium enterprises can greatly benefit from having a virtual CFO.

First, what is a CFO and what do they do?

A “Chief Financial Officer”, or CFO for short, is generally the head of the financial, accounting and commercial roles within a business.

Using financial information, the CFO is traditionally tasked with:
• Reviewing past;
• Maintaining present; and
• Maximizing potential future

financial performance and positions of the business.

A CFO must juggle the strategic goals of the business, keeping in mind the needs of various stakeholders, including shareholders, financial institutions, the Australian Taxation Office, the Chief Executive Officer (“CEO”) or a corporate board.

The CFO will sometimes be as far involved with the business as reviewing the risk of investments, making capital decisions on limited resources (cash, staff, machinery output etc), insurances, process improvements and systems administration.

Above all else, a CFO must be able to drive profitability by improving the ongoing operations of the business without detriment to the medium to long term performance.

OK, so what is a Virtual CFO?

The adoption of technology by businesses has allowed most business owners access to “cloud” services. This can be as basic as having your iTunes account linked to various Apple devices.

This same technology has allowed CFO’s to “go mobile”, with enough time and resources to be employed by several businesses simultaneously.

A Virtual CFO is essentially a part-time CFO, operating on your business according to your individual requirements.

 

Alright, what can they do for me?

Today’s golden age of instant information means that business owners are never short on financial data. Your tablet, laptop or mobile are all devices screaming at you with figures, percentages or buzz words like “Profitability”, “Debtor Days” and “Cashflow Management”.

These details are significant in running a business. But what can we do with all that information?

A cloud-based accounting system such as MYOB Live, Xero or QuickBooks are useful tools in this regard, allowing:
• You, the business owner, to generate efficiencies across processes which are historically painful and time consuming (think of the pain of going through your last box of receipts); and
• A Virtual CFO, to review real-time information from their accounting system so that the best decisions can be made at the right time

A Virtual CFO will break down the myriad of financial data into useful, bite sized portions. A CFO will then work to ensure the information is best used to attain better results for your business.

That all sounds expensive. How much will it cost?

The reality is that a six-figure salary for a full-time CFO is out of reach for most Start-up or Small-to-Medium Enterprises (SME’s).

That’s understandable.

An Outsourced or Virtual CFO has the capability to fly in, fly out of businesses, assisting them where they are needed, and at a fraction of the cost of a full time CFO.

Interested? We can help.

From time to time, a business just needs a helping hand.

We won’t tell you how to run your business, but we will challenge you to do it better.

Please contact our office if we can be of assistance.

Top 10 SMSF Strategies to Grow Your Super using Contributions, Property and Assets

There have been so many changes in superannuation in the last few years, it can be hard to keep track with the best ways to maximise your self-managed superannuation fund. Here are our Top 10 strategies to utilise your Self-Managed Superannuation Fund (SMSF).

1. Maximise Contributions with Personal Superannuation Contributions

If you make a personal contribution into your superannuation fund, you may be able to claim a tax deduction for those contribution. The contribution must be made from your after-tax income i.e. from your bank account directly into your super fund. Before claiming a deduction, you must submit a Notice of Intent to Claim a Deduction for Personal Contribution Form and receive an acknowledgement from your fund. Personal super contributions that are claimed as a tax deduction will count towards your concessional contribution cap (2018-19: $25,000). If you exceed the cap, you will have to pay extra tax and will count to your non-concessional contribution cap. Suitable for members who are investors externally to their SMSF

2. Direct Property Investment

Buying an SMSF Property or investment property directly through an SMSF is becoming increasingly popular. Direct property investing can provide capital growth and rental income in a very tax advantageous structure. Rental income is taxed at 15% and capital gains at 10% if the property is held for more than 12 months. If you hold your property until you have retired and commenced a pension, both rental income and capital gains could become tax free. Suitable for people who enjoy property investing

3. Business Real Property

Generally speaking, you cannot buy an SMSF property and live in it, nor can you rent it to a relative, even on commercial terms. However, if you run a business, you can buy a commercial property using your SMSF and lease it to your own business. Your business would pay rent at market rate to your SMSF, which is a tax-deductible expense for your business. Since rent is not classified as a superannuation contribution, you can still make concessional and non-concessional contributions, subject to your age and contribution caps. Suitable for members who are investors externally to their SMSF

4. SMSF Property Loans or Limited Recourse Borrowing Arrangements

SMSFs can borrow money to purchase a single acquirable asset such as a property, or a collection of identical assets that have the same market value such as a parcel of shares. This is achieved via a limited recourse borrowing arrangement (LRBA). This arrangement involves the lender’s recourse being limited to the single asset. Borrowing in an SMSF is not without risk although there are several potential benefits including leverage, tax advantages and asset protection. Suitable for experienced property investors with the ability to service the loan in their SMSF.

5. Recontribution Strategy

A re-contribution strategy is where you withdraw your super and re-contribute it back into super. There a several reasons as to why you may utilise this strategy: • Estate Planning • Tax Planning • To utilise you and your spouse’s Transfer Balance Cap (currently $1.6 million) • To maximise Centrelink Benefits • Access government co-contribution and spousal contribution tax offset. Suitable for members who have retired or over 65 years old, and eligible to make non-concessional contributions

6. Start an Account Based Pension

Once you reach preservation age and have met the relevant retirement conditions, you can allocate up to $1.6 million to start an Account Based Pension. An Account Based Pension converts your accumulation balance into “retirement phase”. In retirement phase, earnings are tax-free. Suitable for members over 65 years old and members who are retired – aged between preservation age and 64 years old

7. Spousal Contribution Splitting

This strategy involves one member of a couple to split up to 85% of their concessional contributions received within a financial year with their spouse. This opportunity provides an opportunity to equalise their retirement benefits in particular where one spouse is younger, earning a lower income or is not working. Suitable for couples

8. Separate Investment Strategies/Segregated Assets

Circumstances may warrant separate investment strategies within one fund e.g. Parents with children in one fund. The children have a different investing profile to their parents. Under new legislation if funds have over $1.6 mil in pension phase, they are not entitled to use segregation to determine tax-free earnings. However, there is a difference between segregation for tax and segregation for accounting. Suitable for funds with both parents and children

9. In Specie Transfers

This involves making a contribution by transferring listed shares or business real property into your SMSF and not receiving cash proceeds. Although this triggers a SMSF capital gains tax event, this will allow future earnings to be made in a concessional tax environment. Subject to contribution caps. Suitable for investors who hold investments in listed shares and business real property outside super

10. Downsizer Contribution

An older Australian who downsizes can contribute up to $300,000 to super regardless of employment status, Total Superannuation Balance and non-concessional contribution cap. This involves a member 65 years old or older, selling their home and making a contribution within a prescribed period. Suitable for members over 65 years old

**Bonus Strategy**

11. Carry-forward concessional contributions of unused caps over five years

From 1 July 2018, if your Total Superannuation Balance is less than $500,000 at the end of a financial year, you will have the opportunity to start accumulating the unused portions of your concessional contribution caps from previous years (up to 5 years) in the following financial years. This mechanism will allow you to “catch-up” on concessional caps and make contributions which will count towards your unused concessional contribution caps. Amounts carried forward that have not been used after five years will expire. The first year in which you can access unused concessional contributions is the 2019–20 financial year. Suitable for members with balances less than $500,000 in superannuation

 

Kiwi investing or expanding into Australia?

Introduction

This helicopter guide to inbound Australian tax issues for New Zealand resident individuals and entities is meant to operate as a spring-board for high-level structuring discussions by NZ advisers.

The purpose of this guide is to enable readers to quickly identify the various issues raised by the different structuring options before seeking specific advice (preferably ours!) on the most suitable structuring option for your clients.

This guide is separated into five parts.

Part I highlights the tax issues for NZ-resident investors investing in Australian real property, shares and unit trusts.

Part II outlines the tax issues for NZ-resident employees seconded to Australia.

Part III details the tax issues for NZ-resident entities expanding into Australia (whether by way of branch or subsidiary).

Part IV outlines the basics of Australia’s GST.

Part V highlights Australia’s CGT withholding tax.

PART I – CGT ISSUES FOR NZ RESIDENTS INVESTING INTO AUSTRALIA

Overview

Although still a small market by global standards, Australia’s proximity to NZ and the close ties between the two countries means NZ residents often invest in Australian real property, shares and unit trusts.

Under Australian domestic tax law, the starting point is that Australia taxes foreign-residents on their capital gains from Australian sources.[1]

Australia’s CGT rules operate such that a capital gain or loss is triggered where a CGT event arises.

The most common CGT event is CGT A1 – disposal of a CGT asset.[2]

Where, amongst other things, individuals or trusts (but not companies) hold a CGT asset for at least 12 months prior to disposal, the 50% CGT discount will apply so as to halve the gross capital gain before being included in the taxpayer’s assessable income.[3]

Special rules for foreign-resident investors

The general rules above are subject to a specific statutory exception that operates to limit the taxation of foreign residents on Australian source capital gains to those in relation to a limited class of assets, known as ‘taxable Australian property’ (“TAP”).[4]

That is, a capital gain or loss is disregarded if you are a foreign resident, or the trustee of a foreign trust just before the CGT event (e.g. disposal) and the relevant asset was not TAP.

Relevantly, TAP means:[5]

  • taxable Australian real property;
  • an indirect Australian real property interest;
  • a CGT asset used in carrying on a business through a permanent establishment in Australia;
  • an option or right to acquire a CGT asset over any of the above; and
  • a CGT asset subject to an exit election (that is, where a previously Australian-resident individual chose to defer Australian exit tax by electing to pay tax on actual disposal).

Based on the above, where, for example, an NZ resident invests in Australian real property, they will always be subject to CGT in Australia on any capital gain.

However, in relation to the disposal of shares in an Australian company or units in an Australian unit trust, NZ residents will not be subject to CGT in Australia unless those interests qualify as ‘indirect Australian real property interests’ which, amongst other things, requires:[6]

  1. the NZ resident (together with associates) to hold at least 10% of the Australian company or trust; and
  2. the Australian company or trust to pass the ‘principal asset test’,[7] that is, the market value of the entity’s taxable Australian real property assets exceeds the market value of the entity’s non-taxable Australian real property assets (essentially, the company or trust is ‘land-rich’).

Foreign-residents no longer entitled to the 50% CGT discount

As outlined above, where the relevant conditions are met by an eligible taxpayer (individual or trust), the 50% CGT discount applies to reduce the gross capital gain by half before being included in assessable income.

However, from 8 May 2012, foreign-residents are not entitled to the 50% CGT discount, meaning that they will pay tax on the gross capital gain at non-resident rates (currently up to 45%).

For those NZ residents that held Australian TAP assets as at 8 May 2012, special transitional rules apply and specific advice should be sought in this regard in calculating any capital gain or loss in the future.

For those NZ residents that acquired Australian TAP assets after 8 May 2012, they are not eligible for the 50% CGT discount regardless of how long the asset is held.

PART II – NZ EMPLOYEES SECONDED TO AUSTRALIA

Overview

Under Australian domestic tax law, the starting point is that foreign-resident are taxed on their ordinary income (including salary and wages income) from Australian sources.[8]

Application of the Australia/NZ Double Tax Agreement

The domestic Australian tax position above is reflected in the default position under the Australia/NZ Double Tax Agreement (“DTA”),[9] that is, an NZ-resident is only taxed on employment income in NZ unless the employment is performed in Australia.

However, the default position is subject to an overriding provision such that an NZ resident deriving income from employment exercised in Australia is only taxed in NZ if:[10]

  • the NZ individual is present in Australia for a period or periods not exceeding in the aggregate 183 days in any 12 month period commencing or ending in the Australian income year; and
  • the remuneration is paid by, or on behalf of, an employer who is not a resident of Australia, or is borne by or deductible in determining the profits attributable to a permanent establishment which the employer has in NZ; and
  • the remuneration is neither borne by nor deductible in determining the profits attributable to a permanent establishment which the employer has in Australia.

If these conditions are satisfied, the NZ-resident employee is only taxed in NZ.

Further, even if these conditions cannot be satisfied, remuneration derived by an NZ-resident individual in respect of a secondment to Australia is only taxable in NZ where the individual is present in Australia for a period or periods not exceeding in the aggregate 90 days in any 12 month period.[11]

PART III – NZ BUSINESSES EXPANDING INTO AUSTRALIA

Overview

Most NZ practitioners would be broadly familiar with the structuring options in relation to expanding into Australia (or elsewhere for that matter), that is, branch versus subsidiary.

Again, under Australian domestic tax law, a foreign-resident is taxed in Australia on all Australian-source income.[12]

However, under the DTA, the Australian-source business profits of an NZ-resident are not taxed in Australia unless the NZ-resident has a permanent establishment in Australia.[13]

What is a permanent establishment?

A permanent establishment is a fixed place of business in Australia.

Specific advice should be sought as to whether your operations will trigger a permanent establishment in Australia as the concept relies on the particular facts of each individual case and therefore, although similar cases may provide guidance, different facts may prove decisive in a particular case.

The Australian Taxation Office takes an expansive view as to what triggers a permanent establishment in Australia and has ruled that an NZ company had a permanent establishment in Australia where:[14]

  • it sold products to 3rd parties in Australia;
  • sales orders were taken by two Australian-based employees who emailed orders to NZ;
  • the employees were the Australian contacts of the company;
  • the employees were provided with a car and office machinery;
  • the employees operated out of a designated room in their own houses;
  • the company had an Australian bank account; and
  • the products were sent directly from New Zealand to Australian customers or via a 3rd party warehousing intermediary.

Based on the above, an individual employees’ home (or even, a single room of their home) may trigger a permanent establishment in Australia.

Branch versus subsidiary (tax issues)

Assuming that the NZ-resident’s Australian operations would give rise to a permanent establishment in Australia, we note that:

  1. in relation to an Australian branch:
    1. the profits of the branch will be taxed in Australia at the relevant rate (e.g. NZ-resident companies will be taxed at 30% and NZ-resident individuals at their marginal tax rate up to 45%);
    2. Australia does not have branch profits remission tax in moving the profits to NZ;
    3. the assets of an Australian permanent establishment are TAP assets and therefore, the NZ-resident will be subject to CGT in Australia if the Australian branch was sold in the future;
  2. in relation to an Australian subsidiary:
    1. it will be taxed on its worldwide income at 30%;
    2. in relation to dividends paid up to the NZ-resident shareholder(s):
      1. no dividend withholding tax will apply to the extent that the dividend is fully franked;
      2. dividend withholding tax of between 0% and 15% will apply under the DTA to the extent that the dividend is un-franked;
    3. the shares in the Australian subsidiary (unless it is ‘land-rich’ with Australian real property) are not TAP and therefore, the NZ-resident entity will not be subject to Australian CGT if the Australian operations are sold in the future by way of share sale (disposal by way of the sale of underlying assets by the Australian subsidiary will be taxed at 30% in the ordinary course giving rise to the taxation of dividends as outlined above).

Choice of structure of foreign tax credits/offsets

Cross border business activities often gives rise to multiple layers of taxation and the inability to claim foreign tax credits so as to push up the effective tax rate on foreign-source profits. However, some business structures facilitate the claiming of full foreign tax credits (up to the maximum tax liability in the home country) such that taxpayers pay no more than the maximum domestic tax rate in their home country.

Understanding the various structuring options available and how they are ultimately taxed in Australia, New Zealand and under the DTA is the key to making a fully informed decision and preventing any nasty surprises. In this regard, structuring options include:

  1. a New Zealand company with an Australian branch (and in turn, whether or not it gives rise to an Australian permanent establishment);
  1. an Australian subsidiary of a New Zealand parent company;
  1. a New Zealand limited partnership operating in Australia (whether or not an Australian permanent establishment arises); and
  1. a New Zealand Look-Through Company operating in Australia (whether or not an Australian permanent establishment arises).

PART IV – GST ISSUES

Australia levies GST on ‘taxable supplies’[15] and ‘taxable importations’[16].

The rate of GST is (currently) 10%.[17]

The registration turnover threshold (above which you are required to be registered) is AUD$75,000, although you may be voluntarily registered if you are under this turnover figure.[18]

There are various supplies that are not subject to GST, that is:

  1. GST-free supplies (such as certain foods, health and education services and supplies of going concerns[19] – similar to zero-rated supplies in NZ; and
  1. input taxed supplies (such as financial supplies, residential rent supplies and residential premises themselves [unless ‘new residential premises][20] – similar to exempt supplies in NZ.

Where an enterprise makes a ‘creditable acquisition’ or ‘creditable importation’, they are entitled to claim the relevant input tax credits.

Broadly, a creditable acquisition is an acquisition (or expense incurred) that had a GST component within it and was incurred in order for you to make taxable supplies or GST-free supplies (but not input taxed supplies – input tax credits are not available in this regard).

You make a creditable importation if goods are imported and they are entered for home consumption (unless specifically non-taxable).

From a cash flow perspective, NZ businesses importing into Australia should consider the ‘deferred GST’ regime, whereby instead of paying GST only to claim it back at the end of the relevant tax period, the liability is deferred and nets off against the refund at the end of the tax period.

PART V – CGT WITHHOLDING TAX

From 1 July 2016, and in similar circumstances to the NZ CGT withholding regime for properties held for less than 2 years, Australia imposes a 10% withholding tax on the purchase price of Australian real property over AUD$2m.

Even if you are caught by the CGT withholding regime, it is possible, in circumstances where there is insufficient equity in the property or the ultimate CGT liability on the property will be less than the 10% withholding amount, to apply to the ATO for a withholding variation (including to nil) as soon as possible after exchanging contracts so as to ensure that the relevant approvals are granted prior to settlement.

CONCLUSION

Economos has significant experience and expertise in assisting foreign investors and business invest or expand into Australia.

This requires an in-depth knowledge of Australian domestic tax laws and the operation of the DTA.

We provide commercially-focussed, complex international tax advice in a simple, easy-to-understand manner so as to enable your clients to make fully-informed decisions and avoid nasty surprises.

Our tax advisory services form a critical part of our broader service offering, including:

  1. tax compliance (income tax, GST, fringe benefits tax, payroll tax etc);
  1. financial reporting; and
  1. audit.

 

*   *   *   *   *

 

 

[1] Subsection 6-10(5) of the Income Tax Assessment Act 1997 (“ITAA 1997”)

[2] Section 104-10 of the ITAA 1997

[3] See Subdivision 115-A of the ITAA 1997

[4] See Division 855 of the ITAA 1997

[5] Section 855-15 of the ITAA 1997

[6] Section 855-25 of the ITAA 1997

[7] Section 855-30 of the ITAA 1997

[8] Subsection 6-5(3) of the ITAA 1997

[9] Article 14(1) of the DTA

[10] Article 14(2) of the DTA

[11] Article 14(4) of the DTA

[12] Note 8

[13] See Articles 7 (Business Profits) and 5 (Permanent Establishment) of the DTA

[14] See ATOID 2005/289 (available at    https://www.ato.gov.au/law/view/document?docid=AID/AID2005289/00001)

[15] Subsection 7-1(1) and section 9-5 of the A New Tax System (Goods and Services) Tax Act 1999 (“GST Act”)

[16] Subsection 7-1(1) and section 13-5 of the GST Act

[17] Section 9-70 of the GST Act

[18] Section 23-15 of the GST Act and reg 23.15.01 of the A New Tax System (Goods and Services) Regulations 1999 (“GST Regs”)

[19] See Division 38 of the GST Act

[20] See Division 40 of the GST Act

Investing in Property through an SMSF

SMSFs can acquire property directly or indirectly through property trusts or via a Limited Recourse Borrowing Arrangement (LRBA).

 

Direct Property Investments

A direct property investment is the direct purchase of a specific residential or commercial property, using cash (no borrowings). The property would be unencumbered, i.e. not used as security against any borrowings.

The property cannot be leased to a related party of the SMSF with the exception of Business Real Property. Meeting the definition of ‘Business Real Property’ can get complicated and there is a tax office ruling dedicated to this concept – SMSFR 2009/1.

Tenants in Common

Tenants in Common is a structure where an SMSF co-owns a property with another party. Tenants in Common have fixed entitlement in the property and can be unequal shares. For example, one party may own one third and the other owns the remaining two thirds.

 

Indirect Property Investment

Unlisted Unit Trusts

An unlisted unit trust is where a group of investors pool their money together under a trust structure and buy a property under the name of the trust. An SMSF would acquire units in the unit trust thereby owning a share in the property indirectly. This is a common strategy where an SMSF has insufficient capital to acquire the property directly.

The other investors in an unlisted unit trust can be related or unrelated. Where the other unit holders are related, there are strict rules the unlisted unit trust must follow.

The trust must comply with section 13.22C of the Superannuation Industry (Supervision) Regulations 1994 (SISR). The trust must:

  • Not borrow
  • Not lease the assets to a related party of the SMSF. With the exception of a lease relating to Business Real Property.
  • Not invest in another entity e.g. shares in a company
  • Not subject the property to a charge i.e security for a mortgage
  • Not purchase a property previously owned by a related party. An exception applies to Business Real Property acquired at market value.

Please note the above is a highly simplified form of the criteria set out in Reg 13.22C of the SISR and the full criteria of the law must be satisfied to ensure the investment is not considered an In-House Asset.

Listed Property Trusts & Real Estate Investment Trusts

Listed Property Trusts and Real Estate Investment Trusts (REITs) are of a similar structure to unlisted unit trusts but they are list on the stock exchange. An SMSF can purchase units on the market and because they are listed on the stock exchange, they are easily purchased and sold thereby improving liquidity.

LRBAs

An SMSF can borrow to invest in property directly. Section 67A of the Superannuation Industry (Supervision) Act 1993 (SISA) provides an exemption from the prohibition of SMSF Borrowing. The basic principles of section 67A are as follows:

  • The borrowing is applied for the acquisition of a ‘single acquirable asset’ *see below
  • The borrowing must be used to purchase an asset that is to be held on trust
  • The asset being purchased under this arrangement must not otherwise be prohibited from being acquired by the SMSF under superannuation laws.
  • The asset is held on trust so that the SMSF receives the beneficial interest
  • The SMSF has the right to acquire legal ownership
  • The lender’s right to recoup against the loan must be limited to the recovery from the specific asset (limited recourse)

 

* Single Acquirable Assets – the purchase of land or land with a house would meet this definition. However, sometimes there may be multiple titles in a single purchase which may suggest that the property is not a single asset. If the property is considered multiple assets, separate LRBAs will be required for each asset. Where there is a physical or legal impediment to the property that prevents it from being sold separately, it may constitute a single asset e.g. a building built over multiple titles.

 

Can a SMSF property be purchased from a related party?

Section 66 of the SISA prohibits the SMSF from acquiring assets from its members or related parties with the exception of Business Real Property and listed shares. It is important to note that residential property is not included in this exception.

Furthermore, if the property being purchased does meet the Business Real Property exemption, it must also be acquired at market value. The valuation must be based on objective and supportable data. Although the valuation guidelines do not insist upon independent or external valuations in all circumstances, the ATO recommends the use of a qualified independent valuer to determine the market value.

The superannuation laws are complex and it is of paramount importance to consider obtaining professional legal, accounting and financial advice before investing in property using your SMSF.

Speak to one of our SMSF Property Experts or Investment Property Tax Accountants

Speak to one of experienced SMSF Accountants in Sydney. Leanne Tinyow is Economos’ Head of SMSF Services and is in charge of the compliance and administration of over 400 Self-Managed Super Funds. She is also well versed in helping new clients with SMSF setup and sdministration and can answer several SMSF property related questions.

Alternatively, if you would like to speak to one of our experienced Property Tax Accountants, George Shahinian is Economos Managing Partner and has extensive experience with investment property tax and deductions including dealing with Development and sub-division, Commercial Fit-out and refurbishments, Building and Construction and Construction Management and Real Estate agencies.

 

Are You Eligible for the Downsizer Superannuation Contribution Effective as of the 1st July 2018?

The downsizer superannuation contribution allows individuals aged 65 years or over to use the proceeds from the sale of their main residence to contribute to superannuation of up to $300,000.

This reform was part of the Housing Affordability Package announced in the 2017-18 Federal Budget and was legislated on 13 December 2017.

This measure applies from 1 July 2018.

How does it work?

There are 4 main components to be eligible to make this type of contribution

1. The Person

• You must be 65 years or older
• The usual restrictions on contributions such as the work test and having less than $1.6 million in total super balance are disregarded
• The contribution does not count towards any of the superannuation contribution caps
• Must not claim a deduction for the contribution

2. The Home

• Contracts must be exchanged after 1 July 2018 – settlement date is irrelevant
• The home must be in Australia and be affixed to land i.e. not a caravan or a houseboat
• You must have owned the property for at least 10 years (this is based on the original purchase settlement date to the time that legal ownership passes to the new owner (settlement date)
• Held at all times during that period by you, your spouse or former spouse
• There is no need for the non-owner spouse to have been in a relationship for 10 years or more
• The home must be eligible for full or part main residence CGT concession. The property being sold does not have to be the current home; it could be a former home that is now an investment property.

3. The Contribution Cap

The maximum contribution per person under this measure is the lesser of:
• $300,000 or
• The proceeds received from the sale of the property

For example, if a couple sold their home for $1 million, they can contribute up to $300,000 each. However if they sold it for say $400,000, they could only contribute say $200,000 each or a combination up to $400,000.

4. Making the Payment

• Contribution must be made to a complying superfund within 90 days after sales proceeds are received
• Complete and submit to the superannuation fund, the tax office approved form (available from 1 July 2018)

Although this measure is called a downsizer contribution, for the person selling, they are not restricted to buying a smaller dwelling. There is no requirement to purchase another property and it is possible to purchase a larger or more expensive replacement property.

It is important to remember, for those receiving social security benefits such as the Aged Pension, the home/main residence is asset test exempt. When the property is sold, the proceeds from the sale is not exempt and any contribution made to a complying superannuation fund will be included the assessment.

The downsizer contribution could assist older Australian upsize their superannuation savings.

However, it is important to seek professional financial advice, in particular those in receipt of Centrelink benefits, before making the decision to make a downsizer contribution.

Top 5 questions for property investors about the new depreciation regime

Introduction

The Government announced sweeping changes to the depreciation regime for property investors in the 2017-18 Budget.

The Treasury Laws Amendment (Housing Tax Integrity) Act 2017 implements these proposed measures and could have a significant impact on property investors going forward.

What are the rules trying to achieve?

The Government was concerned about the ‘refreshing’ of values of depreciating assets from one property investor to the next and therefore, the ability to ‘over depreciate’ items across multiple owners.

For example, a fridge acquired by a landlord for their investment property for $1,100 is fully depreciated. When the property is sold (along with the fridge), there are no tax consequences in relation to the fridge on the basis that it is worthless. The incoming purchaser (another investor) obtains a report that the fridge is worth $350 and this amount is depreciated.

What do the new rules say?

The new rules:

  1. apply to residential premises only (taking its definition from the GST Act); and
  1. do not apply to excepted entities.

The new rules reduce your depreciation deductions from the use of residential premises to provide residential accommodation (but not in the course of carrying on business) if:

  1. you did not hold the asset when it was first used or installed ready for use (other than as trading stock) by any entity; or
  1. at any time during the income year (or an earlier income year), the asset was used, or installed ready for use, either:
  • in residential premises that were one of your residences at that time; or
  • for a purpose that was not a taxable purpose, and in a way that was not occasional.

 Therefore, broadly, if you did not acquire the depreciating asset new, or you acquired it new but it was first used for private purposes (such as in your own home), the depreciation deductions are reduced.

Who are excepted entities not subject to the new rules?

Excepted entities are corporate tax entities, superannuation plans (other than SMSFs), public unit trusts, managed investment schemes and partnerships or unit trusts if all members/unit holders are other excepted entities.

What if I buy a new property including new depreciating assets?

 A specific exception applies for depreciating assets acquired along with the purchase of new residential premises where (amongst other things), either:

  1. at no earlier time was an entity residing in the residential premises in which the depreciating asset was used, or installed ready for use; or
  1. the depreciating asset was previously used, or installed ready for use but the supply of the new residential premises occurs within 6 months of the property becoming new residential premises.                     

 On eventual disposal, or the depreciating asset stops being used, a balance adjustment is triggered. However, to the extent that the relevant depreciation amounts have not been deductible, they will likely trigger a capital loss (capable of being carried forward and offset against any capital gain on the eventual disposal of the property itself).

 What about my existing depreciating assets?

 The new rules apply from 1 July 2017 onwards for depreciating assets acquired under contracts entered into (or otherwise acquired) at or after 7:30pm (ACT time) on 9 May 2017.

 

*   *   *   *   *

5 Key Questions: Foreign-owned Australian developers back on a level playing field

Introduction

Most property developers and advisers are aware of the recent changes regarding NSW duty and land tax surcharges for ‘foreign persons’.

The broad definition of ‘foreign person’ means that many Australian domestic entities with foreign ownership (deemed or actual) of 20% or more (directly or indirectly) are subject to the surcharges.

The aim of the surcharge measures was to curb foreign investment in NSW property given its perceived role in pushing up house prices. However, in providing a one-size-fits-all approach, capturing both foreign investors and developers alike, the NSW government was both:

  1. Limiting demand – as foreign investors faced increased acquisition and ongoing holding costs; and
  1. Limiting supply – as foreign-owned Australian corporations could be forced to withdraw from the market given the increased costs involved.

In recognition of these issues, legislative amendments were introduced earlier this year to make the surcharge more targeted, however, they were yet to commence before the passage of superseding legislation.

Question 1 – What is the amending legislation?

 The amending legislation is the State Revenue Legislation Amendment (Surcharge) Act 2017 (“Act”) and it amends both the Duties Act 1997 (“Duties Act”) and the Land Tax Act 1956.

Question 2 – What are the changes?

 

 

Duty Surcharge Land Tax Surcharge
  • Australian corporation transferee of residential-related property entitled to refund if Chief Commissioner satisfied:
    • new home constructed on land by transferee (or related body corporate) and sold to 3rd party purchaser without first being used or occupied (other than as display home); or
    • land subdivided by transferee for new home construction and sold after issue of subdivision certificate;
  • amount of refund is determined by Treasurer as published in the Gazette;
  • Chief Commissioner may exempt a transferee if satisfied that they are likely to be entitled to a full refund;
  • exemption may be subject to conditions;
  • surcharge duty only refunded if:
    • application for refund within 12 months after completion of sale of new home or issue of subdivision certificate; and
    • no later than 10 years after completion of transfer to Australian corporation.
  • Australian corporation entitled to refund of surcharge land tax re: residential land owned by corporation at midnight on 31 December if Chief Commissioner satisfied that:
    • new home constructed on land by the corporation/related body corporate (before or after taxing date) and sold after taxing date to 3rd party purchaser without first being used or occupied (other than as a display home); or
    • land subdivided by corporation (before or after taxing date) for new home construction after taxing date and issue of subdivision certificate;
  • amount of refund is that determined by Treasurer as published in the Gazette;
  • Chief Commissioner may approve a person as exempt transferee for a particular transfer if satisfied corporation likely to be entitled to full refund;
  • exemption may be subject to conditions;
  • surcharge land tax only refunded if application for refund within 12 months of completion of sale of new home or issue of subdivision certificate and:
    • if completion of transfer to Australian corporation occurred before 21 June 2016 – not later than 21 June 2021; or
    • otherwise – 10 years after completion of the transfer to Australian corporation.

Question 3 – What is residential-related property?

Residential-related property includes residential land in NSW, an option to purchase residential land in NSW, certain other interests in land and a partnership interest (where the partnership has residential-related property).           

Question 4 – What is an ‘Australian corporation’?

An Australian corporation means a corporation that is incorporated or taken to be incorporated under the Corporations Act 2001. Therefore, unlike the definition of a corporation elsewhere under the Duties Act (such as the corporate consolidation transaction rules), a corporation does not include a unit trust for present purposes.

Question 5 – What should you do?

Property developers and their advisors should:

  1. confirm whether or not the surcharge rules affect them; and
  1. if so:
    1. confirm whether they are entitled to a refund or exemption under the new rules and, where applicable, apply for same;
    2. re-work their feasibility studies to remove these additional costs where it is reasonably anticipated that they will qualify;
    3. going forward, apply for exemption upfront so as to improve cash flow and provide certainty from the outset.

If you or your clients need any assistance in relation to the above, or tax structuring and feasibility analysis more broadly, let’s talk!

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How the Superannuation changes impact Insurance and Estate Planning strategies

From 1 July 2017, significant changes to superannuation, consequently impact insurance and succession planning strategies which may give rise to the need for reviewing of existing insurance and estate plans.

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Key points:

  • Dependents can now choose from which super fund their pension commences by rolling over to their fund of choice.
  • Limitations now apply on the ability to receive Life Insurance proceeds as pensions.

Rollover of death benefit

One of the reforms that applies from 1 July 2017 is the ability to rollover a death benefit to another superannuation fund.

Dependants can now choose from which superannuation fund their pension commences, by rolling over to their fund of choice. This allows more flexibility when deciding which superannuation fund to hold insurance in at the outset, as some do not have the capability to pay a pension.

Only dependants who are currently able to receive a pension will be able to roll to another fund in order to commence a pension — there is no change to eligibility. Specifically, this is the deceased’s:

  • Spouse
  • Child under age 18, age 18–25 and financially dependent, or any age and disabled
  • Financial dependant, or
  • Someone who was in an interdependency relationship with the deceased just prior to their death.

Whether the pension commences in the fund that insurance is held, or in another fund into which proceeds are rolled, tax may apply to pension payments if the beneficiary is under age 60 when they receive them, and the deceased was under age 60 at their date of death.

Implications of the transfer balance cap

The $1.6 million transfer balance cap, which has applied since 1 July 2017, limits the amount that can be used to commence a pension. This affects death benefit pensions, with different rules applying for discretionary and reversionary death benefit pensions, and child pensions.

Discretionary death benefit pensions

A discretionary (non‐reversionary) death benefit pension may commence when the dependant beneficiary has given specific instructions; or when the trustee is acting on guidance, or a BDBN, provided by the deceased before their death.

Where the trustee commences a death benefit pension that is not a reversionary pension, the commencement value of the pension counts as a credit towards the transfer balance account on the date that the death benefit pension commences.

The commencement value includes any investment earnings accrued to that point, including proceeds from a term life policy — regardless of whether the policy was held in the accumulation or pension phase of the deceased member.

If a discretionary death benefit pension is paid, where superannuation savings and term life proceeds are in excess of the transfer balance cap, the excess will need to be paid out from superannuation as a lump sum. Therefore, while it may be beneficial to fund the full sum insured inside superannuation for affordability reasons, the entire amount of the proceeds may not be retainable inside superannuation.

Reversionary death benefit pensions

A reversionary death benefit pension is a pension that commenced in the name of the deceased and, upon their death, continues, but in the name of their nominated dependent beneficiary. The pension does not cease at any point, as the reversionary beneficiary is immediately entitled to receive payments.

In this scenario, for pensions that reverted on or after 1 July 2017, a transfer balance credit equal to the value of the reverted pension on the date of death, will show in the transfer balance account 12 months after the date of death. The 12‐month grace period allows the dependent beneficiary enough time to rearrange their superannuation interests to ensure that they do not breach the transfer balance cap.

Any term life proceeds paid from a policy held in the pension account will be paid after the date of death. Therefore, it appears that these will not count towards the transfer balance cap. Industry guidance has not clarified this point, and thus a private ruling may be required.

Child pensions

The rules differ for child pensions derived from death benefits, in that the child’s transfer balance cap refers to their portion of the parent’s retirement phase interests. Once the child pension ceases, the child’s transfer balance will extinguish, and they will be able to utilise a second transfer balance cap as an adult.

If the child pension commences after 1 July 2017, the applicable transfer balance cap will depend on whether the parent had a transfer balance account or not. A transfer balance account will exist for the parent if they had an existing pension at their date of death, or they had previously commenced a pension that they subsequently exhausted.

If the parent did not have a transfer balance account and they died on or after 1 July 2017, the child’s transfer balance cap is their portion of the parent’s superannuation interest (including insurance proceeds) multiplied by the general transfer cap ($1.6 million (2017/18)). For instance, if the deceased adult has four children, each could commence a pension with a maximum account balance of $400,000 ($1.6 million/4).

If there is a superannuation balance available, and the term life sum insured is large, it is possible that not all proceeds will be payable as a pension. The remainder will need to be paid to the child(ren) as a lump sum.

If the parent had a transfer balance account and they died on or after 1 July 2017, the child’s transfer balance cap is their portion of the parent’s retirement phase interest that the child has received as a death benefit pension. A retirement phase interest includes any investment earnings accrued after death but before commencement of the child pension, however, it excludes proceeds from a term life policy.

Therefore, in this scenario, regardless of whether term life insurance is held in the accumulation or pension phase, proceeds from the policy will need to be paid to the child as a lump sum.

While there may be limitations on the proportion of term life proceeds that are payable as a pension, the parent may still choose to fund insurance from, and therefore own cover inside, superannuation.

Conclusion

The recent super changes have inadvertently impacted pension strategies which are utilised as a tax effective strategy for dealing with Life Insurance proceeds, at the same time flexibility has increased with the ability to now rollover death benefit pensions to a super fund of the dependents choosing.

Enquiries:

Sam Perera

02 9266 2279

sam@econis.com.au

Source: Kaplan, A step by step guide to insurance and estate planning from 1 July 2017.

SMSF Event Based Reporting

With the introduction of the transfer balance cap (TBC), the Australian Taxation Office (ATO) proposed new reporting requirements on all superannuation funds, including Self-Managed Superannuation Funds (SMSFs).

After consultation with the SMSF industry, the ATO announced on 9 November 2017, a relaxed implementation of the new reporting requirements.

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Under the proposed reporting regime, events that count towards an individual’s transfer balance account (TBA) were to be reported within a relatively short timeframe, some within 10 business days after the end of the month in which the event occurs.

Recognising the magnitude of increased administration for SMSFs, the ATO has limited the reporting to SMSFs with members with total superannuation account balances of $1 million or more.

What events will need to be reported?

SMSFs will only need to report events that impact their TBA. Those events include:

  • Commencement of new an income stream (pension)
  • Commutations
  • Cessation of an income stream
  • Rollovers income stream amounts to another fund to start a new pension
  • Limited recourse borrowing arrangement (LRBA) repayment events
  • Structured settlement contributions received on or after 1 July 2017

When do these events need to be report?

From 1 July 2018, those SMSFs that have members with total superannuation account balances of $1 million or more will be required to report the above events within 28 days after the end of the quarter in which the event occurs.

What are the consequences for not reporting?

ATO penalty

If an SMSF fails to report by the required date, a “failure to lodge” penalty may be imposed by the ATO. Depending on how long the event remains unreported, the penalty can be up to $1050 (5 penalty units) for each event.

Tax on Excess Transfer Balance earnings

Where an individual exceeds their TBC, there is tax imposed on excess transfer balance earnings and these earnings accrue until the excess has been removed. Therefore, by reporting late, the individual may end up paying tax on a larger earnings amount then they would have if the amount was removed sooner.

How is Economos getting ready?

We are ready!

We have invested in technology back by a team of experienced SMSF specialist accountants to ensure our clients comply with the new event based reporting regime.

I’m buying an investment property, what is the best structure?

When you decide to buy an investment property, the first question you ask your tax adviser is “what is the best tax structure for my investment property?”.

Unfortunately, there is no ‘one-size-fits-all’ approach and which particular tax structure is best for you and your property investment depends on a number of variables.

Asset Structuring issues to consider

Asset Protection

If you are in an ‘at-risk’ occupation or run a business, you generally avoid holding assets personally, however, this means that you may have to forgo the negative gearing benefits of direct personal ownership.

Negative Gearing vs Positive Gearing and Investment Property Structure

Whether an investment property will be positively or negatively geared is relevant to the choice of structure.

Net rental losses from an investment property may be offset against income from other sources, for example, if you held an investment property directly you can apply those losses against your salary and wage income. However, if an investment property is held by a company or trust:

  1. unless the entity has other sources of income, there is nothing to apply the net rental losses against;
  2. the losses are trapped in the entity and do not flow out to shareholders or beneficiaries; and
  3. the losses may be applied against future income (subject to various loss tests).

Further, if the investment property will be negatively geared, how long you expect it to remain so is another relevant factor. For example, the disadvantages of having losses trapped in a trust over the short-term may be outweighed by the ability to stream rental income and capital gains over the medium to long-term.

Availability of the 50% CGT discount (Capital Gains Tax)

Subject to various conditions, individuals and trusts are eligible for the 50% CGT discount whereas companies are ineligible for CGT discount. Therefore, it is generally preferable to hold capital assets directly or through a trust.

NSW duty issues

NSW has introduced a number of changes relating to ‘foreign persons’, that is:

Duty Surcharge

Duty Surcharge relates to purchases by foreign persons, including:

  1. any individual (other than Australian citizens) not ordinarily resident in Australia (200+ days in 12 months); and
  2. any company or trust in which one or more foreign persons holds a substantial interest (20%+).

Critically, despite the fact that technically, a beneficiary of a discretionary trust has no ‘interest’ in the trust at all, all beneficiaries are effectively deemed to have a substantial interest in the trust such that the (Australian) trust is treated as a foreign person for present purposes.

Duty Surcharge is now 8% (on top of ordinary duty of up to 5.5% for properties over $1m and 7% for residential land over $3m [premium property duty]), that is, total duty of up to 15% may apply to foreign persons!

Therefore, in relation to acquisitions of NSW property through trusts, you should carefully consider:

  1. how any new trust deed is prepared, for example, does it specifically exclude any distributions to beneficiaries that would cause the trust to be a foreign person for present purposes?
  2. if you plan on acquiring the property in an existing trust with other assets, for example, shares, should you:
    1. maintain the status quo knowing that it will be a foreign trust for duty purposes but allowing you to continue to make distributions to beneficiaries who are foreign persons; or
    2. amend the trust deed to prevent any distributions to beneficiaries who are foreign persons for duty purposes, which would also prevent any distributions of other trust income to foreign persons as well.

Whether or not a trust deed can be amended and the tax and duty implications of same (if any) must be carefully considered prior to proceeding.

NSW land tax

Land tax is generally levied annually at $100 + 1.6% of the relevant value over the land tax-free threshold (“Threshold”), where available.

The current (2017) Threshold is $549,000 (Valuer-General value not ordinary market value).

There are various issues to consider in this context:

  1. does the particular structure facilitate access to the Threshold?
  2. if so – is the benefit of the Threshold at the entity level maintained in flowing up the chain of ownership?
  3. is the owner a foreign person such that the land tax surcharge applies at the rate of 0.75% (for 2017) and 2% (2018 onwards).

Broadly, individuals, companies and fixed trusts are eligible for the Threshold, whereas discretionary trusts are not. However, a trust that is commercially understood to be a fixed trust will not necessarily be a fixed trust for land tax purposes (which has very rigid requirements).

Further, even if a trust is fixed for land tax purposes and the Threshold is available at the trust level, the benefit of the Threshold may be effectively reversed out at the beneficiary level where the beneficiary is:

  1. ineligible for the Threshold; or
  2. eligible for the Threshold but already has other NSW real property interests over the Threshold.

Finally, foreign persons will be subject to the land tax surcharge even if ordinary land tax does not apply because:

  1. the value of the land is under the Threshold (i.e. land tax surcharge applies from the first $1 even if the taxpayer is eligible for the Threshold in relation to ordinary land tax); or
  2. the principal place of residential exemption applies (with certain exceptions for New Zealand citizens holding Special Category Visas who are ordinarily resident in Australia).

 Conclusion

As you can see, there are a number of issues to consider when deciding how to structure your investment property for tax purposes. See here for a table on some of the key considerations when buying an investment property in NSW – Structuring Options Table

Of course, if you are considering an investment property in another State or Territory, their particular duty and land tax consequences must be carefully considered but overall, the issue is not what the ‘best’ structure is but what best for you in the particular circumstances.

If you or your clients need any assistance for this or any other tax issues, let’s talk!

 

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Disclaimer – This article is general in nature and does not constitute, and cannot be relied upon, as providing specific advice.

 

Issues for Aussie expats selling their (former) main residence

Introduction

Treasury has released the Exposure Draft for Treasury Laws Amendment (Housing Tax Integrity) Bill 2017: Capital gains tax changes for foreign residents (“Exposure Draft”).

The Exposure Draft is aimed at implementing the Federal Government’s 2017-2018 Budget measures in this regard to specifically deny the availability of the main residence exemption where, at the time the CGT event happens, you are a foreign resident.

In the ordinary course, the relevant CGT event will be CGT event A1 – disposal of a CGT asset and the timing is either:

  1. when the relevant contract for disposal was entered into; or, in the absence of any contract;
  2. when the change of ownership occurs.

The absence rule

Traditionally, Australian ex pats living and working overseas were able to take advantage of the absence rule, that is, where a dwelling was initially established as their main residence, they could subsequently vacate the dwelling but continue to treat it as their main residence for CGT purposes:

  1. if the dwelling was used to derive income (e.g. was rented out in their absence) – for up to 6 years; and
  1. if the dwelling was not used to derive income – indefinitely.

Impact of the proposed legislation

Assuming that the Exposure Draft is introduced in its current form, if an individual is a foreign resident at the time their main residence (or former main residence) is sold, they will not be entitled to the main residence exemption. Critically, the main residence exemption is not even available on a proportionate basis for the period of time the individual was both:

  1. Australian resident; and
  1. living in the dwelling as their main residence.

Worst still, foreign residents are not entitled to the benefit of the 50% CGT discount and therefore, individuals will pay capital gains tax at up to 45% (depending on when they acquired the property and their residence status over the ownership period).

Based on the above, Australian ex pats living and working overseas will have to be careful in deciding if and when to sell their main residence as if they are foreign resident at the time of the relevant CGT event (generally contract date), the entire gain will be ineligible for the main residence exemption and without the benefit (or at least the full benefit) of, the 50% CGT discount.

Is there anything ex-pats can do?

The proposed legislation will not apply to individuals who held a dwelling as at 7:30pm on 9 May 2017 (when the Budget proposal was announced) and the relevant CGT event happens on or before 30 June 2019.

No one has a crystal ball and therefore, it is difficult to determine whether ex pats in these circumstances should:

  1. consider selling their main residence to take advantage of the transitional reprieve;
  1. rely on returning to Australia and re-establishing Australian residence prior to the relevant disposal at some stage in the future; or
  1. simply accept that they will be subject to capital gains tax without the benefit of (or at least the full benefit of) the 50% CGT discount on eventual disposal.

 Whatever the outcome, Australians living and working overseas in these circumstances should carefully consider their options and plan accordingly.

If you need any assistance on how the proposed legislation could affect you, feel free to get in touch.

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Are you sure your foreign company is outside the Australian tax net?

On 30 June 2017, a paper of mine was published in the Asia Pacific Tax Bulletin.

The article discusses the impact of the High Court decision in Bywater and specifically addresses whether it:

  1. represented a clear step towards a substance over form approach in applying the central management or control test; or
  2. did no more than confirm the status quo as a purely factual analysis in the particular circumstances.

As e-commerce and the digital economy continue to change the global economic landscape, expanding overseas isn’t as simple as incorporating a company in a chosen jurisdiction. Rather, Australian proprietors have to ensure that they successfully navigate both Australia’s tax residence rules and the controlled foreign company regime in order to ensure that the income generated offshore is not taxed directly in the hands of either:

  1. the foreign-incorporated company itself (where it is treated as an Australian tax resident); or
  2. any Australian-resident controller(s) (where the foreign-incorporated company is not an Australian tax resident but it is a controlled foreign company with attributable income)

It is only after jumping through these two hoops that Australian shareholders will be taxed in the ordinary course as and when the relevant foreign company distributes dividends.

If you or your clients need any assistance in relation to expanding overseas, or to review any existing structures, feel free to get in touch!