First home buyers super saving scheme

Buying your first home is a milestone in anyone’s life. However, with housing prices, saving a large enough deposit can seem unmanageable. This is why in the 2017 Budget the Government announced a scheme to help first home buyers boost their deposit savings through superannuation.

How will the Scheme work?
From 1 July 2017 first home buyers can make voluntary contributions of up to $15,000 per year and $30,000 in total into your super. The contributions can be made through a salary sacrifice arrangement or if you are a sole trader, a personal contribution for which you claim a deduction. Voluntary contributions must still be made within existing superannuation caps – $25,000 for concessional contributions in 2017/18 (i.e. Contributions from super guarantee and salary sacrifice contributions). From 1 July 2018 you will then be allowed to withdraw the contributions, along with deemed earnings, to use on a first home deposit.

Where does the boost in savings come from?
The contributions are effectively pre-tax income. However, when the contributions hit your super fund they are taxed at 15%. The withdrawal of the contributions will be taxed at your marginal tax rate less 30% offset. This effectively means you will not pay any more than 15% tax on your income that is used for a deposit. Compare this with someone earning $60,000 and is in the 32.5% tax bracket. The savings they will put towards their deposit is taxed at 32.5%. Using the super scheme could result in a few extra thousand for a deposit.

Don’t contribute just yet?
Although you could have started contributing from 1 July 2017; the government have not yet legislated the scheme and it is unclear if it will pass through parliament. If it does not pass, those using the savers scheme might have their contributions held in super until retirement. However, if you don’t mind taking the risk, talk to your payroll to discuss salary sacrificing into super.

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

Working holiday makers

People who come to Australia on a “working holiday” are taxed at higher rates than Australian residents, meaning they do not get the same benefit of the tax-free threshold.

However, from 1 January 2017, working holiday makers will pay tax at 15% for taxable income up to $37,000, instead of the higher non-resident tax rates.

Am I a Working Holiday Maker?

You will pay tax at the working holiday maker rates if you hold either a:
1. Subclass 417 Working Holiday Visa
2. Subclass 462 Work and Holiday Visa
3. Certain bridging visas.

Which bridging visa’s allow me to pay tax at working holiday maker rates?

A bridging visa that permits you to work in Australia will allow you to access the lower rates if:

  • The bridging visa was granted in relation to a subclass 417 or 462 visa, and
  • you are still waiting for a decision to be made on your application, and
  • your most recent visa (other than your bridging visa) was a subclass 417 or 462 visa.

What is my “working holiday taxable income”?
Your working holiday taxable income is derived from all assessable income from sources in Australia while qualifying as a working holiday maker, less deductions relating to working holiday income.

PRO TIP:
As the working holiday maker tax rules only apply from 1 January 2017, the rates of tax payable will differ for working holiday makers, depending on whether or not Australian sourced income was derived before or after 1 January 2017. If a working holiday maker worked for the same employer before and after 1 January 2017, the employer will need to issue two separate PAYG summaries for the employee for the 2017 financial year to distinguish the income earned in each period.

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

Work related expense crackdown by the ATO

The Australian Taxation Office’s (ATO) ability to check work related expense claims (including incorrect and unusually high claims) has become more sophisticated through the use of technology and data analysis which increases its audit coverage of individual taxpayers. This is predominantly through the ATO’s data matching programs (for example matching data from state titles offices to capital gains declared in tax returns).

In identifying higher than expected work-related expense claims, the ATO will be comparing a taxpayer’s claims on the return against claims made by taxpayers in similar circumstances (i.e., taxpayers working in a similar occupation and earning a similar level of salary income).

Where the ATO identifies that a taxpayer’s work-related expense claims are unusually high, the ATO may contact the taxpayer’s employer to obtain more information about the taxpayer’s circumstances, including:

  • any allowances paid by the employer to the employee;
  • the nature of the employee’s duties relative to their claim;
  • whether the employee was required to undertake any travel in relation to their work; and
  • whether the employee was reimbursed by their employer for the relevant expenses.

Where information provided by an employer indicates that a taxpayer’s claims were incorrect, the taxpayer’s claims will be further investigated and adjustments potentially made. So it’s important to make sure that all claims are reasonable, but it’s equally as important that all legitimate claims are made and that supporting evidence is available to support your claims.

Author: Shaun Coelho
Email: shaun@faj.com.au

Do I need to register for GST?

If you are carrying on an enterprise and your turnover for the next 12 months is likely to be more than $75,000 you will be required to register for GST.

If you are under that threshold you can choose to be registered for GST, unless you’re a Taxi or Uber driver in which case you must register for GST, regardless of turnover.

How do I register?
Registering is easy – you can do this online, phoning the ATO on 13 28 66 or alternatively contact your accountant.

If you’re new to business then you can do your GST registration at the same time you apply for your Australian Business Number (ABN).

Once you’ve registered, you must include GST in your sales price (unless you’re providing exempt services such as medical or education).

How do I know how much GST to put aside?
If most of your sales and purchases are subject to GST, then you should put aside an estimated amount based on one-eleventh of your sales less one-eleventh of your purchases.

When do I need to pay the GST?
You report and pay GST amounts to the ATO, and claim GST credits, by lodging a business activity statement (BAS) or an annual GST return. This can be done online or manually.

The ATO will issue your business activity statement about two weeks before the end of your reporting period, which for GST is usually every three months. The date for lodging and paying is shown on your activity statement.

Record Keeping
Ultimately you need a system that is going to track the GST you have received and paid. This could be a simple excel worksheet, manual cashbook or more advanced accounting system such as MYOB or Xero. Your accountant can help you decide which system would best suit your business.

Pro Tips
If you run a small business that deals primarily with home users then it’s usually preferable not to register for GST (if you’re turnover is under the thresholds). This means that your total cost to the end consumer may be less than someone that is registered for GST, and this gives you a competitive advantage.

If you run a small business you can opt to account for GST on a cash basis. The advantage of cash accounting is that it’s easier to manage your cash flow as the money flowing through your business is better aligned with your business activity statement liabilities.

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

Making sense of SuperStream for Employers

SuperStream is the way businesses must pay employee superannuation contributions to super funds. SuperStream transmits money and information electronically across the super system – employers, super funds, service providers and the Australian Taxation Office (ATO).

Advantages include:
• Employers are able to make all their super contributions in a single transaction, even if the payments are going to multiple super funds
• Super contributions and rollovers are processed faster, more efficiently and with fewer errors
• People are more reliably linked to their super, reducing lost accounts and unclaimed monies

Some online accounting software packages include SuperStream for employers – for example MYOB and Xero. If you have this type of accounting software, you can contact the software provider and arrange registration for SuperStream. Transfer of payments and the associated information will then be completed via your online accounting software.

If you do not have online accounting software then you are required to register with the government superannuation clearing house. Once set-up you will be able to lodge your super returns with the ATO and payments with the clearing house. The clearing house will then complete the required payment and information transfer to the appropriate super funds for your employees.

The ATO Small Business Superannuation Clearing House is free for small businesses with 19 or fewer employees, or a turnover of less than $2 million a year. Below is a link to information, including registration about this ATO site:

The employee information required for setting-up SuperStream includes the employee’s tax file number (TFN), their fund’s ABN and their fund’s electronic details. The electronic information required for employees with industry or retail superannuation funds is the fund’s unique superannuation identifier (USI). If your employee has a self-managed superannuation fund (SMSF) then they will need to provide you with their fund’s ESA (electronic service address).

Author: Brigette Liddelow
Email: brigette@faj.com.au

What is Division 7A?

As a business owner you may have heard your accountant talking about Division 7A and wondered what all the fuss it about.

If you are operating your business through a company, you might expect that your hard earned efforts to be profitable would mean that the money is yours to access, right? This is somewhat true. The problem is that a company is a separate legal entity. As the owner of that company you have the ability to access the profits but only through the correct mechanism – i.e. by payment of dividends to shareholders or payment of wages to directors.

A common trap for company owners is to think that they can withdraw money from their company bank account ad-hoc for private use and not pay the money back. This is perfectly acceptable for sole traders or partnerships, but not for companies.

The Australian Taxation Office (ATO) has enforced Division 7A to prevent shareholders from doing exactly this. Why would this matter to the ATO? Because if shareholders are taking money from companies without declaring it in their own tax returns (as you would with dividends and wages), the shareholder is essentially receiving a tax-free distribution. This is different to a sole trader or partnership where the owner is paying personal tax on all the profits anyway, whether he or she draws those profits or not.

Should you withdraw money from your company for personal use and do not pay the full amount back by the lodgement date of that year’s tax return, you will trigger Division 7A. If this occurs, and no action is taken then any payments made from the company to shareholders will need to be declared as unfranked dividend to the shareholders (an outcome which ought to be avoided).

One option to avoid an unfranked dividend being declared is to enter into a complying Division 7A loan agreement between yourself and your company. This allows the money withdrawn to be treated as a loan for which you must pay future minimum repayments and interest. This is often a better outcome, especially when cash flow is an issue and you can’t immediately pay the money back.

Pro Tips
• Always be mindful when taking money from a private company if it cannot be paid back before tax return lodgement date
• Make sure your Division 7A loan agreement complies with all the requirements of the law for it to be valid
• Speak to your accountant about ways repayments can be made if a Division 7A loan agreement has been entered into

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

Subdividing your main residence and selling the subdivided block – what costs can you claim?

If you are considering subdividing your main residence and selling the new block, the profit on the sale of the subdivided block is subject to capital gains tax. In order to calculate the capital gain made on the sale of property, you will need to know the sale price and the cost base. There are several expenses that you can add to the cost base of your newly created property which will decrease the profit you make on the sale of the land, and therefore the capital gains tax you pay.

Expenses that you can add to the cost base of the new block are as follows:

– A portion of the original property cost
– Subdivision costs
– Construction costs (if you build on the new block)
– Council rates
– Water expenses
– Electricity expenses
– Interest on the property loan
– Repairs and maintenance
– Insurance expense

The above expenses are generally apportioned on a reasonable basis between the original dwelling and the new block, except for payments that are solely attributable to new property (for example, construction costs if you build a house on the new block).

It is essential that you have all the information necessary to calculate the correct cost base amount in order to avoid a larger capital gains tax bill.

Pro tip:

Although subdivision costs are generally apportioned across the two properties, the costs of connecting electricity and water to the new block can be solely attributed to this block.

Author: Tessa Jachmann
Email: Tessa@faj.com.au

Four year construction rule when you subdivide your home and move into the subdivided lot

As mentioned in our previous blog (Four year construction rule when you buy vacant land or renovate), the main resident exemption is the concept whereby your home (otherwise known as your main residence) is exempt from capital gains tax (CGT). Under the four year construction rule, you can choose to treat your new house as if it were your main residence for up to four years before it actually becomes your main residence.

This concession is also available if you decide to subdivide your existing home and move into the newly constructed house on the subdivided block. The effect of applying the four year construction rule in this circumstance is slightly different to when you purchase a new property as per the previous blog.

If you subdivide your home and construction of the new house takes less than four years, the main residence exemption will apply to the new house for the four years prior to moving in, including part of the time before the land had been subdivided. So say you purchase your original house in January 2008 and subdivide you family home in May 2011. Construction is completed in October 2013 and you move in straight away. Using the four year construction rule, you are able to claim the main residence exemption for the four years immediately before you move in to the subdivided lot, which is October 2009 (so before you subdivided).

Similarly to the previous blog, if construction of your new house on the subdivided lot takes more than four years from the time subdivided to the time you move in, then the exemption is limited to the four years immediately before the property becomes your main residence.

Pro tips:

  • Remember, you can only treat one property as your main residence at any time. This means if you choose to apply the four year construction rule to the new residence on your subdivided lot, your original property would be liable to CGT.
  • If you elect to use the four year construction rule, you must move into your new home as soon as practicable after it is completed and you must live in it for at least three months to be able to use this concession.

Author: Tessa Jachmann
Email: tessa@faj.com.au

Four year construction rule when you buy vacant land or renovate

Generally, if a house is classified as your main residence (meaning it is your home), then it is exempt from capital gains tax (CGT). This concept is referred to as the main residence exemption.

If you buy a vacant lot that you plan to build your new house on, or if you buy an existing home that you are renovating before you move in, then you are able to claim the main residence exemption from the date that you move in to your new house.

However under the four year construction rule, you can choose to treat your new house as if it were your main residence for up to four years before it actually becomes your main residence. This allows you to apply the main residence exemption for a period of up to four years immediately before the date you move in to that house, during which time your new house is either being constructed, repaired, or renovated.

The effect of this concession depends on your circumstances. If construction or renovations take less than four years from the time you purchased your new property, then the main residence exemption will apply for the entire ownership period. An example of this is if you purchased your new property in May 2011 and completed renovations/construction by October 2013 and move in straight away. In this circumstance, you can claim the main residence exemption for the entire time as the time between purchasing your property & moving into it is less than 4 years.

If renovations or construction take more than four years from the time you purchased or subdivided to the time you move in, then the exemption is limited to the 4 years immediately before the property becomes your main residence. So working on the above example, say you purchase the new property in May 2011 but renovations or construction aren’t completed until October 2016 – in this case, the main residence exemption can be applied from October 2012. This means you may be liable to pay capital gains tax for the period from May 2011 to October 2012.

However, it is important to note that you can only elect to use the four year construction rule if the following conditions are met:
• The new home becomes your main residence as soon as practicable after it is completed
• The new home continues to be your main residence for at least three months.

Pro Tip:

  • No other dwelling can be treated as your main residence (i.e. exemp from CGT) during the construction period, however there is a rule for changing main residences where you may be able to treat both homes as your main residence for a six month period.

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

Private Health Insurance – The carrot and the stick

The government wants the majority of taxpayers to have private health insurance to reduce the costs for the Medicare system.

The government aims to attract people towards holding private health insurance by giving a rebate for premiums paid by people below a certain income threshold and penalising you if your income is above a certain threshold and you don’t have health insurance.

This link outlines the thresholds and rates for the implications of either having private health insurance and receiving the rebate or not having private health insurance and paying the Medicare levy surcharge.

The amount of rebate you receive or penalty you pay depends on how much taxable income you or a combination of you and your spouse make for the year.

Pro Tip:
Purchasing private health insurance is a personal preference. However, if your income is above $140,000 for singles or $280,000 for couples then the surcharge is $2,100 or $4,200 respectively. It is likely that you could get some form of health insurance for less than this. The private health insurance needs to meet certain criteria to qualify, so make sure you specify with your health fund that the policy qualifies you for the rebate or for the avoidance of the surcharge.

Note:
Lifetime Health Cover (LHC): is designed to encourage people to purchase and maintain private hospital cover earlier in life. The amount of a person’s LHC is determined by the number of years they are over 30 years old at the time they take out hospital cover. Each year will attract a 2% hospital cover premium. The maximum LHC loading applied is 70%.

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