Real time super

In the recent federal budget the Government has committed to real time super in a bid to curb the billions of dollars lost in unpaid employee super.

When businesses underpay workers in any form it’s labelled as wage theft. It could be a deliberate deed, an unintended error, or a consequence of the complexity of our HR laws, but it’s all wage theft in the eyes of the public.

It’s rife in this country, but only the big ones make the news. Usually we’re talking mere millions like in the cases of David Jones and Wesfarmers but none were as big as Woolworths who have admitted to around $750 million in underpayments. Beyond the headliners there’s a stack of small employers getting caught – cases this year include 13 Perth security businesses, seven Optus Stadium cleaning companies and a local Hans Café outlet.

The theft often involves an underpayment of award rates, particularly penalty rates for overtime and weekends.

Another less acknowledged form of wage theft is unpaid or late paid employee superannuation. The ATO estimates that employees missed out on around $3.4 billion of their super entitlements in the 2019/20 year alone.

Employers currently provide for employee super each and every payday and immediately disclose the super on their employees’ pay slips. But that doesn’t mean it’s been paid because businesses are not required to remit the super until after the end of each quarter.

With limited scrutiny, it can be tempting for a struggling business to forego its super commitments to cope with pressing cashflow issues. By the time the ATO catches up with late payers they’re sometimes insolvent making it difficult to recover unpaid super (which can include voluntary employee contributions). Historically the ATO recovers only 14% of unpaid super from directors of insolvent companies.

Even if businesses always pay the super on-time, employees are foregoing earnings on that super for months at a time, and the compounding effect of this is significant. It’s not the business’ fault – it’s the law.

In this digital and automated age, it’s sensible policy that from July 2026 employers will be required to pay real time super – i.e. at exactly the same time as they pay employee wages. Superannuation clearly forms part of an employee’s remuneration package and they should not have to wait months to receive the benefit of it.

It will also provide a better mechanism for the ATO to crack down on rogue employers quickly and the budget has allocated some further resources to this.

The Government has recently accepted a Senate enquiry recommendation to criminalise wage theft and it’s likely that this will apply to all forms of remuneration including super.

Related blogs:

Other related blogs

Get attached to your super
Penalties for late payment of super guarantee

Author: Mark Douglas
Email: mark@faj.com.au

 

 

 

 

 

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Refreshed working from home costs

In a recent announcement the Australian Taxation Office have energetically orated that they have “refreshed” the way that taxpayers claim deductions for costs incurred when working from home.

At times I refresh my glass of tepid wine with some cold stuff. I feel refreshed after a shower, and I occasionally freshen up the smelly bin cupboard with a spray of Glen 20. Full marks to the ATO marketing team for effort, but I’m not convinced that the term passes the smell test in this case.

Assistant Commissioner Tim Loh was on a high as he promoted the revitalised changes.

The new rules apply from 1 July 2022. Prior to that, you had a choice of three methods to claim work from home deductions such as electricity, depreciation, phone and internet.

  • Shortcut method – which allowed 80c for every hour worked from home. This was a temporary COVID related measure that covered all running costs.
  • Fixed-rate method – which allowed 52c for every hour worked for certain running costs, but phone, internet and stationery were claimed separately. Depreciation of home office furniture was included in the hourly rate, whereas depreciation of electronic gear wasn’t.
  • Actual cost method – keeping records of all actual costs incurred.

For the 2022/23 tax year, employees and business owners working from home will have a choice of two methods only – a revised fixed rate of 67c per hour, or the actual cost method.

I’m all for minimalism and feel rejuvenated going from three methods to two. But that’s about where the simplicity ends.

The revised rate now covers electricity and gas, internet, phone costs, stationery and computer consumables. It does not include cleaning and depreciation of home office furniture or electronic equipment like laptops, printers, mobile phones and other devices.

To claim work from home expenses, taxpayers must have incurred the costs (and keep at least one receipt for each type), but don’t need to have a specific home office set aside. The ATO found the kitchen table most unacceptable pre-COVID but have since embraced it as a legitimate workspace. Plus, it has plenty of room for a refreshing 4pm cocktail.

However, you’ll need a specific home office set aside if you want to claim your Glen 20 or other cleaning costs. Confusing huh?

Now here’s the real kicker. Under the old rules you could use any four-week period to represent an estimate of your work-from-home hours. You still could up until 28 February 2023. But from 1 March you need a written record of every hour worked from home. This might be timesheets, computer logs, or perhaps you can complete a good old-fashioned diary at the end of each day as you sip away at your mojito.

How refreshing!

Key points:

  • To make a claim using the new hourly rate you must keep a record of all hours worked from home from 1 March 2023
  • Additionally you’ll need a copy of an invoice for each type of expenses (electricity, mobile phone, internet etc.)
  • We don’t need to see your records, but you need to use these to tell us at year end how many hours you worked from home so we can calculate your claim.   

Related blog:

Home office vs place of business

Author: Mark Douglas
Email: mark@faj.com.au

 

 

 

 

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Different types of death benefit nominations

When a person dies, a potential major asset that needs to be dealt with is their superannuation. Many people believe superannuation is paid out according to the terms in a will; however, this is not the case. A death benefit nomination is the only way to ensure your superannuation is being directed as per your wishes.

There are four types of death benefit nominations which can be made.

Binding Death Benefit Nomination

This is a written nomination made by you to nominate who your superannuation is to be paid out to on the event of your death. The trustee of your fund is legally bound by this nomination and must abide by its direction. The nomination will generally lapse after three years and must be renewed if you wish for the nomination to remain.

Non-Binding Death Benefit Nomination

As the name suggests, this nomination is not binding on the trustee of your fund; it is instead a guide as to who you wish your superannuation is to be paid to. The trustee will take this into consideration but will ultimately decide who receives your super.

Non-lapsing Binding Death Benefit Nomination

This nomination is essentially the same as a binding death benefit nomination, except that it does not need to be renewed every three years. The nomination will remain legally binding indefinitely unless you cancel or replace it with another nomination. The non-lapsing nature can be a benefit (in that it does not need to be renewed) but can also be a negative (in that your circumstances may change without you thinking to update your nomination). Some trust deeds do not allow a non-lapsing nomination to be made. 

Reversionary Beneficiary

This nomination is specific to those who are drawing an income stream (pension) from their superannuation. Through this nomination, the member of the fund can nominate a beneficiary to continue receiving the income stream after their death. Assuming the nominated beneficiary is eligible to receive a retirement income stream, this nomination is legally binding to the trustee of the fund.

If a nomination is not in place, the trustee of your super fund will decide who your superannuation is paid to. The potential recipients may include a spouse, children, a person who is financially dependent on you or a deceased estate.

Having a nomination in place ensures the decision is with you and can ultimately be a tool in conjunction with your will for estate planning.

If you are interested in completing a death benefit nomination, contact your Superannuation Fund for details on the process.

 

Other related blogs

Do I need a binding death benefit nomination?
What happen if I die without a will?

 

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

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The difference between tax dependants and SIS dependants

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

What is a tax dependant?

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

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

What is a SIS dependant?

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

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

So what’s the difference?

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

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

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

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

 

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

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

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

Other related blogs:

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

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

 

 

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Coping with rising interest

In May last year, the Reserve Bank of Australia (RBA) lifted interest rates for the first time in over 11 years. This was something that many of the current generation had not experienced until then.

The decision to lift rates was made to counter increasing inflation – meaning costs were rising faster than wages. Mild inflation is actually a good thing and reflects a growing economy, but the current inflation rate is considered too high. The RBA targets consistent inflation of two to three percent whereas in Australia it’s currently running at around seven percent, caused by a perfect storm of factors including COVID impacts, a cashed-up workforce and supply issues from both natural and man-made disasters.

Tweaking interest rates is one of the few levers RBA can pull to control inflation. Their aim is to increase loan repayments, which in turn reduces the spending capacity of consumers, lowering demand and bringing down prices.

The cash rate in May 2022 was 0.1%. This is a base set by RBA to which banks then add their profit margin. At around that time a typical variable housing loan had an interest rate of around 2.5%. Since then RBA has progressively raised the cash rate to 3.1% (as at January 2023) which means variable rates are now more likely to sit around 5% for new loans and in the high fives for existing mortgages.

The increases came quicker than anyone expected across consecutive months and most homeowners have and will continue to find ways to adjust their spending to meet their rising loan repayments. Asking your bank or broker for a rate review is a worthwhile exercise that could help with this – you might be surprised at the result.

My big concern though is for borrowers that locked in fixed low interest rates, typically for a set term of two to three years. Some of these fixed rates were sub two percent, and many will mature in the coming year.

A $500,000 loan over a 20 year term with a fixed rate of 2% will have repayments of $2,529 per month. At the end of its fixed-term, that loan will revert to the Bank’s standard variable rate of the day. At 6%, those repayments will increase to $3,582. That’s an extra $1,053 per month, and I doubt we’ve seen the end of rate rises yet.

My advice is to start adjusting your repayments right now. For example, if your fixed term is due to mature eight months from now and your rate might increase by 4%, then up your repayments (or put the money aside if your fixed loan doesn’t allow extra repayments) to provide for an extra half percent across each of the next eight months (an extra $130 month on month in the example above). Your fixed rate loan product might not allow extra principal repayments. If this is the case then put the extra money aside in a separate bank account and apply it to the loan when the fixed term ends.

There’s a helpful mortgage calculator at moneysmart.gov.au that you can use to calculate the impact of rising interest rates on your loan repayments.

It’s far easier to plan for and cope with small regular adjustments to your spending than it is to find major savings come D-Day.

Related blog:

Barefoot Investor Principles
A Perfect Storm
Online software for managing personal finances

Author: Mark Douglas
Email: mark@faj.com.au

 

 

 

 

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Capital Gains Tax Implications of Granny Flat Arrangements

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

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

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

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

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

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

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

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

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

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

Related Blogs

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

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

 

 

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Risks associated with wash sales

A strategy for investors who own shares that have decreased in value might be to sell them resulting in the capital loss being crystalised and used to offset future gains in their tax returns.

However, what if you wanted to retain the shares and crystallise the loss? Is this possible? What if you sold the shares and bought them back immediately?

It is likely the tax office will view this kind of activity as a “wash sale”.

What is a Wash Sale?

The Tax office define a wash sale as “an arrangement under which a taxpayer disposes of a capital asset where in substance there is no significant change in the economic exposure to the asset, or in other words where that exposure or interest may be reinstated by the taxpayer, to apply a capital loss or allowable deduction against a capital gain or assessable income already derived or expected to be derived”.

Essentially a wash sale may occur when an asset is sold and repurchased leaving the taxpayer in a similar economic situation but an improvement in their tax position through the addition of a capital loss. Selling shares at a loss on 30 June and then buying the same parcel again on 1 July is an obvious example of a wash sale.

Penalties for Undertaking a Wash Sale.

If the tax office determine that you have undertaken a wash sale the capital loss will be rejected. This means that not only will you have made a loss on the shares, but you will also lose the ability to offset that loss against any future gains.

Should Investors Fear the Wash Sale Rules?

It is important to note that the Tax office does not specify a timeframe between selling the asset and repurchasing, instead they will look at the overall circumstances and the intention behind the investor’s actions.

Therefore, if you are not selling and buying shares for the sole intention of reducing tax you shouldn’t fear accidently undertaking a wash sale, as the sale and repurchase of shares within a short period may be due to rational investing based on market changes.

If you are unsure about whether your market activity may be considered a wash sale you can find multiple examples on the Taxation Ruling TR 2008/1 or you can always consult a registered tax agent.

Related blogs:

https://www.faj.com.au/tax-treatment-of-crypto-trading/

Author: Matthew Prawirohardjo
Email: matthewp@faj.com.au 

 

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Total Super Balance vs Transfer Balance Cap

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

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

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

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

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

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

 

 Structured settlement contributions

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

 

 Pension commutations

 
Repayments from certain LRBAs

 

 Family law splits

 
Excess transfer balance earnings

 

 Losses due to fraud

 

 

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

Related blogs:

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

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

 

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Barefoot Investor Principles

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

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

The Buckets 

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

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

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

  1. The Grow Bucket

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

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

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

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

 

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Early Stage Investor Tax Offset

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

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

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

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

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

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

So How Does it Work?

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

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

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

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

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

Who can invest in an Early Stage Investment Company?

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

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

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

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

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

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

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

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

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

Further Information

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

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

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

Other related blogs:

How to provide tax incentives for early stage investors

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

 

 

 

 

 

 

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