We hear everywhere that it’s a great idea to put as much as we can afford into our superannuation funds to set ourselves up for retirement. This money is invested by the fund with the underlying idea that it will result in significant returns that will support us upon reaching retirement until death.

Concessional vs Non-Concessional

What you may not realise is that all super contributions fall under one of the above categories. Concessional contributions are all contributions made to super with your before-tax income, meaning either you or your employer will receive a tax-deduction for the contribution. This is usually super paid by your employer under super guarantee laws, being 9.5% of your ordinary income, but can also include personal contributions you make (see below). Non-concessional contributions are contributions made with income that has either already being taxed in your own name or will be at the end of the financial year when you lodge a tax return. You don’t get a tax deduction for non-concessional super contributions. A potential advantage of concessional contributions is that they are tax deductible at your marginal tax rate (i.e. up to 45%) whereas the super fund generally pays 15% tax on receipt of the contribution. The difference is a real saving towards your retirement and provides opportunities for those wanting to contribute more to super.

Claiming a tax deduction for personal super contributions

It is possible to claim a tax deduction for any personal super contributions made during the year so they can be treated as concessional rather than non-concessional. This will result in the potential tax savings outlined above.

Too good to be true?

We need to keep in mind that there is a concessional contribution cap of $25,000 annually for all taxpayers. This cap includes both employer contributions and personal contributions. Employers only need to pay the 9.5% super guarantee up to a maximum limit on an employee’s earnings each quarter of $55,270. This would result in super paid of $5,250.65 each quarter and $21,002.60 annually, which we find is below the cap. Nevertheless, employers can pay more super to their employees if they wish, at any income level. This may put them over the contributions cap, even if they earn less than the maximum earnings limit.

What next?

If you happen to go over the $25,000 concessional contributions cap, the ATO will send to you an Amended Notice of Assessment for that financial year, increasing your taxable income by the amount you were over the cap. This is done to re-allocate the contributions as non-concessional and to charge at your marginal tax rate. There is also a small excess concessional contributions (ECC) charge which has the intent of acknowledging that the tax is collected later than it would have been if you didn;t have excess contributions. The ECC is calculated from the start of the income year until the day before the tax is due to be paid and uses a compounding interest formula.

Pro tips:

  • When you get your amended assessment you can elect to release the excess contributions from your super fund which can help in paying any additional tax and the ECC.
  • To obtain a tax deduction for personal contributions you must give your super fund a notice of intention to claim a deduction before you lodge your tax return – this is a standard ATO form.
  • If you have made any personal super contributions during the year, bring your annual superfund statement in when you come to complete your annual tax return so an accountant can work out if you can claim a deduction, and if so, how much

Other related blogs:

Allowing catch up concessional contributions
Super Concessional Contribution Cap
Contributing to super – options for employees

Author: Jake Solomon
Email: jake@faj.com.au

Further study can improve an individual’s knowledge and skills which will hopefully improve earning capabilities. The decision to undertake further study can often come down to necessity to adapt, passion for knowledge and cost. Self-education expenses can be costly and it is important to know what costs may be deductible when preparing your personal tax return.

Generally, self-education expenses are deductible if the study being undertaken has a sufficient connection with your current employment. There are a number of conditions which would satisfy the sufficient connection criteria, such as:

  • The study will improve or maintain an employee’s skills or knowledge in their current employment. For example, a construction worker enrolling in a course to learn how to use certain machinery at the work site.
  • The study will lead, or is likely to lead, to an increase in income from their current employment.
  • The study is an upgrade of a qualification in the current employment. For example, upgrading from a Bachelor’s degree to a Masters.
  • The study forms part of the traineeship when employed as a trainee.

If the self-education expenses relate to gaining new employment, then those costs will not be deductible. For example, if a nurse enrolls at university to study a medical degree in order to become a doctor, this study would be considered to be in the course of gaining new employment and not connected to the current position as a nurse. The costs associated with the degree would, therefore, not be deductible.

Here’s some examples from previous cases:

  • A mining engineer was denied a deduction for for costs of undertaking an MBA course after he was retrenched as a mine manager – even though he was eventually employed by another mining company.
  • A medical technologist successfully claimed costs for a trip to an immunology conference in Paris
  • An actress successfully claimed costs for a trip to attend a BBC radio drama course
  • A maths and science teacher was denied a claim for costs related to financial accounting and marketing subjects
  • A features editor of a newspaper was allowed a deduction for speech therapy costs undertaken to enable him to better present himself to people in work situations

If a connection between the self-education undertaken and current employment can be established than expenses incurred to carry out the education can be claimed. General self-education expenses to claim can include:

  • Course and tuition fees
  • Text books
  • Stationery
  • Internet usage
  • Car expenses from home to your place of education
  • Equipment costs
  • Home office running costs (52c per hour from 1 July 2018)
  • Meals and accommodation (if travelling away overnight)

The expenses that related to self-education which are not deductible include:

  • Repayments on Higher Education Loan Program (HELP) loans, repayments on Student Financials Supplement Scheme loans (SFSS) or other Government assisted educational loans.
  • Accommodation and meal expenses when not travelling overnight.
  • Home office occupancy expenses. Examples being; a percentage of rent, mortgage interest or rates

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

The Working Holiday Maker visa program was established in 1975 to promote closer ties between Australia and currently 42 other countries, directed towards young adults wishing to work and study in Australia for up to 12 months.

A person is considered a Working Holiday Maker in Australia if they have either a visa subclass 417 (working holiday), or 462 (work and holiday). Those holding these visas are considered non-residents for tax purposes, but the Working Holiday Maker rules allow a more concessional treatment of taxable income than non-residents.

Working holiday makers must apply for an Australian tax file number. They are taxed at 15% on their first $37,000 of income, and the balance is taxed at ordinary marginal rates. They have no access to the tax free threshold and are not required to pay the Medicare Levy. Working holiday makers are required to lodge a tax return when taxable income exceeds $37,000, or they carried on a business, or they wish to claim any deductions. Tax returns can be lodged early if leaving Australia permanently before 30 June.

Employers of working holiday makers are required to register with the ATO in order to withhold tax at 15%, otherwise will withhold tax at non-residents rates with the first $90,000 taxed at 32.5%. Employers are also required to pay superannuation which can be accessed when leaving Australia as a Departing Australia Superannuation Payment (DASP) and is taxed at 65%.

The working holiday maker rules have recently been in contention with the ATO appealing a Federal Court decision to allow a working holiday maker to be assessed at resident rates. The outcome will only impact working holiday makers found to be Australian tax residents from certain countries.

Author: Danielle Pomersbach
Email: danielle@faj.com.au

New homes and residential property has been subject to GST since the introduction of the tax in 2000. Generally with GST, if you are the seller, you are required to collect the GST portion of the sale and remit this to the Australian Taxation Office.

However this traditional collection method has been thrown out the window when it comes to the sale of new residential premises or potential residential land.

Since 1 July 2018, purchasers of a new residential premises or potential residential land may now be liable to withhold the GST portion from their purchase price and pay this directly to the ATO.

So, what is meant by `new residential premises or potential residential land’?

According to the ATO, a residential premises is considered new when any of the following apply:

  • It has not previously been sold as a residential premises.
  • It has been created through substantial renovations.
  • A new building replaces a demolished building on the same land. Or,
  • One of the properties mentioned above that has been rented out for:
    • Less than five years, or,
    • More than five years but has been actively marketed for sale while it is rented.

Examples may include display homes, off the plan purchases and house/land packages.

Potential residential land is defined as ‘land that it is permitted to use for residential purposes, but that does not contain any buildings that are residential premises’. This essentially means vacant residential zoned land.

You’re selling a new residential premises/potential residential land. What do you need to do?

The supplier of the property is required to notify the purchaser, in writing, of their (the buyers) obligations to withhold the GST and provide information that includes the:

  • Name and ABN of the suppliers.
  • The amount of GST that the purchaser needs to withhold and pay to the ATO.
  • When that amount needs to be paid.

The withholding amount will generally either be:

  • 1/11th of the contract price.
  • 7% of contract price (where the supplier is using the margin scheme). Or,
  • If selling to a related party, the withholding amount is 10% of the GST exclusive market value of the property.

I am buying a new residential property. What do I need to do?

Along with withholding GST from the purchase price and paying this to the ATO, you will also need to lodge two forms with the ATO:

  • Form 1: GST property settlement withholding notification online form
  • Form 2: GST property settlement date confirmation online form

It is important that both the purchaser and seller are aware of these new rules and their obligations, as a failure to comply with these rules may attract penalties for both parties. If you’re not sure if this applies to you, you should get in contact with your tax agent.

Pro tip: As a seller, you should be mindful of the impact of the new withholding regime on your cash flow projections and mortgage repayment schedules.

Pro tip: As a purchaser, the ATO does not require you to be registered for GST to remit this payment.

Other related blogs:

Is there any GST when buying a commercial property?

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

Retirement may be a distant thought or a worrying reminder. However, it is never too early or too late to top up your super fund for the provision of a better future. From 1 July 2018 you may be eligible to top your concessional (tax deductible) super contributions under the new carry forward rule. If you have a total superannuation balance of less than $500,000 on 30 June in the prior financial year, you are now entitled to contribute more than the usual $25,000 concessional contributions cap to catch up on prior unused caps – i.e. where you didn’t contribute and claim a tax deduction for the full $25,000 in a prior year. Concessional contributions include those made by your employer under the super guarantee system, contributions made as part of a salary sacrifice, or personal contributions where you are entitled to claim a tax deduction.

The first year that you are entitled to top up by the unused amounts is the 2019-20 financial year. The unused amounts are available for a maximum of five years and after this the unused caps will expire.

Refer to the table below for an example of when the unused concessional carry forward cap is applicable.

Description 2017-18 2018-19 2019-20 2020-21 2021-22
General contributions cap $25,000 $25,000 $25,000 $25,000 $25,000
Total unused available cap accrued Not Applicable $0 $22,000 $44,000 $69,000
Maximum cap available $25,000 $25,000 $47,000 $25,000 $94,000
Superannuation balance 30 June prior year Not Applicable $480,000 $490,000 $505,000 $490,000
Concessional contributions Nil $3,000 $3,000 Nil Nil
Unused concessional cap amount accrued in the relevant financial year $0 $22,000 $22,000 $25,000 $25,000

Source ATO : https://www.ato.gov.au/Rates/Key-superannuation-rates-and-thresholds/?page=3

Pro tip: are you wanting to increase your super fund balance, but you are unable to use the concessional carry forward cap? You will still be entitled to the non-concessional bring forward rule. This may allow you to increase your contributions to $300,000 for one year providing the balance is less than $1.4 Million.

Other related blogs:

Allowing catch up concessional contributions
Super Concessional Contribution Caps

Author: Lachlan Hunn
Email: lachlan@faj.com.au

When establishing either a discretionary trust or unit trust, it is important to know how each type of trust operates. The main distinction between a unit trust and discretionary trust is around how beneficiaries entitlements are determined under the trust and how this is distributed.

So what are the key differences?

With discretionary trusts the beneficiary’s entitlements are left to the discretion of the trustee, who chooses which beneficiaries receive trust distributions and how much.

A discretionary trust is often used within a family to help protect family assets or conduct a business, and the trust can make a ‘family trust election’ to take advantage of certain tax benefits by limiting the distribution pool to the family group.

The discretionary structure has the major benefit of flexibility in distributing income, as distributions can be directed to beneficiaries on lower marginal tax rates to minimise the overall tax paid. Other benefits include asset protection from creditors (but note the importance of having a corporate trustee) as the assets of a discretionary trust are separate to the assets of the beneficiaries, and the ability to carry forward losses in certain circumstances. The main disadvantages is that the trust cannot distribute outside of the family group without penalty, and the structure is “controlled” rather than owned.

Unit trusts are fixed trusts in that the beneficiaries receive distributions in proportion to the number of ‘units’ they hold. The trust allocates the units to beneficiaries for consideration, and units in the trust can be bought and sold between parties. Beneficiaries receive a set percentage of the income and/or the capital of the trust in accordance with their unit holding.

Unit trusts are similar to companies, in that much like companies have shareholders with fluctuating share prices, unit trusts have units with changing unit values, and unit holders make an initial contribution to the trust as investors.

Unit trusts benefit from simplicity – the units define exactly who is entitled to the distributions. This is generally more suitable when unit holders fall outside of one family group. Another benefit is that the units in the trust may be transferred to another beneficiary easily, or alternatively cashed in. Additionally unit trusts provide asset protection and are subject to far less regulation in comparison to a company. The main disadvantage is that unit trusts have less flexibility with income and capital distributions.

Overall discretionary trusts give the trustee far more choice in how to distribute profits, but unit trusts define ownership better. Choosing the best structure is unique to your circumstances and ultimately you’ll want to get some professional advice around this because getting it wrong at the start can cause a costly problem further down the track.

Other related blogs:

Why use a Family Trust?

Author: Danielle Pomersbach
Email: danielle@faj.com.au

Businesses use cloud-based accounting software for their day to day bookkeeping and accounting needs, to record organise and control their finances. But cloud software is not just for businesses and can be equally useful for managing your personal finances.

If you have an accounting or bookkeeping background you can quite easily use a basic version of cloud accounting software, like MYOB Essentials or Xero for your personal use.

But additionally there’s a whole range of personal finance software and apps (click here for a list) that can help you master the basics, become more efficient at managing your money, and even help you discover ways to meet your long-term financial goals. The apps all do something slightly different so choosing the most relevant personal finance software depends on your current financial needs. Go through the list and check them out, they’re mostly free to try.

Other personal finance software can help you track your expenses (click here for a list) while others can help with investment portfolio management. There are a number of online software tools that are actually free so it’s just a matter of seeing what’s right for you.

Importantly, most software will feed in your bank and credit card information so you have live data that can allow you to analyse and pinpoint areas where you can cut back to reduce spending and increase savings. Even credit card transactions will now show categories for different items e.g: Food & drink, Health & Fitness, Groceries and Travel etc. You can then allocate your bank fed transactions and reconcile your accounts thereby allowing you to manage your cash flow.

You can run various reports but one of the most useful things to do is to set disciplined budgets, and then track your costs against those budgets to manage your personal spending.

Other related blogs:

What is your net worth and why should you monitor it?

Author: Kay Giles
Email: kay@faj.com.au

Superannuation is the savings accumulated during your working life to support you in your retirement. Your super balance is preserved, meaning that you are unable to access your super legally, until you meet a what is known as a ‘condition of release’.

The most common conditions of release are:

  • Reaching your preservation age and retiring.

Your preservation age is the age to which your super benefits are preserved, and is dependent upon your year of birth. If you were born before 1 July 1960 then your preservation age is 55. Recent legislative changes have seen the preservation age increase incrementally to where, if you were born after 1 July 1964, then you super is preserved until you reach 60.

  • Reaching your preservation age and commencing a transition to retirement income stream.

A transition to retirement income stream, or TRIS, is a pension paid from your super balance with certain limits such as a maximum annual payment amount.

  • Being 60 and over and ceasing an employment arrangement.

Ceasing an employment arrangement can include changing jobs or retiring from one job in the situation where you may have two different employers.

  • Being 65 or over.

You do not have to retire once you reach 65 to meet this condition of release.

  • Death.

Other conditions of release exist, though they have strict eligibility criteria. These include:

  • Compassionate grounds.

Super funds can be released for a specific situation such as payment of medical treatment for yourself or a dependent, payment of a loan to prevent losing your house or to cover funeral expenses of a dependent.

  • Severe financial hardship.

Eligibility for accessing super via this method includes being the recipient of government income support payments continuously for 26 weeks, and an inability to meet immediate and reasonable family living expenses.

  • Upon diagnosis of a terminal medical condition.

Super may be accessed early if you have an illness that will likely result in your death within 24 months. This diagnosis needs to have been certified by two medical practitioners, at least one of which being a specialist practicing in the area of your illness.

  • Due to temporary or permanent incapacity.

Where your inability to work due to a physical or mental medical condition is temporary then you may be able to access super payments for the period you are unable to work. If this inability to work is permanent, and you are not likely to work again due to your medical condition, then you may be able to access your super balance without limit. Certification from two medical practitioners is required to support claims of permanent incapacity.

  • A super balance of less than $200.

If you have terminated your employment, and you have a super balance of less than $200 you may access this balance. This can extend to lost super that is held by the Australian Taxation Office with a total of less than $200. No tax is payable when accessing super with balances below this limit.

  • Through the First Home Super Saving scheme.

The FHSS scheme was introduced by the Federal Government in the 2018 budget to release pressure in housing affordability. The scheme allows eligible participants to save money for their first home purchase inside their super fund. This money can be accessed when the home is purchased.

Detailed application forms are required to be submitted to request early access to your super balance.

Other related blogs:

Access super before retirement

First home super savings scheme – now legislated

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

net worth

What is your net worth?

Very basically your net worth is the amount by which your assets exceed your liabilities.

For the less financially savvy you might be thinking what does that mean? Think of it as the difference between what you own and what you owe. If you own more than what you owe you have a positive net worth. If you owe more than you own you have a negative net worth.

Your assets represent anything that can be converted into cash like share investments, real estate, superannuation, personal property including cars and motorbikes and of course cash itself. Your liabilities include debts such as credit cards, mortgages and student loans for example.

So why should you monitor it?

First of all for perspective – when you see your net financial position (that is your assets minus your liabilities) it gives you perspective of where you currently stand and an initial benchmark to track against as you start to accumulate more wealth.

For most people having enough money in retirement to live a comfortable lifestyle is one of their biggest financial goals but how do you know if you are on track if you don’t even know how much money you will need or if you are progressing towards getting to that target?

If you know what kind of lifestyle you want to live in retirement you can determine how much you will need in total assets to fund that lifestyle. From then on monitoring your net worth will give you clarity as to whether or not you are on the right path.

What are some simple tips to increase your net worth?

  • Pay down your debts – start with the debts that have the highest interest rates where the interest can’t be claimed as a tax deduction. Extra repayments reduce interest and this can have a significant compounding effect. As an example an additional $5,000 payment made in the first month of a thirty-year, $500,000 mortgage will reduce the total interest over the term of the loan by about $11,000 (at current interest rates).
  • Invest in superannuation – this is the legal way to minimise the tax you pay. It will save you a lot of money over the course of your working life, it’s locked away until retirement, protected from creditors, and is a good way to force your savings.
  • Spend less and save more – setting a good budget and monitoring your ingoings and outgoings is the best way to stay accountable
  • Invest wisely in growth assets – carefully considered investments have potential to grow, but are also generally less accessible than cash investments and less likely to be drawn down

Other related blogs:

Contributing to super – options for employees

Author: Nick Vincent
Email: nick@faj.com.au

employee or contractorThe difference between an employee and a contractor is not always easy to distinguish. If an employer incorrectly classifies their employee as a contractor, they could face significant penalties. Therefore it is imperative that employers understand the differences between an employee or contractor and correctly categorize their workers.

There are many factors which help determine whether a worker is an employee or contractor. A few of these are listed below.

Factors that may indicate you are an employee:

  • The employer has a high degree of control over you. The employer determines what, how and where the work needs to be done.
  • You are paid at an hourly or daily rate.
  • The employer bears the risk of injury, insurance and rectification costs.
  • You wear a company uniform.

Factors that may indicate you are a contractor:

  • You have the discretion to decide what, how and where the work needs to be done and have the right to delegate your work to someone else.
  • You are only paid to achieve a result.
  • You have to fix mistakes at your own cost – you do not get paid to fix your errors.
  • You provide your own tools or assets necessary to complete the job.

If an employer incorrectly classifies an employee as a contractor, the employee would not have received the 9.5% super guarantee that they should have been entitled to. Because the employer has failed to make these superannuation payments, they will be liable to pay the super guarantee charge. This is made of the following components:

  • The employee’s super shortfall,
  • Interest of 10% per annum, and
  • An administration fee of $20 per employee per quarter.

As a further penalty, unlike normal super guarantee contributions, the super guarantee charge amounts are not tax deductible to the employer.

Further, businesses can also be liable to pay PAYG withholding penalty for failing to deduct the tax from an employee’s payments and an additional super guarantee charge of up to 200%.

Given the severity of the penalties, it is extremely important for businesses to ensure they correctly classify their workers as employees or contractors. The ATO has a decision tool that can assist you with this on their website.

Pro Tip:

Apprentices, trainees, labourers and trades assistants are always treated as employees as per the ATO.

Related blogs:

When do I need to pay super for contractors?
Do I need to pay payroll tax?

Email: tessa@faj.com.au