Important changes to superannuation co-contributions

In November the Federal Government released the Mid-year Economic and Fiscal Outlook. Various savings measures were included in this with the aim of ensuring the budget returns to surplus in 2012-13.

Amongst the savings measures was a reduction in the generosity of the government’s co-contribution. Co-contribution is the process whereby the government contributes to your superannuation account, when you have made an after tax superannuation contribution. In recent years, the government has matched whatever you put in dollar for dollar, up to a maximum of $1,000. The benefit phases out as your income rises, as it is intended as a measure to help lower income earners amass more retirement savings.

From 1 July this year (ie. next financial year), the government will only contribute 50 cents for every $1 that you contribute. And the maximum they will contribute has halved to $500.

So for now at least, government co-contribution lives on, it’s just a little less generous than it used to be.

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Assistant Treasurer and Minister for Financial Services and Superannuation, Bill Shorten has introduced legislation to make directors personally liable for unpaid superannuation obligations.

The Tax Office will have the power to pursue directors once a company’s superannuation obligations are more than 3 months overdue.

The objective of the legislation to address concerns around “phoenix companies”.  This is the practice of running up bills in one company, putting it into liquidation, and then establishing a new entity which effectively takes over the activities of the previous failed business.

The press release can be found here.

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So with Australia’s carbon tax finally getting through parliament (it still has to get through the upper house, though that is expected to present few problems with the support of the Greens), we can now turn our minds to the implications for Australia’s small businesses, the engine room of our economy.

1. The first thing to note is that the carbon tax doesn’t apply directly to small business.  It only applies around 500 of our countries biggest polluters.  Of course the expectation is that these large business will then pass on in higher prices, the impact of the tax, so that the cost will filter through the economy.  However in the context that small businesses already have too much paperwork to do for the government, it’s nice to know this doesn’t add to our burden.
2. Small business will be able to write-off up to $6,500 of asset purchases, up from $1,000 now, thereby bringing forward the tax deduction for these assets.  There are some other improvements to the write down of vehicles from 2012/13.
3. The tax free threshold for individuals will rise from $6,000 now to $18,200 in 2012-13, then $19,400 in 2015-16.  For many micro-businesses and business that income split, this reduction may offer some savings.  Note that because of other changes they will make to the tax scales, people earning more than $80,000 will be worse off.
4. There are few details, however the Clean Technology Program may provide opportunities for small business, particularly in the consultancy space.

I wonder if in 10 years time we look back on this and wonder what all of the fuss was about.

Paul Benson

Guidance Financial Services Pty Ltd – Specialist financial planning advice for business owners and the self employed.

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As flagged in our breaking news post earlier in the week, the ATO has announced a significant change around the issue of Self Managed Super Funds (SMSF’s) being able to improve properties acquired with borrowed funds.  They had previously advised that whilst repairs were no problem, a trustee could not make improvements to a property owned by a super fund where borrowings had been used.

This caused investors considerable angst, as it was common to acquire a property for rent, and perhaps put in a new kitchen or modernise the bathroom for instance.

Thankfully, the ATO has had a change of heart.  They have now stated that improvements are okay, so long as the SMSF does not use borrowings to complete the improvement.

The full Draft Ruling can be found here.

Within the ruling there is a helpful definition of what constitutes an improvement:

In contrast to repair, an asset is improved if the functional efficiency of the asset or the value of the asset is substantially increased through the addition of new and substantial features or rights or bringing a thing or structure into a more valuable or desirable form, state or condition than a mere repair would do.

The crucial change in approach from the ATO is found here however:

Money other than borrowings used to improve an asset

Although borrowings under an LRBA cannot be used to improve a single acquirable asset that is the subject of the LRBA, money from other sources could be used to improve (or repair or maintain) that asset. However, any improvements must not result in the acquirable asset becoming a different asset.

LRBA stands for Limited Recourse Borrowing Arrangement which is the technical jargon for the mechanism through which SMSF’s are able to borrow.

This change in approach should open up further the opportunities for Australian’s to utilise there superannuation savings to engage in property investment as a means to funding there future retirement.

Looking to set up a Self Managed Super Fund (SMSF)?  We have the experience and expertise to ensure this is a painless experience for you. – phone 03 9870 6544.

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The Australian Financial Review reports this morning that the ATO will be releasing a draft ruling which dramatically alters their position on SMSF’s being able to improve properties.  (Refer past blog item SMSF Property Investment Trap).

According to the AFR, the ATO will now allow SMSF’s to improve a property, provided borrowings are not used to make the improvements and the asset isn’t fundamentally changed.

The ATO’s assistant tax commissioner Stuart Forsyth is quoted “You can’t use borrowed funds to improve, but you can use money inside the fund to make improvements so long as they don’t fundamentally change the nature of the asset”.

Once we have access to the Draft Ruling we will provide a more detailed summary of these significant changes.

In working my way through the reporting on Australia’s new Carbon Tax I’ve found lots of references to the fact that the tax free threshold for individuals will rise to $18,200, but not much on the other tax rates.

Thus I have obtained the following information from the Australian Government’s Treasury web site for your information.  Two aspects that I find interesting here:

1. The “Effective tax free threshold” is far less of an increase than the headline change from $6,000 to $18,200 suggests.  This is because they have fiddled with the Low Income Tax Offset (LITO).
2. Some rates have risen.  The first tax rate has risen from 15% to 19%, and the second tax band from 30% to 33%.

Significantly, if you earn $80,000 or more, you get no compensation – the increases in the mid level tax bands offset the gains from increasing the tax threshold – so this is the portion of the population paying for the change. 

No doubt there will be plenty of analysis to come on Australia’s Carbon Tax arrangements.

Source: http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2011/081.htm&pageID=003&min=wms&Year=&DocType=

The ATO have advised they will double the number of audits of self-managed superannuation funds, and expand its scrutiny of fund auditors.

According to the ATO deputy commissioner Neil Olesen “we’re now concentrating on taking firmer action in those cases where it’s warranted, a deliberate philosophical shift from our original focus which was very much on encouraging the accumulation of retirement income”.

Last year 185 funds were made non compliant, compared to only 12 in 2006, as the tax office takes a harsher stance.  When an SMSF is made non-compliant, 45% of the fund balance is forfeited in tax, an outcome Jeremy Cooper referred to in his recent superannuation report as “the nuclear option”.

94 trustees were also disqualified.  Such a disqualification is likely to effect their ability to hold directorships in other entities.

Of particular concern is SMSF’s making repeated suspicious loans to members.  In such instances “…we are finding that an early access breach has occurred about a quarter of the time” according to Mr Olesen.  Repeated failure to lodge annual returns was also another key target of ATO compliance activity.

With the superannuation system receiving billions in tax concessions, and the SMSF sector now being the largest component of the superannuation landscape, it is no surprise the ATO will want to ensure Self Managed Super Funds are meeting their legal requirements.

Guidance offers low cost SMSF administration services and can arrange for our clients annual returns and audits to be completed.  Our fees a fixed, irrespective of the balance of your fund.  Contact us to find out more.

A re-elected Gillard Government will allow SMSFs to continue investing in collectables, including artwork, if trustees comply with new guidelines. From 1 July 2011 collectables and personal use assets owned by self managed superannuation funds (SMSFs) must be stored according to new rules to prevent them from giving rise to a personal benefit.

Only around 1% of all SMSF’s own artwork within their fund, yet the proposed change to prevent this form of investment caused concern amongst the art community which risked losing a valuable customer source.

The Copper report into superannuation was released yesterday.  Significant changes were proposed to the default superannuation options provided by employer superannuation schemes, with the proposal to introduce “MySuper” as the default superannuation option for all Australians.  There were also proposals to improve the back office processing.

It was noticeable however, that very little change was recommended for the SMSF sector, confirming once again that the Self Managed Super Fund sector is performing well and serving the needs of it’s members.  In fact it was telling to learn that of the members of the Cooper Review panel, half had SMSF’s themselves, including Jeremy Cooper.  It is little wonder then that the SMSF sector has grown to be the largest sector within the superannuation environment, and continues to be the fastest growing.

With the proposal now to have most Australian’s start their superannuation journey in the very basic, no frills “MySuper”, it may be that the future of superannuation consists of two phases.  In the early years of a persons life, the MySuper option is adequate for their needs.  At some point in their life, when the balance grows to a point where the person starts to take in interest in how much they have, they move to an SMSF, so that they can work towards achieving their particular goals and objectives in a customised way.  I guess this is a bit like motor cars.  Our first car is pretty basic and cheap, then latter in life, we get a car to fit our particular family arrangement or lifestyle needs.

By Jamie Cheng

Under the new Fair Work Bill there was supposedly double the unfair dismissal applications in the months after the implementation in July 1, 2009. With the increase it becomes evident that employers should be wary of the new legislation to avoid significant costs.

A major change with the legislation is that small businesses are now more susceptible to unfair dismissal claims as of July 1, 2009. The definition of a small business has also changed. A small business is now defined as a business that employs less than 15 full-time equivalent employees.

Note: A business may employ more than 15 employees and still be classified as a small business as long as the combined hours of the employees are under 15 full-time employees.

Below is a table from the Australian Financial Review that summarises the rules around dismissals with a useful link to the Small Business Fair Dismissal Code, which if followed will be deemed a fair dismissal.

Fair’s fair

Rules around dismissals

Source: Australian Financial Review, Business hit as dismissal claims soar, October 20, 2009.

jamie.k.cheng@gmail.com