September 2005 Newsletter
Fees for Henry Kaye's Investment Seminars
INVESTOR FOCUSChanges for Retirement Planning
Long Term Non Reviewable Contracts & GST
Retail Premises - Leasing Procedures
A recent survey confirmed that many employers had not met their Super Choice obligations.
The survey by STA Super, which is one of the larger superannuation fund managers, claims that 40% of mid-size businesses had not handed choice forms to workers. Half of those had not made a decision on their default fund, whilst 13% said they would give advice to their employees if necessary, to the best of their ability.
The deadline to provide the choice form to eligible employees was 28 July 2005, on which the default fund needed to be notified. Failure to comply could result in a fine of up to $500 for each employee.
What is of concern is the potential in subsequent years to be held responsible for a poor performance or inadequate life insurance, etc if the employee claims (successfully?) that the employer provided financial advice. Given that many financial advisers are not prepared to give financial advise on this issue (because of the excessive compliance obligations) it is most unwise for an employer to take on this responsibility, unless they have the special qualifications required. Are you or your pay office giving advice unwittingly?
Our recommendation is that employers simply remind the employee that if they do not return the form then a compulsory level of life insurance will be required. That may or may not be in the employees best interest, but it will be a cost charged to the members account.
Gone for good this time.
Over the past months there have been several things said and reported about the Superannuation Surcharge in regard to whether it was to be abolished or not. Into the mix was the change in the Senate from the 1-7-05 and the implications this had for Government legislation. We??ve reported that this Surcharge was to go, then that it wasn??t, and now we can report that it??s gone.
This is not confusion but rather the effect of any prompt reporting to keep you up to date with what??s happening in regard to certain issues when exposed to the fickleness of politics that can sometimes comes into play. For example, in an address to the IFSA late in June the ??Prime Minister, John Howard, ruled out further superannuation tax cuts for the next three years, after a bill to abolish superannuation tax for high income earners was defeated in the Senate last week?? Simon de Bruyn
However, it??s a pleasure to now be able to note that this aspect of the Prime Minister??s comment was in fact reintroduced into the Senate and has now been passed. The Bill abolishes the superannuation surcharge with effect from 1 July 2005.
Shareholders in Pasminco may recoup some of their loss.
Recent changes allow a company under administration to make a declaration that a capital loss has been triggered.
On 31st March 2005 the administrator of Pasminco made a declaration in relation to shares in the company.
Rather than us explain the process, it is better that you bring this to your tax agents?? attention, if you had Pasminco holdings.
Fees for Henry Kaye Investment Seminars
Unfortunately, many taxpayers paid very high fees for seminars that did not deliver the promised results or were not held (Henry Kaye went broke).
In a recent case, the tribunal commented that it was not appropriate for the Commissioner of Taxation or the tribunal to consider whether the fees paid were excessive.
It was required to decide whether the fees were deductible and connected to the earning of income.
Unfortunately, (for the taxpayer) the tribunal decided that there was insufficient connection with future income.
The taxpayer was not (yet) carrying on a business of dealing in or renting of property, not were they incidental to the derivation of rental income.
It could be relevant that the cost of seminars, various guides and cameras in 2002 and 2003 was $36,756, whilst the rental income was $9,837 in the same period.
Changes to Retirement Planning??.
New Superannuation Rules have radically changed the landscape for Retirement Planning.The government recently introduced the transition to retirement legislation, giving an employed or self employed person the opportunity of accessing their superannuation as a non-commutable pension. Prior to the implementation of this legislation most people could not access their superannuation until they were retired.
If you are between the ages of 55 and 65, there??s a way to bump up your superannuation while working fewer hours, which might also trigger escalating tax breaks. A bigger tax break for working less? Yes, and not because you??d be earning less either. You??ll get the same pay in your pocket, thanks to the bigger tax breaks.
You can work the same hours, pay less tax and, bingo, have more superannuation where you retire.
It??s a way of building extra wealth, just when you are about to need it, with no extra risk. If anything, it??s less risky than the only other feasible way of building a nest egg ?? gearing.
So how does it work? It??s simple. You salary sacrifice your income into superannuation, and replenish your pay packet by raiding some of your superannuation. Salary sacrificing drops your marginal tax rate to 15 per cent, while drawing down your superannuation moves you from 15 per cent to zero tax on investments earnings and gives you a 15 per cent tax offset.
The only catch is that the superannuation raid has to be as an income stream such as an allocated pension or annuity ?? no lump sums allowed. There are no other restrictions, no means test, no limits, no caps on benefits and no conditions.
SNAPSHOT
? Salary sacrifice will drop your marginal tax rate
? Turn some of your future superannuation into an allocated pension now
? The pension matches your salary sacrifice in many cases, so there??s no loss of income
? You may receive a 15% tax offset on the pension payment
? Because your superannuation has moved into the pension phase, the 15% tax on income and 10% on capital gains disappears
? Reinvest some of the pension in superannuation, collecting new tax breaks.
Potential Strategy Benefits
By implementing a TRAP strategy, you have the potential to increase your Superannuation savings for your retirement by saving tax now. Other potential benefits are:
- The government currently pay a superannuation co-contribution of up to $1,500 p.a. if your taxable income is less than $28,000 and you make an undeducted contribution of $1,000. The co-contribution reduces on a sliding scale so that no payment is made if your taxable income is more than $58,000. Implementing a TRAP strategy may make you eligible for superannuation co-contribution that you were previously not entitled to.
- Salary sacrifice contributions can be split with your spouse (40% / 60 %) from July 2006. Splitting contributions with your spouse can effectively give you two lump sum RBLs. This is an area that needs to explored carefully before implementing a TRAP strategy.
- Capital Gains Tax of 10% is payable if you sell an investment within superannuation for a gain. However, no capital gains tax is payable on the sale of an investment asset if you have a superannuation pension.
? A retired person taking an allocated pension can commute it at any time, which means cashing it out. Those taking a pension under the transition-to-retirement arrangements will not be able to cash out, but they do have flexibility. They can transfer their allocated pension account to another provider, and when they choose to stop working or they reach 65, they can commute. They can also roll their income stream back to their accumulation fund at any time.
For more information please contact Michael Ryan and the team at Focus Financial Planning.
Michael Ryan CPA CFP, Authorised Representative
Premium Accounting Group Ltd
AFSL Number: 237498
C/- Focus Financial Planning Pty Ltd
Ph: 03 9551 2822
Employers need to be aware of wide reaching redundancy applications, whilst employees need to be aware of the opportunity for some tax relief.
A recent Western Australian Industrial Relations Commission (IRC) decision (Miller-Smith v. Locker Group Pty Ltd) decided that redundancy arrangements were to be interpreted in favour of an employee.
An employee had been engaged for approximately 15 years in Western Australia, before his employer??s ownership changed. When the due diligence was undertaken by the purchaser, it was informed that no agreements in relation to redundancy applied, other than some in Victoria. Following a restructure the employee was dismissed and applied to IRC for additional redundancy entitlement.
It was ascertained that a common practice in the first employer was to pay the redundancies on a certain formula. However, the employee had been paid a lessor amount. The IRC decided that the higher redundancy payment could be implied into his contract of employment.
The calculation of entitlement to a redundancy is quite different from the tax free element that is permitted by income tax legislation of $6,194 plus $3,097 per year of completed service.
The first step when a redundancy occurs is to determine from the employment relationship what is due to the employee. The second step is to determine how much of this is tax free. If the employer and the employee need to negotiate a satisfactory payment, the tax adviser might find some middle ground with the above knowledge.
Long Term Non Reviewable Contracts and GST
A new process may apply for GST treatment on long term non reviewable contracts.
When GST was introduced on 1 July 2000, the GST transitional provisions allowed supplies made under some pre 8 July 1999 contracts, to remain GST free until 30th June 2005 or an earlier review opportunity. An example might be a 10 year factory lease with CPI increases commencing in 1997.
The transitional period has now ended. An amendment to the GST law will allow suppliers and recipients to revise the price, despite the contract insisting otherwise.
If the supplier (for example - landlord) and the recipient (for example - tenant) cannot agree on a revised price, an arbitrator is appointed to determine the appropriate price. If both agree the tenant then pays the increased price, the supplier provides a tax invoice and normal GST provisions apply thereafter.
If the recipient does not agree with the arbitrator recommendation, the GST obligation is transferred to the recipient (tenant). On the next Business Activity Statement of the tenant, GST is paid and an input tax credit is claimed ?? unless the tenant is a financial institution.
The increased cost to a tenant of the monthly rent will be the financing cost of three months rent before a credit can be claimed (assuming quarterly lodgements) ?? but then that is no different than any other claim for an input tax credit.
Retail Premises ?? Leasing Procedures
The ??Retail Leases Act 2003??, which commenced 1st May 2003 provides a number of compliance issues for solicitors when preparing the lease document itself, but many additional procedural responsibilities thereafter.
The Act applies particularly to shopping centre and similar environments. Exclusions apply if the arrangement is a licence, if the premises are not used wholly or predominately for retail sale of foods or services, are in a basement or above third storey, etc., etc.
Non-compliance with these can mean fines or termination by the tenant.
These obligations include:-
An obligation to provide the tenant with a copy of the signed lease within 28 days of the tenant signing. If this is not done, the tenant can terminate within 28 days of receiving the copy.
A disclose statement needs to be provided at least seven days before entering a lease. The tenant can avoid paying or terminate.
If there are options to renew the lease, there are additional disclosure statements and also advance warnings ?? 6 to 12 months before the date of option exercise.
If there is no option to renew the Landlord??s intention must be notified between 6 and 12 months before expiry. Extensions of existing arrangements can occur if the Landlord fails to provide details of the proposed arrangement.
There is also an obligation to notify the Small Business Commissioner within 14 days of the lease being signed. Non-compliance penalty up to $10,000.
These complex provisions require the assistance of a solicitor well familiar with the provisions and the Landlord to be sufficiently organised to diarise these advance obligations. The tenant has a number of weapons to use during their negotiations for renewal of a lease particularly if the landlord has forgotten some of these obligations. This is not an area of expertise of an accountant, other than reminding you of follow-up activity and assisting in some of these compliance procedures.