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2012 Tax Changes - Entrepreneurs tax offset

Saturday, July 28, 2012

Entrepreneurs’ tax offset

Last year, the government announced the entrepreneurs’ tax offset would be scrapped in order to help fund the $5,000 deduction for any vehicle purchase – that will take effect from next month.

The offset provided businesses an offset equal to 25% of the income tax payable on business income. While the move is a disappointing one for small business, it was only available for entrepreneurs earning less than $75,000 a year.

On the upside, businesses will now be able to access an immediate $5,000 deduction for all vehicle purchases from next month.

2012 Tax Changes - Termination Payment

Saturday, July 28, 2012

Changes to employee termination payments

There will be a few changes made to employment termination payments next month. From July 1, the offset is limited so it only applies where it takes up the person’s total annual taxable income to no more than $180,000.

Any amount above this will be taxed at marginal rates. Any existing arrangements will remain in place for genuine redundancies, or for compensation due to death or an employment-related dispute.

2012 Tax Changes - R&D Scheme

Saturday, July 28, 2012

Research and development tax scheme

From July 1, businesses will be able to register for and claim the new research and development tax incentive. The incentive has two key components.

Firstly, a 45% refundable tax offset for research and development entities with turnover less than $20 million per year, and secondly, a 40% non-refundable tax offset for any other companies with turnover above that amount. Unused offset amounts may be carried forward in some circumstances.

If a business has a standard income year starting from July 2011, you can start to register and claim the incentive from next month.

But to do so, you need to first establish that you’re an eligible entity, that you meet the requirements of the R&D incentive and that you’ve registered your R&D activities with AusIndustry.

You’ll need to justify your R&D activity under the new incentive, and you’ll need to identify which activities are “core”, or “supporting” activities. You can check out the definition of both of those here, but essentially, core activity is an activity whose outcome cannot be known or determined in advance on the basis of current knowledge.

The business records you keep must be sufficient to verify the amount of money you spend on R&D, and you’ll need to satisfy a few tests as well.

In short, there’s a lot to get in order. To get all the details about how you can access the R&D incentive, you should head over to the AusIndustry site here, which will give you all the details.

2012 Tax Changes - Private Health Rebate

Saturday, July 28, 2012

Changes to the private health rebate

The government will start testing the private health insurance rebate and the Medicare levy surcharge against income, in three different thresholds. High income earners will receive less of the private health insurance rebate, and the surcharge may increase.

The thresholds are a bit complex, but here’s the table straight from the ATO.

2012 Tax Changes - Instant Tax Write Off

Saturday, July 28, 2012

Instant asset write-off

Perhaps the instant write-off for assets under $6,500 is the biggest assistance businesses will receive for the carbon tax.

From July this year, any SME with under $2 million in turnover will be able to write off any asset worth less than $6,500 immediately. Right now, the threshold is just $1,500.

2012 Tax Changes - Carbon Tax

Saturday, July 28, 2012

Carbon tax assistance – individuals

This is a huge area of tax change, so we’ll break it down into two categories – individuals, and then businesses.

Most of the assistance is taken care of with the adjusted tax brackets, and they’ll mostly help lower-income earners. But there will be some changes to the way pensions and the Family Tax benefits are handed out.

For instance, pensioner payments have already started arriving, equating to $250 for singles and $380 for couples. After July, pensioners will start receiving supplements worth a 1.7% increase in the maximum pension rate.

Family Tax Benefit A recipients will receive up to $110 extra per child, while those receiving Family Tax Benefit B will get up to $59. Single parents will receive up to $234, as well.

2012 Tax Changes - new Tax Brackets

Saturday, July 28, 2012

Brand new tax brackets – including carbon tax assistance

As part of the government’s introduction of the carbon tax, there’ll be some dramatic changes to the income tax rates – including the adjustment of the tax-free threshold to $18,200 from the current level of $6,000. That means you’ll be able to earn up to $20,542 before any tax is payable at all.

These changes are crucial for employers. Next year, your staff will have less tax withheld from their paychecks, so you’ll need to make the necessary changes to ensure they’re being paid correctly.

Here are the tax brackets for the 2011-12 year, followed by the new tax brackets, which will take effect from the 2012-13 year.

2011-12:

  • $0 - $6,000 = Nil
  • $6,001 - $37,000 = 15c for every $1 over $6,000
  • $37,001 - $80,000 = $4,650 plus 30c for every $1 over $37,000
  • $80,001 - $180,000 = $17,550 plus 37c for every $1 over $80,000
  • $180,001 and over = $54,550 plus 45c for every $1 over $180,000

2012-13:

  • $0 - $18,201 = Nil
  • $18,201 - $37,000 = 19c for each $1 over $18,200
  • $37,001 - $80,000 = $3,572 plus 32.5c for every $1 over $37,000
  • $80,001 - $180,000 = $17,547 plus 37c for every $1 over $80,000
  • $180,001 and over = $54,547 plus 45c for each $1 over $180,000

At the same time, the maximum value of the low-income tax offset reduces from $1,500 to $445, and after that, will be reduced by 1.5 cents in every dollar over $37,000. Previously, that number was at $30,000. From 2015, that figure will be reduced to just $300.

The pensioner tax offset will merge with the new senior Australians tax offset. Meanwhile, there have also been some changes to the Medicare levy and Medicare levy surcharge thresholds.

From July 1, the Medicare levy surcharge thresholds will be changed, while the low-income thresholds will be changed as well. The full details of those changes are available on the Australian Tax Office’s website here.

2012 Tax Changes you need to know about

Saturday, July 28, 2012

The end of the flood levy

You may remember the huge debate last year over the Federal Government’s flood levy, which was introduced to help the Commonwealth pay for the damages caused by the Queensland floods. From July 2012, the levy will no longer apply.

2012 Tax Changes you need to know about

Saturday, July 28, 2012

The end of the flood levy

You may remember the huge debate last year over the Federal Government’s flood levy, which was introduced to help the Commonwealth pay for the damages caused by the Queensland floods. From July 2012, the levy will no longer apply.

SMSF super funds investing in property need to beware

Friday, July 27, 2012

The volatility in the sharemarket may tempt self-managed super funds (also known as DIY funds) to look elsewhere to invest and the recent rule changes to allow those funds to invest in property might look tempting.

Broadly, while super funds are generally not permitted to borrow money in their own right, there is an exception whereby a DIY fund is permitted to borrow money provided that the borrowing is made pursuant to what is known as a limited recourse borrowing arrangement, for example, an instalment warrant.

Such an arrangement entered into from July 7, 2010 can only be referable to a single "acquirable asset" held in a holding trust which the DIY fund is not otherwise prohibited from acquiring directly. In addition, a borrowing applied to the original acquirable asset can only be replaced with a "replacement asset" according to the relevant provisions of the law.

A major ruling has now been released by the Tax Office which gives the Commissioner's views on the limited recourse borrowing arrangement provisions. The ruling explains the key concepts of:

  • What is an "acquirable asset" and a "single acquirable asset".
  • "Maintaining" or "repairing" the acquirable asset (which is allowed with borrowed money) as distinguished from "improving" it (which is not allowed).
  • When a single acquirable asset is changed to such an extent that it is a different (replacement) asset.

The ruling outlines where money borrowed can be applied in maintaining or repairing (but not improving) a single acquirable asset. While such borrowings cannot be used to improve an acquirable asset, the Tax Office says money from other sources (e.g. accumulated funds held by the DIY fund) 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.

The ruling notes that an "acquirable asset" is any form of property (other than money) that the DIY fund trustee is not otherwise prohibited from acquiring under the superannuation law. Although "property" can include proprietary rights or the physical objects of proprietary rights (e.g. land or machinery), the Tax Office says it is necessary to consider the meaning of property in both senses to determine whether money borrowed under a limited recourse borrowing arrangement has been applied for the acquisition of a single acquirable asset.

While the money borrowed can only be applied for the acquisition of a single acquirable asset (or a collection of identical assets with the same market value), the Commissioner considers that a single object of property may be acquired notwithstanding that it is comprised of separate bundles of proprietary rights (e.g. if there are two or more blocks of land). However, this will only be so where it is reasonable to conclude that, notwithstanding the separate bundles of proprietary rights, what is being acquired is distinctly identifiable as a single asset.

Money borrowed under a limited recourse borrowing arrangement may be applied in "maintaining" or "repairing" (but not "improving") the asset. To determine if an asset has been repaired or maintained (or whether it has been improved), the Tax Office says reference is made to the qualities and characteristics of the asset at the time the asset is acquired under the borrowing arrangement. To this end, the Tax Office says an asset is improved if the state or function of the asset is significantly altered for the better, through substantial alterations, or the addition of further substantial features or rights, to the asset.

To some extent, this repair vs improvement issue harks back to the age-old income tax treatment of repairs versus improvements. "Maintaining" the asset, which is allowed under the rules, means work done to prevent defects, damage or deterioration of an asset, or in anticipation of future defects, damage or deterioration provided that the work merely ensures the continued functioning of the asset in its present state. "Repairing" means remedying or making good defects in, damage to, or deterioration of, an asset and contemplates the continued existence of the asset.

In contrast to a repair, the Tax Office considers that an asset is improved if the state or function of the asset is significantly altered for the better, through substantial alterations, or the addition of further substantial features or rights, to the asset.

The Tax Office has given examples contrasting repairs (or maintenance) with improvements:

 

Repairs/maintenance (permitted)

Improvements (not permitted with borrowed money)

  • Fire damages part of a kitchen (cooktop, benches, walls and ceiling).
  • Restoration (replacement) of damaged part of kitchen with modern equivalent materials or appliances would constitute repair or restoration.
  • If superior materials or appliances are used it is a question of degree as to whether changes significantly improve the state or function of the asset as a whole.
  • Addition of a dishwasher would not amount to an improvement (even if dishwasher not previously part of kitchen), as minor or trifling improvement.
  • If house extended to increase size of kitchen this would be an improvement.
  • If as well as restoring the damaged part of the internal kitchen (a repair) a new external kitchen was added to the entertainment area of the house, external kitchen would be an improvement.
  • Guttering on a house replaced with modern equivalent and the house repainted. In replacing guttering a leaf guard can be fitted as minor or trifling addition to asset as a whole.
  • Fence is replaced using modern equivalent materials. Can add a gate to new fence as minor or trifling improvement.
  • Fire alarm installed to comply with new requirements of local council. Not an improvement as minor or trifling.

 

  • Pergola built to create outdoor entertaining area.
  • Addition of swimming pool or garage.

 

  • Integrated home automation system installed including electronically controlled lighting, multi-room audiovisual distribution and security system.
  • House extension to add further bathroom.
  • Cyclone damages roof of house. Replacement of roof in its entirety with modern equivalent is a repair.
  • If superior materials are used it is a question of degree as to whether changes significantly improve state or function of asset as a whole.
  • Addition of second storey to house at time of also replacing roof would be an improvement.
  • If fire destroys a three bedroom residential house. Rebuilding broadly comparable house is not an improvement as it restores asset.
  • If superior materials, fittings or appliances are used it is a question of degree as to whether significantly improve state or function of asset.
  • Rebuilding a residential house that is not broadly comparable to that destroyed is an improvement. If the funds to rebuild are from an insurance company and not from borrowings this does not affect the LRBA.
  • Residential house acquired under an LRBA and rented out for a number of years. The area is now a "real estate hot spot".
  • Decision to renew kitchen which, although functional, is significantly out of date and showing wear and tear. The design of kitchen is improved and modern equivalent, rather than superior, materials and appliances are used. Changes do not significantly improve state or function of asset as a whole.
  • Residential house is acquired under an LRBA and is rented out for a number of years. The area is now a real estate hot spot.
  • Decision to demolish house. Rebuilding a residential house that is not broadly comparable is an improvement. However, if the funds to rebuild are not from borrowings this does not affect the LRBA.

Farm (on single title) is the single acquirable asset under an LRBA. At the time of entering into the LRBA the farm includes one set of cattle yards, 4 bores including windmills, tanks and troughs and 3 km of fencing:

  • Replacing a section of cattle yards or existing fencing is a repair.
  • Ensuring bores, windmills, tanks and troughs continue working is repair or maintenance. This would include laying new pipes between the tank and trough to replace old pipes.

Each of the following further additions is an improvement:

  • A further set of cattle yards;
  • A further bore, tank;
  • A windmill and trough;
  • A further dam; further shed;
  • A further 2 km of fencing.
  • Machinery or equipment item of earth moving equipment acquired under an LRBA. Immediately after its acquisition money borrowed under LRBA is used to fund repairs to hydraulic system of the asset to return it to its full functionality. This would be a repair.
  • A major overhaul of the asset is carried out with all significant parts of the asset being replaced. This is likely to be an improvement as changes have significantly improved the state or function of the asset.

Note that the improvements listed above could be carried out provided that the DIY fund uses its own money (and not borrowed money). According to the Commissioner, these improvements would not fundamentally change the character of the asset to such an extent to result in a different asset.

There are many rules surrounding the investments that a DIY super fund is allowed to make, and many traps for the unwary. Anyone with a DIY fund who contemplates investing in property should seek professional advice.

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.


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