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The 1st July 2021 Superannuation Changes

Changes from 1st July 2021 will impact on how much money you can contribute to superannuation and how much you can have in your retirement phase superannuation account.

In general, your superannuation is either in an accumulation account (when you are building your super), a retirement account (when you meet preservation age and certain conditions of release and can withdraw your super), or in between when you are transitioning to retirement (when you reach perseveration age, are working reduced hours and take some of your superannuation as a pension).

 

The amount of money you can transfer from your accumulation account into your tax-free retirement account is limited by a Transfer Balance Cap (TBC) (a cap on the total amount of super that can be transferred into a tax-free retirement account, known as the transfer balance cap). From 1 July 2021, the current $1.6m general TBC will be indexed to $1.7m and once indexed, no single cap will apply to all individuals (each person will have an individual TBC between $1.6m and $1.7m).

 

Indexation will also change other superannuation caps and limits including:

  • Non-concessional contributions (contributions from after tax income)
  • Concessional contributions (contributions from before tax income such as super guarantee, salary sacrificed super amounts, or contributions you make and claim a tax deduction for etc.)
  • Co-contributions (personal contributions made by low and middle income earners matched by the Government up to $500), and
  • Contributions you make on behalf of your spouse that are eligible for a tax-offset.

The amount you can contribute to super will increase

Indexation will increase the concessional and non-concessional contribution caps from 1 July 2021. These caps are indexed by average weekly ordinary time earnings (AWOTE).

 The bring forward rule

The bring forward rule enables you to contribute up to three years’ worth of non-concessional contributions in the one year. That is, from 1 July 2021, you could contribute up to $330,000 to your superannuation in one year. You can use the bring forward rule if you are 64 or younger on 1 July of the relevant financial year of the contribution and the contribution will not increase your total super balance by more than your transfer balance account cap.

 

If you utilised the bring forward rule in previous years, your non-concessional cap will not change. You will need to wait until your three years has expired before utilising the new cap limit.


* excludes withdrawals made under the COVID 19 relief measures.

How will the transfer balance cap impact me?

You are accumulating super

If you are building your superannuation (accumulation phase) and not withdrawing it*, indexation of the TBC is a good thing because from 1 July 2021 you will be able to access more of your superannuation tax-free. If you start taking your superannuation after 1 July 2021, for example if you meet a condition of release and retire, your transfer balance cap will be $1.7m. Essentially, if you have never had a transfer balance account credit, then the full indexation is available to you.

For low and middle income earners claiming the government co-contribution, the limit will increase in line with indexation to $1.7m.

Similarly, if you are contributing superannuation to your spouse and claiming the tax offset, the limit will increase in line with indexation to $1.7m. That is, you can contribute to your spouse’s superannuation and claim the tax offset as long as their TBC is not more than $1.7m.

 

You have started taking your super

If you started taking your superannuation before 1 July 2021 and have already had a credit added to your transfer balance account, then your TBC will be between $1.6m and $1.7m depending on the balance of your transfer balance account between 1 July 2017 and 30 June 2021. If your account reached $1.6m or more at any point during this time, your TBC after 1 July 2017 will remain at $1.6m. If the highest credit ever in your account was between $1 and $1.6m, then your TBC will be proportionally indexed based on the highest ever credit balance your transfer balance account reached. That is, the ATO will look at the highest amount your transfer balance account has ever been, then apply indexation to the unused cap amount. For example, if you started a retirement phase income stream valued at $1.2m on 1 October 2018 and this was the highest point of your account before 1 July 2021, then your unused cap is $400,000. This unused cap amount is used to work out your unused cap percentage (400k/1.6m=25%). The unused cap percentage is then applied to $100,000 ($100k*25%=$25k) to create your new TBC of $1,625,000.

 

Note that indexation only applies to the difference between the $1.6m TBC and the highest point of your account at any point between 1 July 2017 and 30 June 2021, not the value of your account at 30 June 2021. That is, if you made additional contributions after 1 October 2018 that increased your account to say $1,440,000, then indexation would apply to your unused cap of $160,000 (instead of $400,000), creating a TBC on 1 July 2021 of $1,610,000.

 

Indexation does not impact existing child death benefit beneficiaries. Child death benefit income streams commencing after 1 July 2021 will be entitled to the increment if the parent never had a transfer balance account or a proportion if the parent had a transfer balance account.

 

If you receive income from a capped defined benefit income stream and you are 60 years of age or more, or the income stream is from a death benefit where the member was over 60 at the time of death, then the defined benefit income cap will increase to $106,250 for most individuals. This will mean that the money your fund withholds from your income stream may change.

 

If you want more suggestions and seek for assistance, call BOA & Co. accountants on 02 9904 7886 and our Specialist will be pleased to assist you.

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Professional Services Firm Profits Under Fire

The Australian Taxation Office (ATO) has been concerned for some time about how many professional services firms are structured – specifically, professional practices such as lawyers, architects, medical practices, engineers, architects etc., operating through trusts, companies and partnerships of discretionary trusts and how the profits from these practices are being taxed.

 

New draft guidance (PCG 2021/D2) released last month from the ATO takes a strong stance on structures designed to divert income so the professional ends up receiving very little income directly for their work, reducing their taxable income. Where these structures appear to be in place to divert income to create a tax benefit for the professional, Part IVA may apply. Part IVA is an integrity rule which allows the Commissioner to remove any tax benefit received by a taxpayer where they entered into an arrangement in a contrived manner in order to obtain a tax benefit. Part IVA may apply to schemes designed to ensure that the professional is not appropriately rewarded for the services they provide to the business, or that they receive a reward which is substantially less than the value of those services.

 

The draft guidance for professional services

Set to apply from 1 July 2021, the draft guidance sets out a series of tests to create a risk score. This risk score is then used to classify the practitioner as falling within a Green (low risk), Amber (moderate risk) or Red risk (high risk) zone and determines if the ATO should take a closer look at you and your firm. Those in the green zone are at low risk of the ATO directing its compliance efforts to you. Those in the red zone, however, can expect a review to be initiated as a matter of priority with cases likely to proceed directly to audit.

 

The risk assessment framework will only apply if the firm first meets two gateway tests.

  • Gateway 1 – considers whether there is commercial rationale for the business structure and the way in which profits are distributed, especially in the form of remuneration paid. Red flags would include arrangements that are more complex than necessary to achieve the relevant commercial objective, and where the tax result is at odds with the commercial venture, for example, where a tax loss is claimed for a profitable commercial venture.
  • Gateway 2 – requires an assessment of whether there are any high-risk features. Potentially high-risk features include financing arrangements relating to non-arm’s length transactions, where income of a partnership is assigned in a way that is not consistent with existing guidelines, and where there are multiple classes of shares or units held by non-equity holders.

 

If the gateway tests are passed, then you can self-assess your risk level against the ATO’s risk assessment factors. There are 3 factors to be considered:

  1. the professional’s share of profit from the firm (and service entities etc) compared with the share of firm profit derived by the professional and their related parties;
  2. the total effective tax rate for income received from the firm by the professional and their related parties; and
  3. the professional’s remuneration as a percentage of the commercial benchmark for the services provided to the firm.

The resulting ‘score’ from these factors determines your risk zone. Some arrangements that were previously considered low risk may now fall into a higher risk zone.

 

For professional services firms, it will be important to assess the risk level and this needs to be done for each principal practitioner separately. Those in the amber or red zone who want to be classified as low risk need to start thinking about what needs to change to move into the lower risk zone.

Where other compliance issues are present – such as failure to recognise capital gains, misuse of the superannuation systems, failure to lodge returns or late lodgement, etc., – a green zone risk assessment will not apply.

 

If you want more suggestions and seek for assistance, call BOA & Co. accountants on 02 9904 7886 and our Specialist will be pleased to assist you.

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Business

Why Are Some Businesses Returning JobKeeper?

Retail industry vs Covid-19 vs JobKeeper payment

Super Retail Group – owner of the Supercheap Auto, Rebel, BCF and Macpac brands – handed back $1.7 million in JobKeeper payments (a scheme to support businesses and not-for-profit organisations significantly affected by COVID-19, to help keep more Australians in jobs.) in January after releasing a trading update showing sales growth of 23% to December 2020. Toyota announced that it will return $18 million in JobKeeper payments after a record fourth quarter. And, Domino’s Pizza has also handed back $792,000 of JobKeeper payments.

 

Toyota, Super Retail Group, and Domino’s were not obliged to hand back JobKeeper. Under the rules at the time, the companies qualified to access the payment. However, Toyota CEO Matthew Callachor said, “Like most businesses, Toyota faced an extremely uncertain future when the COVID-19 health crisis developed into an economic crisis …We claimed JobKeeper payments to help support the job security of almost 1,400 Toyota employees around Australia ….In the end, we were very fortunate to weather the storm better than most, so our management and board decided that returning JobKeeper payments was the right thing to do as a responsible corporate citizen.”

 

Domino’s Group CEO and Managing Director, Don Meij said, “We appreciate the availability and support of JobKeeper during a period of significant uncertainty. That period has passed, the assistance package has served its purpose, and we return it to Australian taxpayers with our thanks.”

 

Why are some businesses returning JobKeeper? 

Companies that received JobKeeper and subsequently paid dividends to shareholders and executive bonuses have come under particular scrutiny, not just by the regulators but by public opinion.

 

The first phase of JobKeeper did not require business to prove that they had actually suffered a downturn in revenue, just have evidence turnover was likely to drop in a particular month or quarter. For many businesses, early trends indicated that the pandemic would have a devastating impact on revenue. Many also took action and prevented the trend entrenching by actioning plans to protect their workforce and revenue. The fact that business improved, does not impact on initial JobKeeper eligibility. In the first phase of JobKeeper, employers were not obliged to stop JobKeeper payments if trends improved.

 

Speaking at the Senate Select Committee on COVID-19, ATO Deputy Commissioner – Jeremey Hirschhorn stated that the ATO rejected some $180 million in JobKeeper claims pre-issuance. Approximately, $340 million in overpayments have been identified. Of these, $50 million were honest mistakes and will not be clawed back where the payment had been passed on to the employee.

 

Where the ATO determines that JobKeeper overpayments need to be repaid, they will contact you and let you know the amount and how the repayment should be made. Administrative penalties generally will not apply unless there is evidence of a deliberate attempt to manipulate the circumstances to gain the payment.

 

Taxpayers can object to the ATO’s JobKeeper overpayment assessment. If you are contacted by the ATO, please contact us immediately for assistance and we will work with the ATO on your behalf.

 

If you want more suggestions and seek for assistance about trusts, call BOA & Co. accountants on 02 9904 7886 and our Trust Specialist will be pleased to assist you.

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The Pandemic Productivity Gap

A recent article published in the Harvard Business Review by Bain & Co suggests that the pandemic has widened the Productivity Gap (is a phrase to describe a sustained difference in measured output per worker (or GDP per person employed) between one country and another) between top performing companies and others stating, “Some have remained remarkably productive during the Covid-era, capitalizing on the latest technology to collaborate effectively and efficiently. Most, however, are less productive now than they were 12 months ago. The key difference between the best and the rest is how successful they were at managing the scarce time, talent, and energy of their workforces before Covid-19.”

 

Atlassian data scientists also crunched the numbers on the intensity and length of work days of software users during the pandemic. The results found that workdays were longer with a general inability to separate work and home life, and workers were working longer hours (predominantly because during lockdowns, there is no set start and end of the workday routine). Interestingly, the average length of a day for Australian workers is shorter than our international peers by up to an hour pre pandemic. Australia’s average working day is around 6.8 active hours whereas the US is close to 7.2.

 

However, working longer does not mean working more productively. Atlassian’s research shows that while the length of the working day increased and the intensity of work increased earlier and later in the day, intensity during “normal” hours generally decreased.

 

So, how do we measure productivity? Bain & Co suggests:

 

  • The best companies have minimised wasted time and kept employees focused; the rest have not. Those that were able to collaborate effectively with team members and customers pre pandemic fared the best. Poor collaboration and inefficient work practices reduce productivity.
  • The best have capitalised on changing work patterns to access difference-making talent (they acquire, develop, team, and lead scarce, difference-making talent).
  • The best have found ways to engage and inspire their employees. Research shows an engaged employee is 45% more productive than one that is merely a satisfied worker.

 

The productivity gap was always there. The pandemic merely brought the gap into stark contrast.

 

If you want more suggestions and seek for assistance about trusts, call BOA & Co. accountants on 02 9904 7886 and our Trust Specialist will be pleased to assist you.

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A New Announcement From ATO of Single Touch Payroll

Single Touch Payroll (STP), is an Australian Government initiative to reduce employers’ reporting burdens to government agencies.

With STP, you report employees’ payroll information to us each time you pay them through STP-enabled software. Payroll information includes:

  • Salaries and wages
  • Pay as you go (PAYG) withholding
  • Superannuation.

 

The ATO has made two important announcements in relation to the Single Touch Payroll (STP) system.

A legislative instrument has been released that extends the deadline for phase 2 reporting through STP from 1 July 2021 to 1 January 2022 (i.e., six-month extension).

STP phase 2 will require additional payroll information to be reported to the ATO, which will be subsequently shared with Services Australia and other government agencies.

The ATO also confirmed that small employers will be required to start using STP for Closely Held Payees (an individual directly related to the entity from which they receive payments) from 1 July 2021. That is, no further extension has been granted.

 

However, the ATO will allow small employers to report payments to closely held payees through STP in three ways:

1. Reporting actual payments in real time

The first option involves small employers reporting each payment to a closely held payee on or before each pay event (essentially using STP ‘as normal’).

2. Reporting actual payments quarterly

The quarterly option involves lodging a quarterly STP statement detailing these payments for the quarter, with the statement being due when the client’s activity statement is due.

3. Reporting a reasonable estimate quarterly

The third option involves reporting broadly in the same manner as the quarterly option referred to above (i.e., a quarterly STP report). However under this option the entity would report estimates of reasonable year-to-date amounts paid to employees. This option is similar in some ways to the PAYG instalment system, with employers potentially subject to penalties if the amounts paid to individuals are under-reported.

 

It is also important to note that small employers with only closely held payees will have up until the due date of the closely held payee’s individual income tax return to make a finalisation declaration for a closely held payee.

These changes should allow some level of flexibility in relation to determining and making payments to closely-held payees (e.g., directors of family companies, salary and wages for family employees of businesses). However, it will still be important to ensure clients are aware of the new reporting obligations and the necessity for ongoing planning throughout the year, to prevent being caught out at year-end. out at year-end.

 

If you want more suggestions and seek for assistance about trusts, call BOA & Co. accountants on 02 9904 7886 and our Trust Specialist will be pleased to assist you.

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Know Changes to the Application of Foreign Surcharges for Trusts Holding NSW Residential Property

The State Revenue Legislation Further Amendment Act 2020, which came into effect in New South Wales on 24 June 2020, includes changes to “foreign person surcharges” for purchaser duty and land tax relevant to residential land in NSW owned by discretionary trust.

So, if you are concerned about some changes of foreign surcharges for trusts holding NSW residential property, this article can tell you more about it.

Surcharge Purchaser Duty & Surcharge Land Tax

Surcharge purchaser duty (since June 2016) and surcharge land tax (since the 2017 land tax year) have applied to ‘foreign persons’ acquiring or holding NSW residential property. Currently, surcharge purchaser duty is 8% and surcharge land tax is 2%, in addition to ordinary rates.

Where an interest in a property is acquired directly or indirectly by or held through a discretionary trust, the trustee of the trust may be liable for foreign surcharges if any one of the potential beneficiaries is a foreign person.

Each beneficiary in a discretionary trust is deemed to have the maximum percentage interest in the income or property over which the trustee may exercise a discretion to distribute.

New Measures

There are several new changes which may influence your prior discretionary trusts and the future planning.

Firstly, the new measures provide that a trustee of a discretionary trust holding NSW residential property is deemed a foreign person unless the trust deed expressly excludes foreign persons as beneficiaries and irrevocably prevents foreign persons from becoming beneficiaries.

It is important to keep in mind that a discretionary trust that does not exclude foreign persons as beneficiaries will be liable to foreign person surcharge purchaser duty and surcharge land tax even if the trust has never distributed to a foreign person and intends to never distribute to a foreign person. So, it is essential for trustees to clarify relevant terms in the discretionary trust.

Secondly, the new measures also contain transitional provisions that have retrospective effect to the time the surcharges were introduced in 2016/17.

Gradually, if a trustee incurred the surcharge purchaser duty and surcharge land tax, they could claim a refund of the surcharge. However, for this to apply, the trust deed must be varied before 31 December 2020.

From our perspective, it is necessary to check your previous discretionary trusts because Revenue NSW may reassess relevant discretionary trusts for previous transactions or years to include surcharge purchaser duty or surcharge land tax if they find that the deed for the relevant trust has not been amended by 31 December 2020. If you are planning foreign surcharges for trusts in the future, it is better to read the new measures.

Potential Beneficiary

We have known, it is now essential for trust deeds to include provisions that exclude foreign persons as beneficiaries as well as provisions that irrevocably prevent foreign persons from becoming potential beneficiaries.

A person is a ‘potential beneficiary’ of a discretionary trust if the exercise or failure to exercise a discretion under the terms of the trust can result in any property of the trust being distributed to or applied for the benefit of the person.

Thus, to avoid being a foreign trustee, the potential beneficiary must be clarified. The discretionary trust must meet both of the following requirements:

  1. no potential beneficiary of the trust is a foreign person (the “no foreign beneficiary requirement”); and
  2. the terms of the trust must not be capable of amendment in a manner that would result in a foreign person being a potential beneficiary (the “no amendment requirement”)

Considering the new changes, we are suggesting clients to reassess their discretionary trust deeds where the trust holds NSW residential property and, if necessary, seek advice about varying the terms to comply with the requirements as soon as possible.

If you are interested in knowing more about foreign surcharges for trusts which may impact your future planning, careful consideration should also be made because the duty and land tax surcharge provisions operate differently in different jurisdictions.

If you want more suggestions and seek for assistance about trusts, call BOA & Co. accountants on 02 9904 7886 and our Trust Specialist will be pleased to assist you.

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Using your SMSF for Property Investment

It became possible for SMSFs to borrow money to fund a direct property purchase. And, SMSFs have become an increasingly popular choice for Australians in recent years.

 If you are considering buying a property through SMSF, it is necessary to make sure you know what to do. Here is a guide to use your SMSF to buy a property.

What Is a Self-Managed Super Fund (SMSF)?

A self-managed super fund (SMSF) is a savings account for your retirement that you manage yourself, rather than one that is managed by a superannuation providers (such as Australian Super, REST Super etc). You will be able to pool your existing super balances to your SMSF and invest under your own discretions.

 So, when considering investing in property through a self-managed super fund (SMSF), it is important to learn about SMSF property rules. Investing in the property market using a self-managed fund enables you to select all kinds of property, including residential, commercial, and industrial. However, you also need to consider what is the best option for you since different types of properties have different investment rules.

Residential Property Investment

It is important to make sure that you can’t buy residential property through your SMSF if you intend to live in it, or for any other trustee or anyone related to the trustees – no matter how distant the relationship.

 You cannot invest in a residential property rented by you, or any other trustee or anyone related to the trustees, or any family members.

 Please keep in mind that the SMSF trustee, as well as their relatives and the fund’s members, cannot benefit from the property invested through SMSFs.

Also, you cannot consider an existing residential investment property you want to transfer it into SMSF.

 In short, you can invest in a residential property, but only to rent it out to the market.

Commercial Property Investment

Compared with the limitation of residential property investment through SMSFs, investing in commercial premises through an SMSF has some advantages.

Holding commercial properties in an SMSF can be open to all SMSF trustees. To buy a commercial property in an SMSF, a fund may apply for a specific SMSF loan. Nevertheless, the requirements are stricter than traditional lending with tighter loan to value ratios.

Many small business owners use their SMSF to buy business premises and then pay rent direct to the SMSF. Holding business premises within an SMSF can provide asset protection against any future claims or liabilities that could result from operating their business, which means if the business goes belly up, their properties are still safe. It is important to note, the rent paid must be at the market rate (no discounts) and must be paid promptly and in full at each due date.

Further, since the property is held in your SMSF, you can secure your business’s tenancy for the longer term. It will have benefits of asset protection.

What Benefits Can You Acquire?

Apart from some advantages of commercial property investment, there are also other benefits when you consider purchasing a property through SMSFs.

1. Tax Benefits

There are significant advantages to owning property through an SMSF. First, your super fund will be taxed at 15 per cent on rental income or 10% on capital gain (subject to CGT discount rules), which is considerably lower than most people’s personal tax rates.

Second, your capital gain tax will also be discounted if the properties are held for longer than 12 months.

If the property is purchased through a loan, the interest payments are tax deductible to the fund. If expenses exceed income there is a taxable loss that is carried forward each year and can be offset on future taxable income, but please keep in mind that any tax losses cannot be offset against your personal taxable income outside the fund.

2. SMSF Funds Can be Investing 100% into Commercial Premises

When investing in commercial properties, SMSF funds have the option of investing 100% into commercial premises if a member of the fund runs a business. This is an attractive advantage for small businesses who want to own the premises from which they run. Investors or businesses which already own a commercial property can contribute the property to the SMSF. But please note that transferring property may have capital gains, stamp duty and tax implications, so always get advice before making plans.

When you are thinking of leasing the property to a related party, it must be done on the same terms as it would with an independent third party. If you were leasing to an independent third party, a lease arrangement needs to be in place, clearly outlining the terms and conditions of standard commercial agreements. Market rate rent will need to be paid regularly into the SMSF bank, and the property will need to be periodically independently valued.

3. SMSF Funds Can Borrow Money to Invest

SMSF can be leveraged via loans to acquire assets. There are many loan products from different banks and private lenders, max LVR of 70% can be achieved. Borrowing to buy property through an SMSF is achieved through a limited recourse borrowing arrangement (LRBA).

 When implementing leveraged strategies within SMSFs, it is important to document the assets correctly, especially if the asset being purchased is an interest in another asset-such as a tenants-in-common interest in a property.

Tips before Option

There are some tips you need to keep in mind before you decide to select this type of investment, for example:

Borrowing requirements for an SMSF is generally stricter than a normal property loan that you may take out as an individual. Also, there can be substantial fees and charges associated with the purchase, ownership, and subsequent sale of a property in an SMSF. Remember that loan repayments must be paid from your SMSF. So, you need to ensure the income in the super fund will cover these costs and allow for growth.

And you are responsible for Compliance. The ability to buy property in your SMSF with borrowings would be with some very strict rules and obligations that you may not be familiar with since they are not criteria that exist outside an SMSF.

Using SMSF to property investment is becoming more popular in Australia because it can be another investment choice to diversify your investment assets.

 If you want more suggestions and seek assistance about SMSF, call BOA & Co. accountants in Chatswood on 02 9904 7886 and our SMSF Specialist will be pleased to assist you.

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Advantages and Disadvantages of a Discretionary Trust

If you are considering starting your business through a discretionary trust, it is important to understand how the discretionary trust will impact your business running and understand this structure is appropriate for meeting your purposes. In this article, we’ll explain the advantages and disadvantages of a discretionary trust.

What Is a Discretionary Trust?

Discretionary trusts are often called “family trusts” because they are usually connected with tax planning and asset protection of family members. In a discretionary trust (or family trust) the beneficiaries do not have a fixed entitlement or interest in the trust funds. The appeal of a discretionary trust is that the trustee has better control and flexibility on the disposition of assets and income because the nature of a beneficiary’s interest is that they only have a right to be considered by the trustee in the exercise of his or her discretion. This offers a great deal of flexibility, but might seem too nebulous for some stakeholders.

So, this business structure may work well for one business, but may not be the best option for another business. That’s why it is essential to balance the advantages and disadvantages of a discretionary trust.

Advantages of Discretionary Trusts

There are several benefits of discretionary trusts when you determine to operate your business through a discretionary trust. It may be more suitable to achieve some business objectives.

1. Flexible and Easy Distribution of Trust Income and Capital

Discretionary trusts provide ways for the trustee who has better control and flexibility on the disposition of assets and income. The trustee could use their discretion to change the allocation of funds to beneficiaries without having to make any major changes.

2. Asset Protection

A Trustee of a discretionary trust holds the property beneficially for the beneficiaries. Property held by a person as trustee cannot be taken by a creditor in bankruptcy, unless the debt relating to the creditor was a trust debt. Similarly, property held by a company, as trustee for a trust, cannot be taken by creditors in a liquidation of that company unless the debt is a debt of the trust.  Any properties held in trust can only be attacked by creditors of that trust.

3. Tax Efficiency

Discretionary trusts allow for the accumulation of assets for beneficiaries.

Then, the trustee can distribute income which is regard to tax-specific individual circumstances. Such ‘income splitting’ can minimise overall family tax obligations if the trustee chooses to distribute the trust income to the beneficiaries that have an unused tax-free threshold or a lower marginal tax rate. For example, trust income may be paid to a wife who is on a lower tax rate or to a private company associated with the spouse. The way a trustee distributes income can be changed from year to year to reflect marginal rates for that year.

4. Discount on Capital Gains

If you select your company as a discretionary trust, the trust entitled to a discount on capital gains made on the disposal of assets held by the trust for longer than 12 months. Other tax benefits include availability of the 50% CGT concession where capital gains are distributed to natural person beneficiaries; potential for application of the CGT small business concessions; and capacity for loans to be made to beneficiaries tax-effectively and with flexibility.

Disadvantages of Discretionary Trusts

Unfortunately, there are also some disadvantages when you choose the discretionary trust.

1. Family Trust Distribution Tax

This Family trust distribution tax applies when a distribution is made outside of the “family group.”And a family trust does pay tax is if the income isn’t distributed to its beneficiaries. In this case, the trust gets taxed at the highest marginal tax rate. So, it’s highly important for trustees to make the election and choose the appropriate “test individual” for the family group, and the “family group” is designated by making the election.

2. Losses cannot be distributed

The trust structure cannot distribute capital or revenue losses to its beneficiaries. Hence, when a trust incurs a loss, beneficiaries are not able to offset that loss against any other assessable income such as salary, interest, dividends etc.

3. Beneficiaries Lack Legal Interest in Trust Property

Since the trustee or trustees can use their discretion to change allocations, beneficiaries don’t have certain legal interests in the trust property. Beneficiaries can’t rely on receiving their “share” of the assets because allocations could be changed on a whim.

Although there are some disadvantages of discretionary trusts, this type of trust is still a common business structure in Australia because it maintains a high degree of flexibility and protection for beneficiaries.

Although there are some disadvantages of discretionary trusts, this type of trust is still a common business structure in Australia because it maintains a high degree of flexibility and protection for beneficiaries.

If you want more suggestions and seek for assistance about discretionary trusts, call BOA & Co. accountants in Chatswoodon 02 9904 7886 and our Trust Specialist will be pleased to assist you.

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Make Trusts Part of Your Future Planning

Clients often ask, “Why do I need a trust?” This question comes up when people want to make lifetime gifts to their children in the future, and even more frequently when it comes to the potential tax consequences which can arise where they are misused.

A trust can provide some protection from creditors and can accommodate a relationship between employers and employees. In family matters, the flexibility, control, and limited liability aspects relevant with potential tax savings, make trusts very popular.

What Is a Trust?

A trust is a legal concept that can look complex, but when explained, are easier to understand. A trust is a legal obligation or a relationship that is recognized by the courts which exists where one party gives a second party (the trustee) the ability to hold asset or property for a third party (the beneficiary). The trustee can be an individual, group of individuals or a company.

There can be more than one trustee and there can be more than one beneficiary. Where there is only one beneficiary the trustee and beneficiary must be different if the trust is to be valid.

Common Types of Trusts

Although the basic structure of different trust types is pretty much the same, there are several different types of trusts with different aims and characteristics. Generally, there are six common types of trusts:

1. Unit Trusts

Unit trusts are usually fixed trusts where the beneficiaries and their respective interests are identified by their holding “units” much in the same way as shares are issued to shareholders of a company. The beneficiaries are usually called unit holders.

For example, it is common for property that the trustee owns the property of the trust and distributes each year, income of the trust, to various unit holders with a common purpose. This common purpose includes minimizing the total income tax, capital gain tax and asset protection. Also, investment trusts (e.g., managed funds) and joint ventures can be structured as unit trusts.

Furthermore, a fixed trust is eligible for the land tax threshold. Revenue NSW’s definition of a Fixed Trust states that it is a trust where the beneficiaries (or Unit Holders) are considered to be owners of the land at the taxing date of midnight on 31 December prior to the tax year. This type of Trust applies only to NSW.

2. Discretionary Trusts

These are often called “family trusts” because they are usually connected with tax planning and asset protection of family members. In a discretionary trust (or family trust) the beneficiaries do not have a fixed entitlement or interest in the trust funds. The appeal of a discretionary trust is that the trustee has better control and flexibility on the disposition of assets and income because the nature of a beneficiary’s interest is that they only have a right to be considered by the trustee in the exercise of his or her discretion.

Also, a Family Trust Election (FTE) is a choice by the trustee of the trust to specify a particular individual around whom the family group is formed. Why should some clients consider making FTE? A trust is a family trust at any time when a family trust election (FTE) for the trust is in force. Generally, an FTE is in force from the beginning of the income year specified in the FTE (the election commencement time). The FTE must also specify an individual who forms the point of reference for defining the family group that is considered in relation to the election.

There are some circumstances a trustee should consider making FTE: the trust receives franked dividends, the trust has losses, the trust owns shares in a company with losses, to bring the trust within the family group of another trust, or where the trust is involved in a restructure under the new small business restructure roll over relief.

3. Holding Trusts (Bare Trusts)

Where there is only one trustee, one legally competent beneficiary and no specified obligations, the beneficiary has complete control of the trustee (or “nominee”). Put simply, as for property, a bare trust arises where the trustee simply holds property of and on behalf of the beneficiary. The trustee has no discretion and no active duties other than to transfer the property to the beneficiary when required.

When considering the use of a Bare Trust by a SMSF to borrow money and purchase assets, please keep in mind an SMSF can only borrow money to purchase an asset using a limited recourse borrowing arrangement and in such borrowing arrangements the SMSF Trustee receives the beneficial interest in the purchased asset but the legal ownership of the asset is held on trust by another holding trust or what is sometimes called a Bare Trust.

4. Hybrid Trusts

A hybrid trust, as the name suggests, is generally a hybrid of a discretionary and a unit trust. This type of structure is attractive because it contains the advantages of both and is an extremely useful structure. You can split the trust up into units while also having beneficiaries to distribute to at your discretion. The trustee of a hybrid trust has the power to allocate income and capital among the beneficiaries in a standard discretionary trust.

There are several advantages when considering hybrid trust, for example, asset protection, fixed interest, flexibility of distributions, capital gains tax, tax-free distributions, entry of new parties, employment benefits and low-cost. Make it with more details, as for capital gains tax, Hybrid Trust can help in redeeming units without triggering CGT, and for CGT to only be assessable in the hands of beneficiaries (although this depends on how the trust deed is drafted and detailed advice should be sought). Also, it is generally easier for tax-free (or low tax) distributions to be made through a Hybrid Trust as compared to a unit trust or a company.

5. Testamentary Trusts

A testamentary trust, often called a will trust, is an agreement made for the benefit of a beneficiary and only effective once the trustor has died. The assets included in a testamentary trust are overseen by the nominated trustee, whose job is to distribute the trust’s assets to beneficiaries complied with the trustor’s wishes.

6. Self-managed Superannuation (SMSF)

All superannuation funds in Australia operate as trusts. The deed sets up the basis of calculating each member’s entitlement, while the trustee will normally keep discretion regarding to such matters as the fund’s investments and the selection of a death benefit beneficiary.

There are also other different types of trusts which can satisfy additional specific needs. For example, instalment warrant trusts (superannuation), charitable trusts.

If you want more suggestions and seek for assistance about trusts, call BOA & Co. accountants in Chatswood  on 02 9904 7886 and our Trust Specialist will be pleased to assist you.

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Tips for Freelance Tax Preparation

 

Individuals who have been utilized in conventional work settings are thinking that it’s essential to enhance or supplant their revenue sources. While some intentionally exit their positions, others might be the result of cutting back and cutbacks. In any case, numerous who hold energy for their calling discover options, for example, redistributing, to get back in the work power. It is imperative to remain side by the side of tax laws that sway independently employed people. Here are three significant tax contemplations.

Tip #1 Reduce Taxable Income

When documenting salary taxes, numerous independently employed entrepreneurs are astounded to find that they might have brought down their taxable pay and paid less in taxes during the year. It is imperative to have an arrangement set up that incorporates tax decrease systems. For instance, one frequently missed strategy is retirement investment funds. Adding to a Self Employed Pension Plan is an excellent method to gather non-taxable investment funds and keep a more significant amount of the cash you acquire. Talk with a tax bookkeeper to guarantee that you are boosting benefits around there.

Tip #2: Remit Estimated Tax Payments

Pay tax retentions are not removed from instalments that you get as a consultant. Yet, because no tax is retained doesn’t imply that the administration isn’t searching for you to send them in. The top worry for most freelancers is the amount to cover in assessed taxes and when to send them in. To decide the measure of taxes due you should figure your gross pay. A salary tax adding machine and tax schedule are assets that assist you with assessing sums and make convenient instalments. Furthermore, if state and nearby taxes apply, you should transmit instalments to them also.

Tip #3 File the Right Tax Forms

Freelancers can decide to work as one of a few business elements including Sole Proprietor, Partnership, Limited Liability Company, “S” Corporation, or “C” Corporation. Every one of these choices utilizes an alternate tax structure for revealing purposes so ensure that you know which one to apply.

Filling in as a free-lancer has numerous advantages, including adaptability and boundless salary potential. By the day’s end, it isn’t the amount you make that is important. It is the amount you can reinvest and multiply to make the way of life that you want.

 

Incredible Tips for Freelance Tax Preparation

Setting your work routine and working where you favour may seem like a definitive method to get by with opportunity and portability. Each openwork door may have difficulties, and this is genuine regardless of whether you work in an independent organization. The means to a fruitful separate encounter might be more straightforward than you envision, and planning taxes might be the ideal method to help other people and bring in cash on your terms.

  1. See how taxes collected

Paying taxes is extraordinary on the off chance that you work for yourself rather than being a representative and getting a W-2 structure from an organization. You may get a 1099-MISC design as a record of your profit, and this is the thing that you should submit when you document your taxes. Else you have to follow your pay.

  1. Track your costs and pay

You should think about your independent work as a business, and this implies that you should keep a detailed record of your pay and working costs. You should keep receipts, solicitations, and other relevant data composed consistently. Keep these records in a protected document in your office for when you begin to set up your taxes.

  1. Make standard, assessed tax instalments

Representatives can have taxes retained from their checks. However, it would be best if you approached the lead in setting tax instalments if you work independently. Falling behind can prompt risky budgetary conditions, and you might be confronted with punishments if your tax instalments fall behind also. Fortunately, you can make online instalments, and this can dispose of the weight of concocting a massive whole of money when your return is expected.

  1. Comprehend your derivations

Costs of doing business come in numerous structures, yet real deductible costs are described as being vital and typical for the sort of business being referred to. The operational expense may incorporate protection, lease, promoting, utilities, and individual vehicle use.

  1. Post a gaining benefit

Posting a misfortune every year might be cause for the IRS to see your business tries as an interest rather than an approach to gain salary and make a benefit. This may prompt expensive reviews, so you should practice care as you direct your independent work. However long you produce a decent measure of income and have separate accounts, you ought to be protected. Check with your tax proficient.

Taxes are a yearly event, yet having an arrangement can keep this classic piece of procuring a living from wrecking your fantasy about working freely. Work with experts and buy the apparatuses essential to keep excellent records, like Quicken, and plan great tax reports, perhaps H&R Block Business Edition.

Do you think you may qualify for these deductions? Call BOA & Co. accountants in Chatswood on 02 9904 7886 and our SMSF specialist will be pleased to assist you.

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