Month: August 2021

Breaching The Complex Laws That Surround SMSFs Could Land You In Hot Water

Posted on by Adam_Admin

There is a proverb that says that it is better to ask for forgiveness than to ask permission.

Generally speaking, the idea behind this saying is that if you ask for permission and you do not receive it, then the punishment will be a lot harsher than if you do the thing that you asked to do and get caught afterwards.

For example, if your children were to ask you if they could go to the local pool, and you deny them that request, the chances are that they would be in more trouble than if they simply circumvented you, and went anyway. It may also be said that you may never get caught doing the wrong thing, but asking for permission to do the act could have someone keeping watch over you.

The same cannot be said for Self Managed Superannuation Funds.

It is never a good idea to break the rules and then ask for forgiveness in that instance (or at least not intentionally). SMSF laws are complex. Breaking the rules could be thought of as being quite easy, but is not an excuse.

The Australian Taxation Office (ATO) makes each and every person appointed as a trustee sign a declaration that they are aware of the rules and enforce that that declaration must be witnessed.

Then, after signing a declaration that you are aware and know the rules, they also force you to appoint an independent auditor to thoroughly check everything you have done and to make sure that you have not breached any of the rules.

If they find out that you have breached the rules then that auditor must then report the breach to the Tax Office.

Once it has been reported, this breach must be addressed as quickly as possible. It is even better if you rectify the breach before the auditor reports the breach. Your attitude towards rectifying the breach has a lot of impact on the action that the Tax Office will take against you as a trustee.

Where you can show that this was an inadvertent breach and you fixed it immediately upon realising you made the breach then most likely you will not receive any type of punishment.

Conversely, where the breach was made knowingly and you show hesitancy in rectifying it you should expect to feel the full wrath of the regulator. The ATO does not take lightly to a person not administering their super to the letter of the law.

What Punishments Can The ATO Give You?

There are a number of sticks the ATO has to punish wayward SMSF trustees. The most common punishment used is a direction to do something. For example, you might have acquired an asset off a member that was against the rules. In this case, the ATO would direct you to sell that asset back to the members.

Further on the next level of punishment would be education directives. The ATO has the authority to force you to do some formal SMSF Trustee training. There are a number of providers of these training courses.

That is the extent of the punishments that do not incur monetary penalties. However, the next level of punishment is significant fines for each individual trustee or director of the corporate trustee. These fines can be up to $10,000 per person.

The biggest punishment that can occur is to classify the SMSF as “non-complying,” where the cost of this will be 47% of the accumulated taxable component of the whole fund.

Essentially, that’s half of your super taken from you.

That’s why we always recommend complying with the rules. When you are unsure of the rules, then you should seek further clarification from an expert (and keep off of the ATO’s naughty list while you’re at it).

Renovations, DIY and Repairs – Here’s The Tax Information You Need To Know As A Property Investor

Posted on by Adam_Admin

As a property investor, you might find yourself implementing repairs and renovation work onto a property to ensure that you are maximising its value on the market. However, though both can be claimed on your tax return, it’s of paramount importance that you know how to claim them. Getting it wrong can be both costly, and unlawful.

A rental property improvement is a renovation where something is improved beyond its original state and must be claimed with depreciation. This means that you are claiming a deduction for the decline in the value over the effective life of the renovation. For example, a rental property improvement that could be claimable by a property investor could include a bathroom getting retiled.

Maintenance and repairs however can be claimed differently, with all records kept containing accurate information on that work. This will assist in working out the depreciation of assets of the property.

A depreciation schedule is a report that outlines all available tax depreciation deductions for a residential investment property or commercial building. These depreciations can be claimed in your tax return each financial year and could help you to save thousands.

Investors who renovate and lodge their tax returns prior to ensuring that they have updated their tax depreciation schedule correctly could get caught out in making a mistake between the two types of work. Those who fail to properly record rental property improvements in a tax depreciation schedule risk making inaccurate claims and inviting the scrutiny of the Australian Taxation Office (ATO).

Your tax obligations and entitlements when renovating your property may change depending on how you go about it. Depending on whether you are a personal property investor, engaged in the profit-making activity of property renovations or carrying on a business involved in renovating properties, you will have to abide by certain requirements outside of maintaining the depreciation schedule.

Personal Property Investor

As a personal property investor engaging in renovations to a property:

  • The net gain or loss gained from the renovation is treated as a capital gain or capital loss.
  • Capital gains tax concessions such as the CGT discount and the main residence exemption may reduce your capital gain.
  • You will not be required to register for GST as you are not conducting an enterprise.

Profit-Making Activity of Property Renovations

Consider yourself a ‘flipper’ of properties? You will be required to:

  • Report your net profit or loss from the renovation in your income tax return as a result of the profit-making activity.
  • Have an Australian business number.
  • May be required to register for GST if the renovations are substantial.

In The Business Of Renovating Properties

If you are carrying out the business of renovating or flipping properties:

  • They are regarded as trading stock (even if you live in one for a short period of time.
  • The costs associated with buying and renovating them form part of the cost of your trading stock until they are sold.
  • You calculate the business’s annual profit or loss in the same way as any business with trading stock
  • You’re entitled to an Australian business number (ABN)
  • You may be required to register for GST if the renovations are substantial.

In this instance, CGT does not apply to assets held as trading stock. Similarly, the CGT concessions (such as the CGT discount, small business concessions and main residence exemption) will not be applicable to the income gained from the sale of the properties.

If you are concerned about any of the topics discussed above, or want to know more about claiming property improvements on your tax return, you can come and speak with us for further information and advice.

Finding The Right Partner For Business Is As Serious As A Marriage – And Just As Complicated

Posted on by Adam_Admin

Making decisions as the owner of a business can be a world of difficult choices, but none so much as deciding that your business requires a partner. It’s a critical, strategic decision for the business that you won’t want to get wrong.

Approach your search for the right business partner to suit your business as you would a life partner. As a major legal covenant, a partnership is not unlike a marriage of sorts in the business world. It’s also something that you won’t want to rush into. A good partnership requires:

  • A shared vision and goal
  • Mutual hard work
  • Open communication
  • Mutual respect
  • A balance of power
  • Effective conflict resolution

You might already have an idea of what you are looking for when it comes to a business partner, but it’s still important to identify key aspects of what makes a good one.

Critical Skills & Experience

A candidate for a business partner should possess skills and experience that can be brought to the table which complement that which you already possess. They may possess strengths that you simply do not, which can make it easier to start, plan, grow and run a business.

For example, you may be a customer relations extraordinaire but struggle with the operational aspect of business development. That might be the skillset you look for in a business partner.

If the candidate for a business partner can also provide you with the resources and credibility for your business on top of sharing your vision, this can be a gamechanger. Those resources could include a secure business network, industry connections, client list or specific credentials and expertise that can add value to your business.

Values, Entrepreneurial Spirit & Business Vision

You will need to be able to communicate effectively with your partner to make decisions, set goals and drive the business forwards. Aligning your values and business vision with your partners will help facilitate your business’s development and growth without hindrance.

Minimise The Personal Intruding On The Professional

If your prospective business partner is facing serious challenges in their life, they may translate over to the business. While giving someone a chance to challenge themselves is an honourable act, running a small business takes focus, time and tremendous energy that they may not be able to afford to give.

Personal & Business Ethics

A partnership should be a mutual and trusting relationship. Someone who values honesty and practices good personal and business ethics should be at the top of your list. You don’t want to be involved with someone whose moral code does not align with yours, or who could get you involved in legal matters that may besmirch you and your business’s reputation.

Also, if you cannot respect your partner or they cannot respect you on a professional level, your ability to work as a team will suffer, and your clients will read into that as a lack of professionalism. Never partner with someone that you do not respect, or who does not respect you.

In the event that you choose or have chosen a business partner that is not right for you, make sure that everything agreed upon for the partnership was set out in writing, as breaking the partnership is no easy matter. With a lot of legal ramifications that you may face in dissolving the agreement at play, having evidence and a plan can save you plenty of grief.

For assistance with drawing up partnership agreements, business planning or simple advice on anything brought up here, you can speak with us.

How Much Super Should You Have To Retire?

Posted on by Adam_Admin

Retirement might seem like a far off dream for many in the workforce, but it’s never too early to start thinking about how much money you might require to live comfortably in your golden years.

Your super balance will most likely fund your retirement, so knowing how well it is performing at your current age is a critical way to address performance issues and optimise its path going forward. You want to make sure you’ll be getting the most out of your super so that when it comes to retiring, you can afford the lifestyle you want.

The amount of super that you may need to live comfortably during your retirement may depend on a range of factors, such as expenses that you may incur, outstanding debts you may have and whether you will be eligible for other types and forms of income (such as through investments, savings, an inheritance or the Age Pension).

According to figures set out in March 2021, those who are looking to retire today (regarding individuals and couples around the age of 65) would need an annual budget of around $44,412 or $62,828 to fund a comfortable lifestyle. For a modest lifestyle, they would need an annual budget of $28,254 or $40,829 respectively.

Everyone’s situation is different, and their super balance will likely reflect those differences.

Men and women may have different super balances due to pay gaps, salary differences and potentially the amount of time they have actually spent working (maternity leave, working part-time versus full-time etc, taking time off work for travel, etc.). As an example, a woman in the 20-24 age bracket may have an average super balance of $8,051, while a man in the same bracket is expected to have an average balance of $9,481. In the 40-44 age bracket, the average super balance for men is $134,992, while women in that same age group may only possess $98,572.

So how can you make certain that your superannuation gets the boost it needs to fund your retirement? We can suggest the following:

  • Track down lost super to make sure that you’re not paying for multiple fees on different accounts.
  • Consider whether consolidating your funds might be a worthwhile option, to keep easier track of them.
  • Review your investment options (you may want to consider switching to a more growth-focused super investment option, for example).
  • Review your super at least once a year, and check the fund’s performance, fees that you are paying, what insurance you might have inside your super and if it is still suitable for your current needs.

If you’re looking towards your future, and want more advice on how to plan for your retirement with regard to your superannuation, you can speak with us or your super provider.

When Does A CGT Concession Or Exemption Apply To Your Small Business?

Posted on by Adam_Admin

Small businesses are facing a set of challenges once again that can make fulfilling tax obligations seem like a daunting task. However, as a small business, capital gains tax concessions on assets used to conduct your business may be of interest to you. These assets are known as “active assets” and can, for example, be a tangible asset (such as commercial property), or an intangible asset (such as goodwill).

The turnover threshold for such CGT concessions is $2 million, according to the ATO.  If your turnover is more than $2 million, then you need to satisfy an assets test.

There are stringent eligibility requirements and conditions that you must meet in order to access these concessions.

If you have owned an active business asset, you may only be required to pay tax on 25% of the capital gain when the asset is disposed of.

If you are 55 years of age or older, and are retiring or are permanently incapacitated (and have owned an active business asset for at least 15 years), you may not have to pay any CGT when disposing of an asset by sale, gift or transfer. You might also be able to contribute the amount that you make from this exemption to your super fund without affecting your non-concessional contributions limits (you can speak with us about this if you are unsure about this process).

If you are under 55, the taxable 25% of the disposal of an asset can be paid into a complying fund or a retirement savings account. There is then a full CGT exemption on the sale of an active business asset of up to $500,000 (the lifetime limit). Any amounts earned from this exemption to CGT may be able to be paid into your super fund without affecting the non-concessional contributions limit).

Disposing of an active asset, but are going to buy a replacement asset or improve on an existing one? You can defer your capital gain in this instance until a later year. The replacement asset can be acquired one year before or up to two years after the last CGT event in the income year that you choose the roll-over for.

If the asset is a share in a company or an interest in a trust, there will be additional conditions that you will be required to meet as well. If you are a small business, there are other CGT exemptions, rollovers and concessions specific to small businesses that you may be able to access, if you meet the eligibility criteria. These small business CGT concessions will reduce the taxable capital gain and in some cases result in no tax being paid at all on the gain.

Speak with us to find out what you may be entitled to when it comes to CGT and your business to ensure that you are doing the right thing with your tax obligations after selling an asset.