Author: Adam_Admin

Uncomplicating The Tax Treatment Of Life Insurance

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Have you recently purchased life insurance?

The type of cover, deductibility of premiums and treatment of claims make life insurance a complex topic for tax. It’s a topic that individuals and businesses alike seek assistance from accountants.

The deductibility of premiums and treatment of claims payouts can be a complex, nuanced topic. The opportunities and traps hidden in those complexities are significantly amplified for professionals with higher incomes and greater-than-average wealth.

For professionals who want to structure their life insurance to optimise the balance between cash flow, tax treatment and robust protection, here’s a high-level look at the issues.

Tax Considerations – Cover Outside Super

While premiums for death, TPD (total or partial disability) and trauma cover are not tax-deductible outside of superannuation, premiums for income protection and business expenses protection are.

On the flip side of that, claims payments from death, TPD and trauma policies are entirely tax-free, regardless of whom they are paid to, while income protection and business expense benefits are classed as income and need to be declared (business expenses payments would naturally offset the actual expenses they are intended to cover).

Special Tax Treatment Of Policies Held For Business Purposes

Some tax concessions are available to life insurance policies held for business purposes, including buy/sell agreements and those covering revenue lost in the event of the death or disablement of a key person.

In such cases, policies are generally held by the business with premiums tax-deductible to the business. However, claim payments are generally regarded as income or a capital gain, depending on the purpose of the cover, and therefore subject to appropriate tax. FBT can also apply where a business pays ownership protection premiums on behalf of individual owners.

Tax On Life Claims Paid Through Super

Death benefits paid through super are generally tax-free if paid to a dependent (a term strictly defined under the law). Benefits paid to non-dependents may include a tax-free component but are likely to be subject to tax on at least some of the balance. Depending on the circumstances, the applicable rate will either be 15 or 30 per cent.

With TPD lump sum benefits, a portion is likely to be assessed as tax-free, depending on the member’s eligible service period. The remainder is subject to a tax rate that varies according to the member’s age.

Other tax-optimisation strategies include taking benefits as an income stream to qualify for tax offsets, maximising the uplift in the tax-free portion of the benefit, and washing out taxable components.

For more information about tax and life insurance, consultation with a tax professional (like us) is advised. This can be a very complicated topic to discern, with many intricacies that you may require assistance with.

Starting A New Business In The New Year?

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The coming new year of 2023 may be bringing you a fresh start regarding your business adventures. You may even be looking to start your next adventure on your own terms.

Why not make the coming year your year to start a business?

Understandably, you may have concerns and trepidation about the process (particularly amidst current economic uncertainty). However, an excellent start to a business should consider strategising, planning and development.

Starting a successful business requires three things:

  • A good idea,
  • The right amount of capital you’ll need, and
  • Creativity.

However, with the challenges many businesses faced over the last few years, particularly those who were finding their feet and starting up, having just those three things to face 2023’s business environment might be a little daunting.

That’s why having a strategy in place for your business and a plan for its path in the future is of paramount importance.

Think Through Every Element Of Your Startup (From Top To Bottom)

An idea for your business is a great starting point, but articulating that idea to your investors with a solid foundation is even more critical.

Think about the questions that your investors might ask you about critical elements of your business, including your target audience, the competition in the field, your company’s goals and your potential marketing strategies, as well as potential questions investors might ask you about each of those aspects of your business.

Having solid answers in place will give your investors (and you) a better picture of the idea and your potential as a business innovator.

Draft A Business Plan 

Having a physical business plan that includes all the elements you brought forward to your investors or partners will help you as you move forward on your business trajectory, but also gives a map of your business goals.

Creating a business plan should be fairly easy as it is simply putting in writing what you have already discussed ahead of time with your investors.

You may also be able to speak with us about creating business plans at the beginning of your business and throughout your business’s lifetime.

Put Your Money Into The Resources You Need (Not The Ones You Want)

It might be tempting to shell out for the best and the flashiest equipment that your business could have a use for all at once, but it’s best to plan out your expenses. Determine your needs upfront and invest in them. Are you planning to have a physical space for your business, or can operations be conducted remotely? Putting the extra money into the critical resources and equipment that your business needs at the start may help you to produce a quality product and earmark your business

Don’t Skimp On The Marketing

Marketing is one of the most important business growth strategies but is often neglected or overlooked by new businesses. Use social media, create a website, set up a blog or create email campaigns to bring awareness to your business.

Hire An Accountant

An accountant is specially trained to manage your finances and keep them in good order.

While you might be able to keep track of your finances in the early stages of the business’s growth, we’re equipped to help when things start to pick up speed.

Start a conversation to find out how we can help your business today.

Advantages & Disadvantages Of Property Downsizing For Retirees

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Downsizing during retirement can help you reduce costs and put some more money in your pocket so that you feel more secure about your finances during retirement.

Downsizing by selling your property has advantages and disadvantages, which you should evaluate before making this decision.

Advantages

  • Increased cash flow: Downsizing should reduce your mortgage payments and free up extra money to invest or spend. This will give you more flexibility with your money in your retirement years.
  • Easier to maintain: A smaller house takes less effort and is easier to clean and maintain.  Approaching retirement, you may want to reduce the amount of time you have to spend cleaning your house so that you can participate in other activities.
  • More convenient: A new house will mean that you can choose a layout, fittings, locations and services that are more suited to your updated needs. While your old house might be close to schools, you may want to opt for a house that is closer to a recreational centre or the city centre (for accessibility to shops and services.
  • Lower insurance and utility bills: A smaller home generally costs less. Both in terms of insurance and also in terms of upkeep and maintenance (such as heating and cooling).

Disadvantages

  • Less space: A small house means that you have less storage for things. You might have to make some difficult decisions about letting go of your possessions. Alternatively, you could consider leasing a storage space – although this would cost extra money.
  • Less flexibility: There may be less privacy due to fewer or no guest rooms or less space for entertainment. If you regularly have many guests coming over, this might make downsizing unideal.
  • New neighbourhood: Getting comfortable in your new suburb might be difficult. You might have to check out your neighbourhood before and after moving into the new place.
  • Emotional connection: A family home is full of memories, and there is a strong connection with it. This can make it difficult to let go.

Eligibility 

From 1 July 2022, eligible individuals aged 60 years or older can choose to make a downsizer contribution into their superannuation of up to $300,000 per person ($600,000 per couple) from the proceeds of selling their home.

For downsizer contributions made before 1 July 2022, eligible individuals must still be aged 65 years or older at the time of making their contribution

On 3 August 2022, the Treasury Laws Amendment (2022 Measures No. 2) Bill 2022 was introduced into Parliament. In this, the Government has proposed that the downsizer eligibility age be further reduced to 55 years. This measure is not yet law.

Downsizing has financial benefits, but it does come with emotional costs and is a fairly significant decision to make. It may not be a solution for everyone, but it is one that you should consider carefully.

It is important to discuss the implications with your advisor and, perhaps also, your family members before determining how you will proceed.

FBT Liability During Natural Disasters & Emergencies

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Australians can experience a range of natural disasters, such as floods, bushfires, tropical cyclones, severe storms and even earthquakes. These events can cause devastation to communities and financial hardship for individuals and businesses.

While FBT may not be at the forefront of your mind when helping your employees after an emergency, it can result in potential exemptions depending on the assistance provided.

It is worthwhile to know what kinds of benefits you, as a business owner, can provide for different emergencies that will be excluded from FBT. Businesses that provide benefits to employees during an emergency situation are likely to have assistance costs be exempt from fringe benefits tax (FBT).

Exemptions will apply to benefits you provide to employees who are being impacted by or will be potentially impacted by:

  • A natural disaster such as a bushfire, flood or cyclone.
  • An accident such as a car accident.
  • A serious illness such as cancer.
  • An armed conflict such as a war.
  • A civil disturbance such as a riot.

The benefits you provide to your employees that can be exempt from FBT include health care, temporary repairs or emergency needs such as food supplies, clothing, accommodation, transport or household goods. These can be of great use to employees looking to get back on their feet.

Short-term benefits you provide to an employee, such as temporary repairs to damaged property due to a natural disaster, are exempt from FBT. However, long-term employee benefits after an emergency event will not be exempt, such as a replacement car, new house or ongoing renovations.

When providing health care, certain requirements must be followed. FBT exemptions only apply to health care provided:

  • For an employee of yours or from a related company.
  • On your premises or the premises of a related company
  • By a company doctor at an accident site.
  • At or near an employee’s worksite.

If you decide to pay for your employee’s ongoing medical or hospital bills, then the FBT exemption will not apply.

The benefits costs would be deductible to the employer but not assessable to the employee and will not appear as part of their salary and wages on their payment summary.

These benefits can be of use to not only the individual employees but to your business as well. Regarding FBT, exempt benefits can be a great way to lower the tax bill. They also provide a way to assist your employees during times of great hardship.

However, to ensure you’re maximising your FBT benefits potential, consult with a registered tax agent or adviser for the right information and assistance in handling these matters.

Setting The Right Salary For Your Employees

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Setting the right salary level for your employees is essential to finding the right people to help you run your business. However, it can be difficult to determine the most appropriate level based on your business and what it can afford while also being attractive to prospective employees.

When setting pay levels, particularly for advertising new positions and interviewing candidates, there are many factors to consider to ensure that you are attracting skilled personnel with the desired amount of knowledge and experience to perform well within your business.

Skill Level and Experience

Some of the first things to consider when determining a salary level are the skill set and amount of experience necessary for the performance of the role. If on-the-job training is provided, likely, a specific skill set is not required, and the rate of pay can be lower to offset the cost of the necessary training. Conversely, if a certain amount of industry experience is essential for performing duties within the role, you may need to offer a higher remuneration level.

Education and qualifications can also influence the rate of pay that you should offer; for example, if a specific university degree in Business or Accounting is required for the position, you will have to offer a higher salary level to attract people who have put in the time and money required to attain these qualifications.

What is Your Competition Offering?

You should have a good idea of what salary ranges other organisations within your sector are offering for similar roles. The best way to establish the going rate is to monitor job advertisements, both online and in newspapers and trade journals. There are also several online services designed to help employees determine what their skills and experience are worth within the workplace. Using these services, often found on recruitment websites, you can input the necessary characteristics for the position and calculate what an appropriate salary might be.

What Can Your Business Afford?

Other factors specific to your business may also help in determining the right salary level for your employees. Consider the size of your business and the amount you can afford to offer to attract and retain the right person. Also, think about the region that the position is in – if it is in a large city with a high cost of living, it might be necessary to offer a higher pay rate than in smaller communities.

Other Benefits

If your business is restricted in the amount you can offer as a salary, think about what you have to offer other than money.

Often the right candidate will be attracted to an organisation that helps them to maintain their work-life balance by offering flexible working hours or extra holiday leave.

Showing potential employees that your business considers their personal needs as well as what they can offer you, possibly by providing them with a company car, access to private study cover or assistance with childcare considerations, can often be more valuable than a dollar amount.

Do You Need a Formal Structure?

To make decisions regarding salary levels easier for you in the future, it can be a good idea to implement a formal structure that will apply to all employees and positions. This would be particularly useful in larger businesses or those with a lot of movement within the company or high staff turnover. Such a structure would need to consider all of the above factors and be applied universally to all employees and candidates in the future.

Alternately, for smaller businesses, or ones where roles are more fluid, it can be more beneficial to offer salaries on a case-by-case basis. The lack of a formal structure would allow you to tailor remuneration packages to suit the needs of individual employees, possibly attracting specific people to a role or helping to retain valued employees within the company.

However you choose to set and review your salary levels, you must remain consistent. Salary levels should be set to reflect the skills and experience of the employee that is necessary to the performance of their role while being mindful of the strictures of your business while being careful not to discriminate against specific employee groups.

If you require assistance with reviewing your business’s performance, employee salaries or business cash flow, accountants like us are equipped to assist you. Find out how by starting a conversation with us today.

Strategising Your Risk Levels Of Super Fund Investments Could Pay Off

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When it comes to investing, there is always a certain amount of risk involved. The key to a great investment strategy is to discern how much risk you are willing to take.

The risk profile of your superannuation investment strategy should be determined by combining your financial goals and the time frame in which you want to achieve them.

As you get closer to retirement, you may care to reduce the risk profile of your investments.

Younger people are better positioned to deal with market fluctuations because they have more time to compensate for losses.

The returns you receive on investments are based on the income those investments can generate and the capital growth that the investments will experience. Investments can be broadly categorised into defensive and growth assets.

Growth assets typically have a better potential for high returns but carry short-term risks. Shares and property are examples of growth assets. Defensive assets, such as cash and term deposits, generally have a very low level of associated risk but will also yield lower returns.

By diversifying your superannuation investments between growth and defensive assets, you can fine-tune your portfolio to suit your circumstances.

Individuals running a self-managed superannuation fund should already have a robust understanding of their risk profile. However, if you are a member of a public fund it can still be possible to retain a high degree of control over your risk profile.

Some public funds offer broad investment categories that you can select (usually between five and ten). Others offer members a much higher degree of control over their portfolios, even going so far as to allow you to select specific companies to buy shares from.

Individuals interested in gaining a higher degree of control over their superannuation risk profile may wish to look at joining one of these more precise funds.

However, the downside is that these funds usually have much higher fees, potentially eroding the benefits of more control. Involved investors with an active interest in determining their risk profile may wish to investigate self-managed superannuation.

Before making any major decisions, consulting with a professional is advised.

FBT, The Holiday Season & Your Employees

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At the end of the year, you may look for extrinsic ways to thank your hardworking employees or faithful customers/clients.

A work Christmas/end-of-year party may be a method employed by many businesses to demonstrate their gratitude towards staff, but the expense can be a deciding factor.

Christmas/holiday parties are regarded as “entertainment” expenditures, which means they are not tax-deductible. The employer may have to pay FBT if the party costs $300 or more per person.

It may also be that an end-of-year party might not be feasible for your business this year.

Instead, it may be a better idea to thank your staff through the act of giving certain items known as “non-entertainment” gifts. These non-entertainment gifts must cost less than $299.99 but are fully tax-deductible and carry no FBT.

Non-entertainment gifts are usually exempt from FBT when the total cost of the gift is less than $299.99 (inclusive of GST). An employer can also claim tax deductions and GST credits for every non-entertainment gift to staff members. These gifts could include beauty or skincare products, flowers, wine, gift vouchers or hampers.

If you provide a similar gift to the spouse/partner of an employee, the FBT exemption will also be valid. This can be a nice way to say thank you to the hard-working members of your staff while promoting a positive work culture.

Providing your employees with gifts considered to be “non-entertainment gifts” but costing $300 or more (including GST) is less tax effective. Even though the gift giver can still claim a tax deduction and GST credit, FBT must be paid at 49%.

You can still give staff members entertainment gifts as a way of saying thank you, though this is a less beneficial and tax-favourable option from an employer’s point of view. Examples of entertainment gifts include tickets to a play, sports event, musical, theatre, or even providing a holiday.

These gifts may not be FBT payable if they cost less than $299.99 (including GST) or are claimable for a tax deduction or GST credit. However, if they cost more than $300 (including GST), an employer can claim a tax deduction and GST credit, but FBT is payable at 49%.

Some fringe benefits (such as these gifts) may need to be included in payment summaries. When the value of certain fringe benefits amounts to more than $2,000 in an FBT year, it is your responsibility to record that amount in your payment summary.

Want to know more about possible FBT exemptions that might apply to gifts you give to your employees this holiday season? Speak with us about how you can make this work for your situation.

Keeping Your Friends Close & Your Family Closer (Especially When They’re Staff)

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One of the greatest complaints small employers have is how difficult it is to find good employees. But there’s one place they often fail to search for new job applicants – the families and friends of their best employees.

After all, current employees who have great work attitudes probably have brothers and sisters with great work attitudes too. Before rushing headlong into hiring family or friends, consider the ups and downs.

Advantages

Family members and close friends often come into a business with a strong commitment to the company, more so than the average employee.

Because relatives may think of the company as an extension of the family, they may be more likely to be flexible and work into the evening and over weekends when needed, anticipating that they will personally benefit from the long-term success of the company.

You know family and friends well and are familiar with their capabilities and shortcomings. This may enable you to place them in just the right position. Also, your familiarity may allow you to train them more quickly than other new employees.

Disadvantages

A relative may take advantage of family status, knowing that it’s hard to fire them when you’re sitting down at the dinner table with them that night.

Other employees may see the hiring as nepotism, especially if the family member is given preferential treatment or given a position without having the appropriate experience or training.

Family problems can be brought into the workplace. It’s one thing to have a family disagreement at night and be able to leave it when going to work in the morning. But it is entirely different when you’re facing the same person at work; the strain may affect the entire business.

Managing The Mix

Hiring friends and relatives is tricky. If not handled well, it can sour the work environment. But there can also be great benefits, as long as you proceed carefully.

Your Business Is Not A Charity.

Do not hire someone’s relative just because they ‘need’ a job. If someone has trouble holding a job, you don’t want them either. Write a detailed job description. Make it clear that if the relative or friend doesn’t perform as expected, he or she will be let go. Hire on a probationary basis, establishing a two-week or month-long period to see how things work out.

The Right ‘Stuff’ 

Ask specific, detailed questions about the relative’s qualifications before you agree to interview them. People rarely see their relatives clearly. They’re likely to make comments such as “He’s a wonderful guy” or “She’s so smart.” That doesn’t tell you if they’ve had relevant work experience or training. While you want to hire people with the right attitude, leave yourself an out: “I’m not sure Chris has the right computer skills we need.”

Don’t Have Too Many Chiefs

It is advisable not to have relatives reporting to one another or working too closely together. It’s one thing to have siblings work for the same company in different areas, but if they work together on the same project, you’re likely to see old family patterns emerge. If something goes wrong, don’t be surprised if you hear: “He started it.” “No, she started it.”

The Trouble With Spouses 

Spouses or domestic partners working together can present many difficulties. There can be:

  • logistical issues: vacations or family emergencies may leave you doubly shorthanded.
  • And behavioural issues: a terrific, eager worker may change dramatically with a spouse around.

The dynamics of a couple’s relationship are stronger (and usually less comprehensible) than a boss/employee relationship. Moreover, in a small, new, or very risky company, having both breadwinners work for the same company puts a lot of stress on a family and their budget. That’s a lot of extra stress on you.

Be Cruel To Be Kind

Be the toughest on your relatives. It is essential to set ground rules so that relatives are clear they are not entitled to a ‘free ride.’ It is also important for other staff members to see this strategy in place. Before hiring a relative, make it clear to them that they will have to prove themselves and be held to the highest standards. Never supervise a relative directly.

Don’t Play Favourites

Make sure all the rules apply to all employees. Everyone has to be qualified, and they have to do their jobs well. Otherwise, they will not be hired, or they’ll get fired. Even if they’re your mother.

Binding Death Nominations Are An Important Part Of Your Estate Planning

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You must make a binding death benefit nomination to maintain control and certainty over who will inherit your superannuation assets after you pass away.

Contrary to what you may think, your will does not automatically control the payment of your death benefits. If you do not make a binding death benefit nomination, your super trustee will decide who your super passes onto.

Familiarise yourself with the death benefit nomination rules, so your super assets are paid on your terms after you are gone.

Binding And Non-Binding Death Benefit Nominations

You can make a binding or non-binding death benefit nomination depending on your super fund. A binding death benefit nomination provides the greatest certainty as the legal document binds the trustee to pay your death benefits to the beneficiaries you have nominated.

Some super funds do not offer binding nominations, so individuals make non-binding nominations instead. Non-binding nominations act as a guide to your trustee that they will take into consideration but are not obliged to follow. Your trustee may pay your death benefit to an individual you did not nominate if they feel they are more appropriate.

Lapsing And Non-Lapsing Nominations

Understanding your fund’s options for lapsing and non-lapsing nominations will help you keep your nominations up-to-date and binding. Lapsing nominations typically expire after three years and must be renewed. If your binding nomination lapses without renewal, it will be considered a non-binding nomination upon your death. Non-lapsing nominations are permanent unless you change them.

Changing Death Benefit Nominations

Life circumstances like divorce, marriage or the death of a nominated individual may trigger you to change your nominations.

You can amend, cancel or replace your death benefit nomination at any time, provided the nomination is validly concluded. Remember that a power of attorney can renew lapsed binding nominations if you are mentally incapacitated or unable to sign.

Eligible Beneficiaries

You cannot pay your superannuation death benefits to just anyone, as there are strict eligibility requirements. You may only nominate your dependents or personal legal representative.

Dependents are strictly defined by law. According to the legislation, dependents include

  • Your spouse, whom you are legally married to, in a registered relationship with or live with on a genuine domestic basis
  • Your child (including adopted and foster children) or your spouse’s child
  • Anyone in an interdependent relationship with you at the date of your death
  • Other persons who the trustee deems were financially dependent on you at the date of your death

You can also have your superannuation death benefit paid directly into your estate.

Validity Requirements

Whether you are making a new binding death benefit nomination, replacing an old one or cancelling altogether, you must meet these requirements to make your nomination valid:

  •     Nominate eligible beneficiaries
  •     Clearly allocate your benefits amongst your beneficiaries
  •     Allocate 100 per cent of your death benefits
  •     Sign and date your nomination in the presence of two witnesses who are legally adults and not nominated to receive your death benefits

Ensure your witnesses sign and date the notice in your presence

Is Your Limit To Claiming A GST Refund Approaching?

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Small businesses entitled to refunds of GST may not be aware of the four-year
time limit on claiming those refunds. Your entitlement to a GST credit ends four years from the due date of the earliest activity statement in which you could have claimed it.

GST refunds are claimed under the indirect tax concession scheme (ITCS), which also covers luxury car tax (LCT), wine equalization tax (WET) and excise.

They are a form of “outstanding indirect tax refunds”, which are tax refunds that are entitled to the taxpayer but are yet to be claimed.

“Outstanding indirect tax refunds” can be claimed in the following cases.

Refund Of A Net Amount For A Tax Period:

This applies to those that have yet to lodge an activity statement for a tax period. Small businesses with GST entitlements that amount to $2,500 (which exceeds the net GST, WET and LCT liabilities for that period $2,000), can claim an outstanding indirect tax refund of $500.

Refund Of An Overpayment Of A Net Amount:

Due to a clerical error, a business owner reports and pays $4,600 net GST for a tax period instead of the actual amount of $4,060. The excess amount of $540 is an outstanding indirect tax refund which the business can claim.

  • ETP cap: this is indexed each year, so for 2022- 23 the cap is $230 000. This cap is reduced by any earlier ETPs paid in the same income year.
  • Whole-of-income cap: this cap is $180 000 (2021-22 tax rate), and is reduced by any other taxable payments given to the employee in the same income year.

The concessional tax rate is 17% for employees who have reached their preservation age, which is determined by when they were born (if they were born after 30/6/1964, their preservation age is 60).

For genuine redundancy payments and early retirement scheme payments, there is a tax-free limit depending on the employee’s service amount with the employer. The tax-free amount is not part of the employee’s ETP and is provided as a lump sum in their PAYG payment summary.

Any amount above this tax-free limit is part of the employee’s ETP.

  • The tax-free limit is calculated through the formula: Tax-free limit = base amount + (service amount x years of service).

The ETP payment summary that reflects the payment amount and any associated withholding must be supplied to the employee within 14 days of the employer making the payment.

Refund Due To An Underreported Initial Net Refund Entitlement:

A business claims a net GST refund of $3,000 for the tax period and receives the refund. Afterwards, however, it is realised that the actual refund entitlement was $3,200, the excess $200 represents an outstanding indirect tax refund that can be claimed.

Refund Of Indirect Tax Relating To An Importation:
For example, $200 GST is overpaid for an importation. This $200 represents an outstanding indirect tax refund that can be claimed.