What is an annuity?

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An annuity provides guaranteed income for a number of years, or for the rest of your life. It is also known as a lifetime or fixed-term pension. 

You can buy an annuity from a super fund or life insurance company. You are able to choose whether you want the payments to last for a fixed number of years, your life expectancy, or the rest of your life. 

In order to buy an annuity through your super fund, you must be in the ‘preservation age’ which is between 55 and 60. Additionally. You are required to meet a condition of release e.g. permanently retiring. 

You are also able to buy an annuity in joint names using savings. Through this method, you can split income for tax purposes. If either you or your partner dies, then the survivor has ownership and access to the funds. On the other hand, buying an annuity using a super lump sum can only be in the name of the owner.  

When you buy the annuity, you decide the payment amount you will receive. This can increase each year by a fixed percentage or indexed with inflation. Further, you can also choose if you are paid monthly, quarterly, half-yearly or yearly. There are some conditions the ATO has about minimum annual payments if your annuity is bought with super money e.g. must pay a certain percentage of the balance based on your age. 

You decide what happens with your annuity if you pass away. You can either nominate a reversionary beneficiary or choose a guaranteed period option. A reversionary beneficiary will receive your income payments for the rest of their life, usually at a reduced level. The guaranteed period option will allow your beneficiary to receive their payments as a lump sum or an income stream. 

An annuity will impact your eligibility for the Age Pension as it is accounted for in the income and assets tests which are conducted. You should discuss exactly how the annuity will impact Age Pension entitlement with a Financial Information Service (FIS) officer. 

What is a TPAR and do you need to lodge one?

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The Taxable Payments Annual Report (TPAR) is an industry-specific report through which businesses inform the ATO of the total payments made to contractors for services in that financial year. This information is then used by the ATO to match the contractors’ income declarations to improve their compliance efforts.

A TPAR is generally required by businesses that have an Australian Business Number (ABN), have supplied a relevant service and have made payments to contractors for services completed on your behalf. Contractors can be operating as sole traders, partnerships, companies or trusts. The following services are considered relevant:

  • Building and construction services
  • Courier or Road freight services
  • Cleaning services
  • Information Technology services
  • Investigation or surveillance services

If your business provides these services, regardless of whether it is only a part of the services you offer, or if it is a federal, state, territory or local government entity, you are obligated to report the payments made to third parties through a TPAR.

It is important to remember that not all payments need to be reported. Your taxable payments annual report does not require details of:

  • Payments for exclusively materials
  • PAYG withholding payments
  • Contractors who do not provide an ABN
  • Incidental labour costs
  • Invoices that are unpaid as of 30 June
  • Payments within consolidated groups
  • Payments for private and domestic projects.

Only payments made to contractors for work that is relevant to carrying on your business needs to be reported. Your TPAR is due by 28 August each year, and fines may apply for not lodging the report by the specified deadline.

If your business does not need to lodge a TPAR for a particular financial year, consider submitting an optional non-lodgement advice through the ATO business portal to avoid unnecessary follow-up about TPAR lodgements.

What Is A Retirement Planning Scheme?

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With a significant number of Australians approaching retirement and looking at the best ways to maximise their retirement assets and income from their super for it, retirement planning makes sense.

Unfortunately, there are those who want to target people approaching and planning for their retirement with schemes designed to ‘help’ retirees and prospective retirees avoid paying tax by channelling their income through a self-managed super fund.

Retirement planning schemes are designed to help people avoid paying tax on the income earned through their assets (often in an illegal manner). Those schemes may seem like a simple get-rich-quick solution in maximising assets and income for retirement but can put people’s entire retirement savings at risk.

Anyone can fall prey to a retirement planning scheme. Anyone who is looking to put significant amounts of money into superannuation can be at risk of being ensnared, particularly those who are over 50, and who are:

  • SMSF trustees
  • Self-funded retirees
  • Small business owners
  • Professional service providers
  • Individuals who are involved in property investment

Checking for standard features of retirement planning schemes can be an excellent way to avoid becoming tangled in one. Retirement planning schemes usually:

  • Are artificially contrived and complex, with SMSF members often targeted and encouraged to use their SMSF as part of the scheme
  • Involve a lot of paper shuffling
  • Are designed to leave the taxpayer with a minimal or zero tax, or even a tax refund
  • Aim to give a present-day tax benefit by adopting the arrangement
  • Sound too good to be true – in most cases, they are.

Currently, there are a number of schemes targeted towards those individuals who currently have an SMSF, as they have a high level of control and autonomy in the way that their retirement savings are invested (subject to applicable tax and super laws).

Some examples of retirement planning schemes include:

  • Some arrangements involving SMSFs and related-party property development ventures.
  • Refund of excess non-concessional contributions to reduce taxable components
  • Granting legal life interest over a commercial property to SMSFs
  • Dividend stripping
  • Non-arm’s length limited recourse borrowing arrangements
  • Personal services income
  • Liquidating an SMSF

To avoid becoming a part of a retirement planning scheme, seek professional advice on super or SMSFs from an accountant.

What Is A Proprietary Limited Company?

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In Australia, the Pty Ltd Company (proprietary limited company) is one of the most popular business structures chosen by entrepreneurs and business owners. Pty Ltd companies offer both distinct advantages and certain disadvantages that individuals should carefully consider when determining the most suitable structure for their enterprise.

Benefits of a Pty Ltd Company:

  • Limited Liability: The most significant advantage of a Pty Ltd company is the limited liability it provides to its owners (shareholders). Shareholders’ personal assets are generally protected from business-related liabilities. This means that if the company encounters financial difficulties or legal issues, shareholders are only liable for the amount they have invested in the company.
  • Separate Legal Entity: Pty Ltd companies are considered separate legal entities, distinct from their owners. This separation allows the business to enter into contracts, own property, and engage in legal proceedings in its own name. It provides credibility and professionalism to the business.
  • Access to Capital: Pty Ltd companies can issue shares to raise capital, making it easier to attract investors or secure funding. Investors may be more inclined to invest in a company structure as opposed to sole proprietorships or partnerships due to the limited liability protection.
  • Perpetual Existence: A Pty Ltd company has perpetual existence, meaning it can continue to operate even if the ownership changes due to the death, sale, or transfer of shares of a shareholder. This stability can be appealing for long-term planning.
  • Tax Benefits: Pty Ltd companies often benefit from various tax advantages, including access to corporate tax rates, tax deductions for business expenses, and the ability to distribute profits to shareholders in a tax-efficient manner.

Disadvantages of a Pty Ltd Company:

  • Complex Compliance: Pty Ltd companies are subject to stringent legal and regulatory compliance requirements in Australia. This includes the need to file annual financial reports, maintain records, and adhere to corporate governance standards. Complying with these obligations can be complex and time-consuming.
  • Costs: Establishing and operating a Pty Ltd company involves expenses such as registration fees, accounting fees, and ongoing compliance costs. These costs can be burdensome for small businesses or startups with limited resources.
  • Ownership Restrictions: Pty Ltd companies can have a limited number of shareholders (up to 50), and there are restrictions on transferring shares. This may limit the company’s ability to attract a broad range of investors.
  • Disclosure Requirements: Pty Ltd companies must disclose certain financial and operational information to the Australian Securities and Investments Commission (ASIC). This transparency requirement may not be appealing to business owners who prefer to keep their financial affairs private.
  • Complex Decision-Making: As Pty Ltd companies typically have multiple shareholders, decision-making can become complex, especially if there are disagreements among shareholders. Formal processes and agreements are often needed to address these issues.
  • Capital Raising Challenges: While Pty Ltd companies can issue shares to raise capital, attracting investors can be challenging, particularly for startups or smaller enterprises without a proven track record.

The Pty Ltd Company structure offers numerous benefits, including limited liability, access to capital, and tax advantages. However, it also comes with disadvantages, such as complex compliance requirements, costs, and ownership restrictions.

When choosing a business structure, entrepreneurs should carefully assess their business goals, size, and long-term plans to determine whether a Pty Ltd company fits their needs or if an alternative structure may be more suitable.

It’s advisable to seek legal and financial advice to make an informed decision. Why not start a conversation with your trusted business advisor today to get on the right track?

What is a CGT event?

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Capital Gains Tax (CGT) events occur when an individual or company makes a capital gain or capital loss by selling or disposing of an asset they own. The timing of a CGT event is quite important, as it determines which income year an individual will report the capital gain or capital loss, and may affect how their tax liability is calculated.

When a CGT asset is disposed of, the CGT event usually takes place when a contract for disposal is entered into. When there is no contract, the CGT event happens when an individual is no longer the owner of the asset.

Cases where a CGT asset is lost or destroyed, the CGT event will happen when the owner of the asset receives compensation for the loss or destruction. If no compensation is received, the CGT event takes place when the loss is discovered or when the destruction happened.

For some CGT events, such as exchanging an asset for a replacement asset, the law permits individuals to defer or rollover any capital gain they make until another CGT event takes place. If more than one CGT event happens, individuals must apply the rules for the one that is most specific to their situation.

CGT events can happen when:

  • Selling or giving away an asset.
  • The destruction or loss (voluntary or involuntary) of a CGT asset.
  • Receiving compensation for the loss, destruction or compulsory acquisition of a CGT asset.
  • The disposal of a depreciating asset used for non-taxable (private) purposes.
  • Capital distributions to company shareholders or unitholders in a unit trust or managed fund.
  • Shares or units being cancelled, surrendered, redeemed or declared worthless.
  • You stop being an Australian tax resident.
  • You enter into an agreement not to work in a particular industry for a set period of time
  • A trustee makes a non-assessable payment to you from a managed fund or other unit trusts.
  • A company makes a payment (not a dividend) to you as a shareholder.

What happens to your super in a divorce?

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Divorce or separation can be emotionally draining and stressful as it is, but the legal and financial responsibilities you also need to think about add an extra burden to dealing with the spit. One key area that needs to be considered to protect your financial future is your superannuation and what happens to it after your divorce.

The superannuation splitting law treats superannuation as a different type of property. This means that like any other asset it can be divided between partners who were in a marriage or de facto relationships either through:

  • A formal written agreement where both parties sign a certificate confirming that independent legal advice about the agreement has been provided.
  • Seeking Consent Orders to split the superannuation.
  • Seeking a court order to split the superannuation in the event you cannot reach an agreement.

Splitting the super does not automatically give you a cash asset as it is still subject to superannuation laws.

There are three main options for dealing with your super in a split:

  • A payment split: this is the most common way of dealing with super at the end of a relationship. If you are not yet eligible to withdraw your super, the benefit will be split whilst remaining in the super system. If you have retired or are eligible to withdraw your super, your split can be done as a payment.
  • Payment flag: you can defer your decision if you want to wait for a specific event to occur, such as retirement or the maturation of an investment. Flagging allows you to protect the interest in your super fund and prevents the super fund from making a payment out of the super account until the flag is lifted.
  • No split or flag: this is when you choose to treat super as a financial asset instead of splitting or flagging the super. The super is then a relationship asset that can be divided between the parties. This option is often used by de facto relationships in Western Australia as their super cannot be split, making it their only legal option.

If you run a self-managed super fund (SMSF), then your situation can often be more complicated, particularly if your former spouse is also a trustee of the SMSF. Trustees must continue their responsibilities as a trustee and act in the best interest of all members in accordance with super laws. You must not exclude another trustee from making decisions or ignore requests to redeem assets over to another complying super fund. Dealing with SMSFs in the event of a divorce are often done with professional legal advice.

What Happens To Superannuation When Bankruptcy Is Declared?

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Have you ever wondered what happens to superannuation when someone claims bankruptcy?

Bankruptcy is a legal process that can be commenced when you are declared unable to pay your debts. It is a process that can release you from most debts, provide relief and allow you to make a fresh start.

However, bankruptcy is not a process to enter into lightly.

There are two ways to enter into bankruptcy. These are:

  • Voluntary Bankruptcy: The Australian Financial Security Authority appoints a trustee when you become bankrupt. This trustee is a person or body who manages your bankruptcy.
  • Sequestration Order: Where you nominate yourself for bankruptcy by submitting a Bankruptcy Form.

When you become bankrupt, the Australian Financial Security Authority appoints a trustee. This trustee is a person or body who manages your bankruptcy.

The trustee can take any cash or money you have in a bank account at the date of bankruptcy but should leave you with enough for modest living expenses.

During your bankruptcy, you can keep the income that you save. However, you may have to make compulsory payments if your after-tax income exceeds a set amount. This amount changes with how many dependants you have.

When you are bankrupt:

  • You must provide your trustee with details of your debts, income and assets.
  • Your trustee notifies your creditors that you’re bankrupt, preventing most creditors from contacting you about your debt.
  • Your trustee can sell certain assets to help pay your debts.
  • You may need to make compulsory payments if your income exceeds a set amount.

What Happens To Superannuation?

When someone goes bankrupt, their bankruptcy trustee can recover or sell any assets considered divisible property.

The Bankruptcy Act sets out what is and what isn’t divisible property.

A bankrupt’s superannuation is generally not considered divisible property and is not available to a bankruptcy trustee.

However, it depends on when and how you receive your super. Your trustee must be notified if you receive superannuation before or after your bankruptcy begins.

If Received Before Bankruptcy

  • Super payments received before bankruptcy are claimable by your trustee
  • Any asset purchased with those funds (such as a house) can be claimed by the trustee

For example, if you have taken funds out of your superannuation fund before bankruptcy and you still hold them in your bank account at the time of bankruptcy, the funds will be considered divisible property and you will have to pay any funds still held to your trustee.

This includes both funds taken out as a lump sum and as a pension.

If Received During Or After Bankruptcy

Super payments that are during or after bankruptcy:

  • are not claimable by your trustee if it is a lump sum payment
  • your trustee cannot claim assets you purchase with those funds, e.g. car.

An exception is where your super isn’t in a regulated fund, approved deposit fund or an exempt public sector scheme. Your trustee can claim super not held in these types of funds.

Received As Income

During bankruptcy, the super you receive as an income stream (e.g. a pension) forms part of your assessable income. You may need to make compulsory payments if your income exceeds a set amount.

Self-Managed Super Funds

Someone bankrupt cannot be a trustee of a self-managed super fund. If you have a self-managed fund, you must advise your trustee. You must cease acting in this position and notify the ATO within 28 days. See the ATO website for more information about removing yourself as a trustee.

Are you facing bankruptcy and concerned about risks to your superannuation fund? Speak with a licensed professional today.

What Happens To My Tax If I Have More Than One Job?

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Are you in the process of getting a second job to supplement your income? Or have you already received one, and are now simply confused about what you are being taxed on?

Gaining employment in a second position or job means that you may have a higher amount of tax withheld from your pay. Though this might sound daunting, it is simply because you are already claiming the tax-free threshold from another paying job.

The tax-free threshold in Australia is $18,200. If you are claiming your tax-free threshold, you are not paying tax on the first $18,200 earned in each income year. The tax-free threshold is equivalent to earning:

  • $350 a week
  • $700 a fortnight
  • $1,517 a month

Withholding tax at a higher rate means that you are less likely to have a tax debt at the end of the income year

You may be receiving pay from two or more payers at the same time if you:

  • have two or more jobs
  • have a regular part-time job and receive a taxable pension or government allowance.

In these instances, your new employer will give you a Tax file number declaration to complete. Centrelink is also a payer who will give you this form if you apply for their payments.

When you fill in this form, you can choose whether to claim the tax-free threshold from your employer. However, if you are:

  • Still earning income from your first employer, you should not claim the tax-free threshold for your second job
  • No longer earning any income (including from paid leave), then you are entitled to claim the tax-free threshold from your second job and have a lower rate of tax withheld
  • Starting to receive income from both employers, you can request that one employer withholds at a higher rate to avoid a tax debt at the end of the year.

If you are in the position of having two jobs, it is recommended to claim the tax-free threshold from the payer who usually pays the highest salary or wage. Your other payers then withhold tax from your income at a higher rate, which is known as the no tax-free threshold rate. This is likely to reduce incurring a tax debt at the end of the financial year.

Sometimes the total tax withheld from all sources may be more or less than the amount you need to meet your end of year tax liability. These tax withheld amounts are credited to you when you lodge your income tax return. If too much tax is withheld, it may result in a tax refund. However, if not enough tax was withheld, the difference may need to be paid to the Australian Taxation Office (ATO) so that you have paid enough tax for your income.

Confused, concerned or a little perplexed about what having a second job could mean for your tax obligations? Want to know more about what happens if the tax withheld isn’t enough? You can speak with a registered tax agent like us about your tax liability in the event of a second job.

What happens if your SMSF is non compliant?

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While there are benefits to running an SMSF, they do not come without their compliance responsibilities. This includes lodging your fund’s annual return on time, attending to reporting obligations, and having an investment strategy. SMSFs who do not meet their obligations are subject to penalties by the ATO through the following measures.

Education direction

An SMSF trustee who does not meet compliance requirements can be given a written direction to undertake a course of education that is designed to improve their ability to meet their obligations, reducing the risk of future non-compliance. The course may be completed online within a nominated timeframe. Failure to comply with an education direction can result in an administrative penalty of 10 units.

Administrative penalties

SMSF trustees are liable to pay administrative penalties if they contravene provisions of the Superannuation Industry (Supervision) Act 1993 (SISA). This includes contraventions of borrowings, in-house assets, education direction, duty to notify of significant adverse events, and accounts and statements. The minimum penalty is $1,050 and the maximum penalty is $12,600.

Enforceable undertaking

SMSF trustees may be able to rectify non-compliance by providing a written commitment to an enforceable undertaking. The ATO may or may not accept the undertaking, which should include:

  • A commitment to ending the non-compliance behaviour.
  • What action will be taken as rectification.
  • The designated time period to rectify the contravention.
  • How and when the trustee will report the completion of rectification.
  • Strategies employed to prevent future contraventions.

Rectification direction

The ATO may decide to provide a trustee with written direction to rectify their contravention. The trustee will then be required to undertake specified action to rectify the non-compliance within a given timeframe. Rectification commonly involves employing managerial or administrative arrangements that will prevent similar contraventions in the future. Proof of compliance with the direction to rectify will be required. Failure to comply with the direction is an offence of strict liability, which can lead to disqualification or the removal of the fund’s complying status which may result in a significant tax penalty on the fund.

Disqualification

The ATO has the ability to disqualify individuals from acting as a trustee due to their non-compliance. This will take into account the severity of the contraventions and the likelihood of them reoccurring. Continuing to act as a trustee after disqualification is an offence that may result in further penalties.

Civil and criminal penalties

Civil and criminal penalties through court can apply when SMSF trustees contravene with provisions such as:

  • The sole purpose test
  • Prohibition of avoidance schemes
  • Promotion of illegal early release schemes
  • Duty to notify the regulator of significant adverse events.

Non-compliance notice

SMSFs may be issued a notice of non-compliance when serious contravention of super laws have occurred. This causes the fund to remain non-compliant until a notice of compliance is received. For every year the fund remains non-complying, its assessable income is taxed at the highest marginal tax rate.

Winding up the fund

After a contravention has occurred, the trustee may wind up the SMSF and roll over the remaining benefits to an Australian Prudential Regulation Authority (APRA) regulated fund. However, in some cases, the ATO may continue to issue the SMSF with a notice of non-compliance and/or apply other compliance measures.

Freezing the SMSF’s assets

A trustee may be given a notice to freeze an SMSF’s assets when it appears that conduct by the trustees or investment manager may adversely affect the interests of the beneficiaries. The notice may restrict the trustee or investment manager from acquiring assets and disposing of assets.

What employment type is best for your business?

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An employment contract establishes the terms and expectations of an employee before they start work. It outlines everything the employee has to know about working for you, including employee rights, working hours and performance expectations in the role. Each employment type has different entitlements and obligations that must be met by both the employer and employee. Before hiring a new worker, take the time to look at what each employment type would mean for you and your business.

Full-time employees:
A full-time employee will work an average of 38 hours a week and is a permanent employee. The specific working hours in a week are agreed upon in the employee contract. Under the National Employment Standards (NES), there are 10 minimum entitlements that need to be provided to employees;

  • Maximum weekly hours.
  • Requests for flexible working arrangements.
  • Parental leave and related entitlements.
  • Annual leave – 4 weeks of annual leave are given every year based on ordinary hours of work. Leave that is left over at the end of each year carries over to the next year.
  • Personal/carer’s leave, compassionate leave and unpaid family and domestic violence leave. Employees receive 10 days of this leave every year.
  • Community service leave.
  • Long service leave.
  • Public holidays.
  • Notice of termination and redundancy pay.
  • Fair Work Information Statement.

Part-time employees:
Part-time employees work on average less than 38 hours a week, usually at regular times, and are permanent employees. Part-time employees have the same rights as full-time workers on a proportional basis.

Casual employees:
A casual employee does not have a definitive commitment from an employer about how long they will be employed for or the days/hours they will work. A casual employee doesn’t get paid sick or annual leave, can end employment without notice, has a higher pay rate than equivalent full-time or part-time employees due to ‘casual loading’, two days unpaid carer’s leave and two days unpaid compassionate leave per occasion, five days unpaid family and domestic violence leave in a 12-month period and unpaid community service leave.