Small Business CGT Concessions

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This overview of small business CGT concessions will give you a rough road map of the most generous concession for small business in Australia. 

Small Business CGT Concessions

Imagine the small business CGT concessions didn’t exist. Let’s say you have a small business. And your business is your life. Started from scratch 30 years ago. Risked the family home during the GFC for it. Risked everything. Gave dozens of people good steady jobs. Was part of the engine that drives Australia.

Now you get an offer to sell with a $1m capital gain. How much do you get to keep? 53% – the ATO will take the other 47%, assuming that you have other income and the capital gain fully hits the top marginal tax rate.

Doesn’t feel right. So can you see why we need the small business CGT concessions? To make sure your life’s work doesn’t evaporate in tax. If you qualify, you will pay little or no tax. It can change your life.

Do You Qualify In Principle?

The small business CGT concessions are very generous. But to qualify you have to pass three hurdles. 

Hurdle # 1   Basic Conditions

The basic conditions are your first hurdle. To pass these basic conditions, you need to meet one of 4 conditions – A, B, C or D. It is an either-or proposition. If you fail one, you can still get through with another.

A – Turnover 

You need to carry on a business and have a turnover of less than $2m. This is called the small business turnover test. If you don’t pass it, just keep going. Maybe you pass the net asset value test.

B – Net Asset Value 

You pass the maximum net asset value test, if you have net assets of $6m or less. Your net assets include your interest in the business you sell as well as certain assets of your affiliates and connected entities. But your net assets don’t include your main residence, personal use assets and superannuation for this test.

C – Partnership

If the asset you sell is a partnership asset, then the partnership as a whole must carry on a business and meet the turnover test. If that fails, then the your proportionate share of the partnership will go into your net asset value test under B.

D – Passively Held

If the asset is passively held and used by an associate or connected entity in a small business entity, you pass.

You only need to pass one of these four. Take a capital intensive business like a farm as an example. It might hold land worth more than $6m, but have a turnover of less than $2m, and hence qualify.

Hurdle # 2     Active Asset Test

The active asset test is your second hurdle. You need to always pass this test. This means that the asset must have been part of your business. ‘Used or held ready for use’ is the term they use.

Hurdle # 3      Shares or Units

And the third hurdle only applies if shares or units are involved. If they are not, skip this one. You are done.

If your set up includes shares or units, then this turns into a different ball game. It will get a lot more complicated. How this all works is a long story that we will cover later.  So for now let’s just assume that no shares or units are involved. That you are a sole trader selling your business. 

Do You Qualify For a Specific Exemption?

So you qualified in principle. But what do you actually get? It depends which specific concession you qualify for.

 There are 4 small business CGT concessions. Each of these four is unique with its own set of rules and requirements. Would be boring otherwise. And how you combine these four is important as well and might result in different tax outcomes.

Subdiv 152-B    15-Year Exemption

The first and most generous exemption is the 15-year exemption. It is unique in that it exempts the entire capital gain without any cap. Think about that. The entire capital gain: Tax-free.

This exemption takes priority over the other three exemptions. And it applies before any capital loss offset. So you can keep your capital losses and still get the entire capital gain tax-free.

But to pass you must have owned the asset for at least 15 years and be at least 55 years old. 

And the CGT event must happen in connection with your retirement or permanent incapacitation. What is or isn’t “in connection with your retirement” is often a point of contention though.

If you qualify for the 15-year exemption, you can stop reading here. Anything that comes after this won’t affect you anymore since your entire capital gain is disregarded. This exemption has priority. If you qualify, it applies whether you like it or not. But we have never met a living soul who doesn’t like this one.

Subdiv 152-C   50% Reduction 

This one is easy. The moment you pass the basic conditions, you have this one in your pocket. You don’t have to apply it but you can.

The 50% reduction allows you to reduce a capital gain by a further 50%. Why further? Because you probably already got the 50% CGT discount if you held the asset for at least 12 months.

So now in addition you get the 50% small business reduction when you pass the basic condition. And after that you can still apply the other two exemption, hopefully reducing your capital gain to zero.

Subdiv 152-D    Retirement Exemption

This one is also easy even though it comes with slightly more fineprint. You can claim a capital gain of up to $500,00 as exempt. But not more – ever. That is the lifetime cap.

And there is one more catch. If you are under 55, you have to pay the exempted amount into super. Some people don’t like that. And so they skip this one or park it. The secret word is J5. Sounds confusing – I know.

Here is an example how this works out in conjunction with the 50% reduction.  Let’s say the capital gain is $4m. The 50% CGT discount brings it down to $2m. The 50% reduction brings it down to $1m. And then you and your spouse claim $500,000 retirement exemption each. And voila. You walk away with $4m tax-free in your pocket. Not bad.

Subdiv 152-E  Rollover 

This one will buy you time. Your capital gain is not disregarded just yet, but you defer paying tax on it.

This rollover relief allows you to defer the capital gain for at least two years or beyond two years if you acquire a replacement active asset or incur capital expenditure on active assets. You can choose to rollover the entire capital gain or just a portion after the 50% reduction and retirement exemption. The decision is yours.

If you don’t acquire a replacement asset withing the 2 years, you trigger CGT event J5. But guess what? That might be exactly what you had inteded.

By now you might be 55 and no longer have to put the retirement exemption into super. So now you apply the retirement exemption and walk away with the cash tax-free. 

So that was a quick small business CGT concession overview to give you a rough idea. To show you what is possible.

But don’t give up if this sounds too confusing. Just ask your accountant or ask us. My number is 0407 909 779 – just call me. I am Heide Robson.

 

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Disclaimer: numba does not provide specific financial, legal or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax or legal advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

How Super Rules Change with Age

NSW Payroll Tax

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Payroll tax is a blind spot for many. 

Do I Have To Pay NSW Payroll Tax?

The business is growing. You hire more staff and contractors. And suddenly payroll tax is an issue – a huge issue – an issue you didn’t see coming.

Rough Estimate

To assess whether payroll tax is an issue for you or not, start with a rough estimate. Add up everything you pay for workers – anything you pay for work to get done – wages, paid leave, super, contractor payments, other benefits everything. Does the total in that bucket exceed $1m?

If you are well below $1m, then don’t worry about payroll tax. If you might be getting close, have a closer look

Two Baskets

To work out whether you need to pay payroll tax or not, you need to separate your workers into two groups.  To make this easier imagine two baskets.

Put all your individual workers into the first basket. Individual workers are those who receive a wage from you. And they are those who gave you an ABN in their own name, so no partnership, trust or company involved.

And then you put everybody else into the second basket. Everybody working for you through a partnership, trust or company.

FIRST Basket – Individual Workers

Now you start looking more closely at the individuals sitting in your first basket. Those receiving a wage or working as sole traders.

You look at the totality of relationship. That is the key phrase – totality of relationship. You look at each individual and assess the totality of your relationship with them or their relationship with you – whichever way you look at it.

Totality of relationship means that you don’t just consider one factor, but the total – all six factors together. You look at the total relationship.

A worker is your contractor if they are:

1   –  Able to delegate – they arrive in a team
2  –  Paid for a result, not time – they fix problems at their own cost
3  –  Provide their own tools to complete the work
4  –  Bear the commercial risk – they can make a loss
5  –  Have control over their work – when and how
6  –  Independent of you – you don’t tell them what to do

If considering these six factors somebody looks like a contractor, move them to the second basket. Otherwise leave them in the first basket.

Moving into the second basket is good. You want that. It means you get a second chance. Because everybody left in the first basket is subject to payroll tax.

SECOND Basket – Contractors

Now you look at the second basket. Your contractors – those who work for you through a partnership, trust or company as well as those who came from the 1st basket.

Your aim is to get everybody out of this 2nd basket. But you can only take them out, if one of the 7 exemption applies.

These exemptions are about all or nothing. An exemption either applies to a contract or it doesn’t apply. There is no pro-rata thing going. One day over – gone.

So you go through these 7 exemptions for each contractor. If an exemption applies, great – you can take them out. If none applies, you leave them in there.

# 1  Services Ancillary to the Provision of Goods

It is all about the goods. The labour provided under the contract is ancillary to the supply or use of goods.  

Think of the glazier who delivers and installs the new state-of-the-art glass panels. It is all about the panels. The glazier installing them is just the side show.

# 2  Services Not Ordinarily Required

Your business doesn’t ordinarily require these services. And the contractor supplies the same type of services to the general public in that year.

Think of a plumber who comes to the site once-off to repair a broken pipe. You usually don’t have a broken pipe. And the plumber has plenty of other customers on other sites.

# 3  Services Required For Less Than 180 Days 

The business ordinarily only uses these services for 179 days a year or less. So this is about the service itself. Not the worker. Think of a ski-resort that only needs road clearing for 179 days a year. 

# 4  Services Provided For Less Than 90 Days

This is now about the worker, not the service itself. The worker works for less than 90 days in a financial year. Think of a virtual CFO who only comes  for a day each month.

# 5  Services Generally Supplied To the Public

This exemption only applies if the Chief Commissioner says so. So you need to specifically apply for this one.

This exemption applies when satisfied – based on evidence provided – that the contractor actually provided that type of service to the general public during the financial year. 

# 6  Services Performed by Two or More People

The contractor doesn’t arrive alone but brings at least one other person to help them. Think of the arborist who needs another person to hold his safety lines.

These six exemptions apply across Australia (apart from WA). That is why they are called the ‘six general provisions’.  But there is one more. One specific exemption that only applies to NSW.

# 7  Services Provided by an Owner-Driver

The contract is solely for the conveyance of goods in a vehicle provided by the contractor. The contractor must own or lease the vehicle and must not be an employee. Think of the truck driver who delivers cement for you in their own truck. 

Numbers’ Game

The rest is now just a numbers’ game. You add up everything you pay for the individuals left in the 1st basket and the contractors in the 2nd basket.

And if the total exceeds $1m*, you pay payroll tax. That is why you try to get everybody out of the 1st basket into the 2nd basket and then everybody out of the 2nd basket. That is why you try. 

As part of the NSW COVID-19 Stimulus Package there is no payroll tax during the corona virus crisis until 30 June 2020.

* The threshold for payroll tax is $1m from 1 July 2020 onwards. Lower thresholds apply to the years before that.

 

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Disclaimer: numba does not provide specific financial, legal or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax or legal advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

 

 

minor benefit rule

Tax Deduct a Business Lunch

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How to tax deduct a business lunch. Or breakfast meeting. Or morning and afternoon tea. Or dinner.

Tax Deduct a Business Lunch

Most accountants will tell you that you can’t tax deduct a business lunch, nor a breakfast meeting, nor morning or afternoon tea, nor a business dinner. It is all entertainment. And hence not deductible.

And they are right. BUT…..

There are 5 back doors – FIVE – wide open – that allow you to claim a tax deduction nevertheless.

Backdoor #1   The 4W Test

This is the biggest door of all. Think garage door. And this door exist thanks to TR 1997/17. You have probably never heard of this tax ruling and will never again. But it is your best chance to claim a tax deduction for a meal.

TR 1997/17 allows you to tax deduct a meal if the expense passes the Why, What, Where and When test. So let’s call it ‘The 4W Test’.

If the Why, What, Where and When indicate that the dominant purpose of the meal was business, then it doesn’t count as entertainment.

The Why and What carry the most weight. You must get those right. And then you need at least one more – the Where or the When – or even better both.

WHY did you have it? Taking a client out to lunch means business. Taking out a friend doesn’t.

WHAT did you have? Something purely functional like sandwiches and coffee means business. A three-course meal doesn’t. 

WHERE did you have it? Business premises means business. Off site weakens your argument, but doesn’t kill it if the When supports your argument

WHEN did you do it?  During business hours means business. At night doesn’t.

So if your meal ticks at least 3 boxes, it is a business expense and hence not entertainment. And so it is tax deductible.

Backdoor #2    Sustenance

If you have a simple meal on business premises without alcohol, the ATO will count it as sustenance as long as it is finger food. Think of  a working lunch in the board room with sandwiches and tea, a morning tea in the staff room with muffins and coffee or an all-nighter at your desk with pizza and coke.

Sustenance doesn’t count as entertainment, but is a business expense, hence tax deductible.

Backdoor #3    FBT

If you pay FBT for an expense – any expense – then you can tax deduct that expense even if it is entertainment.

So whenever you pay FBT for a meal, you can tax deduct that portion of the expense that was subject to FBT.

Backdoor # 4    Sudiv 32-B

And then there is another door but a really tiny one. Certain entertainment expenses are tax deductible thanks to exceptions listed in Subdiv 32-B..

This subdivision is long and confusing with tricky details and a long list of exceptions. So we run a real risk of boring you with this one.

So below we have just listed a few to give you an idea, but please email or call if you want to try and fit through this tiny door.

You can tax deduct a meal if it falls under certain employer, seminar, promotion and advertising or other expenses. There is also a specific exception for businesses in the entertainment industry. 

If you provide a lunch in an in-house dining facility, that expense might be tax deductible per s32-30.  The same might apply to food or drink that would be subject to FBT but is not due to certain exemptions in the FBT Act. If you provide a business lunch at a seminar that lasts 4 hours or more, you can deduct these entertainment expenses per s32-35.  If you provide a lunch to promote or advertise your goods or services – a product lunch for example – you may be able to claim a deduction per s32-45, but only if ordinary members of the public have an equal chance to attend your event.

Back Door # 5    Travel

And then there is travel. All bets are off when it comes to travel. When you travel, you can have as lavish a meal as you like and it still counts as a business expense. Just stay off the booze. Alcohol and business don’t mix in the eyes of the ATO.

GST

If your lunch is tax deductible for income tax purposes, then you can also claim the input tax credit in your BAS. But if it isn’t, then you can’t

GST just follows what you do for income tax. Whatever is tax deductible as a business expense, gives you an input tax credit (as long as it is a taxable supply).

 

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Disclaimer: numba does not provide specific financial, legal or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax or legal advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

 

Super Death Tax

Super Death Tax

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There is no inheritance tax in Australia. But there is super death tax.

Super Death Tax

Super death tax can be a nasty surprise for your family when they are at their most vulnerable. So best to be avoided.

Who Gets Your Super

When you die, you leave your super behind. Your left-over super goes to your SIS dependants or your estate. That’s it. SIS dependants or estate. We cover all this in Who Gets My Super. 

Once this is clear, the next issue rears its head – tax.

How Much Tax

Your super might not arrive alone. It might arrive with a hefty tax bill in tow. The dreaded super death tax. To understand super death tax, you need to remember one thing. Your super had a good run. Tax deductions for contributions and a 15% or 0% tax rate. That is a pretty good deal.

The legislator did all this to help you fund your retirement. And to help those dependent on you. But now that you are no more, the legislator wants those tax concessions back for the super you left behind. Your non-tax dependants are not deemed worthy of these concessions. 

The argument is that outside of super you would have paid an average 30% tax, not 0% or 15%. And so your left over taxable components going to non-tax dependants get hit with a top up.  Top up back to 30% plus Medicare. This top up is the dreaded super death tax. How badly it hits depends on four factors.

1 – Tax Dependancy

When your super goes to tax dependants as a lump sum – no super death. Your tax dependants depended on you and now your super is all they got.  So the legislator goes easy on them. No tax. They will get every cent of your super.

But everybody else – any non-tax dependant – pays super death tax. But who is a tax dependant and who isn’t?  

Your spouse and your children under 18 are your tax dependants. Anybody financially dependant on you or living with you in an interdependency relationship qualifies as your tax dependant as well. And this can include your adult children per ATO ID 2014/22.

By the way, the official term is ‘death benefits dependant’ per s302-195 ITAA97, but that is too long and so everybody just says ‘tax dependant’.

2 – Super Components

Your super consists of a tax-free and a taxable component.  We cover all this in Super Components. 

Your tax-free component won’t trigger any tax – tax dependant or not – ever. You paid your non-concessional contributions out of after tax income. So there won’t be another tax charge.

But your taxable component does trigger super death tax when paid to non-tax dependants. 15% for any taxed element and 30% for any untaxed element, both plus 2% Medicare levy. 

3 – Type of Payment

Your super needs to go when you go. And so it either leaves the super environment straight away as a lump sum. Or it goes into somebody else’s super account as a pension. Different rules apply to either.

The tax treatment of a lump sum depends on whether a recipient is a tax dependant or not. Tax dependants pay no death tax. Everybody else only gets the tax-free component tax-free, but pays super death tax on the taxable component – 15% for a taxed and 30% for a tax-free element.

The tax treatment of a pension on the other hand doesn’t depend on tax dependancy. Anybody receiving a pension is a tax dependant anyway since the rules overlap. It also doesn’t matter whether it is a reversionary or death benefit pension. The tax treatment is the same. For a pension it is all about age – how old is the beneficiary now? How old was the deceased at the time of death?

Both 60 or over – no tax. One of them 60 or over – no tax. Both of them under 60 – super death tax on the taxable component, but only until the beneficiary turns 60. 

4 – Medicare Levy

Whether or not the 2% Medicare levy applies on top of a 15% or 30% tax rate depends on how the death benefit is paid.

If it comes directly from your super fund, the 2% Medicare levy applies. If it comes via your estate, the levy doesn’t apply. This little detail can easily cost your adult child $20,000 on a $1m lump sum death benefit.

So these are the 4 factors that determine how much super death tax your beneficiaries pay when they receive your super.

Does all this make sense? Just call me if it doesn’t. There might be a simple answer to your query. 

 

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Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

Super Fund

Super Fund

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Think of a super fund like a piggy bank. 

What is a Super Fund

The coins inside are your super. The piggy bank is your super fund. That is what it basically is. Except that a super fund is not limited to cash. And is a separate entity – a fund – rather than porcelain on your window sill, but the concept is the same.

Keep Safe

Putting your super into a separate entity – a fund – is to keep it safe – mainly from you. 

Imagine your rent is overdue, but you are broke. Would you use your super to pay the landlord if you could? Of course you would. At least most of us would. You take the money – not forever of course – you will pay it back next week. A week passes and you are still broke. A month. Three months – still broke. Your super is gone. 

To prevent this from happening, your super sits in a separate fund.

Fund Types

The fund holding your super could be an industry or retail fund. In these funds others manage and invest your super.

Officially, there are also government and corporate funds, but these tend to be a thing of the past. Too much of a headache for the companies and governments involved.

So industry and retail funds it is. These funds give you a few investment choices and then send you a statement every six months. The fee they charge for these services – a percentage of your super balance – will have already been taken from your super. 

But there is one more option you have. You could set up your own fund and manage your own super. This is called a self managed superannuation fund or SMSF for short. 

Trust

Whatever type of super fund you choose, a super fund is always a trust. This means five things. Just like a ‘normal’ trust your SMSF is

1 – Not a separate legal entity;
2 – Only a fiduciary relationship;
3 – Between trustee and at least one name beneficiary (‘member’);
4 – With respect to clearly defined trust property;
5 – Governed by a deed and law.

And like any other trust the SMSF trustee can be one or more individuals or companies. The later is referred to as corporate trustee.

Different to a Trust

But an SMSF is also quite different to a ‘normal’ trust in seven distinctive ways. An SMSF

1 – Pays income tax;
2 – Requires a condition of release to distribute;
3 – Distinguishes between accumulation and pension mode;
4 – For a pension must distribute a fraction of net assets, irrespective of income;
5 – Must follow investment rules;
6 – Requires an investment strategy;
7 – Has contribution caps.

A ‘normal’ trust doesn’t have or do any of these. And a ‘normal’ trust doesn’t refer to its beneficiaries as members.

Trustee

Like any ‘normal’ trust, a super fund has a trustee – at least one trustee, but it could be more than one. And like any other trust, this trustee can be an individual or company. If the trustee is a company – preferably a special purpose company – it is referred to as a corporate trustee.

The trustee is the entity who actually owns the asset – legally. So the trustee is the one whose name is on the bank statement, share certificate, land register and so on. 

The trustee is also the one who acts, manages and decides. The trustee receives your contributions and pays your pension. It is the trustee you write to when you want to start or commute a pension or cash it all out.

If you have a SMSF,  you are the trustee. In an SMSF each member must be a trustee – by law – either an individual trustee or the director of a corporate trustee.

A non-member can’t be a trustee  – with two exceptions. If you lose capacity, your LPR will step into your shoes as trustee. And if your SMSF only has you as individual trustee, then another individual has to join you as trustee.

Members

In a super fund beneficiaries are referred to as members. As a member you hold the beneficial ownership of the assets without being the legal owner. This means the assets have to benefit you as the member.

If you have an SMSF, you are a trustee as well as a member. This means that you will often write as a member to yourself as trustee. 

Legislation

A super fund has to follow many rules, but these three are crucial:

Superannuation Industry (Supervision) Act 1993 (‘SIS Act’)
Superannuation Industry (Supervision) Regulation 1994 (‘SIS Regs’)
Income Tax Assessment Act 1997  (‘ITAA97’).

The SIS act sets out the road map. The SIS regulations fill out the details. And the ITAA97 stipulates how all this is taxed. 

Regulator

All super funds have a regulator. The regulator is like an umpire making sure everybody plays by the rules. Handing out yellow and red cards when they don’t.

The regulator for SMSFs is the Australian Taxation Office (ATO). For all other funds it is the Australian Prudential Regulation Authority (APRA).

Regulated Superannuation Funds

Being a regulated super fund just means that the trustee has decided to play by the rules. The trustee has declared that the SIS Act and SIS Regulations are to apply to the fund. This is all it takes to become a regulated superannuation fund.

But being a regulated super fund doesn’t really mean anything. It just says that you want to comply.

Complying Superannuation Funds

What does mean something is being a complying superannuation fund. That will make a difference. Now you don’t just say that you want to comply. You actually do comply.

A complying super fund is a fund per ss42 and 42A SIS Act that complies with all relevant rules of the SIS Act and SIS Regulations. A fund is also a complying fund if the regulator has told them so in a compliance notice.

Once your super fund qualifies as a complying fund, two things happen. Your super fund:

1 – Can receive super guarantee (SG) contributions. Super guarantee is the 9.5% super your employer pays for you into a super fund of your choice.

2 – Qualifies for concessional tax treatment.

A non-complying fund on the other hand can’t receive SG contributions and doesn’t qualify for lower tax rates. 

Being a complying fund is not forever. If a fund breaks the rules, it can lose that status again. 

Financial Product

Your super – officially called ‘an interest in a superannuation fund’ in the Financial Services Reform Act 2001 – is a financial product. This means that only somebody with an AFS licence – Australian Financial Services Licence – is allowed to tell you what to do with it. 

Only somebody with an AFSL is allowed to tell you whether to make a contribution, split contributions with your spouse, take benefits as a lump sum or pension, make a binding death benefit nomination and so on. 

But there is a difference between telling you what to do and just giving you the facts. Telling you what to do requires an AFS licence. Just giving you the facts – explaining the rules of the game – doesn’t.

And by the way – since 1 July 2016 – accountants no longer have a so-called accountants exemption.

_____

So this is a short summary of what your super fund is about. If you get stuck, please email or call us. There might be s simple answer to your query.

 

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Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

How Super Rules Change with Age

How Super Rules Change

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Some super rules change with age – some don’t.

How Super Rules Change with Age

The rules around superannuation are confusing. And one of the reasons for that is that some change as you age and some don’t. Here are 9 rules that change and 9 that don’t.

Super Rules Not Affected by Age

Not everything changes as you age. Some super rules stay the same from birth to death. They are not affected by age, neither yours nor anybody else’s.

1 – Tax Rates 

Your tax rates within super don’t change – no matter your age. You will always pay 15% tax on accumulation and 0% on pension within super.

2 – Tax Free

Your tax-free components will always be tax-free irrespective of age. Neither you nor any beneficiary will ever pay tax on tax free-components.

3 – Contributions

The rules around government co-contributions as well as spouse contributions apply irrespective of your age.

4 – Investment Rules

The rules around what your fund is allowed to invest your super in don’t change with age.

5 – Special Conditions of Release

Your age has no bearing on whether you meet a special condition of release like terminal illness, disability or financial hardship.

6 – Transfer Balance Cap

Your transfer balance cap and account is not affected by your age. Whether you can start a pension might depend on your age, but the amount doesn’t.

7  – SIS Dependants

SIS dependancy doesn’t depend on age. Whether you qualify as a SIS dependant or not has nothing to do with how old you are.

8  – Tax Dependants

Your tax dependancy doesn’t depend on your age as long as you are not a child of the deceased. 

9  – Administration

The rules around the administration of your fund – annual audit, annual return, TBAR reporting etc – are not affected by your age. 

Super Rules Affected By Age

What worries our lawmaker while you are young no longer worries them when you are old. And vice versa. And so many super rules change with age.

1  – Personal Contributions

Between 65 and 74 you must pass the work test to make personal contributions. Once you hit 75, the door is closed apart from SG and downsizer contributions.

2 –  Concessional Contributions

While a minor, your super can’t receive personal concessional contributions unless you run a business. Once you turn 18, the door is all open.

3 – Downsizer Contributions

You can only make downsizer contributions once you are aged 65 or more. 

4  – Superannuation Guarantee

Under 18 you have to work at least 30 hours per week and earn at least $450 per month to get the super guarantee. Once 18, only the $450 threshold applies.

5 – General Conditions of Release

General conditions of release depend on your age. Preservation age, turning 60 and 65 are important trigger points.

6 – Minimum Pension Payments

Your minimum pension payment percentage steadily increases with age. It starts at 4% under 65 and increase to 14% when 95 or older.

7 – Taxable Components of Benefit Payments

If you access your super before you turn 60, you pay tax on any taxable component. Once 60, any benefit payment to you is tax-free.

8 – Child Dependancy

While under 18, being somebody’s child automatically makes you a tax dependant and eligible for a death benefit pension. Past 18 it doesn’t. 

9 – Death Benefit Pension

A death benefit pension is tax-free when the deceased at the time of death and/or the beneficiary are 60 or older. It isn’t, while both are under 60.

So this is a short overview of how super rules change with age. If you get stuck, please email or call us. There might be a simple answer to your query.

 

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Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

SIS Contribution Rules

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If you want your SMSF to enjoy concessional tax treatment, make sure it complies with the SIS contribution rules. 

SIS Contribution Rules

The SIS contribution rules tell you what contributions your SMSF can or can’t accept. If you fall foul of these rules, the penalties are tough. Your entire fund will loose its concessional tax treatment. Not just a specific transaction but the entire fund. So it is important to get this right.

When it comes to contributions into super funds, there are two hurdles to take. Two sets of rules to comply with. The SIS contribution rules and then the tax contribution rules.

SIS Contribution Rules

The SIS contribution rules are about whether the fund is even allowed to accept a specific contribution. Reg 7.04 SIS Regulations will tell you that.

Any contributions that don’t meet the conditions of Reg 7.04 need to go back to where they came from. If they don’t, all hell will break lose. Your entire SMSF will loose its concessional tax treatment with all fund income taxed at the top marginal rate.

Only if a contribution has passed this first hurdle – the fund is allowed to accept it – do you even need to worry about the tax contribution rules.

Tax Contribution Rules

The tax contribution rules – the second set of rules – sit in ITAA97. These rules will tell you how to treat a contribution for tax purposes, once it has been accepted. Any contributions that exceed the caps, work tests and age limits in ITAA97 are likely to trigger additional tax.

But these rules are a lot more gentle. Penalties will only affect the specific contribution at your marginal tax rate. Not your entire fund at the top marginal tax rate. Big difference.

So in this article let’s focus on the tough ones – the SIS contributions rules Which contributions is your SMSF allowed to even accept? What are acceptable super contributions per reg 7.04 SIS Regulations?

Reg 7.04

Reg 7.04 lists what contributions a super fund can and can’t accept. It is very black and white. A contribution is either ok or it is not ok. If a contribution doesn’t meet the conditions set out in reg 7.04, the contribution needs to go back to where it came from.

Compliance with reg 7.04 means that your SMSF maintains its status as a complying super fund and concessional tax treatment. It means your SMSF doesn’t have to tax all income at the top marginal rate. So making sure you comply with reg 7.04 is worth the effort.

Mandated Employer Contributions

No matter your age, your super fund must accept any mandated employer contributions. For this you can thank Dr Ken Henry who led the Henry tax review published in 2010.

Mandated employer contributions are defined in reg 5.01 (1). Usually they just include the 9.5% superannuation guarantee (SG) payments your employer has to pay. But sometimes your employer also has to pay you super through an award or agreement. Your fund has to accept all of these as mandated employer contributions.

SuperStream is to better capture and track mandated employer contributions.

Voluntary Contributions

In addition to mandated employer contributions, your super fund might receive voluntary contributions. Your employer might voluntarily pay you additional super. Or you personally make member contributions as defined in reg 5.01 (1).

This is where it gets tricky. Whether your super fund has permission to receive these contributions depends on your age and employment status. Beside that make sure your fund has your tax file number (TFN), since it can only accept your member contributions per 7.04(2) SIS Regulations, if it does.

Under 65

As long as you are under 65 as of 1 July of the relevant financial year, all this is easy. Your super fund can accept any concessional contributions. It can also accept any non-concessional contributions within the 3-year-bring-forward rule.

Per SIS reg 7.04 (3) your fund can accept non-concessional contributions up to three times the non-concessional contributions cap per s292 -85(2) ITAA97 and reg 7.04 (7) SIS Regulations, but not more. This is the 3-year-bring-forward-rule. The current non-concessional contributions gap is $100,000, so the three-year-forward rule allows contributions of up to $300,000 over a period of three years.

65 to 75

Between 65 to 75 voluntary contributions get more tricky. Still possible, but trickier. And when we say 75, we mean 28 days past the month you turn 75.

Your fund can only accept additional contributions if you are gainfully employed on at least a part-time basis during the financial year in which the contributions are made. The three-year-bring-forward rule no longer applies, so non-concessional contributions are limited to $100,000 per year.

You are “gainfully employed on a part-time basis during a financial year” per reg 7.01(3) SIS Regulations if your are gainfully employed for at least 40 hours in a period of not more that 30 consecutive days in that financial year. This roughly equals to 10 hours per week.

75 and Older

Once you have passed the 28th day of the month that follows the month you turned 75, the door is closed. No more additional contributions. Any additional super paid into your fund needs to go back to where it came from.

______

So this is what the SIS contribution rules are about. If you get stuck, please just email or call. There might be a simple solution to your problem.

 

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Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

Super Contributions

Super Contributions

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You can contribute to your super – but how much and when depends.  Super contributions come with a lot of strings attached.

Super Contributions

There are three ways to grow your super:

1 – Contributions;
2 – Investment income;
3 – Transfers from another super account.

Investment income and transfers are relatively straight forward. They are what they are. Just make sure the investment income is at-arm’s-length.

But contributions come with a lot of ifs and whens. There is a mandatory and a voluntary part. Contributions are either concessional or non-concessional. And there are caps, work-tests and age limits.

Mandatory Contributions

It is mandatory for your employer to make minimum superannuation contributions on your behalf whenever they pay you $450 or more (before tax) in a calendar month. This is the superannuation guarantee (SG).

And it applies to all adult employees – full-time, part-time or casual – no matter your age with two exceptions.  While under 18, you must work more than 30 hours per week in addition to the $450 before you qualify. The same applies if you work in a domestic setting, for example as a cleaner or nanny.

The current SG rate is 9.5% but set to increase by 0.5% increments until it hits 12% from 1 July 2025 onwards.

Your employer has to pay 9.5% of what you usually earn each month, so your salary for your usual hours of work plus anything extra you usually get – for example commission, bonus, shift loadings or allowances. The official term is ordinary times earnings (OTE). Your OTE doesn’t include overtime.

Your SG entitlement is capped at $5,250.65 per quarter for 2019/20, equivalent to an OTE of $55,270. This is the maximum super contribution base (MSCB). Even if you earn significantly more, your employer only has to pay super up to the MSCB.

If your employer doesn’t pay your SG on time, they have to pay the superannuation guarantee charge (SGC) which consists of your SG payments plus penalties and interest.

Your employer’s SG payments count as a concessional contribution and so trigger a 15% contribution tax upon arrival in your super fund.

Voluntary Contributions

In addition to your employer’s SG payments, you can make additional contributions into super. You don’t have to, but you can. Voluntary contributions are also referred to as personal contributions.

They can be in cash or in-specie. A cash contribution is just a bank transfer. An in-specie contribution is when you transfer ownership of an asset. In-specie contributions are usually limited to SMSFs. Government, industry and retail funds are unlikely to accept in-specie contributions. 

Once you hit 65, you can only make voluntary contributions, if you work at least 10 hours per week, averaged over 30 consecutive days. So over 30 consecutive days you must work at least 40 hours. This is the dreaded super work test.

Once you hit 75, you can’t make any more voluntary contributions – even if you pass the work test – apart from the down-sizer contributions. 

Voluntary contributions are either concessional or non-concessional contributions.

Concessional Contributions

You can contribute up to $25,000 each year before-tax. Before-tax means that somebody claims a tax deduction, either you or your employer. This is called a concessional contribution.

Your employer’s SG payments count towards this cap, but you can use up any remaining cap space with additional personal contributions and claim a tax deduction. If you don’t use up the cap space in one year, you can use it over the following five years as long as your TSB is below $500,000.

Any concessional contributions will trigger a 15% contribution tax upon arrival within your super fund. If your total income plus super contributions exceed $250,000, then your concessional contributions will trigger an additional 15% Div 293 tax.

Non-Concessional Contributions

You can contribute up to $100,000 each year after-tax. After-tax means that neither you nor your employer claim a tax deduction, so this is called a non-concessional contribution.

Spouse contributions you receive count as non-concessional since they trigger a tax offset but not a tax deduction as such.

If you want, you can contribute 3-years’ worth of contributions in one hit. So instead of contributing $100,000 each year, you could contribute more in one year and then contribute less in the following two years, so that all up you don’t contribute more than $300,000 over 3 years.

Once your total superannuation balance (TSB) – so everything you have in super – hits $1.6m, you can’t make any more non-concessional contributions.

Non-concessional contributions don’t trigger any tax upon arrival in your super funds. 

So this is a short overview of what you can contribution when and how. If you get stuck, please call or email us. There might be a simple answer to your query.

 

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Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

superannuation

Superannuation

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Superannuation is for your retirement. You pay less tax to save more for later.

Superannuation

When you are old and no longer work, you hopefully have enough savings, superannuation or the age pension to live comfortably. But will you?

Saving for your retirement is tough – low wage growth, high marginal tax rates, HELP/HECS debt, mortgage, young kids, you name it – and so you probably won’t get far with this one.

Qualifying for the age pension is also tough and likely to get worse, since our current system is not financially sustainable for generations to come.

And so that means your super is all you will have left – unless you want to rely on family and friends, charity and welfare or crime and begging.

That is a lot of heavy lifting for your super to do. And so there are tax concessions to help you.

Less Tax

Your super comes with three tax concessions. You pay 15% tax on any income within super while in accumulation, 0% tax within super while in pension and 0% tax when you cash your super past 60 or 65 years of age.

This is what super is about. If these tax concessions didn’t exist, very few would consider contributing more than they absolutely have to.

Super Rules

Super comes with nice tax concessions, but also with not-so-nice strings attached. Especially four areas have the legislator’s full attention. How much goes into your super. What happens inside. How much moves into pension mode. And how much comes out. 

How Much Goes In

What goes into your super is called a contribution. There is a mandatory and a voluntary part. The mandatory part affects your employer. The voluntary part just you. 

It is mandatory for your employer to pay a superannuation guarantee (SG) on your behalf whenever they pay you $450 or more (before tax) in a calendar month. The current SG rate of 9.5% is applied to your ordinary earnings capped at the maximum super contribution base, which is $55,270 per quarter in 2019/20. These payments count as concessional contributions.

In addition to your employer’s SG payments, you can voluntarily make additional contributions into super (before-tax or after-tax) as long as you are below 65. Between 65 and 75 you can make voluntary contributions if you work at least 10 hours per week. 

Before-tax means that somebody receives a tax deduction – this is called a concessional contribution. Your concessional contribution is capped at $25,000 per year and triggers 15% or 30% tax upon arrival in your super fund.

After-tax means no tax deduction – so this is a non-concessional contribution. Your non-concessional contribution is capped at $100,000 per year and only possible while your superannuation balance (TSB) – so everything you have in super – is below $1.6m. Non-concessional contributions don’t trigger any tax upon arrival in your super fund.

What Happens Inside

What happens inside is all about investment rules. Your super is yours but you can’t do with it whatever you want. There are six rules that are to protect your super – from you and your Part 8 associates. They are especially relevant for self-managed super funds (SMSF) since an SMSF gives you plenty of opportunity for chummy deals with your mates.

You must pass the sole purpose test and act at arm’s length. You must keep in-house assets below 5% of total assets.  And you must neither acquire assets from related parties, nor acquire or hold assets for personal use, nor borrow money unless it is through a limited recourse borrowing arrangement (LRBA).

How Much Moves Into Pension Mode

How much moves into pension mode is all about transfer balance accounts and caps. Since funds in pension mode enjoy 0% tax, there is a cap on how much you can move into pension mode. That cap is $1.6m at the moment, but will increase with time.

What Comes Out

And how much comes out is all about conditions of release and benefit payments. The big draw-back of super is that you can’t access it for a very long time, usually until you hit 60 or 65. There are ways to access it earlier but those will cost you a fair bit of tax.

Super Fund

Your super is for your retirement. To keep it safe over all those years, it needs to go into a separate entity – a superannuation fund, also called a super fund.

You can join a government, industry or retail fund. Or you can set up your own superannuation fund – called a self-managed superannuation fund (SMSF).

A super fund consists of trustees and members. Trustees mange the fund and are the legal owners of any super assets, but hold these on behalf of members. 

In an SMSF, you as the member are also a trustee – either an individual trustee or a director of the corporate trustee.

And so this is a very short overview of superannuation. Super is a complex topic and a highly regulated area. Please call or email us if you get stuck. There might be a simple answer to your question.

 

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Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

minor benefit rule

Minor Benefit Rule

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The minor benefit rule is the one exception that turns a non-deductible contribution into a deductible one. 

Minor Benefit Rule

When you make a donation and you pay way more than the minor benefit you get back, then you obviously did this to support the charity. And that should be rewarded through a tax deduction. This is the essence of the minor benefit rule.

The tricky point is what makes a benefit a minor benefit. What means minor? That is the point the entire rule evolves around.

Recap

Here is a quick recap in case you haven’t read Tax Deductible Donation.

A donation is either a gift or a contribution. A gift is tax deductible if it meets the six conditions listed in s30-15 ITAA97 and TR 2005/13.

A contribution is usually not tax deductible, but there are two exceptions – the general deduction in s8-1 ITAA97 and the minor benefit rule. 

The general deduction in s8-1 (1) ITAA97 allows you to claim a tax deduction whenever you pay for something to gain assessable income. To get brand exposure or to buy donor data for example.

The minor benefit rule in s30-15 ITAA97 allows you to claim a tax deduction for a contribution if your contribution qualifies as a tax deductible gift without being a gift and – in addition – meets five other conditions.

Minor Benefit Rule

For your contribution to be tax-deductible after all, it needs to pass two tests. It needs to pass the test for a tax deductible gift. That is the first test. Let’s call it the gift test.

But instead of being a gift – the first condition for being a tax-deductible gift – it needs to pass the additional five conditions of the minor benefit rule. This is the second test.

Gift Test

The contribution needs to be LIKE a tax-deductible gift …apart from the fact that it isn’t a gift. So it must meet all the conditions a gift has to meet per s30-15 ITAA97 and TR 2005/13, except the first one about receiving nothing in return. Roughly speaking, a gift is tax deductible if it meets the following conditions. It must be

1 – a gift – skip this one – a contribution fails this one by definition;
2 – of money or property;
3 – of sufficient value;
4 – made voluntarily;
5 – with a tax receipt;
6 – to a recipient with DGR status.

This is the first test.

Minor Benefit Rule

The second test is passing the minor benefit rule. To pass the minor benefit rule:

1 – You must be an individual and not a company, trust or partnership.
2 – The event must be a fundraising event or charity auction.
3 – If you claim the price of a ticket, you can only claim up to two tickets.
4 – You must only receive a minor benefit in return for your contribution.
5 – The relevant charity must run less than 15 events of this type per year.

Minor 

The core essence of the minor benefit rule is that the benefit you receive is only…MINOR. The thinking is that if you get way less than you paid for, then you must have done this to support the charity. And that should be rewarded with a tax deduction. 

But what is a minor benefit? A benefit is minor if it is worth $150 or less and you pay at least 5 times more than what it is worth. So there are two criteria – market value and payment.

Market Value

The market value of the benefit must be $150 or less. 

This is important. It means that whenever you buy something at a charity auction worth more than $150, the auction item won’t qualify as a minor benefit. The same applies to the tickets for a fundraising event. If it is worth more than $150, no minor benefit.

But remember this is not about what you actually pay for the ticket or item. It is about what it is worth – the market value of your ticket to the event. And the market value of the auction item you successfully bid for.

Payment

You must pay at least 5 times more than its market value.

And this is just as important. It means that if the venue charges $100 per head, then you must pay at least $500 for the ticket for it to qualify as a minor benefit. And if an auction item is worth $50, you must pay at least $250 for it.

The argument is that if you pay 5 times more for what it is worth, you clearly pay the money for other reasons than the benefit you get back. Your intentions are clearly altruistic.

How To Determine Market Value 

A benefit is worth its market value, which is what you would have had to pay for the same good, service or event on the open market. And if there is nothing else like this, then a similar or comparable good, service or event (price or market comparison).

And if it is impossible to make a reasonable price or market comparison, then the market value is assessed based on cost. Take the actual cost plus notional costs plus a certain profit margin and you get the market value (cost-based approach). 

So the value of a benefit is assessed based on market value or cost. Since it is the charity issuing the receipt, they are the ones that need to ultimately work this out. 

Subsidised Benefits

What happens if some benefits are subsidised and the charity didn’t actually pay for these? Makes no difference. Any benefit is assessed based on its market value or cost, even if part or all of the benefit was actually subsidised by another donor.

Let’s say a donor picked up the tap at the charity Gala dinner. So the charity only had to pay $50 per meal, but not the additional $60 per head for free drinks. What is the market value of the benefit received? The answer is $110.

Or another donor donated a range of items for the charity auction. The minor benefit rule still uses the actual market value, despite the fact that the charity paid nothing for these items.

Even if everything was donated – venue, meals, drinks, MC and auction items – it would still be the market value of all this that would go into the calculation. The fact that the charity didn’t pay for some of the benefit doesn’t change the market value or notional cost of that benefit.

Free Event

What happens if attendees don’t pay for the ticket to attend and are just asked for a donation, which they are free to make or not?  Then the entire payment is a donation and hence tax deductible as such. In this case you don’t need to worry about the minor benefit rule.

Splitting

The charity can’t split the ticket into event and gift. It can’t say $150 of the ticket is for the Gala dinner and the other $350 are a gift. Para 149 in TR 2005/13 is very clear on that one,

Para 149: Where DGRs conduct fundraising events such as celebrity dinners, gala events, $1,000-a-plate dinners, and so on, the price of a ticket cannot be notionally split between the value of the material benefit received, that is, the meal, and the amount which represents a gift. Where attendees are to pay a given sum of money in order to attend a function, no part of that sum can be considered a gift. This is so even where the cost of attendance is well in excess of the value of the meal received.

But the charity can charge the meal at market value and then ask for a donation. Para 151 in TR 2005/13 even suggests that,

Para 151: However, a fundraiser can offer tickets to a function for an amount which approximates its market value, and solicit additional optional donations from potential attendees. The ticket cost will not be deductible as a gift. However, the additional optional donations will be tax deductible.

Example

After all this, let’s do an example. 

Let’s say there is a Gala dinner followed by a charity auction, which Bob attends. Bob pays $500 for the dinner worth $100 and he successfully bids $1,000 for a golf bag worth $100 and $500 for wine worth $50.

In that case Bob can claim 3 deductions. He can claim $400 for the ticket, $900 for the purchase of the bag and $450 for the purchase of the wine. 

FBT

And last but not least, just in case it confuses you. FBT also has a minor benefit rule. But it is a case of same name – different rule. The minor benefit rule for FBT purposes has nothing to do with the minor benefit rule for contributions to charities.

For FBT purposes, benefits that are less than $300 in notional taxable value count as minor benefits and hence are exempt from FBT. But that is FBT land and has nothing to do with tax deductible contributions.

 

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Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.