Residency vs Non Residency by Claire Chapman

RESIDENCY VS NON-RESIDENCY FOR TAX PURPOSES

There is a common misunderstanding that residency for tax purposes is the same as residency for immigration purposes. It is possible for a person to be an Australian resident for tax purposes whilst being a non-resident for immigration purposes.

Generally, if you reside in Australia, you will be considered an Australia resident for tax purposes. As there is no definition of the word ‘reside’ in the tax legislation, the tax office relies on the ordinary definition of the term ‘reside’. The Shorter Oxford Dictionary defines ‘reside’ as:

“…to dwell permanently, or for a considerable time, to have one’s settled or usual abode, to live, in or at a particular place…’[1]

Some of the matters that the tax office will take into account when determining if a person is a resident for tax purposes or not are as follows:

Individuals Coming to Australia

  • Intention or purpose of presence
  • Family and business/employment ties
  • Maintenance and location of assets
  • Social and living arrangements

In particular, if an inbound individual has been in Australia for more than half the tax year (183 days), they will generally be declared as an Australian resident.

Individuals Leaving Australia

  • Intended and actual length of stay overseas
  • Any intention either to return to Australia at some definite point in time or to travel to another country
  • Existence of an established home overseas
  • Abandonment of any residence or place of abode in Australia (while overseas)
  • Duration and continuity of the individual’s presence in the overseas country
  • Family and financial ties with Australia.

The weight to be given to each factor will vary with the individual circumstances of each case and no single factor is conclusive.

The intention of a particular individual to either become or cease to be an Australian resident is particularly important. As a result, the tax office is now placing more emphasis on this intention as indicated on the person’s Australian immigration incoming or outgoing passenger cards.

It is important to determine the correct residency status as Australian residents are taxed in Australia on their world-wide income, whereas non-residents are only taxed on their Australian-sourced income. Non-residents are also taxed at higher rates than residents. Residency status must be determined each year.

[1] TR 98/17, para. 13
Posted in Accountant, Foreign asset, Income, Property, Tax

Taxation of a SMSF (Self Managed Super Fund ) by Sharon Plant

Taxation within a SMSF

One of the basic principles of superannuation is that it is a low taxation vehicle. The Government gives these tax concessions in return for your SMSF complying with the super laws, which restrict when you can access these funds.

The following is a overview of the basics of the taxation within a SMSF, assuming that the fund is a complying superannuation fund.

Taxable income

The trustees of a complying SMSF are liable to pay tax (from the assets of the SMSF) on the taxable income of the fund for each year of income. The taxable income of a SMSF is calculated as:

Total assessable investment income + concessional contributions + taxable capital gains – allowable deductions.

This taxable income is taxed at the concessional rate of 15%.
However, the are some special rules for:

– capital gains
– special income

And a further reduction of tax payable by way of any rebates such as imputation credits.

Capital gains tax:

A capital gain arising from the disposal of an asset of the SMSF will form part of the fund’s taxable income and will be subject to tax at 15%. However there are some further concessions:

  • – Where the fund has held the asset for more than 12 months, the fund will receive a discount of one-third of the capital gain (effectively reducing the capital gains tax to 10%). This is known as the CGT discount method. For example, if the fund makes a $10,000 capital gain on the disposal of an asset and the discount method applies, only $6,666.66 would be counted as taxable income.

  • – Where the fund acquired the asset prior to 21 September 1999 and has held it longer than 12 months, the fund has the choice of using either the above discount method or the frozen indexation method (frozen at 30 September 1999) to calculate the capital gain. If the fund acquired the asset on or before 30 June 1988, the asset is deemed to have been acquired by the fund on 30 June 1988.

  • Special income:

  • Special income of a SMSF is taxed at the highest marginal tax rate i.e. 45%. It includes:

  • – Dividends received directly or indirectly from a private company, unless the Commissioner is of the opinion that it would be unreasonable having regard to a number of factors.

  • – Distributions from a trust, where the SMSF as beneficiary had no fixed entitlement (i.e. discretionary trust distributions)

  • – Any other income of the fund where the parties were not dealing with each other at arm’s length, or the income derived is greater than that which could be expected if the parties had been dealing with each other at arm’s length (i.e. excessive unit trust distributions).

  • Concessional (Taxable) contributions

  • Concessional contributions (or formerly known as Taxable contributions) are those contributions generally made up of Employer contributions, and those personal contributions where the member has claimed a tax deduction. Contrary to popular belief, these contributions actually make up part of the fund’s taxable income.

  • Use of imputation credits

  • Once the 15% tax rate has been applied to the taxable income of the fund, the use of imputation credits may be able to reduce, or even eliminate the actual tax payable.

  • Member goes into the pension phase:

  • Upon retirement (or other condition of release), members of your SMSF will commence a private pension from the fund. From a tax perspective, any income and capital gains generated from what is known as “segregated pension assets” of the fund is subject to zero tax within the fund. That’s right, zero. In this case, any imputation credits received can be used to reduce the tax payable by other members of the fund who are in the accumulation phase. This allows incredible flexibility. If there are no “accumulation” members, then these imputation credits can be received by the SMSF as a refund from the ATO.

    Once a lump sum or pension payment is made to a member, the lump sum or income stream itself is tax free in the hands of the member if they are over the age of 60, however there may be some tax payable if you are less than 60.

Plant and Associates Pty Ltd

Accountants Beenleigh, Accountants Nerang

www.plantandassociates.com.au

1300783394

Posted in Accountant, Asset Protection, Super, Tax

Winding up a SMSF

To wind up a SMSF you need to:

  • Refer to your SMSF Trust deed as it may contain vital information about winding up your fund.
  • Notify the ATO within 28 days
  • Deal with all the assets of the fund
  • Arrange a final audit
  • Complete your reporting responsibilities including lodging your SMSF annual return and finalising any outstanding tax liabilities.

Why would you need to wind up a SMSF

There are a number of reasons why you might need to wind up your SMSF:

  • All the members and trustees may have left the SMSF
  • All the benefits may have been paid out of the fund
  • Relationship breakdown
  • The fund may no longer meet the definition of an Australian Superannuation fund because the trustees have moved overseas permanently
  • You may have found that running an SMSF is not in your best interests
  • The trustees’ circumstances may have changed in a way that affects their capacity to effectively manage their fund.
  • There may be insufficient balance of funds in the SMSF to meet the ongoing costs of operating the SMSF.

Options available to pay out the benefits

To pay benefits to a member when you wind up your SMSF, a condition of release must be met to allow them access to their benefits. If the member does not meet a condition of release or does not want to access their benefits at the time the funds winds up, the benefits must be rolled over to another complying super fund.

Assuming a condition of release has been met, there is the option of an in specie transfer of assets to the member. This is particularly useful if the timing is not right to sell the assets in the SMSF. (This includes when a managed fund puts a stop on trading due to a financial crisis). There are various tax consequences of paying out benefits both as cash and in specie so you should always seek advice before proceeding.

Plant and Associates Pty Ltd

Accountants Beenleigh, Accountants Nerang

www.plantandassociates.com.au

1300783394

Posted in Accountant, Asset Protection, Capital Gains Tax, Deceased Estate, Property, Super Tagged with:

Do you have a SMSF and are thinking of moving overseas? by Bernie O’Sullivan and Julian Smith (Cleardocs)

Fund residency requirements generally

For an SMSF to be a ‘complying fund’ and receive concessional tax treatment, the SMSF must be an Australian resident fund. SMSFs are at risk of losing their complying status, if their members spend time working overseas. This is because the residency rules require trustees and the majority of contributing members to reside in Australia.

For a fund to remain resident, the fund has to satisfy the residency rules throughout an income year — unless an exception applies.

The trustees’ presence rule

Generally speaking, for SMSFs, the individual trustees of the fund must be the same people as the fund’s members. Similarly, if a fund has a corporate trustee, then the directors of the trustee company must be the same people as the fund’s members.

Under the residency rules, central management and control of the SMSF must be in Australia: this implies that the trustee directors or individual trustees must function in Australia. Although these are commonly called residency rules, on closer examination they actually involve a physical presence test, rather than a residency test.

The exception to the trustees’ presence rule

However, there is one exception: a trustee or director may be absent from Australia for a continuous period of up to 2 years and still not jeopardise the fund’s complying status. To start the 2 year period again, the person must return to Australia for a visit of more than 28 days.

The risk to the SMSF by a breach of the trustees’ presence rule

The problem then, is that an overseas assignment of more than 2 years may well pose a residency problem for an SMSF — unless the assignment is broken by a return to Australia for a month or more.

The active members asset rule

Non-resident members must not have more than 50% of the total fund of active members

Member residency requirements revolve around the concept of an “active” member. Generally speaking, an active member is a member who is resident in Australia and currently contributing to the SMSF, or having contributions made by their employer to the SMSF.

Under another rule, the accumulated entitlements of non-resident active members must not exceed 50% of the entitlements of total active members — unless an exception applies.

The exception to the active members asset rule

However, there is also an exception to this rule. The amount of active member entitlements does not include those of a member:

  • who does not contribute to the fund when they are non-resident; and
  • who does not have contributions made by their employer to the fund in respect of periods of non-residency

This exception is available because the member is considered non-active.

Non-active, non-resident members still cause a problem…down the track

Even if that exception applies, a non-active, non-resident member will still present a problem to the SMSF if they are overseas for more than 2 years. This is because the SMSF will not be able to comply with the trustees’ presence rule.

Why is it important for a fund to maintain its residency status?

A fund needs to maintain its residency status. If a fund loses its residency status:

  • it will no longer be “complying”;
  • the tax rate on its income and gains increases from 15% to 45%;
  • a tax of 45% of its assets applies in the year it becomes non-complying;
  • a tax of 45% of the assets applies again if it then becomes complying again;
  • it loses the discount for certain realised capital gains;
  • it loses the exemption for income supporting current pensions;
  • it loses exemption of income flowing from life policy investments and PST unit realisations; and
  • it loses deductions for life and disability insurance premiums.

The ATO’s approach

The ATO has indicated at recent industry forums, that:

  • it has no discretion to ignore a fund’s non-compliance arising from non-resident status; and
  • it will be monitoring the residency status of SMSFs.

Funds can avoid residency problems

Planning an overseas assignment

It is crucial to seek advice on how a SMSF will be managed, before members go overseas. Although a member/trustee may plan to be away for less than 2 years, a change of plan to extend the trip may have disastrous results.

Contributions

If one or more remaining resident members have:

  • more than 50% of the fund’s assets, then this will still satisfy the 50% resident active member requirement , and contributions may continue. However, it will be important to carefully monitor the situation in case those balances change or the intentions of the remaining resident members change; or
  • less than 50% of the fund’s assets, then this will not satisfy the test. However, this problem may be avoided if during a period of non-residency, the contributions of the remaining resident members cease and no employer support is provided that is, the remaining members become non-active. However, the fund will still have to comply with the trustees’ presence rule

Trustees

It is important to seek advice about maintaining central management and control in Australia. It is not enough that the trustees may remain resident for tax purposes.

The legislation requires the trustees to be present in Australia, unless the 2 year concession applies. If a majority of the trustees/members remain in Australia or satisfy the 2 year rule, then it may be possible to put forward a case supporting Australian management and control. However, it is crucial to plan ahead and monitor to ensure that compliance is achieved.

What you should plan for

If there is any doubt about the central management and control of the fund, it would be prudent to plan for:

  • Replacing the trustees:

This could be done by converting the SMSF to a small APRA fund with a professional trustee. This approach would generally enable the fund to continue its existing investments and strategy — as long as the new trustee agrees with the existing investment strategy. However, there are increased costs to engage a professional trustee and increased regulatory fees.

  • Transferring entitlements to another fund:

Another approach is to consider winding up the fund and transferring the entitlements to a larger fund. However, the trustees would lose control over the specific assets: Also larger funds are most unlikely to accept the transfer of the member’s specific assets. This means that the SMSF’s assets may have to be converted to cash first (with duty and CGT consequences). However, one benefit is that administrative burdens and compliance concerns become a thing of the past.

These choices should be carefully considered in the context of members’ long term plans.

Plant and Associates Pty Ltd

www.plantandassociates.com.au

1300783394

admin@plantandassociates.com.au

Posted in Accountant, Asset Protection, Super, Tax

Land Tax – McCullough Robertson

McCullough Robertson Lawyers have provided the following information in relation to land tax. The Office of State Revenue have advised that they will be contacting all landowners claiming a land tax “home exemption” as part of their audit process.  Those clients at risk of losing their “home exemption” are:

  • clients who rent out rooms in their home
  • clients who spend time between multiple properties
  • Clients who move into rented accommodation and continue to claim the main residence(NSW)
  • Clients who reside on land not necessarily zoned residential (NSW)
  • Clients with multiple properties
  • Clients who use the same premises to live and carry on a business
  • Clients in the process of renovations/demolitions
  • Elderly – transitioning into care
  • Workers who work overseas, but may have claimed home exemption in past for Australian property.

Land tax is a tax based on the unimproved value of land. In QLD it is assessed on the 12 months from 30 June each year. In NSW it is assessed on the 12 months from 31 December each year.

Queensland Tax free threshold Maximum rate
Resident individuals $600,000 $62,500 each plus 1.75c for each $1 more than $5,000,000
Trustees, companies and absentees $350,000 $75,000 plus 2c for each $1 more than $5,000,000

 

New South Wales Tax free threshold Maximum rate
General $412,000 (tax free) $100 plus 1.6% up to the premium threshold
$2,641,000 (premium) $35,444 for the first $2,641,000 then 2%

Home exemption applies where?

property is owned by a person and used as the person’s home ?

property is owned by trustee and used as home of all beneficiaries of the trust ?

Used as a home statutory tests ?

main test – Continuously used for residential purposes for 6 month period immediately prior to 30 June ?

deeming test – deemed use at 30 June broadly if

– landowner resides in a nursing home/hospital for all or part of the 6 month residency period

– temporarily residing elsewhere due to demolition or renovations ?

residual test – Otherwise if Commissioner satisfied the land is used as a person’s principal place of residence

Land held by trustees ?

still eligible for main residence exemption if land is used by beneficiaries as principal place of residence and a power of appointment has been exercised in favour of those beneficiaries by the trustee ?

may not want absolute entitlement as this would trigger a CGT event ?

may just want to grant a mere right to occupy ?

Note exemption not available for NSW trusts or companies

NSW principal place of residence exemption (post 1 Jan 2005) ?

Home exemption applies where ?

land is used and occupied as the land owner’s principal place of residence, if the land

– is residential land or

– a strata lot ?

‘Used and occupied’ statutory tests ?

main test – the land (and no other land) has continuously been used for residential purposes for 6 month period immediately prior to 31 December ?

residual test – otherwise if Commissioner satisfied the land is used as a person’s principal place of residenceVarious concessions and extensions re exemption ?

If you would like further information or would like to discuss your situation you can contact Lyndon Garbutt, Senior Associate on 07 3233 8921 or email: lgarbutt@mccullough.com.au

Posted in Investments, Property, Tax

Income Tax Requirements of Deceased Estates

Executors and trustees of deceased estates should be aware that there are various tax requirements that must be fulfilled in respect of the estate of a deceased person and that these requirements must be met before any funds or assets are transferred to the beneficiaries of the estate.

Initially, a final tax return will be required for the individual up until their date of death. This will include any income earned by the person for the period from the beginning of the financial year (1 July) to their date of death. Any tax payable in respect of this tax return must be paid from the estate funds. You may also be required to lodge any outstanding returns for prior years.

If the estate earns any income between the date of death and the time that the estate is distributed to the beneficiaries, it will be necessary to lodge a tax return in respect of the estate of the person. In these circumstances, the executor/trustee must apply for a tax file number for the trust estate, lodge a tax return for the estate and pay any tax applicable. This must be done prior to the distribution of any funds to beneficiaries. In some instances, there may be several years where a tax return will need to be lodged for the trust.

 

Below are some examples that explain the potential tax implications of different circumstances:

Example 1:

Mr Sample dies on 30 March 2015. At the time of his death, he is retired and his only assets are cash in a bank account and shares held in a listed company.

In accordance with his will, all his assets are to be transferred to his wife, Mrs Sample. This is done very soon after his death and no income is received from the assets between the date of death and the transfer date.

In this circumstance, a tax return will need to be lodged in Mr Sample’s personal name for any interest or dividends received from 1 July 2014 to 30 March 2015. However, as his estate did not receive any income prior to the asset transfer to his wife, the trustee will not be required to apply for a TFN or lodge a tax return in respect of the estate.

 

Example 2:

Mr Sample died on 30 March 2015. At the time of his death, he holds significant cash investments in term deposits and shares in several listed companies.

In accordance with his will, the shares are sold by the executor and the proceeds received, together with the funds from the term deposits are held in a bank account prior to being distributed to the beneficiaries named in the will. As the funds are held for several months, there is an amount of interest income earned on the account during the interim period.

In this circumstance, the trustee would firstly need to lodge a personal tax return for Mr Sample for the period from 1 July 2014 to 30 March 2015.

They would also need to apply for a tax file number for the deceased estate (a trust) and a tax return would need to be prepared to include the interest income and any capital gain from the sale of the shares.

It is important to note that when dealing with shares and other non-cash assets (e.g. property), the executor may need to obtain confirmation of when the deceased person acquired the asset and the cost they paid for the asset. For this reason, it is important that if you own these types of assets, you should retain this information in such a manner that they can be located upon your death.

It should also be noted that only certain costs of deceased estates are deductible for tax purposes. For example, accounting fees for preparation of tax returns for the deceased person are deductible, however funeral costs are not.

If you are the executor of a deceased estate, you should contact us to discuss the possible tax requirements to ensure that there are no delays in distributing the estate to the beneficiaries.

Plant and Associates Pty Ltd

www.plantandassociates.com.au

1300783394

admin@plantandassociates.com.au

Posted in Accountant, Deceased Estate, Tax

Work related expenses in the ATO firing line

 

Work related expenses in the ATO firing line

This year the ATO is paying particular attention to the following work-related expenses: –

  • Overnight Travel. – The ATO is concerned that excessive claims are being made for overnight travel costs, such as transport, accommodation and meals. As a general rule, employees can claim a deduction for travel expenses they pay where –
  1. their employer requires them to perform their work away from their usual workplace for a short period
  2. it would be unreasonable to expect them to return home each day, which means they must stay away from home while they are doing that work.
  3. the ATO  considers an individual is “traveling” for work purposes, as opposed to “living-away-from-home”, when the period away is less than 21 days.
  4. however if away more than 6 nights a travel diary is required.
  5. Substantiation Exception – Under this exception, individuals can claim a deduction for the full amount of their overnight travel expenses with out receipts if certain conditions are met.
  6. See ATO TD 2014/19 for  allowable rates  
  • Expenses for transporting bulky tools and equipment between home and work. – Where an individual transports bulky tools and equipment required for their job, provided that certain requirements are met.
  1. a deduction is not allowable if a secure place for storage of equipment is provided at the workplace.
  2. if the equipment is transported as a matter of convenience or personal choice, no deduction is allowable.
  • Computers, phones and similar devices – As a general rule, the cost of mobile devices are deductible for employees who can demonstrate they are either “on call” or are required to contact their employer on a regular basis while they are away form the workplace.
Posted in Tax

Superannuation Guarantee and excess contributions

As an employer, you are required to pay compulsory superannuation to provide for the retirement of your employees and some contractors. The minimum super guarantee payable is currently 9.5% of an employee’s ordinary time earnings (i.e. their ordinary hours of work, including commissions, shift loadings and allowances but not overtime payments).

The super guarantee must be paid at least four times during the year, on the 28th day of the month following the end of each quarter (e.g. super accrued for the July to September 2015 quarter must be paid to the employee’s superannuation fund no later than 28th October 2015).

Failing to pay the superannuation by the due date will result in your business being denied a deduction for that expense. This can significantly increase the tax liability of your business.  Furthermore, failing to pay by the due date requires you to submit documentation by no later than 28 days after the due date for the late paid superannuation with an admin fee and interest on the superannuation components.  If you are severely behind in the superannuation, the ATO can come after you personally for the unpaid superannuation.

There are certain circumstances where you are NOT liable to pay super on an employee’s wages, these being:

  • If the employee earns less that $450 in a calendar month;
  • If an employee is under 18 years old and works less than 30 hours per week;
  • If the employee is a private or domestic work (e.g. a nanny, housekeeper or carer) and works less than 30 hours per week;
  • Non-resident employees you pay for their work outside Australia;
  • Some foreign executives who hold certain visa or entry permits;
  • Employees under the Community Development Employment Program;
  • Members of the army, naval or air force reserve for work carried out in that role;
  • Employees temporarily working in Australia who are covered by a bilateral super agreement.

You have to pay super guarantee for contractors (even those who have quoted an ABN) if:

  • Their contract is wholly or principally (i.e. more than half the dollar value of the contract) is for their labour;
  • For their personal labour and skills, and not to achieve a result. This may include physical labour, mental effort or artistic effort;
  • To perform the contract work personally (i.e. they must not delegate the work to someone else).

Excess Concessional Contributions Assessments

The contributions made into superannuation are subject to certain annual contribution caps. These are dependent on the age of the member and also the type of contributions being made. Exceeding these caps can result in significant tax consequences, as the additional contribution amounts are taxed at the top marginal tax rate, currently 49%.

The most common instance where we see employees incur an Excess Concessional Contributions Assessment is where their employer has failed to make their compulsory superannuation guarantee contributions for several years and then pays the outstanding amounts into an employee’s superannuation fund in one lump sum. This can result in the employee having to pay the excess contributions tax. Where the contributions actually related to a prior year, the employee can apply to the tax office to have these contributions “reallocated” to the year to which they related. Generally, the employee is required to pay the additional tax up front to the tax office and then if their application for reallocation of the contributions is successful, the ATO will refund the tax amounts. This process can take some time and in some instances our clients have waited 6 months for the additional tax amounts to be refunded to them. This can be a significant burden for the taxpayer, given that they have no control over when their employer pays their superannuation or if they pay it on time.

It is therefore important that employers are paying their employee superannuation contributions in a timely manner. Employees should also be checking their superannuation accounts regularly and following up with their employer if contributions have not been made.

Plant and Associates Pty Ltd

07 5596 5758

www.plantandassociates.com.au

Posted in Super, Tax, Tax Minimisation Tagged with: ,

Intellectual Property

Intellectual Property

Intellectual property (IP) refers to creations of the mind such as inventions, literacy and artistic works, designs and symbols, names and images used in work.  It includes all types of identifiable intangibles that are protected by legal rights. Eg Copy rights, Patents and Trade marks.

The economic value of IP is based upon the following concepts:

  • Monopoly rights provided to the owner
  • Provides a discernible economic advantage to the holder
  • Is often not considered to be an asset by financial institutions

It is important to protect your IP by seeing an solicitor who specialises in IP protection.

Posted in Accountant, Asset Protection, Super, Tax, Tax Minimisation Tagged with: ,

Avoid Payroll errors – simplify your payment summary preparation

Another financial year is almost over and it will soon be time to prepare your payment summaries.  Minimise the time spent fixing errors by checking your files now.

Ensure the following details are collected and current:

  • Tax File Number
  • Full Name
  • Employment start and termination date
  • Date of Birth
  • Current Address
  • Pay information: gross salary, allowances, hourly rate, period of employment, salary sacrifice and FBT items

Ensure you report your payroll obligations in a timely manner:

  • PAYG withholding deduction from employee wages is reportable monthly/quarterly on the BAS/IAS
  • Payment summaries must be prepared and given to employees by 14/07/2016 and lodged with the ATO by 14/08/2016
  • Superannuation must be reported and paid by the 28th of the month following the quarter (eg 28/07/2016 for the June QTR).  If you are late you must complete the charge statement for late contributions.

We can prepare your payment summaries for you (Cost is $11 per summary)

We can also attend to the reporting of your superannuation contributions quarterly to a super clearance house at a cost of $132 for 1-9 employees or $187 for 10-19 employees.

If you are late remitting your superannuation we can assist you with the completion of the charge statements at a cost of $132 plus $11 per employee per reporting period.

www.plantandassociates.com.au

admin@plantandassociates.com.au

07 55965758

Posted in Super, Tax Tagged with: , ,