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Author: Glance Consultants

What you need to know about investment bonds?

Posted on by Glance Consultants

Investment bonds are a practical investment option for those who earn a high income and seek long term tax efficiencies.

Investment bonds, also known as tax-paid, insurance or growth bonds, work similarly to a managed fund, except they are combined with an insurance policy. There is a ten year rule which allows tax free earnings on the bond if no withdrawals are made in the first ten years and contributions do not exceed 125% of the previous year’s contribution. Most investment bonds offer a range of investment options to cater for differing risk levels such as cash, fixed interest, shares, property or a range of diversified investment options.

Investment bonds are particularly suitable for high income earners with a marginal tax rate higher than 30% who want to build wealth without increasing their personal tax liability. They are also useful for estate planning purposes as beneficiaries other than dependants can be nominated and will not incur tax upon receiving proceeds.

An investment bond can be used as an investment structure for future financial needs of children such as education expenses. Alternatively, investment bonds can be used for supplementary retirement planning as investment bonds are not subject to preservation age, unlike superannuation investments, which may be more viable for those planning an early retirement.

Investments held in an investment bond are generally not subject to capital gains tax (CGT). Where an investment does not qualify for a CGT discount, the maximum tax rate of 49% may apply on earnings whereas an investment bond generates a maximum rate of 30%.

However, investment bonds do carry some risk that individuals should consider before making a decision. Common fees such as establishment, contribution, withdrawal, management, switching and adviser service fees may be applicable depending on your provider and the investment options you choose.

If you do choose to invest in an investment bond ensure you will be able to make regular contributions over the lifetime of the investment and can comply with the 125%. It is important to align your financial and estate planning goals with an appropriate investment structure suitable to your risk profile.

Does your SMSF Meet the Sole Purpose Test?

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If you have a self-managed super fund (SMSF), then you need to meet the sole purpose test to be eligible for the tax concessions that are normally available to super funds. The sole purpose test aims to ensure that SMSFs are maintained for the purpose of providing benefits to members upon retirement or for beneficiaries if a member dies before retirement.

The sole purpose test is not a formal process that trustees have to go through, but more of a standard rule of thumb they should follow when making decisions relating to their fund and investments. If the sole purpose test is contravened, the fund will lose its concessional tax treatment and be subject to the highest tax rate. Members could also be disqualified as a trustee and face civil and criminal penalties such as fines or imprisonment.

If you or anyone else get some sort of financial, pre-retirement benefit when making investment decisions and arrangements other than increasing the return of your fund, then it is likely that your fund does not meet the sole purpose test. The test is divided into core and ancillary purposes, where regulated funds must be maintained for at least one core purpose and can add one or more ancillary purposes but cannot be run only for ancillary purposes.

The core purposes are paying benefits to:

  • Members on or after retirement from gainful employment.
  • Members when they have reached a prescribed age.
  • Dependents if the member dies.

The ancillary purposes are:

  • Termination of a member’s employment where the employee made contributions to the fund on behalf of the member.
  • Cessation of employment due to physical or mental health reasons.
  • Death of the member after retirement where the benefits are paid to the member’s dependants or legal representative.
  • Death of the member after attaining a prescribed age where the benefits are paid to the member’s dependants or legal representative.
  • Other ancillary purposes approved in writing by the regulator (ATO or the Australian Prudential Regulation Authority).

Making NRAS Claims

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The national rental affordability scheme (NRAS) started on 1 July 2008, encouraging large-scale investment in affordable housing. It offers tax and cash incentives to providers of new dwellings for 10 years, granted they are rented to low and moderate income households at 20% below market rates.

Though the NRAS is no longer taking new investments, property owners within the scheme will soon be receiving letters from the ATO to remind them of their claim requirements.

The two key elements of the NRAS are;

  • An Australian Government contribution in the form of a refundable tax offset or direct payment to the value of $8,394.10 per dwelling per year in 2018-19. The Australian Government contribution is 75% of the total annual incentive.
  • A state or territory contribution in the form of direct financial support or an in-kind contribution to the value of at least $2,798.03 per dwelling per year in 2018-19. The state or territory contribution is 25% of the total annual incentive.

Owners of NRAS rental property are eligible to claim a refundable tax offset if:

  • The Approved Participant has provided them with advice of their entitlement based on the certificate received from the Housing Secretary, and;
  • The claim is made in the year to which the certificate relates.

Deductions can be claimed for expenses incurred with a NRAS rental property, excluding the contribution amount received from the state or territory. The contribution amount is non-assessable, non-exempt (NANE) income for tax purposes.

When do you need an ABN?

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When do you need an ABN?An Australian business number (ABN) is a unique 11-digit number that the Australian Business Register issues to all businesses, identifying your business to the community and government whilst also making it easier to keep track of business transactions for tax purposes.

While it is compulsory for businesses with a GST turnover of $75,000 or more to have an ABN and to be registered for GST, businesses with a GST turnover of less than $75,000 can still apply for an ABN and may choose to register for GST.  You are entitled to an ABN if you are aligned with the following entitlement criteria.

Carrying on or starting an enterprise in Australia:

An enterprise includes activities done in the form of a business, as well as acting as the trustee of a super fund, operating a charity and renting or leasing property. Features of business include:

  • Significant commercial activity, involving commercial sales of products or services and is of a reasonable size and scale.
  • Intention to make a profit from the activity as demonstrated by a business plan and a set rate of pay.
  • The activity is repeated, systematic, organised and carried on in a business-like way with records being kept.
  • The activity is carried on in a similar way to that of other businesses in the same or similar industry.
  • The entity has relevant knowledge or skill.
  • The entity has the appropriate insurance, such as public liability and WorkCover.

Making supplies connected with Australia’s indirect tax zone:

Even if your business or organisation is located outside Australia, you may be entitled to an ABN if you are carrying on an enterprise in Australia or involves making supplies connected with Australia’s indirect tax zone.

A Corporations Act company:

Companies registered with the Australian Securities & Investments Commission (ASIC) are entitled to an ABN.

Returning to Work after Accessing your Super

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Returning to Work after Accessing your SuperRetirement isn’t necessarily a permanent thing as even the best-laid plans can collapse when circumstances change. The Australian Bureau of Statistics (ABS) has found the most common reasons retirees return to employment are financial necessity and boredom. But what does this mean when you have already dipped into your superannuation funds?

Individuals are able to access their super once they have reached their preservation age and retired, ceased an employment arrangement after age 60, or turned 65. Depending on your circumstances, there are rules regarding how you can return to work after retirement.

For those who genuinely retired with no intention of ever returning to work but found that circumstances required them to, you can return provided that you work on a casual basis up to 10 hours per week. By meeting this requirement, you can still access your super whilst working, however, additional contributions made to your account after you met the definition of retirement will be preserved until you meet another condition of release.

In the event you access your super after an employment arrangement comes to an end once reaching age 60, you are able to work in a new position as soon as you like, provided the first arrangement ended. Subsequent contributions made after your employment arrangement came to an end will be inaccessible, however, you will have access to the benefits that became available as a result of your first employment arrangement coming to an end.

When you turn 65, you don’t have to be retired or satisfy any special conditions to get full access to your super savings. This means you can continue working or return to work if you have previously retired, provided you complete the work test requirements before going back. If you return to work and earn more than $450 a month, your employer will be required to make superannuation contributions at the current rate of 9.5% until you reach age 75 where you can still work but receive no further super contributions, either voluntary or from your employer.

As returning to work and continuing to receive super is circumstantial, individuals considering their options should consult their accountant or financial advisor for information specific to their situation.

Are you meeting the Active Asset Test?

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Are you meeting the Active Asset Test?To qualify for small business CGT concessions, an asset must meet the conditions of the Active Asset Test to apply. An asset is considered active when you own it and it is used or held ready for use in relation to a business. You can also have an intangible active asset if it is inherently connected with a business you carry on.

An active asset of yours has been held for a certain amount of time, based on how long you have owned the asset and the test period to meet the requirements of the Active Asset Test. The test period begins when you acquired the asset, and ends at the earlier of

  • the CGT event, or;
  • when the business ceased, if the business in question ceased in the 12 months before the CGT event.

Assets owned for over 15 years need to have been held for at least 7.5 years within the test period and assets owned for 15 years or less need to have been held for at least half of the test period to satisfy requirements.

When the assets are shares or trusts, passing this basic active asset test is not enough to qualify for CGT concessions. In addition, the asset will need to pass a further test, called the 90% test, to determine whether it is to be counted as an active asset or not. The test is satisfied if CGT concession stakeholders in the company or trust in which the shares or interest are held have a total small business percentage in the entity claiming the concession of at least 90%.

The periods in which the asset is active does not have to be continuous, however, they must total the minimum periods specified. An asset does not need to be active just before the CGT event.

Tax Time Changes

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Tax Time Changes ImageThe ATO start full processing 2018-19 tax returns on 5 July 2019 and are expected to start paying refunds from 16 July 2019, with the majority of electronically-lodged current year tax returns completed within 12 business days of receipt. There a few changes to tax returns individuals should take note of going into this end of financial year.

Private health insurance statements:

From 1 July 2019, health insurers are no longer required to send private health insurance statements, it is now optional to send this information. Private health insurance information will be available in the pre-fill report, expected by mid-August. If it is not populated by then, taxpayers may need to request a statement from their health insurer.

Low and middle-income tax offset:

Taxpayers may be eligible for an income tax offset if they are an Australian resident for income tax purposes or their taxable income is in the appropriate income range. It is not compulsory to claim this offset, the ATO will work it out when their tax return is lodged.

In the event the changes proposed in the 2019-20 Budget become law after 1 July 2019, the ATO will automatically amend assessments. The offset can only reduce the amount of tax paid to zero and it does not reduce Medicare levy.

Income statement:

Employers reporting through Single Touch Payroll are not required to provide a payment summary to their employees as income statements will replace them. Employees can access their income statements through ATO online services at any time. Employees will receive a notification through myGov when their income statement is ‘Tax ready’, so they can complete their tax return. Employees will be able to contact the ATO for a copy of their income statement if they do not have access to myGov.

What and When you need to report in your SMSF

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self-managed super funds imageThe event-based reporting (EBR) framework for self-managed super funds (SMSFs) commenced on 1 July 2018. This system allows the ATO to administer the transfer balance cap. Reporting under the EBR framework commences when your first member begins a retirement phase income stream. The transfer balance account report (TBAR) is then used to report certain events and is separate from the SMSF annual return.

An SMSF must report events that affect a member’s transfer balance, these should include details of:

  • Pre-existing income streams being received on 30 June 2017 that;
    – continued to be paid to them on or after 1 July 2017.
    – were in retirement phase on or after 1 July 2017.
  • New retirement phase and death benefit income streams including value and type.
  • Limited recourse borrowing arrangement (LRBA) payments, including the value and date of each relevant payment, if entered into on or after 1 July 2017.
  • Compliance with a commutation authority issued by the ATO.
  • Personal injury contributions.
  • Commutations of retirement phase income streams that occur on or after 1 July 2017.

Events that an SMSF do not need to report include:

  • Pension payments made on or after 1 July 2017.
  • Investment earnings and losses that occurred on or after 1 July 2017.
  • When an income stream ceases because the interest has been exhausted.
  • The death of a member.

All SMSFs must report events that affect their members’ transfer balances. If no event occurs, there is nothing to report.

Timeframes for reporting are determined by the total superannuation balances of an SMSF’s members. In the events affecting members’ transfer balances, reports must be made within 28 days after the end of the quarter in which the event occurs. Unless a member has exceeded their cap and the fund needs to report an event sooner, the first due date for the lodgment of TBARs is 28 October.

Avoiding Unfair Business Practices

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Avoiding Unfair Business Practices ImageUnder Australian Consumer Law, there are a number of sales practices that are illegal for businesses to engage in when dealing with their customers. Unfair business practices encompass a wide range of activities, such as misleading or false statements and deceptive conduct.

Here are some examples of illegal activities that you should be aware of as a business owner in order to avoid harsh penalties.

False or misleading statements:

It is unlawful for a business to make false or misleading representations about their goods or services that they are supplying, offering to supply, or promoting. For example, businesses may not make false or misleading statements about the standard or quality of goods or services, testimonials from other customers about the goods or services, or their price. While it will depend on the circumstances of each particular case, the maximum fine for this offence is $220,000 for individuals and $1.1 million for a body corporate.

Accepting payment without intending to supply:

Payment cannot be accepted for goods and services if businesses do not intend to supply, they intend to supply materially different goods or services, or if they are aware that they will not be able to supply the goods or services in a timely manner. However, this is not intended to affect businesses who demonstrate a genuine attempt to meet supply agreements. For example, a business may avoid prosecution if the failure to supply was due to something beyond its control.

Unconscionable conduct:

Businesses are prohibited from acting in a manner that is against good conscience. For conduct to be classified as unconscionable, it is extremely harsh or aggressive where one party exploits another and must be more than just unfair or unreasonable. Examples of this conduct include coercing a person to sign a blank or one-sided contract, failing to disclose contractual terms, or taking advantage of low-income consumers by misleading them about prices. Whether certain conduct is deemed to be unconscionable will depend on the particular circumstances involved and may require legal action. There is a list of factors that courts may consider, including the relative bargaining strength of the parties, and the extent to which the parties acted in good faith.

The Federal budget for 2019-20 is now available!

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(Click here to View/Download the complete document)

The 2019-20 Federal Budget contains few surprises and only a modicum of major initiatives: one is tempted by the view that even the Government doesn’t have its heart in it.

The major – and widely expected – initiative is an extension of the Government’s personal income tax cuts from those announced in the 2018-19 Budget which match and raise the more generous benefits which Labor announced in response to the Government’s previous measures: at a cost of $5.7 billion over four years.

Treasurer Josh Frydenberg said in his Budget “Lockup” press conference the Government would not try and force this measure through Parliament before it is dissolved for the election but would take the package to the electorate.

This contrasts with the Government’s “Power Rebate” announced before the Budget and included in it, which the Government does plan to try and push through before the election.

Other major Budget measures are:

• An extension of the small business instant asset write-off, with an increase of $5000 in the amount to $30,000 and an increase to $50 million (from $10 million) in the size of business eligible for the concession (See Small Business)

• $4 billion over four years for increased infrastructure spending

• $1 billion in increased Medicare spending (See Health) • $530 million for the Disability Royal Commission

• A small concession removing the work test for superannuation contributions for people aged 65 and 66 (See Superannuation).

The Budget’s biggest saving is a $2 billion windfall to come from a tightening of welfare payments to recipients who are also working, using the controversial automated ‘Single Touch Payroll System’ which businesses are being forced to adopt. The Budget contains little information about how this will operate but says, “From 1 July 2020, income support recipients who are employed will report income that is received during the fortnight, rather than calculating and reporting their earnings. Each fortnight, income data received through an expansion of STP data-sharing arrangements will also be shared with the Department of Human Services, for recipients with employers utilising STP.”

(Click here to View/Download the complete document)

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