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25th Mar, 2024
Estate planning is a complex area which requires careful consideration of tax implications. Many issues that affect the distribution of assets to beneficiaries will need to be considered before an individual dies, to ensure undesirable tax consequences are avoided for both the individual and their potential beneficiaries.
These include the timing on the transfer of the assets, potential gifts, transfer duties and the use of testamentary trusts.
Typically in terms of capital gains tax (CGT), the transfer of assets upon the death of an individual does not immediately trigger a CGT event; rather, a CGT “rollover” applies. This means that the beneficiaries of the estate do not have to pay CGT at the time of inheritance. Instead, CGT implications are deferred until the beneficiary decides to dispose of the asset.
Generally, beneficiaries inherit the deceased’s assets at their market value as of the date of death, which becomes the cost base for future CGT calculations when the asset is eventually sold. One important exemption to note is the main residence exemption, which can fully or partially shield the deceased’s primary home from CGT, provided certain conditions are met.
While gifts can be made as a part of estate planning before an individual dies, remember that if the gift is an asset (eg property, cryptoassets, shares, etc), CGT will still apply.
Another consideration in terms of the timing of transfers (in particular, of property) is the transfer duty involved at the state or territory level. For example, in New South Wales, if property is received from a deceased estate in accordance with the terms of a will, the beneficiary will pay transfer duty at a concessional rate of $100. However, if the transfer occurs before an individual’s death or not in accordance with a will, normal rates of transfer duty will apply. In that scenario, it would be better to wait to transfer the property. The rules for each state and territory differ, so it’s important to check before making decisions.
For individuals looking to exert more control after their own death, a testamentary trust may be one way of providing a flexible and tax-efficient way to manage and distribute the assets of the estate to beneficiaries. Generally, the terms and conditions of the testamentary trust are outlined in the will of the deceased, including the appointment of trustees and beneficiaries and how the trust assets are to be managed and distributed. The trust itself comes into existence upon the death of the person making the will, and it is separate from the deceased estate for legal and tax purposes.
However, establishing and managing testamentary trusts can involve significant costs, and there is a requirement to carefully draft the trust deed so it includes clear instructions for the establishment and operation of the testamentary trust, in order to avoid possible future disputes. There may also be ongoing legal, accounting and administrative expenses, making testamentary trusts the most complex route to head down.
The specific tax implications of estate planning can vary widely depending on individual circumstances and the state or territory in which an individual lived. This is a complex area where seeking professional advice tailored to the situation is crucia.
25th Mar, 2024
With the rise in businesses purchasing electric vehicles (EVs) for the use of their employees, the ATO has finalised its guidelines setting out the methodology for calculating the cost of electricity for FBT purposes when an eligible EV is charged at an employee’s or an individual’s home. The rate of 4.20 cents per kilometre now applies (from 1 April 2022 and for later FBT years). To use this rate, employers will need to keep a record of the distance travelled by the car, and a valid logbook must be maintained if the operating cost method is used.
In terms of FBT, the employer now has the choice of either using the methodology outlined in the guidelines or determining the cost of the electricity by determining the actual cost incurred. Once made, this choice applies to each vehicle for the entire year, although the choice can be changed from one FBT year to another.
A transitional approach applies for the 2022–2023 and 2023–2024 FBT years, whereby if odometer records have not been maintained, a reasonable estimate may be used based on service records, logbooks or other available information. After the transitional period ends, employers will need to keep a record of the distance travelled by each car and a valid logbook must be maintained if the operating cost method is used.
Employers are reminded that even if an EV is eligible for an FBT exemption, the benefit must still be included in an employee’s reportable fringe benefits amount. Therefore, the taxable value must be determined, and where the employee home-charged the EV throughout the year and paid their electricity bills and provided the employer with the necessary declaration for electricity costs, the home charging electricity cost will form a part of the recipient contribution amount.
25th Mar, 2024
The transfer balance cap which limits the amount of capital that can be transferred into a tax-exempt retirement phase will not increase for the 2024–2025 income year, based on the release of December 2023 consumer price index (CPI) numbers from the Australian Bureau of Statistics (ABS). This means the figure will remain at $1.9 million for the 2023–2024 and 2024–2025 income years.
The transfer balance cap was originally introduced in 2017 as a way to limit the amount of capital that can be transferred into a tax-exempt retirement phase.
This was implemented in response to criticism that the superannuation system was being used by the wealthy for estate planning purposes rather than for retirement, and that the soaring cost of tax concessions for fund members threatened the sustainability of the entire super system.
The transfer balance cap was originally set at $1.6 million, and indexation has applied to that cap from 1 July 2021 in line with the CPI in $100,000 increments. As a result, the current transfer balance cap for the 2023–2024 income year is $1.9 million. Based on the release of CPI index numbers from the ABS, this figure of $1.9 million will also apply for the 2024-25 income year, as the CPI figure for December 2023 was not large enough to trigger a $100,000 increase.
The transfer balance cap is a lifetime limit on the amount an individual can transfer into one or more retirement phase accounts. Individuals will have a personal transfer balance cap equal to the general transfer balance cap when a retirement phase income stream is commenced for the first time. For example, if an individual commences a retirement stream in the 2024–2025 income year, their personal transfer balance cap will be $1.9 million.
For individuals who started their retirement phase income stream in an earlier year with a lower general transfer balance cap, if the full amount of the personal transfer balance cap was never used, proportional indexing may apply. This means the individual’s personal transfer balance cap will be indexed based on the highest ever balance in the transfer balance account.
Where an individual exceeds their personal transfer balance cap, the excess is required to be commuted and excess transfer balance tax needs to be paid.
25th Mar, 2024
Establishing a self managed superannuation fund (SMSF) offers a variety of benefits, so it is perhaps no surprise that in the latest data released by the ATO, the number of SMSFs in Australia continues to grow as more people seek to take advantage of the control and flexibility offered.
In the five years to 30 June 2023, the ATO estimates that there were on average 24,000 establishments and only 13,800 wind-ups of SMSFs, leading to an overall growth rate of 9%. As at 30 June 2023, there were 610,000 SMSFs holding roughly $876 billion in assets, which accounts for around 25% of all super assets.
It’s important to be aware of the challenges and considerations that can significantly impact this type of fund’s suitability for individual retirement planning. One of the primary concerns is the complexity and responsibilities involved in managing an SMSF: trustees must navigate a maze of financial, legal and tax regulations to ensure compliance with the ATO. This complexity is compounded by the potentially high costs associated with setting up and running an SMSF, including auditing, tax advice, legal advice and investment fees, which can erode investment returns, especially in funds with smaller balances.
The autonomy in investment decision-making, while a key advantage, also introduces significant investment risks – trustees’ lack of experience or knowledge can lead to poor investment choices. SMSFs also need to meet the sole purpose test, which means the fund’s investments are required to be for the sole purpose of providing retirement benefits to the fund’s members.
There is also a time commitment required to research investments, monitor fund performance and stay updated on regulatory changes. Taxpayers thinking about starting an SMSF should consult qualified advisers for further advice.
25th Feb, 2024
With the government finally caving into pressure to change the stage 3 income tax cuts despite its previous promises to keep the already legislated measures, new proposed tax rates have been flagged to come into place from 1 July 2024, largely – in comparison to the legislated measures – benefiting those earning less than $45,000.
The talk about the stage 3 income tax cuts has reached fever pitch in recent weeks. The changes were originally legislated by the previous Coalition government in 2019 with support of the then Labor opposition. During the 2022 election campaign and since coming into government, Prime Minister Anthony Albanese had reassured voters on multiple occasions that the stage 3 tax cuts would remain. However, with the recent inflationary stressors, the government has been under increasing pressure to scrap the already legislated tax cuts in favour of cost-of-living relief for low to middle income earners, which would require the introduction of amending legislation.
As a refresher, the original stage 3 tax cuts are due to come in place from 1 July 2024, and would benefit individuals that earn above $45,000 of taxable income.
From 1 July 2024 under the already legislated stage 3 tax measures, those earning taxable income between $45,000 and $200,000 will be taxed at $5,092 plus 30% of excess over $45,000. In addition, individuals who earn $200,001 and more will taxed at $51,592 plus 45% of excess over $200,000.
According to the latest ABS data, the median earnings of full-time Australian workers are around $1,600 per week, equating to $83,200 per year. Under the current rates a worker on this median wage would be paying $17,507 in tax, and under the already legislated stage 3 rates for the 2024–2025 income year the same worker would be paying $16,552 (a tax saving of $955).
Of course, as critics of the legislated tax cuts have pointed out, those who earn more will be saving more. For example, the same ABS data indicates that individuals earning $2,820 per week are in the 90th percentile of workers in Australia. This figure equates to annual earnings of $146,640. Under the current tax rates a worker on this wage would be paying around $39,323 in tax, and under the already legislated stage 3 tax rates the same worker would only be paying $35,584 (a tax saving of around $3,739).
This effect becomes even more pronounced at the edge of the stage 3 threshold of $200,000. As currently legislated these individuals would experience a tax saving of a whopping $9,075 ($60,667 in tax under the current rates versus $51,592 in 2024–2025 under the stage 3 tax cuts).
Under the government’s most recent proposed changes, those earning between $18,201 and $45,000 would see their tax rate reduced from 19% to 16%. In addition, those who earn between $45,001 and $135,000 would be taxed at the new marginal tax rate of 30%, and the existing 37% marginal rate would be retained but would apply to individuals earning between $135,001 and $190,000. The top marginal rate of 45% would remain for those who earn $190,001 and above.
An average worker earning $83,200 per year will be better off under the government’s proposed changes, paying around $15,748 in tax (versus $16,552 under stage 3 and $17,507 under the current rates), and those in the 90th percentile of earners would be slightly worse off under the proposed changes ($35,594 in tax) compared to stage 3 ($35,584 in tax), but would still be better off than under the current system ($39,323 in tax).
The government will now be working to get the proposed changes passed before 1 July 2024 (when the original stage 3 changes were due to apply).
25th Feb, 2024
As we move into 2024, the ATO has highlighted three areas of focus for businesses: taking steps to address cyber security and increased protection of personal data, addressing the growth in the collectable debt book – particularly for small businesses – and improving overall tax performance.
With increased cyber-crimes, scams and hacks occurring in Australia in recent times, like any other large organisation the ATO has taken additional steps to address cyber security and increase protection of personal data to deal with an unprecedented rise in identity-related fraud attempts. For all businesses, the ATO has introduced “client-to-agent linking”, which requires all entities with ABNs (excluding sole traders) to digitally nominate their agent through ATO’s secure online services before the agent can access any data. This will cover approximately 4.7 million businesses.
For all individuals interacting with the tax system, the ATO encourages the use of myGovID. This coincides with the government announcing a tightening of the way in which individuals access their myGov account. Individuals who use their myGovID to access the ATO’s services will need to use that myGovID for future logins from now on. In other words, it will not be possible to access an ATO account without it.
In 2024, the ATO will also be seeking to address the growth in the collectable debt book. Currently, the collectable component of debt sits at about $50 billion and consists of mostly self-assessed debt, with small businesses owing 67% of this. According to the ATO, its more lenient approach during the height of the pandemic, under which it chased fewer lodgments and recovered less debt, has now led to a concerning behavioural pattern from some businesses where they deprioritise paying tax and super and increasingly rely on unpaid tax and super to prop up cashflow.
One of the ways the ATO is seeking to level the playing field on uncooperative businesses is the reporting of debt information to credit reporting bureaus. Since 1 July 2023, it has disclosed the debts of more than 10,500 businesses that have significantly overdue undisputed tax debts of at least $100,000.
The takeaway message for businesses, especially small businesses, for this year is to be proactive and engaged with the ATO in terms of any unpaid tax or super debts and keeping data secure.