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Income tests for tax offsets

Income tests are used to work out a person’s eligibility for tax offsets and benefits which can reduce the amount of tax they have to pay.

The Australian Taxation Office considers various items from a person’s tax return when applying income tests. For example, a number of offsets, benefits and obligations are assessed using a family income threshold. Those who have a spouse should include the spouse’s income in the relevant section of their tax return.

Below are some of the tests used to assess a person’s entitlements:

Adjusted taxable income (ATI)
A person’s ATI affects their entitlement to any dependant tax offset. Generally, an adjusted taxable income includes:
Rebate income
The ATO determines whether a person is eligible for the seniors and pensioners tax offset by considering a person’s ‘rebate income’. Rebate income includes taxable income; adjusted fringe benefits amount; total net investment loss and reportable super contributions.

Income for Medicare levy surcharge purposes
The ATO uses a person’s income for surcharge purposes to work out if they have exceeded the Medicare levy surcharge threshold that applies to them to determine:
Super income tests
Reportable employer super contributions are included in the income tests for the spouse super contributions tax offset; government super co-contribution and deduction for personal super contributions.

Posted on 15 November '16 by , under Tax.

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Self-managed super funds (SMSF) aren’t just about financial investment

Individuals may be looking to opt for an SMSF because these provide entire control over where the money is invested. While this sounds enticing, the downside is that they involve a lot more time and effort as all investment is managed by the members/trustees.

Firstly, SMSFs require a lot of on-going investment of time:

  • Aside from the initial set-up, members need to continually research potential investments.
  • It is important to create and follow an investment strategy that will help manage the SMSF – but this will need to be updated regularly depending on the performance of the SMSF.
  • The accounting, record keeping and arranging of audits throughout the year and every year also need to be conducted up to par.

Data shows that SMSF trustees spend an average of 8 hours per month managing their SMSFs. This adds up to more than 100 hours per year and demonstrates that compared to other superannuation methods, is a lot more time occupying.

Secondly, there are set-up and maintenance costs of SMSFs such as tax advice, financial advice, legal advice and hiring an accredited auditor. These costs are difficult to avoid if you want the best out of your SMSF. A statistical review has shown that on average, the operating cost of an SMSF is $6,152. This data is inclusive of deductible and non-deductible expenses such as auditor fee, management and administration expenses etc., but not inclusive of costs such as investment and insurance expenses.

Thirdly, investing in SMSF requires financial and legal knowledge and skill. Trustees should understand the investment market so that they can build and manage a diversified portfolio. Further, when creating an investment strategy, it is important to assess the risk and plan ahead for retirement, which can be difficult if one is not equipped with the necessary knowledge. In terms of legal knowledge, complying with tax, super and other relevant regulations requires a basic level of understanding at the very least. Finally, insurance for fund members also needs to be organised which can be difficult without additional knowledge.
Although SMSFs have the advantage of autonomy when it comes to investing, this comes at a price. Members/trustees need to invest time and money into managing the fund and on top of this, are required to have some financial and legal knowledge to successfully manage the fund.

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