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Tax on super death benefits for dependants vs non-dependants

A super death benefit is the super paid after a person’s death, usually to a nominated beneficiary. These benefits are subject to different tax treatments, depending on whether the beneficiaries are dependant or non-dependant.

Superannuation death benefits will generally be received tax-free by tax dependants, who are considered to be:

Dependants will not have to pay tax on the tax-free component of their super in the event that they:

However, they will be taxed at their marginal rate if they receive a capped benefit income stream and:

Not all super death benefits are subject to tax; for non-dependants, there is a taxable portion. This component is largely made up of after-tax super contributions that the deceased member has made.

Super death benefit payments are subject to tax when:

Non-dependants must calculate how much money in the super account is a:

The amount of tax non-dependants pay will be based on their marginal tax rate, however, this amount may be reduced by tax offsets. For the taxed element of the taxable component, the effective tax rate is your marginal tax rate of 17% (whichever is lower). For the untaxed element of the taxable component, the effective tax rate is 32% or your marginal tax rate (whichever is lower).

Posted on 9 July '20, under Super. No Comments.

Are you eligible for the small business income tax offset?

The small business income tax offset can be used to reduce the tax you pay by up to $1,000 a year. Also known as the unincorporated small business tax discount, the offset is worked out on the proportion of tax payable on your business income.

The rate of offset is 13% for the 2020-21 financial year and 16% for the 2021-22 financial year and onwards. The offset is only available to entities with an aggregated turnover of less than $5 million (from 2016-17 financial year onwards) and is capped at $1,000.

The ATO will work out your offset based on your income tax return and uses your:

Conditions for sole traders

The offset is calculated based on net small business income for sole traders (which is the sum of your assessable income from carrying on your business, minus any deductions). Sole traders are not entitled to the offset in the event that their net small business income is a loss.

Income and deductions that you need to include in your net small business income include:

Conditions for partnership and trust distributions

You may be eligible for the tax offset if:

Keep in mind that there are income and deductions that you cannot include when working out your net small business income for the small business income tax offset. Such income amounts include wages, government allowances and net capital gains you made from carrying on your business. Discuss with a financial advisor or accountant for more information on the offset conditions for your business.

Posted on 9 July '20, under Tax. No Comments.

Do you need to lodge a transfer balance account report?

Self-managed super funds (SMSF) may be required to lodge a transfer balance account (TBA) report by 28 July 2020 in the case of a TBA event.

A TBA report will need to be lodged with the ATO in the event that both of the following apply:

SMSFs will also need to complete this report when a member needs to correct information about a TBA event that they have previously reported to the ATO or are responding to a commutation authority.

According to the ATO, an event is classified as a TBA event if they result in credit or debit in a member’s transfer balance account. Such events include:

There are a number of ways you can lodge your TBA report with the ATO:

Posted on 2 July '20, under Super. No Comments.

COVID-19 factors to remember when filing your tax return

The end of the financial year has rolled around again, but this time, COVID-19 may affect the way you fill out your tax return. The ATO has released a range of methods to make tax time easier for businesses and individuals experiencing unprecedented circumstances.

How JobKeeper will affect tax returns

Sole traders receiving JobKeeper payments on behalf of their business are required to include these payments as assessable income for the business. Employees receiving JobKeeper will see that those payments have been automatically filled out in their tax return.

Individuals who have had their wages increase due to JobKeeper should identify whether they have been bumped into a higher tax bracket as a result. If an individual is working multiple jobs and receiving JobKeeper at one of these positions pushes them into a new tax bracket, they may be faced with a higher tax bill on their return if their other employers had continued deducting tax at their original lower rate.

How JobSeeker will affect tax returns

JobSeeker payments are considered taxable income. The ATO will automatically upload JobSeeker details in the ‘Government Payments and Allowances’ section of recipients’ tax returns. However, recipients are advised that there may be a delay in these JobSeeker details being updated, potentially until the end of July. The ATO recommends delaying tax return lodgements until these details are finalised. Recipients that wish to complete their returns prior to this must ensure they include these details themselves, as leaving out assessable income can slow down the return process or result in a bill later.

COVID-19 protective equipment

Occupations that require public interactions may be able to claim personal protective equipment (PPE), including:

This would typically apply to industries such as healthcare, retail and hospitality. Many workplaces now have this PPE available for employees, however, employees who must pay for their own COVID-19 PPE and are not reimbursed for it will be able to make a claim.

Working from home

The ATO has introduced a new ‘shortcut method,’ which applies from 1 March 2020 to 30 June 2020. Under this new method, employees working from home as a result of COVID-19 can claim expenses incurred at a rate of 80 cents for each hour worked from home. Employees must keep a record of the hours they worked from home as evidence to support their claim.

Deductible running expenses include:

Posted on 2 July '20, under Tax. No Comments.

Carrying on a business in an SMSF

Self-managed super funds can carry on a business providing the business is allowed under the trust deed and operated for the sole purpose of providing retirement benefits for fund members.

Carrying on a business through an SMSF does have restrictions that other businesses do not have, such as entering into credit arrangements or having overdrafts.

SMSF trustees that carry on a business through their fund must adhere to the sole purpose test. The ATO looks for cases where:

The same regulatory provisions still apply to funds that carry on a business, i.e, SMSF investments must be made on a commercial ‘arm’s length’ basis, business activities must be conducted in accordance with the SMSF’s investment strategy, collectables and personal use assets cannot be displayed at the business premises and so on.

The SMSF cannot be involved in the following business activities:

Posted on 25 June '20, under Super. No Comments.

Cars and taxes for 2020-21 financial year

New car threshold amounts will be implemented from 1 July 2020. Understanding the new thresholds and how they may affect your small business operations and vehicle usage will be important in preparing you for the financial year ahead.

Income tax:

There is an upper limit on the cost you use to work out the depreciation for the business use of your car or station wagon (including four-wheel drives). The maximum value you can use for calculating your depreciation claim is the car limit (irrespective of any amount you were paid for a trade-in) in the year in which you first used or leased the car.

For the 2020-21 financial year, the upper cost limit is $59,136 including GST.

Goods and services tax (GST):

Businesses registered for GST with motor vehicles used solely for business purposes are entitled to claim a credit for the GST included in the price of the vehicle, provided they have a tax invoice.

In the event that you purchase a car and the price is more than the car threshold, the maximum amount of GST credit you can claim is one-eleventh of your car limit amount. Keep in mind that you cannot claim a GST credit for any luxury car tax you pay when you purchase a luxury car, regardless of how much you use the car in carrying on your business.

Luxury car tax (LCT):

You are required to pay LCT if you’re registered or required to be registered for GST and you sell or import a luxury car.

LCT applies to motor vehicles designed to carry a load of less than two tonnes and fewer than nine passengers. LCT also applies to a car purchased by a person with a disability even if the car is GST-free. However, disability-related modifications are not subject to LCT. The LCT value of a car includes the value of any parts, accessories or attachments supplied or imported at the same time as the car.

Cars with LCT over the LCT threshold attract an LCT rate of 33%. From 1 July 2020, the LCT threshold will increase to $68,740. Additionally, the LCT threshold for fuel efficient cars will increase to $77,565 for the 2020-21 financial year.

Posted on 25 June '20, under Tax. No Comments.

How to transfer a business property into your SMSF

Employers with a self-managed super fund (SMSF) looking to protect their business assets can consider transferring their business real property into their SMSF.

Transferring business property into your SMSF is useful to protect your assets in the event of your business failing or facing litigation. It is possible for SMSF members to transfer business real property (land and buildings used exclusively for the business) to their SMSF by using a combination of methods.

In-species transfer
An in-species transfer in the context of a business property refers to the ownership transfer of a property from one entity to another without the need to convert it into cash. During an in-species transfer, the value of the property is considered a contribution to your SMSF and is restricted by CGT regulations and contribution caps.

Cashing in your SMSF
You can use the cash available in your SMSF to buy your business property at market value as a normal cash purchase. The property must first be valued by an independent and qualified party before this is allowable. SMSFs that do not have enough sufficient capital to do this may consider using their non-concessional contributions cap to cover the outstanding balance.

Limited recourse borrowing arrangement (LRBA)
In the event that you do not have enough cash in your SMSF to outright buy your business property, you can apply for a loan using an LRBA. An LRBA can be obtained through a third-party lender, including your own business. You can borrow funds for your SMSF under an LRBA from your own business. However, before applying for an LRBA, consider its legal complexities and whether your SMSF will be able to maintain loan repayment fees on top of existing fees you may have, such as member pensions and accounting and auditor fees.

CGT retirement concession
The CGT retirement concession allows business owners exemption from CGT on business assets up to $500, 000 over a lifetime. If you are over 55, there are no associated conditions, however, if you are under 55, then you must place the money into a superannuation fund to receive the exemption.

This means that if you are under 55 and wishing to transfer a business real property into your SMSF, you can potentially do so without incurring any CGT liability (up to $500, 000).

Posted on 18 June '20, under Super. No Comments.

Landlord tax obligations under COVID-19 circumstances

Property investors may have a number of tenants that have temporarily paused their rent payments or are not paying the full amount of rent owed due to being impacted by COVID-19. Regardless of rental income changes, landlords are still entitled to claim deductions on rental property expenses if they are still incurring regular rental property expenses.

Landlords who receive a back-payment of rent, or an amount of insurance as a result of a decrease in rental income, will still need to include these amounts in their assessable income for the tax year that they receive the payment.

Additionally, landlords may be faced with deferred loan repayments as a result of COVID-19. In this case, if your loan accumulates interest it will be considered as an incurred expense, meaning that you will still be able to continue claiming a deduction on your loan interest.

It is likely that landlords of short-term rental properties have had their situation compromised by COVID-19 due to cancelled bookings and low demand. If your property is used both privately and for renting out short-term accommodation, you will be able to continue deducting property expenses in the same proportion as you were entitled to prior to COVID-19. If you had begun using the property differently in the period after your latest tax return and before COVID-19, the proportion of expenses you can claim may vary. This can include situations where:

Posted on 18 June '20, under Tax. No Comments.

Divorce and splitting your SMSF assets

Running an SMSF under regular circumstances comes with enough compliance obligations as it is. Adding divorce or separation into the equation can raise even more legal and tax issues that need to be addressed.

The breakdown of your relationship does not absolve you from your responsibilities as an SMSF trustee; you are still expected to continue acting in accordance with super laws and in the interests of all members. As a trustee, you must:

When it comes to dividing SMSF assets, separating couples can transfer assets, such as property, from one SMSF fund into another. During this process it is important to consider:

Posted on 11 June '20, under Super. No Comments.

Claiming self-education expense deductions

Individuals upskilling and educating themselves during these down times may be eligible to claim a deduction for their self-education expenses. The deductions apply to self-education activities that are directly related to an individual’s work as an employee.

In the case that individuals are looking to claim self-education expenses based on a course’s relation to their work, the relation must mean:

There are many types of expenses you can claim as part of your self-education deduction, including:

Work-related self-education expenses cannot be claimed as part of a deduction. These expenses include travel expenses, child care costs related to attendance of courses and capital costs of items (e.g. computers, desk) acquired for self-education purposes.

Keep in mind that self-education courses which enable individuals to get new employment are not eligible for deduction claims. Some expenses also need to be apportioned between private purposes and use for self-education such as travel costs and depreciating assets. You will need to estimate your apportions and provide information on such expenses to be eligible to claim.

For more information on what you claim as self-education expenses, visit the ATO website or consult with a financial advisor.

Posted on 11 June '20, under Tax. No Comments.

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Tax on super death benefits for dependants vs non-dependants

A super death benefit is the super paid after a person's death, usually to a nominated beneficiary. These benefits are subject to different tax treatments, depending on whether the beneficiaries are dependant or non-dependant.

Superannuation death benefits will generally be received tax-free by tax dependants, who are considered to be:

  • A child of the deceased who is under 18 years of age,
  • A spouse or former spouse of the deceased,
  • A person who has an interdependency relationship with the deceased (e.g. if they live together or have a close personal relationship),
  • A financial dependant of the deceased.

Dependants will not have to pay tax on the tax-free component of their super in the event that they:

  • Withdraw it as a lump sum, or
  • Receive an account based income stream.

However, they will be taxed at their marginal rate if they receive a capped benefit income stream and:

  • The deceased was at least 60 years of age at the time of death
  • The dependent is over 60 years of age and the total of their tax-free component and taxed element exceeds their defined benefit income cap.

Not all super death benefits are subject to tax; for non-dependants, there is a taxable portion. This component is largely made up of after-tax super contributions that the deceased member has made.

Super death benefit payments are subject to tax when:

  • The payment is made as a result of the SMSF member passing away,
  • The payment is provided to a non-dependent for tax purposes,
  • The payment has a taxable component.

Non-dependants must calculate how much money in the super account is a:

  • Tax-free component,
  • Taxable component the super provider has paid tax on (taxed element),
  • Taxable component the super provider has not paid tax on (untaxed element).

The amount of tax non-dependants pay will be based on their marginal tax rate, however, this amount may be reduced by tax offsets. For the taxed element of the taxable component, the effective tax rate is your marginal tax rate of 17% (whichever is lower). For the untaxed element of the taxable component, the effective tax rate is 32% or your marginal tax rate (whichever is lower).

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