King & Whittle August 2023 Newsletter
Welcome to our August newsletter and, with winter winding up and tax returns on the way for some, there may be sunnier days ahead.
While the price of most goods and services continues to rise, the good news is the rate of increase is continuing to slow and the markets are beginning to breathe a sigh of relief. The Consumer Price Index rose 0.8% in the June quarter and 6% annually in the lowest increase since September 2021. And in some areas prices fell including domestic holiday travel, accommodation and petrol. In the US, sharemarkets ended July higher after inflation eased to its lowest level in two years.
Nonetheless, cost-of-living pressures continued to affect our spending with a sharp fall in retail turnover of 0.8% in June. Those figures, along with the better-than-expected US data bringing concerns of tighter monetary policy, kept the ASX200 in check as some banks, commodities and miners suffered. The Australian dollar was also affected, hitting its weakest levels in more than two weeks. Unemployment remains at 3.5% with the number of people employed increasing by about 33,000 and the number of jobless decreasing by 11,000.
Meanwhile tightening global oil supplies and high hopes for the outlooks of Chinese demand have seen a steady increase in Brent crude futures to around US$84 a barrel. But iron ore continues its downward trend, falling 2.6% since the beginning of 2023.
King & Whittle News
Over that past year many of our clients have requested the ability to sign their documents electronically. Following a review of various offerings we have chosen an electronic signing platform via FuseSign. One of our highest priorities is getting documentation out to our clients as quickly and securely as possible and with FuseSign we can achieve both of these effortlessly while providing you with the best experience possible.
What does this mean for you?
Within FuseSign we will set you up with your contact details including your mobile number. Mobile numbers are important in the FuseSign process as this acts as your authenticator when signing your documentation.
Once we have prepared your document bundle within the new platform there are a few simple steps to review and sign. We will help you through this process. If at any time you are unsure how to proceed with signing your document bundle or have any questions about the information you’ve been supplied with please call our office and we’ll be more than happy to assist
Going forward we see Digital Signing via FuseSign as a quick and simple way to deliver and have you approve and sign documents. We are still very happy to sit down with you to sign your documentation or post your documentation if that’s your preference.
We hope you enjoy our August Newsletter.
Market movement & review video - August 2023
Stay up to date with what's happened in Australian markets over the past month.
While the price of most goods and services continues to rise, the good news is the rate of increase is continuing to slow.
As a result, the markets are beginning to breathe a sigh of relief.
The ASX rallied to close the month on a positive note due to a combination of stronger than expected growth data, better than expected earnings and lower inflation.
Click the video below to view our August update.
Please get in touch if you’d like assistance with your personal financial situation.
Trusts and the new super tax rules
Ensuring you’ve structured your finances tax-effectively is always a concern, but with new tax rules for super on the horizon, many people with large balances are considering alternative vehicles to save for retirement.
Unsurprisingly, this has sparked a renewed interest in an old favourite – trusts.
Trusts have always been popular in Australia, with the government’s Tax Avoidance Taskforce (Trusts) estimating more than one million were in place in 2022.
Separating ownership using a trust
The popularity of trusts for business, investment and estate planning purposes is due to both their flexibility and inherent benefits, particularly when it comes to managing your tax affairs.
At their heart, trusts are simply a formal relationship where a legal entity holds property or assets on behalf of another legal entity.
This separation means the trustee legally owns the assets, but the beneficiaries of the trust (such as family members) receive the income flowing from the assets.
A common example of a trust structure is a self managed super fund (SMSF), where the fund trustee is the legal owner of the fund’s assets, and the members receive investment returns earned on assets held within the SMSF trust.
Which trust is best?
There are many different types of trusts, with the appropriate structure depending on the financial goals you’re trying to achieve.
For small businesses and families, the most common trust is a discretionary (or family) trust. These vehicles are very flexible and can be used with immediate and extended family members, family companies or even charities.
In a discretionary trust, the trustee has absolute discretion on how both the income and capital of the trust are distributed to various beneficiaries.
This gives the trustee a great deal of flexibility when it comes time to allocate income to family members paying different marginal tax rates.
Advantages of a trust structure
Discretionary trusts offer tax, asset protection, estate planning and property holding benefits.
They can also assist with the accumulation of assets for younger generations within your family and provide opportunities for the discounting of capital gains.
For small businesses and farming operations, a discretionary trust can be used to provide valuable asset protection. If your business goes bankrupt or a beneficiary is divorced, creditors will be unable to access assets or property held within the trust as it is the legal owner of the assets.
Building wealth outside super
With new tax rules for super fund balances over $3 million being introduced, trusts also provide a useful tool to consider for continued wealth accumulation.
Unlike super funds, trusts don’t have annual contribution limits, restrictions on where you can invest or borrowing limits. Money can be added and removed from the trust as necessary, providing significant financial flexibility.
Discretionary trusts can also be used with vulnerable beneficiaries who may make unwise spending decisions. The trustee can decide to provide a spendthrift child or a family member with a gambling addiction regular income, but not large capital sums.
Holding ownership of assets within a trust is useful for estate management, as the assets will not be part of a deceased estate, avoiding the possibility of a Will being challenged.
Trusts aren’t always the solution
Although trust structures provide many benefits, there are also tax issues that need to be considered. For example, any trust income not distributed to beneficiaries is taxed at the top marginal rate.
Distributions to minor children are taxed at higher rates and a trust is unable to allocate tax losses to beneficiaries, so they must remain within the trust and be carried forward.
Trusts can be expensive to set up, administer and dissolve when they are no longer needed and the trustee’s actions are restricted by the terms of the trust deed.
If a family dispute arises, running a trust can become difficult and making changes once it is established isn’t easy.
If you would like to find out more about trusts and whether one is appropriate for your business or family, call us today.
The automotive industry sparking up with electric vehicles
With electric vehicles fast overtaking petrol driven cars in sales in Australia, what are the considerations for the industry, the environment, and consumers?
The popularity of electric vehicles has been a long time coming. While electric vehicles may just be giving petrol driven cars a run for their money now, the technology has been around for centuries. The first electric cars appeared on roads as early as the 19th century, however internal combustion engines, fuelled by petrol, took off shortly after this in the 1920s and quickly became the power source of choice for cars.i
Growing in popularity
While at present internal combustion engines still dominate passenger vehicle sales in most categories, that’s changing – mainly in the medium car space. In fact, three out of five new medium-sized cars sold in Australia in the first quarter of the year were powered by electric batteries, according to new figures from the Australian Automobile Association.ii
And in general, the popularity of electric vehicles is surging, with year-to-date sales totalling 32,050 – increasing in 12 months by a staggering 778.3 per cent.iii
Market share is likely to continue to grow. The main barrier to entry has to date been primarily cost but with new more cost-effective models flooding the market, electric vehicles are becoming even more accessible. One other concern for consumers was that electric vehicles were perceived as being less powerful than gas guzzlers, but new models are providing greater grunt. The latest edition to the Queensland police force’s fleet is electric and is being hailed as their most powerful car yet.iv
Easy on the hip pocket
So, what are the considerations if you are thinking of making your next car an electric vehicle? Electric vehicles are significantly cheaper to run, offering fuel savings of up to 70 per cent and maintenance savings of around 40 per cent compared to a standard petrol or diesel vehicle. For an average car travelling 13,700 km per year, this could amount to an annual fuel saving of $1000, or $1200 if the EV is able to charge overnight on an off-peak tariff.
Electric vehicles are also much cheaper to maintain, with less moving parts than a petrol or diesel car. There is relatively little servicing and no expensive exhaust systems, starter motors, fuel injection systems, radiators and many other parts that are not needed in an electric vehicle.
The benefit to the environment, health and the economy
The benefits of electric vehicles are broad-ranging and have the potential to impact our personal health, the health of our environment and the economy. Breathing in the contaminants from motor vehicles is implicated in a range of health problems and transport is a significant contributor to Australia’s greenhouse gas emissions. And the potential benefits for our economy in terms of reduced greenhouse gas emissions, less air and water pollution, and less vehicle noise are estimated to equate to almost $500 billion over the next 30 years.v
What are the considerations?
While there are a lot of benefits to electric vehicles, both at a personal level and at a more macro level, there are also some considerations you need to think about if buying an electric vehicle is on your radar.
One of the biggest issues with electric vehicles is the fact that they need charging quite regularly, generally having a charging range of around 80-100kms. This limitation may mean an electric car is great as a runabout but might not be so suitable if you are regularly travelling longer distances.
Then there are the practicalities of charging your vehicle. New electric vehicles come with a dedicated charger which is usually mounted on the garage wall. You also need to make sure you have access to charging infrastructure while you are out and about so it’s a good idea to check what is available close to you and be aware of likely charging times.
There are a few factors that you need to consider, but electric cars are certainly here to stay and becoming ever more popular so it’s worth thinking about going electric for your next vehicle purchase.
i https://discover.agl.com.au/energy/why-buy-an-electric-car/
ii https://www.smh.com.au/politics/federal/first-past-the-post-evs-race-to-front-in-sales-of-medium-sized-cars-20230420-p5d1yj.html
iii https://www.whichcar.com.au/news/vfacts-may-2023-best-selling-electric-cars-australia
iv https://thewest.com.au/news/transport/most-powerful-queensland-police-car-will-be-electric-c-11045915
v https://www.acf.org.au/electric-vehicles-are-our-zero-emissions-future
ATO focus on rental properties
Rental property owners are now one of the ATO’s top targets after it found nine out of ten tax returns reporting rental income and deductions contained at least one error.i
The tax office estimates it’s missing out on around $1.5 billion due to over-claiming of rental property expenses and omission of rental income.
Growing interest in rental property tax
Around 2.2 million individuals have an interest in a rental property in Australia. In a recent media release the ATO warned these taxpayers they are under the spotlight as rentals are “an area that’s easy to get wrong, and needs extra care when lodging”.ii
It’s urging property owners to carefully review their rental property records and ensure they understand the income they need to declare and what expenses can be correctly claimed as a deduction.
Declare all rental income
These days the ATO receives rental income data from a range of sources, including sharing economy platforms, rental bond authorities, property management software providers and land title authorities.
This allows the ATO to spot rental income being charged to a tenant but not declared. Landlords must include all rental income, whether it’s from short-term rental arrangements or from rental-related sources like insurance payouts and retained bond money.
Get your expense claims right
Although landlords can deduct many expenses relating to a rental property, claims need to stay within the rules.
Some expenses can be claimed immediately (such as management fees, council rates and insurance premiums), while others (loan interest, borrowing expenses and capital works) must be claimed over time.
Major capital works (such as replacing the property’s roof or existing kitchen) need to be claimed over a number of years.
Depreciating assets (such as a new dishwasher or oven) are claimed over their effective life, although items costing under $300 can be claimed immediately.
If you refinance your rental property loan or draw down on it for private expenses like a holiday, the loan interest relating to the private expense cannot be claimed as a deduction.
Claiming for private usage
Special care is needed if you use your property for certain periods, stop renting it out for a time, or allow family or friends to stay at cheaper rates.
You can’t claim deductions for these periods as the property is not being used to produce rental income. Normal annual expenses must be apportioned to omit these non-income periods.
Deductions also can’t be claimed if you pretend your property is available for rent when it isn’t, or if you place unreasonable restrictions on a potential tenant.
Common mistakes
According to the ATO, the most common tax error relates to apportioning expenses. If you don’t split your expenses – or do it incorrectly – you may find your return being queried or adjusted.
Another mistake is claiming for all the cost of purchasing your property. Costs such as conveyancing fees and stamp duty are used when working out if you need to pay capital gains tax (CGT), not as deductions.
Claims for capital works and capital allowances are also a danger area. Repairs directly related to wear and tear and damage while the property is rented can be claimed in the financial year the expense is incurred, but initial repairs for damage when purchased are not immediately deductible.
Failing to keep detailed records covering the income and expenses for your rental property is also a recipe for trouble. The ATO requires landlords to keep records for five years from when your return is lodged.
Don’t forget other taxes
While the ATO is focussing on income and deduction claims for rental owners, they are not the only tax obligations landlords need to keep in mind.
When you sell your rental property, you may be liable for CGT and detailed records of all your expenditure will be needed to correctly calculate the cost base for the property.
If you are not registered for GST, or if the rental income is from a residential premises, you can include any GST in the rental expenses you claim. GST-registered landlords follow different rules.
You will also need to make PAYG instalment payments if you earn $4,000 or more in rental income. The ATO will inform you if this occurs.
The tax rules around a rental property are complex. If you would like help in this area, contact our office today.
i https://www.ato.gov.au/Media-centre/Media-releases/Tax-time-focus-on-rental-property-income-and-deductions/
ii https://www.ato.gov.au/misc/downloads/pdf/qc70095.pdf
How to handle a tax debt
After taking a softly, softly approach with taxpayers during the pandemic, the ATO has made it clear it will start chasing taxpayers for their outstanding tax related debts.
Starting with its aged debt book, the ATO is sending letters to taxpayers asking them to engage or face firmer action. An aged debt is an uneconomical debt the ATO has placed on hold and not taken any recent action to collect, but this is about to change.
Potential action includes offsetting tax refunds to pay tax debts and disclosing tax debts to credit reporting bureaus, a move that could affect your business’ credit rating and ability to raise funds.
Business taxpayers have also been warned about their potential personal liability under the director penalty notice (DPN) program for unpaid PAYG withholding and GST amounts.
Dealing with your tax debts
So, what are your options if you are having difficulty meeting your tax or employee super obligations?
The first thing to remember is not to panic. Ensure you lodge all your tax returns on time to avoid a late lodgment penalty and to show the ATO you are aware of your obligations and are doing your best to meet them.
Where you have a good payment history or are in serious hardship, the ATO will offer you support and you are likely to be treated more generously than if you have deliberately set out to avoid tax, or regularly fail to pay your tax.
If you can’t pay by the due date, you may be allowed to set up a payment plan. The ATO has a Payment Plan Estimator tool you can use to work out a suitable payment schedule. Daily interest on your unpaid debt will accrue, however, at an annual rate of 8.00 per cent in the July to September 2022 quarter.
Eligible small businesses owing activity statement amounts may also be able to make interest-free payments over 12 months.
What will the ATO do if I don’t pay?
Aside from charging interest, if you don’t pay, the ATO will begin offsetting future tax refunds to reduce your tax debt and debts to other government agencies, such as overdue child support.
The ATO may take stronger action with taxpayers unwilling to engage, repeatedly defaulting on payment plans, found to have deliberately avoided paying tax, or who are engaged in phoenix activities.
These harsher powers include issuing a garnishee notice or a DPN. Garnishee notices require an employer, bank or trade debtor to pay your money directly to the ATO to reduce your tax debt.
The ATO may also file a claim or summons, which can result in you receiving a bankruptcy notice, or a statutory demand and application to wind-up your company.
Missing super contributions
Failing to meet your obligation as an employer to pay Superannuation Guarantee (SG) contributions into your employees’ super accounts is also in the ATO’s sights.
If you don’t pay your required SG contributions by the quarterly payment deadlines, you must pay the SG Charge (SGC) and lodge an SGC Statement. The SGC consists of a shortfall amount, 10 per cent annual interest and an administration fee for each unpaid employee per quarter. You are also ineligible to claim a tax deduction for the SG contributions against your business income.
Penalties for SG non-payment
The ATO is prepared to support employers who engage and try to get things right with their SG payments but will take firmer action with businesses repeatedly failing to pay correct SG amounts or supply the necessary information.
With employers who pay and lodge their SGC Statement late, or who fail to provide information during an audit, the ATO can impose a Part 7 Penalty, which is up to 200 per cent of the SGC amount payable.
Company directors failing to meet their SGC liabilities risk having the business’ liability become their personal liability. The ATO may also start bankruptcy action or seek to wind-up your business.
Don’t ignore a tax debt
Communication with the ATO is essential when it comes to tax and super debts.
To get on top of the situation, contact the ATO or make an appointment with us to discuss your financial position and possible ways to pay your tax and super obligations. The sooner you act the better the outcome is likely to be.
How the ATO mines your data
It was hard to miss the media splash about international tax evasion when the Pandora Papers were released, with local interest focussing on what Australian tax authorities would do with this massive trove of information.
But it seems the ATO is relaxed. Deputy Commissioner and Serious Financial Crime Taskforce Chief Will Day responded that the tax man doesn’t “rely on data leaks to do our job. We detect, investigate and deal with offshore tax evasion year-round.”
So where does the ATO get its data from and how is it being used?
Information from many sources
As some of the most powerful computers in the country are matching data from just about every facet of a taxpayer’s financial life, the ATO doesn’t miss much. Every year it receives reams of data from share registries, banks and financial institutions, allowing it to identify most of the financial transactions occurring in Australia. In 2020, more than 600 million transactions were reported to the ATO.
Property and lifestyle assets are also key areas of interest, with data from state and territory title offices and revenue agencies covering real property transactions, rental bond payments and property management all flowing to the ATO.
Data is also exchanged with tax agencies in other countries to ensure correct reporting of overseas income and income earned by foreign residents.
Current data-matching programs by the ATO cover credit and debit cards, ride-sourcing providers, sharing economy accommodation platforms and cryptocurrency service providers. Information on online sales over $12,000 also end up with the tax man.
Government departments data sharing
Government agencies are also a major source of data for the ATO, with detailed protocols on information sharing in place with the Australian Electoral Commission, Services Australia (Centrelink and the Child Support Program), and the Department of Home Affairs’ visa and passenger movement records.
Motor vehicle registrations from the states and territories provides data on all motor vehicles sold or registered where the value is over $10,000.
The new Single Touch Payroll (STP) system for businesses is also used to confirm employment income, deduction reporting, payments to contractors and superannuation contributions.
Even tips from other businesses and individual taxpayers can be used in specific data-matching activities.
Matching and analysing the data
Once all this information is received, it’s validated against the ATO’s internally collected data. Algorithms and other analytical tools are used to refine the data and match it against information reported in tax returns.
Although the ATO uses some of the data it receives to pre-fill sections of your tax return, much of it is used to identify discrepancies in taxpayers’ returns.
You are then contacted and provided with details of the discrepancy so you can check your records. Discrepancies can be as simple as omitted interest, employment income or government payments; CGT from the sale of an asset; payments to contractors in the building and construction industry; or distributions from partnerships, trusts and managed funds.
Data-matching is also undertaken on taxpayers purchasing expensive consumer items (such as boats, racehorses, antiques and luxury cars) to determine whether they can afford the items based on their declared income.
Helping businesses operate
Data-matching programs help the ATO identify businesses that may not be reporting all their income, operate outside the system, or operate but fail to lodge a tax return.
Careful analysis of financial data helps businesses to operate on a level playing field. Running part of a business ‘off the books’ and not reporting all the income received provides an unfair advantage.
By data-matching, the ATO can also better understand trends and patterns in specific industries. This is used to create performance benchmarks (or financial ranges) for each industry, particularly in relation to tax and activity statements. These benchmarks cover turnover comparisons with your cost of sales, total expenses, rent, labour and motor vehicle expenses.
The ATO also develops a key benchmark range for an industry. If data analysis shows your business operates outside this range, it’s a red flag raising the possibility that your business may be avoiding its tax obligations by not reporting some of its income. The benchmark range may also be used to determine how much tax a business should have paid if there are insufficient or no records available.
If you would like help with understanding your tax obligations and preparing your tax records, please contact our office today.