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Why so much super “stuff” this year?

New rules mean that insurance coverage will be cancelled on “inactive” superannuation accounts from 1 July 2019, unless the fund member informs the fund in writing that they want to keep the insurance.

         

 

Also, where an inactive account has a low balance (under $6,000) the fund will have to send that super to the Australian Taxation Office for “consolidation and safekeeping”.

If you haven’t made contributions or rolled over your super in the past 16 months, no matter what your balance, it’s important to check in with your fund now to keep your account active and maintain the insurance you want.

The new law also bans super funds from charging exit fees when you want to leave the fund, which should make it easier to change and consolidate your super accounts when you need to.

Life insurance within superannuation can be cheaper.  If you are in doubt whether you should have it, why not ask your dependents?

 

 

AcctWeb

Reverse Mortgage?

Some elderly Australians are trapped asset rich, income poor.  Whilst downsizing might be the smartest solution, another option is a reverse mortgage.

       

 

No income is required to qualify, however, credit providers are required by law to lend money responsibly, so not everyone will be able to obtain a reverse mortgage.

A reverse mortgage is a type of loan that has been specifically designed for seniors over the age of 62 years to borrow money using the equity in their home as security.  The loan can be taken as a lump sum (for a holiday, renovation, boat, accommodation bond for aged care, etc), a regular income stream, a line of credit, or a combination of all these options.

Interest is charged like any other loan, except the borrower is not required to make repayments while they live in their home – the interest compounds over time and is added to the loan balance.  The borrower remains the owner of their house and can stay in it for as long as they wish.

The loan must be repaid in full (including interest and fees) when:-

  1. the borrower sells their home,
  2. they move into permanent aged care,
  3. the last surviving borrower passes away.

A reverse mortgage is not the same as a house reversion scheme, where a portion of the house is sold.

The family need to understand the impact on the reduced “inheritance”.

It will not be cheap, fees will apply, it will take time, legal advice should be obtained, and expect numerous conditions.  Always seek help and involve the family.

 

 

AcctWeb

How the gig economy could create hidden tax issues for contractors and employers

Workers and employers are benefiting from the burgeoning gig economy in which people work part-time or on a project basis, often for a stable of employers.

         

 

However, this is creating some uncertainty around whether people are independent contractors or employees, or a hybrid of both.

Misinterpreting the arrangements can lead to inadvertent breaches of various legislation, as was demonstrated in the Fair Work Commission’s decision in Joshua Klooger v Foodora Australia Pty Ltd [2018] FWC 6836.

While Mr Klooger had entered into an independent contractor agreement with Foodora that stipulated he was a contractor and not an employee, the Fair Work Commission found that he was, in fact, an employee based on the “totality of the relationship”. This meant Mr Klooger had been unfairly dismissed and was entitled to compensation.

Furthermore, the tax authorities swooped after the decision, finding that payroll tax obligations existed, as well as other employment tax obligations such as pay-as-you-go withholding (PAYGW), superannuation and personal services income (PSI).

These decisions meant that Foodora was liable for millions of dollars of potentially unpaid withholding taxes and superannuation. Compounding the problem, the decision of the Fair Work Commission effectively changed the flow of income for both Foodora and its workers. The cumulative impact meant that the German-founded food delivery business had to leave Australia.

Instead of the independent receiving all the income and paying an amount to the digital platform provider, the result is now that the digital platform provider receives all the income and pays some of that to its employees. While this may not change the bottom line for either, the implications across a range of stakeholders including banks, government departments and auditors are significant.

Tax authorities in Australia have been grappling with this issue for many years and, to date, no attempts to solve the problem have been effective. The Foodora example illustrates the potential pitfalls for many businesses when it comes to embracing the gig economy. The line between independent contractors and employees remains murky, which could affect businesses in a range of different industries.

Contractors are not technically employees of the business, so they usually get paid by issuing the business an invoice for their services and then pay their own superannuation, tax instalments and liability insurance, as well as any other costs of doing business.

This common example of a relationship between a contractor and a business has generally been accepted by the Australian Taxation Office (ATO), but the Foodora case could lead to changes. If the ATO were to take the view that these relationships were, in fact, employee relationships, then there would be a large number of contractors and businesses that would need to reconsider their tax structures and affairs.

This could mean significant out-of-pocket expenses for businesses as they would need to pay wages to their employees, pay the superannuation guarantee charge (SCG), allow for leave entitlements and ensure their insurances covered their employees.

The contractors themselves would have their tax affairs simplified but would also be unable to continue claiming certain tax deductions or splitting income through certain tax structures.

If the contractor and business elected to continue with the current independent contractor arrangement, the ATO may seek to review the arrangement with the following outcomes:

  1. Request the business pay an applicable outstanding SGC to the contractor’s superannuation fund. As this would be late-paid superannuation, no tax deduction would be allowed for the payment.
  2. Charge a 10 per cent interest rate and quarterly administration fees on the unpaid SGC amounts.
  3. Amend the contractor’s income tax return under the personal services income (PSI) provisions to disallow certain deductions and income splitting.

These developments mean it’s critical for any business engaging independent contractors to seek expert advice to ensure they understand the issues and take all steps to ensure their business model works. Failing to do so could be catastrophic, as was illustrated by Foodora’s forced exit from the Australian market.

 

 

Tony Ince and Kane Zaknich, RSM Australia 
22 November 2019 
accountantsdaily.com.au

 

15,000 tip-offs as ATO black economy hotline rings hot

Black economy tip-off calls to the ATO have breached the 15,000 mark in the three months since it launched its new tax integrity centre, with cash payments and income declaration among the biggest gripes.

         

 

On 1 July, the ATO launched its new tax integrity centre, aimed at providing a single point of contact for reporting suspected or known illegal phoenix, tax evasion and black economy activity.

In its first quarter of operation, the tip-off centre has received 15,000 tip-offs, averaging 230 tip-offs a day.

The top categories of tip-offs include not declaring income; demanding cash from customers or paying workers cash in hand; lifestyles not matching a person’s income level; and not reporting sales.

Cafés and restaurants received the most attention, topping the list in terms of the total number of tip-offs received in the first quarter this year.

“We’re hearing loud and clear that people are sick and tired of this kind of dodgy behaviour. Running a small business can be a really tough gig, and when dishonest competitors are cheating the tax system by operating off the books, it’s really unfair and makes it even harder to succeed. It’s also effectively stealing from the community,” said ATO assistant commissioner Peter Holt.

“The proof is in the pudding. Our risk indicators tell us that there is a black economy problem in the café and restaurant industry and the fact that tip-offs about this industry top our list tells us that there is still more work to be done to protect honest café and restaurant owners and workers in this industry.

“Trading in cash and paying your workers in cash is perfectly legal but failing to report the income to the ATO and not paying your workers their entitlements like superannuation is not only illegal but also incredibly unfair,” he added.

“Regardless of what industry you’re in, if you’re cooking the books, your competitors and workers are probably aware of it. And they’re not hesitating to let us know about it.”

Apart from the hospitality industry, the ATO also received high volumes of tip-offs about black economy behaviour in the hairdressing and beauty, building and construction, and cleaning industries.

Tip-offs from New South Wales topped the ATO’s list, closely followed by Victoria and Queensland.

While tip-offs are private and can be anonymous, 53 per cent of people who provided a tip-off were happy to provide their contact details to the ATO.

“The fact that more and more people are willingly handing over their contact details when they give us a tip-off goes to show that the community has had enough of this kind of mischief. They want to help us uncover and deal with this behaviour,” Mr Holt said.

“A tip-off from the community could be the missing piece of the puzzle we need to successfully audit or prosecute someone who is illegally operating in the black economy, so we really value and rely on the community letting us know when something doesn’t add up.”

 

 

Jotham Lian 
31 October 2019
accountantsdaily.com.au

 

What happens when interest rates hit the floor?

Amid challenges facing central banks in keeping the economy open for business, zero or negative benchmark interest rates are a real possibility. Let’s consider what that means for business.

         

 

What’s happening?

On 1 October, the Reserve Bank of Australia (RBA) announced another interest rate cut. It is the third cut within five months and brings the cash rate to 0.75 of a percentage point, the lowest level in Australian history. The RBA has indicated that it is willing to take extraordinary steps to boost the economy, decrease unemployment and push the inflation rate back within the target bands.

Expectations of further cuts in Australia could become a reality after the US Federal Reserve cut its benchmark rate by 25 basis points in September.

Negative interest rates might sound odd, but they have been seen previously in the central banks of Switzerland (’70s and 2014), Japan (early ’90s), Sweden (2009 and 2010), Denmark (2012) and the European Central Bank (2014).

What does it mean in theory?

A zero, or negative, interest rate would appear to be counterintuitive to core financial and economic principles. Theoretically, this could result in banks actually paying customers for borrowing from them.

What’s the real impact?

Sadly for customers, a negative benchmark rate does not mean free money or a paid-for mortgage. Generally, banks will include a zero, or minimum, interest rate floor clause in a debt facility to guarantee a minimum level of interest earned. This is even if the bank bill swap rate (BBSW) or other floating rates become negative.

However, what borrowers need to watch out for is interest rate swaps they may have used to lock in interest on their floating rate loans. Often, such swaps don’t have a similar floor.

In this situation, it’s possible that future cash flows for the loan and the interest rate swap will no longer match.

Critically, this means fixed loan rates might not actually be fixed: borrowers may actually end up paying more than their fixed rate.

We use the following scenarios to illustrate this effect.

Company borrows $1 million from Bank at a floating rate of BBSW + 2%. The loan has a floor so total interest cannot drop below 2%, even if BBSW was negative. To fix its interest rate, Company also purchases an interest rate swap to lock in a fixed rate of 4%. Under the swap, Company receives BBSW + 2% and pays 4% fixed. The swap has no floor.

Scenario 1 – BBSW is 1%, so bank variable interest rate is 3%

Scenario 2 – BBSW is -2%, so bank variable interest is 2% (because of the floor)

 

Scenario 1 – Net outflow: $40,000

Scenario 1: 
BBSW (1%) is greater than the floor (0%)

Interest Rate Swap: Company pays

Interest Rate Swap: Company receives

Interest on debt: Company pays

Net effect: Company pays

Exposure to the floating rate is 100% hedged

Fixed 4% under the terms of the Interest Rate Swap

 

Variable 3%, comprising 1% BBSW + 2% fixed

 

Variable 3%, comprising 1% BBSW + 2% fixed

Fixed 4%

Scenario 2 – Net outflow: $60,000

Scenario 2:
BBSW (-2%) is less than the floor (0%)

Interest Rate Swap: Company pays

Interest Rate Swap: Company receives

Interest on debt: Company pays

Net effect: Company pays

The floor limits the volatility of the loan which is not offset by the Interest Rate Swap. The hedging relationship is not effective

Fixed 4% under the terms of the Interest Rate Swap

0%, comprising -2% BBSW + 2% fixed

 

Variable 2%, comprising 0% BBSW (limited by the floor) + 2% fixed

Total 6% interest, being fixed 4% AND 2% (i.e. interest on debt)

 

In Scenario 2, Company may have thought it was locked into a fixed interest rate. However, because of the floor, their net interest is actually 6 per cent!

What might borrowers do?

In order to manage the exposure to negative interest rates in the situations above, borrowers can include interest rate floors along with swaps when entering into new debt agreements.

For existing swaps, borrowers could purchase a floor (by way of a purchased option) to try to manage interest rate exposures if benchmark rates did actually go negative. 

What are the accounting implications?

Although rates have fallen to an all-time low, Australia has never actually had negative interest rates.

However, if the curve begins to turn, ineffectiveness may arise from hedging relationships which, in certain circumstances, require hedge accounting to be discontinued — with consequent significant potential profit and loss (P&L) statement volatility.

Depending on a company’s particular circumstances, the outcomes could be:

Continue hedge accounting but separately account for the floor interest

This means that:

  • hedge accounting would not be precluded, but
  • the floor derivative is marked to market through the P&L statement.

The financial instruments standard provides an example where an embedded floor on the interest rate on a debt contract is not separated, provided the floor is at or below the market rate of interest when the contract is issued. If the floor is above the market rate of interest when the contract is issued, then it should be separately accounted for (i.e. if it is “in the money”).

Separation of the floor does not mean hedge accounting necessarily fails. However, where separation is required, the floor is accounted for at fair value through the P&L statement.

Discontinue hedge accounting

If this occurs:

  • hedge accounting is discontinued prospectively, and
  • existing cash-flow hedge reserves remain and are recognised in the P&L statement in the normal course.

Whether hedge accounting can be achieved will depend on the circumstances. If there is a floor, which is not separated from the debt instrument, and there is no equivalent floor in the hedging instrument, ineffectiveness will result from the hedging relationship.

The extent of the disconnect between the floating rate and the floor could require discontinuation of hedge accounting where there is no longer an economic relationship between the hedged item and the hedging instrument; for example, where the variable rate is lower than the floor for a substantial period of the hedging relationship.

What can you do to prepare?

If your business is exposed to interest rate risk, regardless of whether you are a lender or borrower, it is important to be aware of the possibility of having a zero interest rate environment and what the accounting implications might be. Check your contracts. If you do have a floor, think about whether you need an additional option or swap to protect your interest profile.

 

Insights: David Waters, Manuel Kapsis, Fei Huang and John Ratna
PwC Australia 
11 October 2019 
Reported in the accountantsdaily.com.au

Director Penalty Notices (DPN)

Directors need to be more aware of the increased ATO scrutiny of company reporting and payment obligations.

         

 

The ATO has been quickly increasing its focus on business audits, its 'bob-in’ a business scheme, collecting outstanding tax liabilities, and its visits to regional business sites.  This is a lot already but it's not all, the ATO is also increasing the amount of Director Penalty Notices (DPN).

What is a DPN?

A Director Penalty Notice (DPN) means the directors of a company can be pursued directly for outstanding Superannuation Guarantee Charges (SGC) and Pay as You Go (PAYG) liabilities.  Directors are no longer protected by a company’s corporate structure.

Under what circumstances would a DPN be issued?

  • Historical non-reporting;
     
  • Significant ATO debt which remains unpaid;
     
  • Suspicion of phoenix activity.  Phoenix activity is defined by the ATO here.

Obviously the main ATO trigger points for issuing a DPN relate primarily to obligations that have been outstanding for some time, though the current length of an outstanding obligation will most likely be shortened in the future.  Equally obvious is that phoenix activities are illegal. 

Directors need to pay very close attention to their company’s reporting and payment obligations and your accountant is well placed to help.  If you have any concerns, then don't hesitate to ask. 

Being more focused on these issues may sound relatively simple but in larger companies the directors may not have direct oversight regarding the company’s tax compliance obligations. In such cases all key personnel must also be very aware of the greater ATO scrutiny, and act accordingly. 

Nor are new directors exempt.  If there is an SGC, PAYG and GST liability that remains unpaid and unreported within 3 months from the date of a new director’s appointment then they too become liable.

Directors only have 21 days from the date a Director Penalty Notice is issued to act and avoid personal liability.

 

AcctWeb

 

Synchronised global economic slowdown

The International Monetary Fund (IMF) grabbed headlines this month on releasing its latest World Economic Outlook report, downgrading its global growth forecasts to the lowest levels since the 2008-09 financial crisis.

       

 

Pointing to heightened economic and political uncertainty, particularly in China and the United States, the IMF cut its 2019 global growth forecast by 0.3 per cent to 3 per cent, and its 2020 estimate by 0.2 per cent to 3.4 per cent.

Vanguard also expects global growth to continue to soften over the next 12 months, and sees the likelihood of a shallow recession occurring in the US in 2020 as being above 50 per cent, with the risk of a more severe recession a 10 per cent probability.

The IMF's forecast also came with a stark warning: that the world is in a “synchronised economic slowdown”, with financial markets expecting interest rates to stay lower for longer than had been anticipated earlier in 2019.

Indeed, more cuts to official interest rates in the US, Australia and other countries are highly likely as central banks attempt to use monetary policy as a lever to kick start growth.

“Financial conditions have eased even more, helping contain downside risks and support the global economy in the near term,” said a joint commentary by the IMF's director of monetary and capital markets, Tobias Adrian, and deputy director Fabio Natalucci.

“But loose financial conditions come at a cost: they encourage investors to take more chances in a quest for higher returns, so risks to financial stability and growth remain high in the medium term.”

Risk and fixed income inflows
Macro-economic and policy events have been among the key drivers of markets instability for some time, although risk assets such as equities are continuing to trade at high valuation levels.

“These periods of time do come about and they tend to be a more difficult time to invest, because you need to stay engaged in the market to earn respectable returns,” says Christopher Alwine, principal, head of credit, of Vanguard's global Fixed Income Group.

“But, in staying engaged in the market, it's also important to make sure the risk levels that you're positioning your portfolios in are consistent with the risks of an economic downturn, because those risks are elevated.

“To a retail investor, that really comes down to how much you have in stocks versus fixed income and cash.”

Ongoing large inflows into listed and unlisted bonds funds, where investment returns over the past year have been very strong, are a strong indicator of the de-risking phenomenon that's been occurring, and continues to occur, globally.

In a weak macro-economic environment, pointing to low inflation, higher unemployment and lower growth, broad fixed income strategies should perform relatively well as a risk diversifier to more volatile equities.

Most importantly, when you have your worst periods of equity performance, you want to see fixed income perform well. Yet, that's not always the case.

Understanding interest rate risk
Investors do need to be aware that the fixed income asset class is not homogenous. Indeed, depending on the investment strategy being used, investors in fixed income can be exposed to market risks they may not have appreciated at the time of making their investment.

For example, interest rate risk or sensitivity (duration) can enhance returns when share markets perform poorly.

But a fixed income fund may not necessarily perform this way if a fund manager has structured a portfolio in a way where the fixed income investments made materially change the underlying nature of the fund.

“One of the biggest decisions that you can make in a fixed income portfolio is to make significant duration bets,” says Vanguard senior manager, investment product management, Scott Cornfoot. “They are single decisions that can be quite volatile and surprise investors.

“What you don't want is to invest in a fixed income portfolio and, when equities go badly or markets get jittery … to find that your manager has taken a big duration position (that is, has effectively gone underweight fixed interest) and your portfolio doesn't perform as you would expect.”

This is why low-cost actively managed global credit funds that invest in high-quality investment grade bonds, and which have very tight duration constraints, are attracting investor demand.

In addition to the risk-free component generated from government bonds, these credit funds seek to generate additional performance by investing across investment grade bond markets and by seeking out opportunities to add value through specific security selection.

So, in a synchronised economic slowdown climate, if you're moving to de-risk your portfolio by shifting capital into fixed income, it's important to understand the nuances within the asset class and how they may impact returns.

This is where a licensed financial adviser should be able to provide guidance.

 

Tony Kaye
Personal Finance Writer,Vanguard Australia
29 October 2019
Vanguardinvestments.com.au

 

STP to be increasingly monitored

The ATO’s “softly softly” approach to Single Touch Payroll will not last long, warns a tax expert, as clients are urged to revisit historical data before the Tax Office catches up to them.

         

 

With Single Touch Payroll (STP) now mandatory for businesses of all sizes, BDO partner Ben Renshaw believes it will only be a matter of time before ATO audits increase as the agency begins analysing STP data.

“What the ATO has done with Single Touch Payroll is they’ve automated the process of collecting payroll data in a way that ultimately will make it much easier for them to audit,” Mr Renshaw said.

“So, my expectation is that the payroll data that the ATO is collecting from pretty much everybody now will be looked at using analytics tools and artificial intelligence–type tools to really start to pick out areas of concern from single organisations or industries or areas or whatever it might be.

“The ATO has got more and more data to be able to look at this, so they are committing more resources to this, but it’s part of the Single Touch Payroll approach that we’ve seen come in, and that’s going to drive more compliance in this space.”

Mr Renshaw said that while the ATO has adopted a collaborative approach to help employers get on board STP, that approach will not last forever.

“That gently, gently, softly softly approach, which has been fantastic, isn’t going to last forever,” Mr Renshaw said.

“The ATO is also going to look backwards. So when Single Touch Payroll information today highlights a concern or an error or an issue, the ATO will certainly want to look back historically, pre–Single Touch Payroll, to see if that issue also existed.

“[Employers] assume that STP is just a forward-facing thing, but you really need to be confident that what you’ve done historically is correct as well.”

 

 

Jotham Lian 
08 October 2019 
accountantsdaily.com.au

 

6 new accounting related videos

Videos are a good way to learn more about a topic or show to others who my be new to financial management.

Six new videos have just been added to our website. The topics covered are: 

  • How interest rates affect your loan
  • SMSF borrowing limited recourse loan
  • Cloud based accounting
  • Why you need business expense insurance
  • Understanding SMSFs
  • Saving and Investments

 

     

Click on the Video menu entry above to view our new collection.

 

 

 

GDP by country since 1800

This animated chart is simply amazing.  It's fascinating to see how the world has changed and is changing.  Food for thought!!

         

Simply click on the image and see how things have changed but also how, in many ways, they've stayed the same.

 

 

 

 

 

 

 

 

 

 

 

 

 

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