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Our Advent calendar for 2019

On behalf of all our staff we wish our clients a Merry Christmas, Happy New Year and a great holiday period.

Come back each day for an inspirational quote or poem about Christmas, summer and life in general from some of the great writers and poets.

(Please click on the image to open the Advent Calendar and then click on a date)

           

 

 

Tax Office sounds warning on 8 types of super schemes

The Australian Taxation Office has earmarked a number of superannuation and SMSF schemes it says are under additional scrutiny for their ability to enable taxpayers to evade laws around superannuation and tax rules.

         

 

There are a number of warning signs associated with illegal super schemes that Australians interested in SMSFs must be aware of.

Taking part in an illegal super scheme could see you penalised financially, disqualified from being a trustee and having to wind up your SMSF, or even spending time behind bars.  

The Australian Taxation Office has now highlighted eight separate types of superannuation schemes that are attracting its attention for all the wrong reasons. These are:

Related-party property development ventures

While an SMSF can invest directly or indirectly in property development ventures, the Tax Office said “extreme care must be taken”.

Some arrangements can give rise to significant income tax and superannuation regulatory risks, such as the potential application of the non-arm’s length income provisions and breaches of regulatory rules about related-party transactions.

Non-concessional cap manipulation

Non-concessional cap manipulation sees individuals and some SMSF members “deliberately exceed their non-concessional contributions cap with a view to manipulating the taxable and non-taxable components of their superannuation account balances”.

Granting legal life interest over commercial property to SMSFs

This is done by SMSF members or other related entities to divert rental income so it can be taxed at a lower rate without full ownership of the property ever transferring to the SMSF.

Dividend stripping

In this scenario, shareholders in a private company transfer ownership of their shares to a related SMSF so that the company can pay franked dividends to the SMSF with the purpose of stripping profits from the company in tax-free form.

Some limited recourse borrowing arrangements (LRBAs)

Where these arrangements aren’t consistent with a genuine arm’s length dealing.

Personal services income

Where an individual — with an SMSF often in pension phase — diverts income earned from personal services to the SMSF so it is concessionally taxed or treated as exempt from tax.

 

The next two arrangements being monitored by the ATO relate to the new super caps and restrictions that apply as a result of the super changes that came into effect on 1 July 2017:

Improper use of multiple SMSFs

The ATO said having multiple SMSFs does not ordinarily raise compliance issues, but the establishment of additional SMSFs intended to manipulate tax outcomes would.

The example provided was a switching of each respective fund between accumulation and retirement phases.

Inappropriate use of reserves

In the past, many existing reserves “arose legitimately from legacy pensions that are no longer available”, the Tax Office has conceded.

However, there are now very limited appropriate circumstances where new reserves would be established and maintained in SMSFs.

Structures using reserves designed to bypass super balance and transfer balance cap measures will attract scrutiny.

 

To prevent falling prey to foul play and super schemes that are illegal, the ATO has asked taxpayers to make sure they are receiving ethical professional advice when undertaking retirement planning.

It emphasised the importance of seeking a second opinion from a trusted and reputable expert, especially where in doubt.

 

 

Grace Ormsby 
25 November 2019 
accountantsdaily.com.au

 

Don’t forget sharing economy income

Money that you earn from “gig” jobs through platforms like Uber, Airtasker and Airbnb, such as transporting passengers or renting out a room or house, counts as your assessable income.

           

 

This means you must declare it on your tax return.  And, be aware the platform sends the income details direct to the Australian Taxation Office for their data matching surveillance.

Depending on your gig activities and expenses, you may also be able to claim deductions related to this type of income, but it’s important to keep evidence to support your claims.  Smart taxpayers tell their tax agent well before year end.

 

 

AcctWeb

 

Impress your friends with your knowledge!!

Knowing this information is a 'must have' for this Christmas break.

         

 

Please click on the following link to see all this interesting information. The areas covered are:

  • Overview
  • Markets
  • GDP
  • Labour
  • Prices
  • Money
  • Trade
  • Government
  • Business
  • Consumer
  • Housing
  • Taxes
  • Climate

 

Access all this data here.

 

 

tradingeconomics.com/australia

Salary sacrificing and the superannuation guarantee

Employers should take note of the new rules that became law on 28 October 2019, regarding the application of compulsory superannuation guarantee to salary sacrificed superannuation amounts.

         

 

From 1 January 2020, where an employee salary sacrifices part of their salary into superannuation contribution benefits, these superannuation contribution amounts will be subject to further 9.5 per cent superannuation contributions. Employers who currently contribute the 9.5 per cent superannuation guarantee based on the cash salary only will need to update their systems to comply with the new law by 1 January 2020.

We also note that where the arrangements between the employer and the employee is such that superannuation contributions (including salary sacrifice contributions) are quoted on top of a remuneration package (rather than within the package), and the employer doesn’t currently contribute based on the full cash plus salary sacrifice contributions package, then those employers will have additional costs from 1 January 2020. We recommend that employers review all salary sacrifice arrangements for impacts for compliance with the new law.

For example: Remuneration $100,000 per annum (excluding superannuation guarantee contributions). Employee salary sacrifices $10,000 into superannuation; therefore, $100,000 remuneration is made up of $90,000 cash salary and $10,000 benefits. Prior to 1 January 2020, the employer was only obligated to contribute superannuation guarantee on the cash salary of $90,000 (which at 9.5 per cent is $8,550). From 1 January 2020, the employer will be required to contribute superannuation guarantee based on the full remuneration of $100,000 p.a. (which at 9.5 per cent is $9,500 (being an increase of $950 p.a.) (in addition to the $10,000 salary sacrifice contributions).

Further, the new law also ensures that salary sacrificed superannuation does not count towards an employer’s compulsory superannuation contributions obligations.

For example: Remuneration $100,000 p.a. (excluding superannuation guarantee contributions). Employee salary sacrifices $10,000 into superannuation; therefore, $100,000 remuneration is made up of $90,000 cash salary and $10,000 benefits. Prior to 1 January 2020, the employer could effectively make no additional superannuation contributions, because the salary sacrificed contributions of $10,000 count as employer contributions. That is, the employer is treated as meeting its obligations, as 9.5 per cent of $100,000 = $9,500, and $10,000 in superannuation contributions have been made (due to the employee’s salary sacrificed amounts). From 1 January 2020, the employer will be required to contribute superannuation guarantee based on the full remuneration of $100,000 p.a. (which at 9.5 per cent is $9,500) (in this case, this is an increase of $9,500 on top of the $10,000 salary sacrifice contributions).

Please note that this new law only applies to salary sacrifice amounts that constitute superannuation contributions. It is our understanding that the new law does not apply to other salary sacrificed items.

Reference: Treasury Laws Amendment (2019 Tax Integrity and Other Measures No. 1) Bill 2019

Judy White, BDO Australia 
08 November 2019 
accountantsdaily.com.au

 

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

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