One-off Bonuses

The Rudd Government Tax Bonus for Working Australians and Household Stimulus Package – are ready to go now the High Court has confirmed their constitutional validity and will be paid from Monday 6 April for those eligible who have lodged a 2007-08 tax return.

Tax Bonus for Working Australians

This gives a one-off bonus to taxpayers who paid tax in 2007/08 after taking into account tax offsets and imputation credits.

The amount of the bonus depends on the taxpayer’s taxable income for that financial year ranging from $900 on taxable income up to $80,000 down to $0 if taxable income was more than $100,000.

The Tax Office will make the payment to taxpayers after determining eligibility for the 2007‑08 financial year.

Taxpayers who have not already lodged their 2007‑08 income tax return should do so by the end of June 2009 to obtain the bonus. The bonus will be a direct payment to taxpayers including through electronic transfer or cheque.

Household Stimulus Package

Eligible families and individuals will receive the following bonuses:

• $900 Single Income Family Bonus to families who, on 3 February 2009, were eligible for Family Tax Benefit Part B 
• $950 per child Back to School Bonus to families who, on 3 February 2009, were eligible for Family Tax Benefit Part A
• $950 Training and Learning Bonus to students and people outside the workforce returning to study 
• $950 Farmers Hardship Bonus to farmers and rural-dependent small businesses who, on 3 February 2009, received exceptional circumstances-related income support

Tax Concessions for Business

The Small Business and General Business Tax Break was announced on 3 February 2009 and is draft legislation which has been released for public comment. The bill proposes providing additional support in the form of a bonus tax deduction for Australian businesses undertaking capital investment in 2009.

More to follow as details are finalised.

Minimum Pension - Temporary Relief

The significant downturn in global financial markets has had a negative effect on retirees' superannuation capital in account-based pensions.

The Federal Government has decided to reduce by 50 per cent the minimum payment amount for 2008-2009. This will be equivalent to suspending the minimum draw down requirement for the second half of 2008-2009. For those who have already taken half of the current minimum payment for 2008-2009, a further payment will not be required until the end of the 2009-2010 year.

The valuation of minimum pensions for 2008-2009 is based on the fund's asset value as at 1 July 2008 when equity values were higher. Eligible pensions that are in existence on 1 July 2009 and those that commence in the year 2008-2009 will both benefit from this measure. The temporary relief is applicable to:

• Account-based annuities and pensions payable since 1 July 2007 
• Allocated annuities and pensions 
• Market-linked annuities and pensions
• Account-based and allocated pensions payable from Retirement Savings Accounts.

5% in-house asset deadline approaching

The 30 June 2009 deadline is rapidly approaching by which any of the following investments in a Self Managed Superannuation Fund (SMSF) must not form more than 5% of the total market value of the SMSF's assets:

• loans to, or investments in, related parties of the fund; 
• units in a related trust; 
• leases of assets to, or from, related parties (excluding business real property). 

Please contact us if you would like to know more about the in-house asset rules.

SMSF residency trap law changes

Legislation has recently made the SMSF residency trap much tougher.

The general rule If the central management and control of a SMSF — that is, the trustees or the directors of a corporate trustee — is ordinarily outside Australia, then the SMSF ceases to be an Australian super fund. If that happens, the SMSF's assets and income are likely to be taxed at the highest tax rate.

Old way out Under the old rules, SMSF trustees (or directors of the trustee) could return to Australia for 28 days in each 2 year period to be treated as "ordinarily in Australia" and so escape the trap.

New rule If SMSF trustees (or directors of the trustee) are based outside Australia for 2 years, then the SMSF's central management and control will be outside Australia. In that case, the fund will not be an Australian superannuation fund. The legislation does not give the ATO any discretion. If you are a SMSF trustee (or director of the trustee) and are planning an extended absence from Australia, you should seek professional advice.

Super Contributions - yes or no?

Are you over 65?

If you are 64 years of age or less on 1` July of a financial year you may assume that your non-concessional contributions cap is $450,000 because of the bring-forward cap available to you.

If you are over 65 for the entire financial year you cannot bring forward two years of contributions.

Your non-concessional contributions cap is $150,000. If you contribute more, you will be assessed for excess contributions tax (ECT).

If you are over 65 and are making non-mandated (voluntary) contributions, then you will also need to satisfy the work test (40 hours in a month) – please ask us if you require further clarification.

Are you over 75?

The ATO has recently advised some over-75s are making contributions to superannuation when they are ineligible. After the age of 75, people can not make contributions to their super. There are very limited circumstances where an employer can continue to make contributions after a person turns 75.

Did you know deducted contributions count towards the concessional cap?

Deductions for super contributions in an income tax return are treated as concessional contributions and count towards the $50,000 concessional contributions cap.

From 1 July 2007, the concessional contributions cap is $50,000 per year. For individuals aged 50 and over, the transitional concessional contributions cap is $100,000 per year until 30 June 2012.

Deductions for Personal Super Contributions

Tax Office audit activity has identified a high rate of incorrect claims for deductions for personal super contributions in 2008 tax returns attributable to a failure to consider the new laws now governing this deduction.

New rules Individuals must have:

• Made personal contributions to a complying super fund or retirement savings account (RSA) - salary sacrifice contributions don't qualify 
• Satisfied the 10 per cent test - generally less than 10 per cent of assessable income plus reportable fringe benefits can be from employment related activities 
• Provided the super fund with a notice of intent to claim an income tax deduction in the approved form advising it of the amount they intend to claim as a deduction 
• Received a formal acknowledgment of the notice from the fund before claiming the deduction.

If the individual is selected for audit and is found not to have met these requirements, their claim will be disallowed.

Varying your PAYG amounts

Given the current economic downturn, SMSFs can vary their PAYG amount due to a change in their financial circumstances.

If you need to vary the amount, you can do so by lodging your business activity statement or instalment notice on or before the payment's due date. 

You may also be entitled to a 20 per cent reduction to your PAYG instalment amount if you pay quarterly PAYG instalments using the amounts printed on your activity statement; you carry on a business with an annual turnover of less than $2 million; or you receive income from a partnership or trust that is carrying on a business which has an annual turnover of less than $2 million.

SMSFs and Tax Exemptions on Pension Assets

You may be able to claim a tax exemption in the SMSF annual return for certain income, once your SMSF commences paying super income stream benefits (commonly referred to as pensions).

Pension liabilities are the SMSF’s liability to pay super income stream benefits. Ordinary income and statutory income that a complying SMSF earns from assets held to provide for super income stream benefits is exempt from income tax. This is referred to as exempt current pension income (ECPI). The ECPI exemption applies to all complying super funds (including SMSFs) currently paying super income stream benefits. An SMSF paying such a benefit is not automatically entitled to the exemption – they must meet certain conditions.

In order to claim the ECPI exemption in the SMSF annual return, there are steps you must take prior to commencing the payment of the super income stream benefit. These include ensuring that all of the SMSF’s assets are re-valued to their current market value prior to commencing payment of the super income stream benefit.

SMSFs will require an actuarial certificate each year where they have not segregated assets in a fund where there are both pension and accumulation accounts.

SMSF Trustees and insolvency

The downturn in the economy is predicted to result in higher numbers of personal bankruptcy proceedings and corporate insolvency.

Trustees should act early to restructure their SMSF benefits before bankruptcy proceedings commence. A person who is an insolvent under administration is not allowed to act as trustee of superannuation entities. Hefty penalties apply to contravention of the SIS Act ‘disqualified person provisions’.

In addition, a trustee issue arises if disqualification of the trustee means that the SMSF no longer has a trustee with the legal capacity to act on its behalf. Under the SIS Act, legal personal representatives cannot act on behalf of disqualified trustees. 

Any person facing insolvency would be prudent to replace themselves as either trustee or director of a SMSF trustee in order to avoid further legal complications.

Timely guidance for trustees

The Institute of Chartered Accountants in Australia has recently issued a set of guidelines for trustees of SMSFs.

“All trustees of SMSFs need to know and understand their responsibilities and continually monitor and review their SMSF investment strategy,” said Hugh Elvy, Head of Financial Planning and Superannuation at the Institute.

Other tips for guidance include:

• Remember that superannuation is a long term investment – stick to your investment plan.
• The fundamentals of investing for a superannuation fund during a financial crisis include regularly reviewing the SMSFs investment strategy to ensure adequate liquidity, understand the risk and return trade-off, invest in quality sound assets and investments and sell underperforming assets and investments. 

“It is extremely important to remember that it is the trustees’ responsibility to monitor the current economic conditions. Absorb the information in the media and from industry professionals. The more you know the better your decisions”.

For more information see:

www.charteredaccountants.com.au/Industry-Topics/Superannuation

Market Update

There are so many numbers being reported on the movement of the stock indices. It might be useful to put them into some context for you.

The Australian All Ords index was 6,873 at its market high and 3,091 at its recent low: a 55.0% fall. At 31 March 2009 it was 3,547: a 14.8% rally, still 48.4% below its market high.

The US Dow market high was 14.198 and has a recent low 6,470: a 54.4% fall. It has rallied to 7,609 (17.6%) at end of March but still 46.4% down on its market high.

The MSCI World index has fallen 59% from market high to recent low. It has rallied 16.8% from recent low to 31 March 2009 and would require a 108.9% rise to recover the market high, being currently 52.1% below its high.

The Australian Property Trust index (XPJ) was 2,553 at its market high and 547 at its recent low: a 78.6% fall. At 31 March 2009 it was 664: a 21.4% rally. This index needs to rise a whopping 284.5% from here to recover its market high; it’s currently 74% down.

China’s stock market has fallen 70.4% from its market high to recent low. It has rallied 30.7% but is currently 61.3% below its high.

Quoting movements in percentage terms can be a little confusing as a 33% fall will require a 50% rise to regain the initial loss.

The big question for all investors is have we seen the bottom or is this just a bear market rally and the bottom is still ahead for us?

For our clients we remain cautious. We took our clients to significant cash positions in July 2008 and progressively since. This has protected their wealth and positioned them well to ride this crisis.

The investment decision of whether to buy or sell is becoming more difficult. On one hand it is likely the economic news will worsen in the short term but on the other low interest rates and the significant government stimulus programmes should take effect. 

During a period of extreme market volatility such as now, we counsel investors to remain flexible and patient.