NOVEMBER 2006
FBT RATES
IN THIS ISSUE:
What’s new for the 2006/07 financial year?
FBT rates
Super changes
Depreciation
Retention of records
Protecting your assets
Improved CGT concessions
Death beats fringe benefits tax!
When the ATO knocks...
New appointment at Le Cornu Lewis
Hancock
The FBT rate has been reduced from 48.5% to
46.5%, effective from 1 April 2006.
WHAT’S NEW FOR THE 2006/07 FINANCIAL
YEAR?
The changes are intended to come into
operation as at 1 July 2007, and the major
proposed changes are follows:
 All payments of superannuation benefits to
members aged 60 or over, (which can be
taken as either a lump sum or in the form
of a pension) will be tax free, provided that
tax had been previously been paid on
contributions and earnings.
 Reasonable benefit limits (RBL’s) will be
abolished.
 Rules requiring members to take their
super after age 65 will be removed, and it
will be no longer necessary for people to
continue working in order to retain their
benefits in a super fund.
 Age
based
limits
for
deductible
contributions into super will be removed.
 As an alternative, annual contributions up
to $50,000 can be made for each member,
with a transitional period for people aged
50 and over.
 Superannuation contributions will be
deductible for people aged up to 75.
 Contributions made by self-employed
people will be fully deductible.
 After tax contributions made by employees
and government co-contributions will be
exempt from tax.
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Income Tax Cuts
New rates and thresholds which will apply from 1 July 2006
are as follows:
2006/07
Taxable Income ($)
Tax Payable ($)
0 - 6,000
Nil
6001 - 25,000
0 + 15% of excess over 6,000
2,850 + 30% of excess over
25,000
17,850 + 40% of excess over
75,000
47,850 + 45% of excess over
150,000
25,001 - 75,000
75,001 - 150,000
150,000 +
Tax rates applicable for non-residents will be as follows:
Taxable Income ($)
Tax Payable ($)
0 - 25,000
29%
25,001 - 75,000
75,001 - 150,000
7,250 - 30% of excess over 25,000
22,250 + 42% of excess over
75,000
150,000 +
52,250 + 45% over 150,000
SUPER CHANGES
Various changes to the Superannuation law
were proposed in the 2006-07 budget. These
changes were suggested in order to simplify
and streamline the superannuation system,
which is currently in operation.
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The co-contribution scheme will be
extended to after tax contributions made
by the self-employed.
After tax contributions limited to $150,000
per year. People aged less than 65 will be
able to bring forward two years of
contributions, enabling $450,000 to be
contributed in one year, provided that no
further contributions are made in the two
years following.
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In addition to the annual cap,
people can contribute a lifetime
limit of $1 million from the sale of a
small business which has been
held for 15 years; and settlements
for injuries which resulted in
permanent disablement.
The SIS levy will be increased from $45
to $150 in order to provide additional
funding to the ATO for compliance
activities,
steam
lining
reporting
requirements and other measures.
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Records relating to capital gains and
losses must be kept for at least five years
after the last relevant capital gains tax
event, ie sale.
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Records relating to deductions, which
relate to your work as an employee must
be kept for five years from the date of
lodgment of your income tax return.
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For depreciating assets, you must keep
records for the entire period over which
you claim deductions for decline in value of
those assets. You must also retain these
records for a further period of five years
from the date of your last claim.
If you have a particular situation, which is not
covered above and you are uncertain of your
responsibilities, please contact us to discuss
the relevant record keeping requirements.
PROTECTING YOUR ASSETS
For further information about the proposed
changes to the superannuation system, please
contact us.
We introduced you to succession planning in
our November 2005 newsletter - the need to
plan ahead for the handing over or sale of your
business, as well as protecting your assets.
DEPRECIATION
Under previous legislation, if you depreciated
assets on a prime cost basis to arrive at a
depreciation rate, you would divide 100 by the
effective life of the asset, and if depreciating on
a diminishing value basis you would divide 150
by the effective life.
Under the new legislation, for assets acquired
on or after 10 May 2006 you can use 200
divided by the effective life of the asset to
calculate depreciation on the diminishing value
basis, This will substantially increase the level
of depreciation claimed on assets in the early
years of ownership. For example if a motor
vehicle is purchased after 10 May 2006, under
the new rules the diminishing value
depreciation rate on motor vehicles will
increase from 18.75% to 25% p.a.
RETENTION OF RECORDS
Please note that original documentation
forwarded to Le Cornu Lewis Hancock to aid in
preparation of income tax returns and financial
statements will be returned to clients. It is the
client’s responsibility to retain these records for
the period prescribed by the tax and other
legislation. Some of the basic rules are as
follows:
DID YOU KNOW?
Recent reports indicate more than 65% of
businesses will face a major succession issue
in the next 10 years, and on current figures
barely 25% have done anything about it yet.
Picking up on the theme of protecting your
assets, from an estate planning perspective,
we’re going to have a brief look at how it may
also be possible to use your will to set up a
trust (called a ‘testamentary trust’) to hold
and protect your assets for future generations.
It’s a complex topic to cover in a small space,
so we’re only outlining the bare bones of some
of what’s involved. Whilst it does have some
distinct tax advantages, it’s not just about tax.
LOOK BEFORE YOU LEAP
As always, it’s best to get appropriate legal, tax
and financial advice about whether setting up a
testamentary trust is right for you.
What’s a testamentary trust?
You use your will to set up a testamentary
trust. As it is part of your will, the testamentary
trust comes into existence when you die.
At the risk of oversimplification, when this
happens, the assets in this trust are ‘owned’ by
the trustee(s) and the ‘benefit’ of the income
and capital belongs to your beneficiaries – this
effectively shifts control over the assets from
the beneficiaries to an independent trustee(s).
A testamentary trust is usually a discretionary
trust, so this separation of ‘ownership’ and
‘benefit’ enables your trustee(s) to determine
who benefits, when and to what extent.
PLANNING TIP
A testamentary trust can be used to ensure
your beneficiaries receive some form of regular
income after you die and, when they become
adults, the assets of the trust.
Why set up a testamentary trust?
A properly set up testamentary trust may be a
useful planning tool to help you plan for your
family’s income and asset protection needs.
There are also potential tax advantages.
In addition, there’s another potential tax
saving.
The use of a testamentary trust allows any of
your beneficiaries who are under 18 years old
to have the benefit of adult income tax
marginal rate scales.
This is instead of the usual penalty rates that
apply to certain types of income earned by
minors.
A SIMPLE EXAMPLE
When you die, $700,000 in funds are vested in
your testamentary trust and invested by the
trustee. The trustee distributes $40,000 in trust
investment income equally to your two
surviving children, who are 12 and 14 years of
age ($20,000 each). The distributions to each
of your children are taxed at adult income tax
marginal rates, with a total tax of $4,800 (at
rates applicable from 1 July 2006).
Re-cap on succession planning
Your asset protection needs
Here’s a re-cap on some of the key steps in
formulating your own succession plan:
You may want to control where your income
and assets go from beyond the grave for any
number of reasons.
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Most people want to ensure their assets
remain within the family and are used for the
benefit of family members. For example,
people sometimes use a testamentary trust to:
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provide for children who need ongoing
medical care and community support;
protect their assets where the assets may
otherwise be at risk in the hands of the
beneficiary (e.g., where a beneficiary
becomes bankrupt, is spendthrift, or
becomes divorced and their assets are
split on divorce).
Tax advantages
Tax may be saved by splitting income across
one or more minor beneficiaries rather than
adults taxed at the top marginal tax rate.
For instance, your trustee can direct income to
the lowest income-earning beneficiaries. If your
surviving spouse is a high-income earner, then
instead of distributing income to him or her, the
income could be distributed to your children at
their lower tax rates.
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identify someone to take over your
business and whether you plan to be
involved in the business in some way after
the hand-over or sale and, if so, how you
want to do this;
identify and maintain key relationships,
including suppliers, financiers, employees,
external advisers, and so on – it’s
important to have strategies in place to
ensure these relationships are maintained
after you go;
ensure funds are available for life’s events
like retirement, resignation, bankruptcy,
total and permanent disablement, death
and other trauma related events; and
consider all tax consequences, such as
income tax, capital gains tax (CGT) and
stamp duty on asset transfers.
IMPROVED CGT CONCESSIONS
Given the anticipated level of business handovers in the next 10 years, it’s encouraging
that steps were take in the recent Federal
Budget to make the small business capital
gains tax (CGT) concessions more accessible
and hopefully less difficult to comply with.
Before looking at some of the proposed
changes, we’ll take a look at the current state
of the small business CGT concessions.
As you can see, exactly how any of these
concessions relate to your business and which
concessions are appropriate may depend very
much on your particular circumstances.
OK, what are these concessions?
What’s the problem?
Provided you meet the qualifying conditions,
there are 4 small business CGT concessions:
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15-year exemption: you can disregard a
capital gain you make on an eligible asset
you have owned for at least 15 years;
active asset reduction: you’re entitled to
a 50% reduction of the capital gain;
retirement exemption: allows you an
exemption from capital gains up to a
lifetime limit of $500,000; and
small business rollover: this allows you
to defer the making of a capital gain if you
acquire eligible replacement business
assets.
ADDITIONAL BONUS
You may also be able to factor in the general
50% CGT discount to reduce any capital gain.
How do the concessions apply?
The order in which you can apply these
concessions can be a bit tricky. As a general
guide:
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If you qualify for the 15 year exemption,
you can disregard the capital gain entirely
and there’s no need to apply any further
exemptions.
If you don’t qualify for the 15 year
exemption, then the next step is to reduce
the capital gain by any capital losses you
may have.
Once you’ve done that, before applying
any of the remaining concessions, you
then see if you can also apply the general
50% CGT discount to reduce any
remaining capital gain.
That done you can then work out if you’re
eligible to apply the 50% active asset
reduction to any remaining capital gain.
If you still find that there is some capital
gain left over after doing this, you would
then see if you are eligible to apply the
retirement or rollover exemptions to the
remaining part of any gain – you can in
fact choose both these concessions for
different parts of the remaining gain if
eligible.
One of the main problems with the small
business CGT concessions is that they are
difficult to access.
IT’S ALL TOO DIFFICULT!
Many small businesses make mistakes in
trying to work out whether they satisfy a
number of entry conditions, and then the
concessions themselves have extra conditions
attached that are often hard to apply.
The end result is small businesses find it
difficult to get around the entry hurdles and are
denied access in the first place.
Tax Office feedback also shows that if you get
over the entry hurdles, the concession claims
themselves are frequently wrongly calculated.
Given the potential tax savings involved, this is
a disaster!
What will the changes do for you?
The Government intends implementing all but
one of the recommendations of the Board of
Taxation’s post implementation review of the
small business CGT concessions.
The Government’s plan is to increase the
availability of these concessions and also
hopefully reduce your compliance costs.
As there are a number of proposed changes,
some of which are quite technical, we have
picked a couple of the more significant
improvements that are on the drawing board.
The maximum net asset value test
This is one of the main general entry tests and
perhaps the most significant stumbling block to
accessing these concessions.
Currently if you, together with persons
associated with you (e.g., your spouse), own
business or investment assets with a total net
value of more than $5 million, you’re not
entitled to access the concessions at all.
There are two main problems with this test:
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calculating the $5 million net assets is
riddled with difficulties. To make the
calculation easier, from 1 July 2006, a
range of legitimate liabilities (e.g.,
provisions for annual leave and long
service, unearned income, and future tax
liabilities) can be taken into account in
calculating the $5 million; and
the $5 million cap is too low. From 1 July
2007, total net value of assets will be
increased to $6 million.
The active asset test
The small business CGT concessions only
apply to active assets. Essentially these are
assets used or held by you in the course of
carrying on your business, e.g, plant and
equipment.
One of the big problems with this test is that
you have to “use” the asset in your business
right up to the point in time just before sale.
This is in addition to a requirement that you
also have held the active asset for a particular
length of time.
Prior to the proposed changes, by vacating the
old shop Margie would not have been able to
access the small business CGT concessions in
relation to the sale of the shop. Her old shop
was not used or “held ready for use” in the
course of carrying out her hat business
immediately before she sold it – failing the
active asset test.
To get around this problem, Margie may have
been advised to store stock and other
business related bits and pieces in the old
shop in order to maintain its active asset status
prior to its sale. This type of advice should no
longer be necessary under the proposed
changes for Margie to satisfy the active asset
test.
Under the proposed changes, as Margie has
held the business premises for the required
time, she’s at least got over the active asset
hurdle.
DEATH BEATS FBT!
There are a number of traps for the unwary in
Australia’s fringe benefits tax (FBT) regime.
From 1 July 2006, the test will be simplified so
that the active assets must now only be active
assets for the lesser of half of your ownership
period or 7 ½ years, regardless of whether
your business has actually ceased.
One that catches out many employers is that
you can still be exposed to a potential FBT
liability if you provide a taxable benefit to a
former employee (e.g., someone who has
retired or simply changed employers).
IT’S NOW EASIER TO COMPLY
It will no longer be necessary to show that the
active asset was used or ‘held ready for use”
by your business just before sale.
However, you might be interested to know that
if you foot the bill for the funeral expenses of
one of your employees, your business will not
have a fringe benefits tax (FBT) liability.
Where’s the benefit for me?
The above change is best illustrated with the
following simple example.
Margie runs a successful hat shop near the
race course. She has owned the strata title to
the shop for over 10 years and has carried on
this business in her shop for all that time. She
purchases a bigger shop nearby and vacates
the old shop, moving her business to her new
premises.
The old shop is left vacant and after 3 months,
luckily for her, she is able to sell it at a
handsome profit.
According to a recent Interpretative Decision
from the Tax Office, the ATO has conceded
that the concept of ‘employee’ for FBT
purposes requires the continuing existence of
the individual concerned! So it looks like FBT
stops at death’s door for the ATO!
Is there a planning opportunity here?
In the wake of the above decision by the Tax
Office, there is some speculation as to whether
the ATO’s reasoning has broader application.
For instance, if you allowed the deceased
employee’s family to keep the company car or
you agreed to continue to pay school fees for
the deceased employee’s children, would you
have an FBT liability?
In light of the ATO’s Interpretative Decision,
some would argue ‘no’.
NEW APPOINTMENT AT LE CORNU LEWIS
HANCOCK
EXERCISE CAUTION
The matter is far from clear or settled so it’s
important to get advice about what to do if
you’re looking at benefits in this area.
Finally, we would like to congratulate Renae
Bolt who has recently been promoted to our
management team. Renae has been with the
firm since July 2000 and has numerous
qualifications including a Bachelor of Laws
(hons), a Bachelor of Commerce, and
membership with the Institute of Chartered
Accountants. Renae is also a Fellow of the
Taxation Institute of Australia.
WHEN THE ATO KNOCKS…
With the incidence of tax audits on the rise, it’s
a good idea to know in advance what to expect
if you find an ATO auditor on your doorstep.
Always follow this plan of action!
Set out below are series of key steps to follow
should you find the ATO on your doorstep.
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If the ATO calls, advise them that you have
an adviser and contact us immediately –
we need to determine as soon as possible
whether you have anything in fact to be
concerned about and how to manage the
ATO.
It’s best not to deal with the ATO alone – in
particular, if the ATO wants a meeting, we
can advise the ATO that we will also be
with you and try to meet the ATO on
neutral ground, like our office.
Designate one person in your business to
deal with an ATO officer so the ATO
doesn’t get different views from talking to
different people – it’s best to take a cooperative approach and try to avoid
unnecessary conflicts.
Generally don’t volunteer information
unless asked – only provide information in
response to a particular request.
If the ATO makes an oral request for
particular information, ask for the request
to be put in writing to avoid any
misunderstanding.
If a request seems unreasonable and you
have to reallocate resources to meet the
demand, you may need to consider
offering to provide the information at a
more convenient time.
If an ATO auditor is on site, don’t let them
sit anywhere where they can access your
files at will or wander around your office.
Disclaimer
Taxwise® News is distributed quarterly by
professional tax practitioners to provide
information of general interest to their clients.
The content of this newsletter does not
constitute specific advice. Readers are
encouraged to consult their tax adviser for
advice on specific matters.