The reserve bank decided to keep rates on hold at 4.75 per cent despite recent news that inflation was running higher than expected.

It’s good the Reserve Bank have decided to wait and see if the higher inflation is temporary thanks to recent disasters and seasonal factors, rather than attack it with another interest rate rise.

Households are already facing increased living costs and will be grateful they don’t have to dig deeper into their pockets for at least another month.

The official interest rate is now 4.75 per cent and mortgage holders on variable interest rates are being charged a standard variable rate of about 7.83 per cent by their lenders.

Mortgage holders should always try to pay extra off their loan to give themselves a buffer in case rates do rise. 17 months can be wiped off the average new mortgage and save $30,085 in interest by paying an extra $60 per month or about the equivalent of a 0.25 per cent rate rise.

Q: I have great sympathy for the businesses which were battered by the floods, fires and cyclones in Australia this year. These things can happen to anyone, any time. What should I do to make my business disaster-proof?

A: Identify which data and applications are critical to your business, then ensure you have them backed up off-site. Cloud-based storage facilities are ideal as they are stored securely on the internet. Always keep your back up data off-site so if something does happen to your business, you can retrieve the information after the incident.

Develop a workplace continuity plan. After a natural disaster your employees may not be able to make it to work for days or even weeks. Consider what your employees require to do their job from another location. Access to company information, data and an e-mail system may be required. Again, cloud-based systems may be the best solution for easy access.

Prepare a disaster response strategy. Work with your team to develop an evacuation procedure, develop a plan to save any key assets and securing the worksite against any damage. This type of plan will have a huge impact on the personal safety of your staff and the survival of your business.

Three men were today sentenced to over eleven years combined jail time for their involvement in tax fraud worth more $4.5 million.

Ian Henke, Robin Huston and Brian Fox were each charged with conspiracy to defraud the Commonwealth for their role as promoters of an asset-stripping scheme which mirrored elements of the infamous ‘bottom of the harbour’ schemes of the 1970s and 80s.

Through use of an intricate arrangement the Vanuatu based asset-stripping scheme was designed to leave Australian companies in a position where they were unable to pay their tax liabilities. Almost 70 companies in Australia participated in the arrangement.

“Australia will not stand for these types of illegal scheme arrangements,” Tax Commissioner Michael D’Ascenzo said after the hearing today.

“This finding shows scheme promoters that regardless of the type of scheme they use, it will be exposed and justice will be served.

“Those who participate and promote these schemes burden the majority of Australian taxpayers who do the right thing. Tax funds vital community and government programs that the community relies upon.

“If you are participating in an illegal scheme, particularly those using overseas tax secrecy jurisdictions, it is only a matter of time before we find you. This is the same clear message that we are sending to the community through Project Wickenby.”

Reduced penalties can apply for those who come forward to the ATO. To discuss your situation or to make an offshore voluntary disclosure, contact the ATO on 1300 132 346.

Ian Henke was sentenced to four and a half years jail with a non-parole period of 12 months, Robin Huston was sentenced to four years jail with a non-parole period of ten months and Brian Fox was sentenced to three years and nine months jail with a non-parole period of nine months.

Further information about offshore schemes and ATO compliance processes including Project Wickenby can be found at www.ato.gov.au.

“Trying to stop thinking in the negative or towards the risks, is like telling someone to stop thinking about a green horse. The more they try to stop thinking about a green horse the more they think about it. The best approach is not to fight thoughts, but to acknowledge them.”

 So let’s look at a few investments before tax, fees and inflation:

1. THE STOCKMARKET

Expected return of 12.01% (All Ords accumulation index compound return since 1979). Risk four out of 10.

2. BONDS

10 year return of 5.5%. Risk zero

3. PAYING OFF THE MORTGAGE

Pretax return of 7.81% (Standard variable rate) which grosses up to 10.6% pretax. Risk zero

4. LOTTO

Expected return of one million percent. Risk of 100% loss is 9.99999999999 out of 10.

5. MARRIAGE

Expected average return of one extra income, zero to four kids, two possible inheritances, a free life coach even if you don’t need one, onerous school fees and a dog. Risk = long term love, fulfillment and satisfaction.

6. DIVORCE

Expected return of minus 50%. Risks unknown.

Lawyer

Length of time the flood levy will be in place

The Government will apply a flood levy to help fund reconstruction in flood affected areas. The flood levy will apply to individual’s taxable income only in the 2011-12 financial year.  

Amount of the flood levy

A levy of 0.5 per cent will be applied on that part of an individual’s income between $50,001 and $100,000 and a levy of 1.0 per cent will be applied on that part of the taxpayer’s taxable income above $100,000. No levy is payable where the person has income of $50,000 or less.

For example, for someone who has an income of $80,000 this means the cost of the levy to them will be $2.88 per week.

Exemption from the flood levy

Where the person has received an Australian Government Disaster Recovery Payment in relation to a flood event in 2010?11 they will be exempt from the levy.  

Payment of the flood levy

Taxpayers will not have to do anything extra to pay the levy. People will make their levy payments through the tax taken out of their regular pay in the same way that people pay the Medicare levy. This will help prevent taxpayers from receiving a tax bill at the end of the financial year.

Pay As You Go (PAYG) Instalment taxpayers will have the levy charged in their PAYG instalments. People who received an Australian Government Disaster Recovery Payment can seek a variation to their instalment payment so that they don’t have to pay the levy. The ATO is also investigating the possibility of automating
PAYG Instalment amounts so that people who don’t have to pay the levy are not charged an amount in their PAYG instalments.

Employees who are exempt from the levy ask their employer to not have the levy withheld from their regular pay with other tax withheld. Alternatively, at the end of the year the ATO will assess taxpayers’ tax liability taking into account the exemption from the levy. 

Impact on businesses

Businesses will need to apply a new withholding schedule to their employees to withhold levy payments. 

Businesses will not be required to pay the levy. The levy will be applied to individual taxpayers.

If you want a loan, expect a grilling from the lender.
Here’s what every lender will want to see.

1.  Operational Strength: The Commonwealth Bank told us, “The aim is to ensure that the business is healthy and growing, or is a start-up with great prospects. Having up-to-date information is important. Customers with a financial year ending in June should be thinking about putting forward trading results to June 2010 and also management figures, if available, for the months between June and the current date.
    
2.  Cash flow: CBA says, “Your business banker will need to check that you can meet ongoing repayments and this can be an area where businesses have difficulty. A good way to help overcome this is to put together a realistic cash-flow forecast.”
    
3. Security: This is all about risk. You will enjoy a lower interest rate if you put up residential property as security.
      
4. Your Experience. Your vision. The reason for the funding – and what it will deliver.
     
5. The lender will check your past credit history. Order a copy of your credit file at Dun & Bradstreet (www.dnb.com.au) or Veda Advantage (www.vedaadvantage.com). Make sure you correct any errors on the file.
     
6. Tax returns for the business for the past two years, plus personal tax rturns for the past two years.
     
7. Be prepared to deal with tighter credit terms. Lenders may cut the loan-to-valuation ratio or impose stricter repayment terms. Work out how you would manage with a smaller loan.
     
8. Be honest. A significant number of borrowers mislead credit providers (as many as 10 percent of applicants, according to Veda Advantage’s 2010 Australian Debt Study). Lenders are alert to the problem, and if you are found out, you won’t get the finance.

If you’re a small business with an annual turnover of less than $2 million you may qualify for the extra 50% business tax break on eligible assets. But how do you know what is eligible?

Meet Maria, a small business owner who wants to buy a new computer for her shop. She wants to know – Is the computer eligible for the extra 50% tax break? What about software? By when does she have to buy it and by when does she need to start using it to get the extra deduction? How much will her deduction be?

After phoning Taxwise, she knows the computer is eligible as long as it is new, costs more than $1,000, is purchased by 31 December 2009 and is installed or first used by 31 December 2010. Assets must be tangible and as software is not a tangible asset it is not eligible for the tax break.

Maria buys the computer for $2,400 (excluding GST and the cost of the software used on the computer). She will be able to claim an additional $1,200 tax deduction (50% of $2,400) in her business income tax return for the year in which she installed or first used the computer. This is in addition to the decline in value deductions she would normally claim for such business assets.

After applying the 30% company tax rate (the rate which applies to Maria’s business), this tax deduction would reduce the amount of tax Maria’s business would have to pay by $360.

If you’re like Maria and thinking about taking advantage of the business tax break, you need to check the facts before you buy. Phone Taxwise on 9248 8124.

The May Federal Government Budget announcement included important changes to the way salary sacrifice to super will be treated.

The first change affects super contributions maximums, or caps. In the 2009 – 2010 financial year, the concessional contributions cap (for employer contributions, including salary sacrifice) will reduce to $25, 000 per person. For those aged 50 and over, the cap will reduce to $50,000. The non-concessional contributions cap (for after tax contributions) will be calculated at six times the concessional cap, so it remains at $150,000 in 2009 – 2010.

Note that the reduced limits apply to contributions received during 2009 – 2010, even if some of those contributions relate to employment before 1 July 2009.

The second change will see some forms of salary sacrifice super contributions included as ‘non-wage remuneration’ in various income tests for individuals. These include contributions that have been made by an employer or associate of the employer, for which the individual has or might reasonably be expected to influence the size of the contribution or the way the amount is contributed.

These contributions are called Reportable Employer Superannuation Contributions, or R E S C s, and from 1 July 2009, you’ll be required to report RESCs in PAYG annual withholding reports and employees’ PAYG summaries.

Speak to Taxwise (08-9248-8124) or our resident financial adviser, Mark Christie (08-9344-6495) to make sure you’re prepared for these changes, and that any affected employees are aware of the potential taxation implications of their salary sacrifice to super.

Compulsory acquisition of an asset.
This section explains your CGT obligations if your CGT asset is lost, destroyed or compulsorily acquired.

Generally, there are no CGT obligations for assets acquired before 20 September 1985 (pre-CGT).

There may be a situation where you receive money or another CGT asset (or both) as compensation when you dispose of an asset involuntarily (or under an insurance policy against the risk of such an event happening). In this case, you may be able to choose to:

• defer your liability to pay tax on any capital gain arising on the disposal, or
• get a CGT exemption for any replacement asset if you acquired the original asset before 20 September 1985.

This concession is known as a rollover. It may be available if one of the following events happens:

• all or part of your CGT asset is lost or destroyed
• your CGT asset is compulsorily acquired by an Australian government agency
• your CGT asset is compulsorily acquired by an entity (other than by an Australian government agency or a foreign government agency) under a power of compulsory acquisition conferred by an Australian or foreign law. However, the compulsory acquisition of minority interests – such as shares in a company – under the Corporations Act or similar foreign law are excluded
• you dispose of your CGT asset to an entity (other than a foreign government agency) after a notice is served on you inviting you to negotiate a sale agreement. You must have been informed that, if the negotiations are unsuccessful, the asset will be compulsorily acquired under a power of compulsory acquisition conferred by an Australian or foreign law. However, the compulsory acquisition of minority interests – such as shares in a company – under the Corporations Act or similar foreign law are excluded
• you dispose of land to an entity (other than a foreign government agency) where a mining lease was compulsorily granted over the land, the lease significantly affected your use of the land, the lease was in force immediately before the disposal and the entity to which you disposed of the land was the lessee
• you dispose of land to an entity (other than a foreign government agency) where a mining lease would have been compulsorily granted over the land, the lease would have significantly affected your use of the land and the entity to which you disposed of the land would have been the lessee
• a lease that had been granted to you by an Australian Government agency under a Commonwealth, state or territory law expires and is not renewed.

This rollover is not available for plant disposed of after 11.45am (by legal time in the ACT) on 21 September 1999 and other depreciating assets from 1 July 2001. Instead, if a depreciating asset is lost or destroyed or, acquired compulsorily or by forced negotiation (other than by a foreign government agency), the capital allowances provisions may allow for a balancing adjustment offset.

This means that rather than including an amount in your assessable income by way of a balancing adjustment, you can offset that amount against the cost of a replacement asset (or assets).

If you choose to take rollover, you do not need to lodge a written election stating your choice – it will be clear from the way you prepare your tax return.

You cannot choose to defer a capital loss but you can use it to reduce any capital gain made in the current income year or a later income year.

For rollover relief to apply, the replacement asset you receive cannot be a car, motorcycle or similar vehicle.

Further, from 1 July 2001, for rollover relief to apply, the replacement asset you receive cannot become an item of your trading stock, nor can it be a depreciating asset.

Marriage breakdown.
Read this section if your marriage or de facto marriage ended on or after 20 September 1985 and:

• you transfer an asset or a share of an asset to your spouse
• you receive an asset or a share of an asset from your spouse, or
• a company or trustee of a trust transfers an asset to you or your spouse.

When we talk about ‘your spouse’, this includes your former spouse or former de facto spouse. ‘Transfer’ of an asset means transferring ownership of an asset to the transferee spouse and includes ‘creating’ an asset in their favour (such as a right to use property). Where we talk about ‘an asset’, this includes a share of, or an interest in, a jointly owned asset.

The term ‘transferee spouse’ refers to the spouse to whom an asset is transferred, while the ‘transferor’ is the person (or a company or the trustee of a trust) who transfers an asset to the transferee spouse.

As a general rule, CGT applies to all changes of ownership of assets on or after 20 September 1985. However, if you transfer an asset to your spouse as a result of the breakdown of your marriage or de facto marriage, there is an automatic rollover in certain cases. You cannot choose whether or not it applies.

This rollover ensures the transferor spouse disregards a capital gain or capital loss that would otherwise arise. In effect, the one who receives the asset (the transferee spouse) will make the capital gain or capital loss when they subsequently dispose of the asset. If you are the transferee spouse, the cost base of the asset is transferred to you.

Deceased estates.
If you are a deceased person’s legal personal representative or a beneficiary of a deceased estate, read this section to find out about the special CGT rules that apply.

When a person dies, the assets that make up their estate can:

• pass directly to a beneficiary (or beneficiaries), or
• pass directly to their legal personal representative (for example, their executor) who may dispose of the assets or pass them to the beneficiary (or beneficiaries).
• A beneficiary is a person entitled to assets of a deceased estate. They can be named as a beneficiary in a will or they can be entitled to the assets as a result of the laws of intestacy (when a person dies without having made a will).

A legal personal representative can be either:

• the executor of a deceased estate (that is, a person appointed to wind up the estate in accordance with the will), or
• an administrator appointed to wind up the estate if the person does not leave a will.

Forestry managed investment scheme interests.
This section explains your CGT obligations if:

• you are a subsequent participant in a forestry managed investment scheme (FMIS), and
• you sold or otherwise disposed of your forestry interests in an FMIS in the 2008–09 income year.

Subsequent participant.
You are a subsequent participant if you are not an initial participant. In most cases, this means that you bought your forestry interest from an initial participant.

You are an initial participant if:

• you obtained your forestry interest from the forestry manager of the scheme, and
• your payment to obtain the forestry interest is used to establish trees.
  

Real estate and main residence.
This section explains your CGT obligations for real estate. Real estate includes –

• vacant blocks of land
• business premises
• rental properties
• holiday houses, and
• hobby farms

The CGT exemption for a main residence is also explained in this section.

Apart from the main residence rules, capital gains and capital losses on real estate are worked out under the rules set out earlier.

Land is a CGT asset. In some cases, improvements made to land are treated as separate CGT assets – see Separate assets. A depreciating asset that is found in a building (for example, carpet or a hot-water system) is also taken to be a separate CGT asset from the building. When a CGT event happens to your property, you must work out a capital gain or capital loss for each CGT asset it comprises (or balancing adjustment in the case of depreciating assets sold with the property).

The most common CGT event that happens to real estate is its sale or disposal – CGT event A1. The time of the event is:

• when you enter into the contract for the disposal
• if there is no contract – when the change of ownership occurs
• if the asset is compulsorily acquired by an entity – the earliest of when
  • you received compensation from the entity
  • the entity became the asset’s owner
  • the entity entered it under a power of compulsory acquisition, or
  • the entity took possession under that power.

If land is disposed of under a contract, it is taken to have been disposed of when the contract is entered into – not the settlement date. The fact that a contract is subject to a condition, such as finance approval, will generally not affect this date.

You are not required to include any capital gain or capital loss on your tax return for the relevant income year until settlement occurs. When settlement occurs, you must include any capital gain or capital loss on your tax return for the income year in which the contract was made. If an assessment has already been made for that income year, you may need to have that assessment amended. Where an assessment is amended to include a net capital gain and a liability for shortfall interest charge (SIC) arises, remission of that interest charge will be considered on a case-by-case basis. Generally, it would be expected that the SIC would be remitted in full where requests for amendment are lodged within a reasonable time after the date of settlement – which, in most cases, is considered to be one month. If you consider that the SIC should be remitted, you should provide reasons why when you request the amendment to your assessment. More information about SIC is available on the ATO’s website.

Tomorrow’s Episode……. Compulsory acquisition of an asset, Marriage breakdown and Deceased estates.

About the Author

Warren Kruger is an Australian Tax Specialist and Advisor.

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