May was a big month on the local economic front, beginning with the pre-election federal budget on May 3 and a surprise rate cut the same day. The Reserve Bank cut the cash rate by 25 basis points to a new low of 1.75 per cent in response to a drop in the inflation rate to 1.3 per cent, well below the Bank’s 2-3 per cent target band.
The Australian dollar fell from above US77c before the rate cut to below US72c by the end of the month. Despite depreciating 35 per cent against the greenback over the past five years, economists are predicting further falls. The ANZ Bank is forecasting the dollar will fall to US50c next year, due to rising debt, falling exports and the possible loss of Australia’s AAA credit rating. The market is now expecting two further rate cuts in the current cycle.
It was not all bad news though. The local sharemarket hit a nine-month high after solid local earnings reports and lifting sentiment. The Australian Bureau of Statistics quarterly capital expenditure survey showed the economy is rebalancing away from the mining boom to other sectors. Manufacturing firms expect to invest 14 per cent more in equipment, plant and machinery in the year ahead than they anticipated a year ago. And despite the election uncertainty, the ANZ/Roy Morgan consumer sentiment rating rose 3.6 per cent in the four weeks to May 22 before slipping 2.2 per cent in the final week of the month.
Super shake up on the way
If you are planning to put after-tax money into super before June 30 you now need to work out whether you will be in breach of the new $500,000 lifetime cap on non-concessional contributions. This cap is calculated from 1 July 2007.
There is no need to worry if you were already over the limit on budget night, but any excess contributions made after that date could attract a tax penalty.i
Assuming the budget is passed into law, two further caps will come into force on 1 July 2017 that could force many people to rethink their retirement income strategy. The annual concessional (pre-tax) contributions cap will be reduced to $25,000 for everyone. Currently the cap is $30,000, or $35,000 if you are 49 or older.
Then there is a new lifetime pension transfer cap of $1.6 million, restricting the amount that can be transferred from an accumulation account into pension phase where earnings and withdrawals are tax free. Any super savings above $1.6 million will need to be held in an accumulation account where earnings will be taxed at 15 per cent.
On the plus side, retirees will not be taxed on withdrawals from an accumulation account and they can pull their money out at any time.
Transition to retirement
One change that could adversely affect more people than the wealthy fund members targeted by the government is the removal of the earnings tax exemption for transition to retirement (TTR) pensions from 1 July 2017. There is no change to the way pension payments will be taxed; they will remain tax free if paid after age 60 and taxed at 15 per cent if paid before age 60.
When you retire or turn 65, your TTR pension balance will be assessed under the new pension transfer cap of $1.6 million.
This change may impact the ability of many middle-income earners to catch up on retirement savings in the final years of their working lives.
Good news for couples
But that’s enough of the bad news. From 1 July 2017 the income threshold for the low-income Spouse Contribution Tax Offset will increase from the current $10,000 to $37,000. This will give more scope for higher earning spouses, or those who have reached their individual contribution limits, to boost their partner’s super balance.
This should take some of the sting out of the new contribution limits and lifetime pension cap. Instead of an individual $1.6 million tax-free pension, couples can shoot for a combined $3.2 million.
…and older workers
The praise was unanimous for the decision to allow people to add to their super up to age 75. At present people aged 65 to 74 need to satisfy a work test before they can make a contribution.
From 1 July 2017 anyone can continue contributing to their super up until they turn 75, whether or not they are working. This applies to concessional and non-concessional contributions as well as spouse contributions and will give women and others with low super balances extra time to play catch up.
Also good news is the long overdue move to allow all individuals to make personal, concessional contributions to super, up to the new $25,000 annual cap, and claim a tax deduction.
With such sweeping changes in prospect, many people will need to revisit their retirement income planning. Wealthier Australians may also need to find alternative homes for their retirement savings once they reach their individual caps.
Yet despite the headache the proposed changes will cause, super is still the most tax effective retirement savings vehicle in the land, albeit less generous than it was. We are here to help you minimise any adverse impacts and maximise the opportunities, so give us a call.
i For all the details on the super changes covered in this article go to www.budget.gov.au and search under ‘tax and super’
Tax tips for financial year end
The first thing you should consider is bringing forward all deductible expenses. This includes repairs and maintenance but you could also consider prepaying any monthly costs such as rent, interest, electricity, wages and utilities up to 12 months in advance.
You should also aim to defer income until after June 30 so that payments fall into next financial year. If you work on a cash basis then aim to defer payment until after July 1 and if you work on a non-cash basis then delay issuing the invoice.
Immediate asset write-off
Small businesses should also take advantage of the $20,000 asset write off introduced in the May 2015 federal budget. Under the scheme, small businesses with turnovers of less than $2 million can immediately write off any asset worth no more than $20,000 in one go.
Beware though, you can’t buy an asset for $30,000 and creatively account for it as two items.
Bad debts and obsolete stock
Another strategy is to write off any bad debts in the business. Make sure you physically write off the debt by June 30, rather than just backdate it after the end of the financial year. You must have documentation to show you have made serious efforts to recover the debt which must have been previously included as assessable income.
Similarly, if you have any obsolete stock now is a good time to write it off. You must physically dispose of the stock in order to claim the immediate deduction.
Car expenses are another area where you may be able to claim a deduction. There are numerous ways to claim and as the calculations can be complex it’s probably wise to get some advice on which method will suit your company best.
Capital gains tax
If you have any capital gains tax (CGT) liability, then the business may use capital losses, if any, to offset this. So you might want to consider selling any non-performing assets to create a capital loss. Be mindful that if you’ve made a gain on the sale of an asset that qualifies as an active asset of the business, then you may be able to reduce or even eliminate the tax on that gain by using one of the available small business CGT concessions.
Make sure your capital gain reporting is accurate or you might find your business facing an audit. The ATO has warned that it is cracking down on abuse of capital gains tax provisions using its data-matching program.
Superannuation is another area to consider at the end of the financial year, for you and your employees. While employees’ super guarantee contributions don’t need to be paid until July 28, it makes sense to pay them by June 30 so you can claim the tax deductions in the current year.
But also take advantage of the current concessional arrangements by paying your own super, particularly if you are over 50. The $35,000 concessional contributions cap still applies this year and next but a $25,000 flat contributions cap was proposed in the May 2016 budget to be introduced from 1 July 2017.
Small businesses can claim an FBT exemption from portable work-related electronic devices for their employees.
The end of financial year also offers a good opportunity to review your business structure. For instance, if you are a sole trader, you might want to consider incorporation to take advantage of recent and proposed future reductions in tax rates for small businesses.
Making sure your business pays the correct amount of tax but no more can be a complex process. Call us to help with your pre-June 30 tax planning.
Master the mess – managing tax receipts
Cue frantic searching through desk drawers, filing cabinets, glove compartments, handbags and shoeboxes. Typical result? A meagre fistful of crumpled, ripped or completely faded receipts.
Just as there are many ways to skin a cat, new technology offers many ways to cure your record-keeping headaches.
The paperless office
Many business owners have now embraced cloud-based accounting software. The three heavy hitters are MYOB, Xero and Quickbooks. However, there are plenty of other options such as Pocketbook, Reckon and Saasu.
Accounting software can do all sorts of wonderful things, such as send invoices and generate profit and loss statements. One of its less trumpeted but most practical applications is keeping track of business expenses.
Xero, for example, has a ‘Xero Touch’ app. Once downloaded, it allows users to take a photo of a paper receipt they’ve received with their phone and have it automatically added as an expense claim. Quickbooks offers something similar, along with an impressive graphic display of all recent expenses on its dashboard.
These systems were designed to make it as straightforward as possible for business owners – and their bookkeepers and accountants – to keep on top of the finances. What that means in practice is that once you install one of these systems and get into the habit of photographing receipts (or uploading them some other way, such as by scanning them) you’re spared the end of quarter/financial year headaches. All the necessary data is waiting on the system for your accountant to work his or her magic. So you can just sit back and wait for that refund from the ATO to arrive.
From shoebox to Shoeboxed
If you’re not a businessperson and don’t need high-powered accounting software, there are number of mobile apps that will scan and organise receipts. Some good ones, such as the free app OneReceipt, are yet to make it down under. Others, most notably Shoeboxed, are being enthusiastically adopted in this part of the world.
With Shoeboxed there are multiple ways to upload receipts. You can email and scan them, or even snail mail them in reply-paid envelopes, but most users photograph them with their mobile phone.
The ATO has also joined the action, releasing a basic but free app called myDeductions which records work-related expenses.
While having an expense-tracking app as well as accounting software will be overkill for most taxpayers, it’s simple to sync them. For example, you can use Shoeboxed to record your receipts then have that data automatically forwarded on to your MYOB, QuickBooks, Reckon, Saasu or Xero software.
Don’t miss the digital bus
Many of the apps and software products mentioned above offer a one-month free trial. After that they typically cost $15-$35 a month. Given all the time and heartache they’ll save you and your accountant, it’s a small price to pay for what they offer. (And, remember, you can claim it on tax!)
Plus, while nothing online is completely invulnerable to hackers, if you’re putting your financial data in the cloud via a reputable accounting software provider, state of the art cyber security comes included.
Lisa Greig, Business Services Managers at Taxpayers Australia, says that everything is headed online, so people may as well get with the digital program sooner than later. Using cloud-based technology can assist with efficiency and mean accurate information is stored for tax purposes.
“And because it’s in the cloud your accountant can access it anywhere at any time, whether they need it to prepare a tax return or just want to determine the real time tax position of your business”, she says.
Call us if you would like to talk about the best record-keeping solutions.