SMSF non-arm’s length income (NALI) and expenses clarified

ATO clarifies ‘nexus’ between SMSF non-arm’s length income and expenses

If you are in a qualified profession or trade, it is important that to be aware of the Australian Taxation Office’s Self-Managed Super Fund (SMSF) rules that may impact you.

Under Australian tax law, all Self-Managed Super Fund (SMSF) dealings must be at ‘arm’s length’.

That is, individuals and entities must deal with each other on a commercial, unrelated-party basis.

Arm’s length dealings help ensure the purchase and sale price of SMSF assets, for example, reflect the fair market value of the assets.

SMSF dealings that result in more income than would be expected in an arm’s length transaction or arrangement is deemed to be non-arm’s length income (NALI).

Examples include a trustee loaning money to their SMSF at 0% interest or leasing commercial premises from their SMSF at above market rates.

NALI is used by some individuals to try to increase their superannuation savings in a way that’s not caught by the super contribution caps and to minimise their tax liability.

The federal government penalises it by taxing the non-arm’s length component of a fund’s income, including any capital gains, at the top marginal rate of 45% (rather than the usual concessional rate of 15%).

ATO clarification

Recently, the Australian Taxation Office (ATO) clarified its interpretation of amendments made to the NALI laws on 2 October 2019 (and which were backdated to 1 July 2018).

Those amendments were designed to ensure that where an SMSF incurs non-arm’s length expenses to earn or produce income, that income is considered NALI.

(These expenses include losses, outgoings and expenditure, and can be of a capital or revenue nature.)

Some SMSF trustees, though, remained unsure about whether services they provide to their fund in their individual capacity, for example, are considered arm’s length.

In late-July the ATO clarified that SMSF income (encompassing ordinary or statutory income, private company dividends, and trust distributions) is NALI where:

…the fund incurred expenses in deriving the income that are less than (including nil expenses) those which the SMSF would otherwise have been expected to incur if the parties were dealing on an arm’s length basis.

Depending on the circumstances, these non-arm’s length expenses can end up ‘tainting’ all of an SMSF’s income, including pension income (if applicable).

Examples of NALI

The ATO clarified its position on the ‘nexus’ between non-arm’s length expenditure and income in a law companion ruling (LCR 2021/2).

The ruling provides more than a dozen examples of when SMSF trustees’ dealings are and are not at arm’s length.

Here’s one of them, involving an SMSF trustee carrying out duties in her individual capacity:

Trang is the trustee of her SMSF and a plumber who runs her own business. She undertakes a complete renovation of the bathroom and kitchen of her SMSF’s investment property, which is rented out at a commercial rate. She schedules time in her work calendar to undertake the work and uses the tools of her trade to undertake all the plumbing work. Trang does not charge the SMSF for the work undertaken. Because the fund’s (nil) expenditure on the renovation is not at arm’s length, the rental income from the property is subject to the NALI penalty tax rate. And if Trang disposes of the property, any capital gain will also be taxed at 45%.

Here’s one of them, involving a trustee incurring non-arm’s length expenditure to acquire an asset

Trang is the trustee of her SMSF and a plumber who runs her own business. She undertakes a complete renovation of the bathroom and kitchen of her SMSF’s investment property, which is rented out at a commercial rate. She schedules time in her work calendar to undertake the work and uses the tools of her trade to undertake all the plumbing work. Trang does not charge the SMSF for the work undertaken. Because the fund’s (nil) expenditure on the renovation is not at arm’s length, the rental income from the property is subject to the NALI penalty tax rate. And if Trang disposes of the property, any capital gain will also be taxed at 45%.

See all the ATO’s examples

During the 2019–20 income year, Armin sells commercial property to himself (as trustee of his SMSF) for $200,000 — $600,000 less than its market value. The SMSF leases the property to a third party. Because of the non-arm’s length expenditure the fund incurred in acquiring the property, the rental income from the property is subject to the NALI penalty tax rate. And if Armin disposes of the property, any capital gain will also be taxed at 45%.

Commercial-property leases

If you’re leasing your SMSF’s commercial property to a related party, you need to be careful not to fall foul of the NALI laws.

For example, the rent and/or terms of the lease must be commercially sound, be in writing, and the trustees must ensure the related-party tenant complies with the arrangement.

Overcharging to get around contribution limits and boost your fund’s super balance or — if the tenant is struggling financially — undercharging can land you in trouble with the taxman.

Similarly, trustees need to be wary of bringing forward rent as this may inadvertently create a prohibited borrowing by the fund.

Get expert advice

Clearly, given the financial impact of the non-arm’s length provisions, it is possible that if this issue is not considered by auditors then the financial statements of a super fund could be materially misstated.

SMSF auditors may consider requesting trustees issue a representation letter stating if, and how, they have considered the non-arm’s length tax issues when preparing their fund’s financial accounts.

SMSF auditors might also consider stating in their engagement letter, or other method of reporting to trustees, that they have taken the trustees declaration about this issue into account when auditing the fund.

We’re here to support you. If you have questions, contact us here to book a catch up with an RJ Sanderson professional.

This article is published by R J Sanderson and Associates Pty Ltd ABN 71 060 299 783. This article contains general information only and is not intended to represent specific personal advice (Accounting, taxation, financial or credit). No individual personal circumstances have been taken into consideration for the preparation of this material. It is recommended that you obtain your own personal professional advice before making any financial or business decision.

Peter Thornhill’s My Say – No. 69

This one is good news.

I want to cover a couple of topics here so will curtail my verbosity. Let’s begin with another update, the Listed Property Trust index. I had covered yet again in detail in ‘My Say No 63’ so I merely want to confirm the trend.

The chart below says it all but let me remind you that by ignoring LPT’s as part of your portfolio you can harvest a tidy increase in your performance and income. Keep the lead out of the saddle bag.

Return on Invest of $100,000 Dec 1979-2020

I would like you to pay particular attention to the reduction in industrial dividends in 2020 caused by the impact of Covid and I will ask you to return to this chart again soon.

On a happier note, I thought I would allow you to see what a resilient share market looks like. Below is the S&P 500 from the time the second world war broke out to December 2020, noting that the US economy is not reliant on digging stuff out of the ground with materials representing only 2.64% of their index (versus 18.5% in the ASX!).

As some of you may have idle time; consider all the ‘horrifying’ events that have transpired over the last 80 years and take some comfort from the fact that human endeavour does not grind to a halt.  Also notice the resilience of the dividend stream.

Return on Investment of $10,000

No doubt we are facing unpleasant times at present, so I was looking for a little bit of good news and, hey presto I got great news instead. I foreshadowed in My Say No 67 (July) my optimism regarding the forthcoming dividend season in a suitably low-key manner and I quote.

“The next dividend season for the second half of this year kicks off in Aug – Sept and I am reasonably confident that we will see an improvement again. Same old, same old!”

How was I to know the magnitude of the event until this article appeared in this morning’s SMH (16th Sept) and brought a smile to my face.

“If you thought dividends have caused a bit of market turbulence in recent weeks, hold on to your hat. According to Commsec, distributions to investors is about to hit its peak. The broker says ASX 200 companies paid about $5.5 billion in dividends to investors between mid-August and September 17, but the distributions will reach a peak starting next week with more than $15 billion cash handed to investors.
CommSec estimates that more than $41 billion in dividends will be paid in coming weeks compared to just $25.8 billion for the interim reporting season in February and $21.6 billion during the 2020 reporting season. In the February 2020 season, the last season untainted by COVID concerns, it was $27.5 billion. “Some analysts are forecasting record annual dividend growth of around 17 per cent, more than triple the average annual growth rate,” Commsec’s chief economist Craig James said.”

I hope you are there to enjoy the shower coming our way. The only dampener to my joy was remembering my newsletter No 67 referencing the huge foreign ownership of Australian companies. Since most Australians are totally dazzled by gambling on unproductive residential property, too much of that $41 billion will slip away overseas.

However, if I may show my age, that will have no effect on the dollars about to coming raining down on our heads. Refer back to my first chart and consider the leap in the yellow bar we are about to experience.

I wish all subscribers good health and wealth for the future.

Happy to help

If you have any questions regarding anything in this newsletter, or just investing in general, then please drop us a line anytime. We are always more than happy to have a chat.

Get expert advice

The right investment strategy is one that moves you toward your lifestyle potential without losing sleep at night. Let an RJS Panner guide you to a strategy that will meet your goals.

Contact us at info@rjswm.com.au or on (03) 9794 0010.

Contact us for a complimentary consultation at info@rjswm.com.au or on (03) 9794 0010.

For more information on our services, CLICK HERE.

Disclaimer: The views expressed on these articles are those of the authors named, and not those of RJS Wealth Management Pty. Ltd, or any of its employees. Past performance is not an indication or guarantee of future performance. The ideal investment vehicle for an investor is dependent on personal outcomes. It is vital to obtain tailored advice specific to your circumstance before taking action. While we try to ensure that the information we provide is correct, mistakes do occur and we cannot always guarantee the accuracy of the material. All comments posted are the responsibility of the poster. Subsequently, RJS Wealth Management Pty. Ltd does not necessarily agree with or endorse any opinions expressed. However, we do maintain the right not to publish comments or to remove them without notice.

This blog has been prepared by RJS Wealth Management Pty. Ltd. ABN 24 156 207 126. RJS Wealth Management Pty. Ltd. is a Corporate Authorised Representative (No. 438158) of Modoras Pty. Ltd. ABN 86 068 034 908 an Australian Financial Services and Credit Licensee (Number 233209). The information and opinions contained in this blog is general information only and is not intended to represent specific personal advice (Accounting, taxation, financial, insurance or credit). No individual’s personal circumstances have been taken into consideration for the preparation of this material. Any individual making a decision to buy, sell or hold any particular financial product should make their own assessment taking into account their own particular circumstances. The information and opinions herein do not constitute any recommendation to purchase, sell or hold any particular financial product. Modoras Pty Ltd recommends that no financial product or financial service be acquired or disposed of or financial strategy adopted without you first obtaining professional personal financial advice suitable and appropriate to your own personal needs, objectives, goals and circumstances. Information, forecasts and opinions contained in this blog can change without notice. Modoras Pty. Ltd. does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained within, Modoras Pty. Ltd. does not warrant that the articles within are free from errors, inaccuracies or omissions. To the extent permissible by law, neither Modoras Pty. Ltd. nor its employees, representatives or agents (including associated and affiliated companies) accept liability for loss or damages incurred as a result of a person acting in reliance of this publication.

Are you losing out on your super

Earlier this month we came across a report on some research by money educator and expert Vanessa Stoykov showing 10% of Australians don’t trust superannuation funds.

While that figure may seem modest, it’s nonetheless concerning.

After all, super is compulsory for most workers and is the vehicle that will fund retirement in many cases. Australians generally have a keen eye on the value of their home, the value of their bank account and investments and the level of their income. However we often see people with their eye off their superannuation.

Equating to over $2.7 trillion in assets owned by over 15 million members, it is certainly possible that an Australian’s superannuation nest egg will be one of the largest assets in their lifetime. And perhaps worth including on the list of assets to actively keep an eye on.

It is certainly possible that Australians’ distrust of super funds stems from the Productivity Commission’s inquiry into superannuation a few years ago. Focused on products and their return, the findings were alarming.

  • Ending up in an underperforming MySuper (default) product = 10 years’ lost pay

Due to the power of compound interest, a worker who ends up in the median bottom-quartile MySuper product would retire with a balance significantly lower than if they were in the median top-quartile product.

Cost to member at retirement: $502,000 or 45% less

.

Losing out on super

  • Paying for an unsuitable insurance policy = 2.5 years’ lost pay

The premiums that come out of members’ accounts erode their retirement balances.

The effects are worse for members on low incomes or who work intermittently, who continue to have premiums deducted from their accounts while not contributing to their super.

Cost to member at retirement: $85,000 or 14% less

  • Being a member of a high-fee fund = 2 years’ lost pay

Australians pay over $30 billion a year in fees on their super (excluding insurance premiums). An increase in fees of just 0.5% can cost a member tens of thousands of dollars.

Cost to member at retirement: $100,000 or 12% less.

  • Unintentionally holding multiple accounts = 1 year’s lost pay

According to the Australian Taxation Office, as at 30 June 2018, about six million Australians held two or more super accounts.

These accounts are created when workers change jobs or industries and don’t close their old account or roll over their existing balance.

These erode members’ balances by $2.6 billion a year in unnecessary fees and insurance.

Cost to member at retirement: $51,000 or 6% less

Interestingly, the superannuation inquiry did focus on what we believe is most important; the lifetime impact of:

  • a default superannuation and fund selection compared to a recommendation from a financial planner that is ideal for an Australian’s financial circumstances, goals, and possibilities;
  • having a set and forget view on superannuation as opposed to the ideal strategy strategically implemented. Crafted for the individual to make the most of this it, and
  • not considering superannuation as a piece of a far bigger financial puzzle which is ultimately designed to create financial security.

“Many members simply default, and rely on their fund to manage their super for them (whether out of trust, a lack of interest or an inability to compare products themselves).”

As a result, rates of switching between funds and products are modest.

Default arrangements are necessary in a compulsory super system to protect members who do not make their own investment decisions.

The downside is that these policy settings have created an ‘unlucky lottery’ for members by failing to ensure they are placed in the most appropriate funds for them.

When you really look at it, it is no wonder 10% of Australians do not trust their super funds.

Financial security is a journey, not an event. If you have kept your eye off your superannuation, are concerned about its performance, or wonder if you will have enough to live a comfortable retirement, get in touch with one of our Strategic Wealth Planners today for some impartial advice on 1300 27 28 29 or book an appointment here.

 

This blog has been prepared by RJS Wealth Management Pty. Ltd. ABN 24 156 207 126. RJS Wealth Management Pty. Ltd. is a Corporate Authorised Representative (No. 438158) of Modoras Pty. Ltd. ABN 86 068 034 908 an Australian Financial Services and Credit Licensee (Number 233209). The information and opinions contained in this blog is general information only and is not intended to represent specific personal advice (Accounting, taxation, financial, insurance or credit). No individual’s personal circumstances have been taken into consideration for the preparation of this material. Any individual making a decision to buy, sell or hold any particular financial product should make their own assessment taking into account their own particular circumstances. The information and opinions herein do not constitute any recommendation to purchase, sell or hold any particular financial product. Modoras Pty Ltd recommends that no financial product or financial service be acquired or disposed of or financial strategy adopted without you first obtaining professional personal financial advice suitable and appropriate to your own personal needs, objectives, goals and circumstances. Information, forecasts and opinions contained in this blog can change without notice. Modoras Pty. Ltd. does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained within, Modoras Pty. Ltd. does not warrant that the articles within are free from errors, inaccuracies or omissions. To the extent permissible by law, neither Modoras Pty. Ltd. nor its employees, representatives or agents (including associated and affiliated companies) accept liability for loss or damages incurred as a result of a person acting in reliance of this publication.

We are in a recession… What does that mean?

The ‘lucky country’ has managed its way out of a recession for almost 30 years. But the latest downturn has taken some of the world’s economies with it. Australia included. So after such a long stint without one, what do we need to know?

What is a recession?

A recession is a period when the economy is contracting rather than expanding and is often accompanied by a significant rise in unemployment rates.

When people spend less money, businesses tend to need to let employees go. As opposed to when the public are feeling positive and spending money, they’re hiring. Generally as a result of growth.*

Formally announcing that the country is in a recession is typically dependent upon Australia’s gross domestic product (GDP), and is assessed over 2 successive financial quarters. Not just the performance of the economy over a day or month. A recession will typically require two successive quarters where Australia’s GDP has fallen.

GDP is the value created by goods and services produced inside Australia such as government spending, household consumption and business investment.

What are the numbers?

The recent confirmation that Australia is in a recession had been speculated by many since the first quarter figures showed a 0.3 percent drop in GDP (Jan-March 2020)*. And was expected to worsen since the second COVID-19 lockdown measures were announced.

Recent figures have shown that the Australian GDP has contracted by 7 per cent in the second quarter (April – June 2020)***. This is the worst fall on record. As these two quarters were consecutive declines, Australia was announced to be in a recession.

Statistics show households are now saving almost 20 per cent of their disposable income in comparison to 6 per cent in the first quarter 2020****.

What’s the forecast?

It is difficult to make predictions during a pandemic.

Some economists believe that the worst hit to the GDP has passed, however the second wave of lockdown measures in Melbourne may have an impact.

The RBA expects unemployment will continue to rise as many businesses are forecast to close once Government COVID support schemes begin to be withdrawn.

We are in a recession… so what’s your plan?

Join us to find out what YOU could be doing right now, to make sure you and your family are financially secure during these uncertain times. Join us via your laptop, desktop, smartphone or tablet for an interactive question and answer webinar.

Our experts at RJ Sanderson have decades of experience in doing exactly that. We’ve helped hundreds of clients take correct financial choices and improve their lifestyle.

The right investment strategy is one that moves you toward your lifestyle potential without losing sleep at night. Let an RJS Strategic Planner guide you to a strategy that will meet your goals. Call us on 03 9794 0010 for a complimentary consultation.

Book an appointment! Email:info@rjswm.com.au

 

Sources:

* https://www.rba.gov.au/education/resources/explainers/recession.html

** https://www.smh.com.au/politics/federal/australia-on-track-for-recession-with-first-quarter-of-negative-growth-in-9-years-20200603-p54z0f.html

*** https://www.cnbc.com/2020/04/02/cbo-sees-gdp-down-7percent-in-second-quarter-and-the-jobless-rate-past-10percent.html

**** https://tradingeconomics.com/australia/personal-savings

This blog has been prepared by RJS Wealth Management Pty. Ltd. ABN 24 156 207 126. RJS Wealth Management Pty. Ltd. is a Corporate Authorised Representative (No. 438158) of Modoras Pty. Ltd. ABN 86 068 034 908 an Australian Financial Services and Credit Licensee (Number 233209). The information and opinions contained in this blog is general information only and is not intended to represent specific personal advice (Accounting, taxation, financial, insurance or credit). No individual’s personal circumstances have been taken into consideration for the preparation of this material. Any individual making a decision to buy, sell or hold any particular financial product should make their own assessment taking into account their own particular circumstances. The information and opinions herein do not constitute any recommendation to purchase, sell or hold any particular financial product. Modoras Pty Ltd recommends that no financial product or financial service be acquired or disposed of or financial strategy adopted without you first obtaining professional personal financial advice suitable and appropriate to your own personal needs, objectives, goals and circumstances. Information, forecasts and opinions contained in this blog can change without notice. Modoras Pty. Ltd. does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained within, Modoras Pty. Ltd. does not warrant that the articles within are free from errors, inaccuracies or omissions. To the extent permissible by law, neither Modoras Pty. Ltd. nor its employees, representatives or agents (including associated and affiliated companies) accept liability for loss or damages incurred as a result of a person acting in reliance of this publication.

EOFY Frequently Asked Questions – Individuals

Strategies for Individuals

As the end of another tax year rapidly approaches on 30 June, we’ve put together an End of Financial Year FAQs to help you maximise tax time benefits.

COVID-19 FAQs

 

I worked from home before COVID-19 and my work pattern has not changed as a result. Am I entitled to claim the shortcut rate of 80 cents per work hour for my additional running expenses?
Yes, the new shortcut method can be used for all individuals working from home. Even those who worked from home prior to the COVID-19 pandemic. Be aware that the shortcut method applies to those hours worked between 1 March and 30 June 2020. Taxpayers can also choose to continue to claim using existing methods which are outlined below.
-the work-related portion of your actual expenses
-the fixed rate of 52 cents per hour plus the work-related portion of expenses not covered by that rate.To find out which is the most appropriate method for your circumstances, book an appointment with an RJS Professional here to discuss the most appropriate method for your circumstances.

 

If I claim my actual running expenses, what records do I need to keep?
Taxpayers will need to retain receipts for expenses, in addition to the records showing all work-related use. This method will have individuals calculate the size of their home in addition to the size of the work-related space. Remembering to also include the total of household running expenses (electricity & gas).

To apply this method, taxpayers will need to calculate the business percentage by dividing the area of work-related space by the total house area, then multiply this rate against the total costs. This is the amount that may be claimed. Click here to view the ATO’s working from home calculator. Or book an appointment with an RJS Professional here to discuss the most appropriate method for your circumstances.

 

If I suspend my private health insurance due to losing my job and my income for Medicare Levy Surcharge (MLS) purposes is above the threshold will I be liable for MLS?
If you and all of your dependents were not covered by an appropriate level of private patient hospital cover, and your income for MLS thresholds is either met or above, you may still be required to pay the surcharge. The rate depends on your income for the surcharge threshold. This applies unless you (and your dependents if you have them) are exempt from paying the Medicare levy. Click here to find out more about the Medicare Levy Surcharge exemption.

 

If I lose my job and suspend my private health insurance part way through the year will I get a partial exemption from the Medicare levy surcharge, if my income for MLS purposes is above the threshold?
If you hold hospital cover but temporarily suspend payments for that cover, then you may have to pay the surcharge for the days that the private health cover was not in force. This will be determined from the information the health provider and the taxpayer provide to the ATO.

 

I have lost my job as a result of COVID-19 and have found another job. Will I be taxed at a higher rate because it is considered a second job?
No, if you have lost your job, then you are entitled to claim the tax free threshold to reduce the amount of tax that is withheld from your pay from the new job.

Remember to tell the new employer that you want to claim the tax-free threshold by answering ‘Yes’ at question 8 ‘Do you want to claim the tax-free threshold from this payer?’

You can see how much tax the employer will withhold from your payment by using the tax withheld calculator. Click here to view it.

 

I am not an Australian resident. I am staying in Australia for longer than I expected because of COVID-19. What are my Australian tax obligations?
You may need to lodge an Australian tax return if you earn any assessable income from an Australian source. Your Australian tax obligations generally remain unchanged as a taxpayers salary, wages, investment income, etc will still be assessed.

All foreign-sourced income will also be assessable unless you are a temporary Australian resident.

Tax matters can be complicated. It’s best to seek advice from an RJS Professional on 1300 27 28 29.

 

Will my tax residency for tax purposes change as a result of me returning to Australia due to COVID-19?
Whether you are a resident for tax purposes in Australia is dependent on your individual circumstances. If an individual is here temporarily for some weeks or months because of COVID-19, then the individual will not be considered an Australian resident for tax purposes if the following is in force:

  • usually live overseas permanently
  • intends to return there as soon as able to.

It is important to consider that circumstances may complicate the matter if the individual:

  • ends up staying in Australia for a lengthy period
  • do not plan to return to your country of residency when able to do so.

Please seek advice on 1300 27 28 29 to understand the possibilities as the consideration as potential tax outcomes.

 

What happens if I earn employment income that is paid leave while I am in Australia temporarily?
Those who usually work overseas and earn foreign-source employment income may need to declare it in Australia. For those who have been on leave since arriving in Australia and are receiving foreign income from paid leave (such as annual or holiday leave) may be considered foreign-sourced income.

Check with an RJS Professional on 1300 27 28 29 to find out what is most appropriate for your circumstances.

 

What if I get a wage or salary in Australia and my home country has a double tax agreement with Australia?
Employment income derived by a person who is a resident of another country (after applying the double tax arrangements (DTA) tie-breaker rules) and is performing duties in Australia for a short period, will not be taxed in Australia. DTA’s must be confirmed before assuming this is the case as the wording, conditions and time periods vary from agreement to agreement.

Generally, employment income will not be taxed in Australia if:

  • you are a resident of a country with which Australia has a DTA (the DTA country)
  • you are not present in Australia for more than 183 days in aggregate in either an income year or a 12-month period (depending on the applicable DTA)
  • your salary and wages are paid to you by, or on behalf of, an employer that is not a resident of Australia
  • your salary and wages are not deductible against the profits of an Australian permanent establishment of your employer.

Check with an RJS Professional on 1300 27 28 29 to find out more.

 

I am working overseas because of COVID-19. What are my Australian tax obligations?
If you usually live and work in Australia but you are temporarily overseas as a result of COVID-19, there is no change to your Australian tax obligations.

 

I am a temporary resident. Can I access my super under the COVID-19 early access arrangements?
It depends. Some eligible temporary residents can apply to access up to $10,000 of their super until 30 June 2020. Otherwise, if you have worked and earned super while visiting Australia on a temporary visa, visitors may like to consider applying for this super to be paid on departure as an Australia superannuation payment (DASP) after you leave.

 

If the bank defers loan repayments for a period of time as a result of COVID-19, can I continue to claim interest on the loan as a deduction?
Yes. If interest continues to accumulate on your loan, it remains deductible. Even if the bank defers the repayments.

 

SUPERANNUATION FAQs

 

I use personal superannuation strategies to build my nest egg for retirement. Which also have a positive impact on my tax position. Are there any other strategies I should be considering?
Perhaps consider:

  1. Government Co-Contributions
    Superannuation co-contributions help eligible individuals boost their retirement savings. For those who are low or middle-income earners and make personal (after-tax) contributions to superannuation, the Government may also make a contribution up to a maximum of $500 per financial year.The amount the Government will contribute will depend on your income and how much after-tax contributions have been made to the fund during the financial year. You don’t need to apply for the super co-contribution, when you lodge your tax return, the Government will work out if you’re eligible.If your total income is equal to or lower than the threshold of $38,564 and you make an after-tax contribution of $1,000 to your superannuation account, the maximum Government contribution will apply. If your total income is between the lower threshold and the higher threshold of $53,564, your maximum entitlement will reduce progressively as your income rises.If your total income is equal to or lower than the threshold of $38,564 and you make an after-tax contribution of $1,000 to your superannuation account, the maximum Government contribution will apply. If your total income is between the lower threshold and the higher threshold of $53,564, your maximum entitlement will reduce progressively as your income rises.There are other eligibility criteria to be aware of. Click here to find out more or talk to an RJS Professional and obtain advice specific to your circumstances.
  2. Boosting a spouse’s super and reduce tax.
    In your spouse earns low or no income, you may be able to make a superannuation contribution and obtain a tax off-set. The spouse’s assessable income needs to be equal or less than $37,000 for the financial year for the full tax off-set to apply. Contribution limits are aligned to the spouse’s contribution caps and are on a scaled basis, phasing out when their income reaches $40,000.There are other eligibility criteria to be aware of. Click here to find out more or talk to an RJS Professional and obtain advice specific to your circumstances.

 

Can I access the money inside super at a later date if I need it?
Before adding to super, keep in mind that the money will be inaccessible until certain conditions are met. There are caps on how much can be contributed to super each year.
It’s important to take the caps into account as penalties may apply if exceeded.Make sure any contributions are received before June 30 to claim a deduction or offset for that financial year. With electronic transfers (including BPAY) the contribution takes effect the day the super fund receives the money, not the day of transfer. So don’t leave it to the last minute, talk to an RJS Professional today about maximizing your superannuation contribution caps, because with planning… retirement is just the beginning.

 

 

 

EOFY Frequently Asked Questions – Business

Strategies for Business

With the end of the financial year approaching, it’s a great time to make smart decisions about your finances. Taking action before 30 June can open up more opportunities for you. We know that there isn’t a one-size-fits-all solution to accounting, wealth management and business growth. So we’ve outlined some tax-effective strategies that you may benefit from. We can help you find what strategies are right for you and/or your business

 

Question: Can I claim a tax deduction for payments made to workers/contractors
No, deduction will apply if the business does not meet its PAYG withholding obligations. However, a deduction will apply to salary, wages, commissions and bonuses paid to employees. It will also apply to payments for the supply of services where a contractor has not provided their ABN.

 

Question: Is my audit insurance tax deductible?
Yes, the premium paid for audit insurance is tax-deductible. It also covers the cost of defence in the event of a claim. The ATO continues to benchmark businesses, with cash businesses become a major focus. Technology is becoming more advanced so be aware of information sharing and matching between government and non-government institutions.

 

How much is the instant asset write-off?
The instant asset write-off caps at $30,000. However, due to COVID-19, from 12 March to 30 June the instant asset write-off was increased to $150,000 excluding GST.

 

What is the depreciation limit for motor vehicles?
The depreciation limit for the 19/20 FY is $57,581 – it applies to both the depreciation as well as the GST credits claimable.

 

Can I use the work vehicle for private use to reduce the possible FBT?
The ATO continue to focus on the use of work vehicles for private use. Business owners may consider limiting the length per trip and total km per annum.

 

Can I delay the receipt of income to the following tax year to defer the tax payable?
Yes, if the businesses accountant is using the income on a cash basis method. Delaying receipt until after 30 June, will delay the tax liability by a full tax year. If however, the business uses the accrual method, it is important to hold back issuing of invoices for the deferral to apply.

 

Can I delay the receipt of income to the following tax year to defer the tax payable?
Yes, if the businesses accountant is using the income on a cash basis method. Delaying receipt until after 30 June, will delay the tax liability by a full tax year. If however, the business uses the accrual method, it is important to hold back issuing of invoices for the deferral to apply.

 

If accounting on a cash basis, should I pay creditors by 30 June?
If cash flow allows, creditors’ accounts should be paid by 30 June to maximize deductions.
The 12 month rule will apply to prepayments for expenses such as registrations, insurances and subscriptions. Accounts under $1,000 are excluded from the 12-month rule.

 

Should I restructure my business to a corporate entity for tax reasons?
Depending on your circumstances, consider restructuring to a corporate entity to take advantage of the flat company tax rate. Companies with a turnover of $50 mil or less will be taxed at 27.5% in 2019 FY (this is expected to drop to 26% from 1 July 2020).

 

Should I introduce a corporate beneficiary to a discretionary trust for tax reasons?
If a re-structure to a corporate entity is not feasible, consider making a distribution to a company to maximize tax at 30%.

 

Should I write off bad debts?
Consider paying dividends to shareholders before the end of the financial year to utilise the higher rate of imputation credits, which will lower post 30 June.

 

Have I taken advantage of the Government Stimulus packages available to my business?
The Australian Government has released a number of relief packages to help businesses owners through the impact of the COVID-19 pandemic, click here to take a look and speak with an RJS Professional on 1300 27 28 29. Running a business is a never-ending business. We can help.

 

 

 

My Say – No. 62 Investors Unite by Peter Thornhill

This content is not the views and opinions of RJ Sanderson. The content belongs to Peter Thornhill on behalf of Motivated Money Pty. Ltd. ABN 83 089 708 092.

With ‘breaking news’ shattering our peace at present, I am rather reluctant to add any more to the tumult attempting to address the health aspect of the current ‘crisis’.

However, I would like to add some comfort for committed investors. Whilst this current situation is the result of a pandemic over which we, as individuals, have no control, I would like to address the financial aspects over which each one of us has total control.

The last time we faced a financial meltdown was the GFC and I was browsing through an article I had written at the time and relating it to earlier events.
I have decided to reproduce it here in an edited and amended form as my view of the financial implications hasn’t changed. I therefore ask for your indulgence and, as you read, remember that it was written in October 2008.

“WHAT A DIFFERENCE A DAY MAKES” – My Say No 38

What a difference a day makes!

London Evening Standard, Thursday 25th September 2008; “BAILOUT HOPE BOOSTS SHARES”

London Evening Standard, Friday 26th September 2008; “BAILOUT CHAOS HITS THE CITY”

Since no one knows what is going to happen in the short term it would be stupid of me to claim any foresight. The heroic claims to having foretold this current setback will be ex-post.

It is difficult to know where to start or even what to say as the market movements have been reported minute by minute, ad nauseum. However, let’s give it a go with my personal slant on events.

Fear is based on ignorance. Fear is one of the most contagious and destructive diseases known to man. Even if you are not an investor, fear of current events will still strike at you or your family. Every second article has the word ‘panic’ and the ‘D’ word (depression) is appearing with greater regularity as indices are daily hitting new lows. Markets are now being suspended with increasing frequency as selling pressure overwhelms them.

Don’t look for ‘cause and effect’ reasons for what is happening; fear is a far stronger force than greed. Useless comparisons with the very recent past abound and attempts to give some credibility to the commentary is laughable: “On Wall Street, the key Dow Jones index fell below the key psychological level of 10,000 for the first time since 2004” – “the FTSE 100 index was falling through the psychological 5000 barrier”!

What the hell is psychologically important about some big numbers? I maintain my stance that all the economic theory accounts for diddly squat when the herd is spooked; behavioural finance is the new order. After losing a staggering 20,000 pounds in the South Sea bubble Sir Isaac Newton was moved to comment that he could, “calculate the movement of the stars, but not the madness of men”.

The first real systemic threat to the financial system in Britain following the Second World War arrived in 1973 with the secondary banking crisis that affected the ‘fringe’ banks (we were living in England at the time and I still have the newspaper clippings). They had provided finance to speculators during (causing?) the property boom. When the crash came, the Bank of England launched a ‘lifeboat’ to prevent the crisis from threatening the first-tier banks.

Similarly, with Japan’s problems in the 1990s which were caused by the pricking of a massive property bubble in the late 1980s that resulted in banks seeking to liquidate massive losses. Whilst the Japanese government was subjected to criticism for failing to act quickly enough at the time, I think it is now a case of ‘those in glass houses shouldn’t have thrown stones’.

An understanding of this history should have given all those in power today enough foresight to have avoided the worst but perhaps the balance of bankers/mathematicians to historians in positions of influence is wrong!

I doubt that any of what is happening presently will be enough of a scare to curb the hubris of future government’s and their ill-advised generosity, or to avoid the waste of productive capital inherent in artificially supporting property prices. If consumers cannot be happy without irrational rises in property or share prices, then we are all off to hell in a hand cart.

I forlornly hope that consumers have had enough of a scare to understand that just as nations cannot live beyond their means; the same rules apply to them. Reckless leverage and a misguided reliance on property can destroy nations, banks, and you and me. I personally am confident that nothing will change in the long term.

To understand what the future holds I commend “Extraordinary Popular Delusions and the Madness of Crowds” written by Charles Mackay and first published in 1841. To help get a handle on the present I commend “Manias, Panics, and Crashes” by Charles Kindleberger. Both these books are recommended reading on my website.

On the larger issue, Kindleberger goes on to say: “It is necessary now to move to a critical question, one that probably cannot be resolved. Assume that we have demonstrated that destabilising speculation can occur in a world of individuals whom it is convenient and fruitful to consider as normally rational. Permit this world to be perturbed by a ‘displacement’ of one sort or another, largely from outside the system, giving rise to prospects that individuals misjudge, either for themselves or for others. At some stage, investment for use gives way to buying and selling for profit. How likely is the speculation to lead to trouble?”

How likely indeed. I think I can say from my understanding of history the answer is an unequivocal YES.

Where present events will lead in the short term, I wouldn’t have a clue. As I indicated in my last newsletter, despite the substantial decline in our portfolio values, I have been monitoring the dividends during the current reporting season and can now update the earlier sketchy results.

Of 54 companies in our portfolio that have reported so far, five have reduced their dividends with the reductions ranging from very little to a complete suspension. Twelve have maintained their dividends and the balance have increased. I haven’t yet worked out the impact in dollars as we have made a substantial number of purchases since prices began to decline so a further bit of work is required. Suffice to say, and ignoring purchases, we will have more income this year than the same time last year.

I have discussed in previous editions of ‘My Say’ the implications a cut in dividends would have for us so won’t go over old ground. The next test for us will be in March/April 2009 when the next dividend season gets underway. Whether this is a sustained decline and a depression results I don’t believe anyone knows. However, if it should come to pass then I will rely on history.

Our parents were in their late teens/early twenties when the depression arrived. Our grandparents went through two world wars and the depression. The only social security system was the community.

I do not believe that my wife and I are any less resourceful than they were (by observation I cannot speak for others). I do not wish to sound melodramatic, but I am tired of all the hyperbole and self-seeking wailing associated with current events. Personally, we are not over-geared so we will simply pull in our belts, live within our means, hunker down and wait for the cloud to pass; just like our parents. As for our children; hopefully they will learn a valuable lifetime lesson!

There is a famous saying; “it’s always darkest just before the dawn”. A perversion of this is attributed to Mao Zedong which goes; “It’s always darkest just before it is completely black”!
Remember, your perception is your reality.

That’s the end of the 2008 article content and I would just like to make some observations regarding the differences between now and then.

I have written previously about my concern over the decades of the ‘rescue at all cost’ policies of central banks and governments generally; they predate the GFC and have become increasingly irrational with each new rescue. We all need to become more resilient rather than relying on larger and larger handouts to alleviate our discomfort.

The GFC was purely a financial problem whilst we are now facing the covid19 ‘black swan’ event overriding the ‘rational’ market correction we were long overdue for. With Donald Trump now having his Moses moment and the US government supporting speculative ETF’s to part the waters and allow everyone to escape the looming problem has capped every other ridiculous attempt.

There is a brilliant article by Stephen Bartholomeusz in the finance section of the Sydney Morning Herald 21st April edition. It is titled “Zombies must live or die on merits, that’s capitalism”. It is brilliant; I have cut it out to frame, and I would encourage you to do whatever it takes to obtain a copy of the article. It captures everything that is wrong with policy.

Over 2000 years ago, Plato observed that the longer democracies existed – the longer their freedoms and equalities extended – the more incoherent they became, leaving them susceptible to the cynical corruption of a tyrant, who “offers himself as the personified answer to the internal conflicts of the democratic mess. He pledges, above all, to take on the increasingly despised elites”.  Let us hope that everyone learns from this event, not just you and I but politicians and leaders of industry.

I spelt out in the above article our personal strategy and it remains thus 12 years later. As I have mentioned in previous My Say articles, the GFC had a hugely positive impact on our finances, despite the dividend cuts and the huge number of capital raisings at the time. No doubt this will probably be repeated now.

On a more positive note, we must acknowledge that industry is the dynamo that drives a nations fortunes and this dynamo is driven by human endeavour. As I have said many times; human endeavour is not about to grind to a halt unless of course history can be ignored and this time it is different!

Stay safe and calm.

The True Impact of Low Interest Rates

Nearly everyone welcomes low interest rates with open arms. However, that doesn’t mean everyone will feel a positive impact. Let’s look at some things that you should be wary of.

The Nation has had an eventful year to date, and it certainly hasn’t been all quiet on the economy front.

The Reserve Bank of Australia (RBA) ended 2019 with an interest rate reduction to 0.75%. In an attempt to stimulate the economy, the RBA has reduced rates twice in 2020 to a low of 0.25%. RBA hopes that the cash rate reduction will be the necessary trigger for a U-turn.

The move is hoping to relieve the purse strings of Australians, releasing a little pressure and hopefully a little cash reserves that will be spent at local businesses.

On paper, an interest rate reduction should help both companies and individuals in many ways. However, this doesn’t mean that you shouldn’t take precautions. Especially because numbers and short-term upswings (if any) tend to mask the real picture.

With a recession looming, let’s take a look at the impact low interest rates have on both businesses and individuals. And after, we’ll deal with all of its potential negative impacts.

Why You May Like Low Interest Rates

A decrease in interest rates opens an array of possibilities. This is especially true if you know how to use it properly.

Here are some of the most common benefits that you can take advantage of:

1. It’s Easier to Make Loan Repayments

During a recession, a lot of large banks lose their ability to lend money due to a lack of capital. And even when they do, it’s with adverse repayment conditions.

When short-term interest rates are low, banks improve their capacity to lend money.

This works both ways. Low interest rates cause banks to “recapitalize” and lend more money. In return, they provide lenders with much better repayment conditions.

That way, lenders can easily repay money to the banks while banks essentially earn more money.

Businesses and investors may be enticed to take out loans – small business owners, huge companies, and regular consumers.

2. Your Assets May Increase in Value

Lower cash rates will impact the value of assets in many ways.

Depending on other market conditions, housing prices tend to increase as demand improves. Favourable bank loans and easier repayments make buying properties much more attractive.

Additionally, a spike in additional discretionary spending has an impact on higher employment and productivity. Therefore, even non-housing assets, such as products and services, and share prices as companies earn more, may increase as demand increases.

3. It Leads to Overall Economic Stimulation

Prolonged increased spending also has an impact on the consumer price index (CPI – the rate the cost of living is increasing or decreasing). During a period of economic stimulation, we may observe CPI heading north. Increasing the overall cost of living.

It sets off a chain reaction.

This stimulation of the economy should lead to a healthy financial ecosystem. However, it’s not always efficient in practice.

The Unexpected Negative Impacts

There’s one big issue with low interest rates:

They look far more attractive than they actually are.

If this move is dead-certain to miraculously save any economy, everyone would use it. But in truth, the situation is far more complex.

Low interest rates can positively impact the economy long-term, but they are only a short-term solution. If low rates stay in place for a longer time than necessary, they can do more harm than good.

A lot of people rush to take advantage of low rates without thinking of the consequences. They make risky investments and loans, or even indulge in compulsive spending. And this can lead to some unfavourable outcomes.

Here are some common issues that may arise while the rates are low.

1. The Liquidity Trap

Just because the government lowers interest rates doesn’t mean the economy will grow.

When the rates are low, people may invest in assets that won’t spur employment. This includes stock markets and loan repayments, for example. Not stimulating the economy at all.

This further reduces the cash flow and unemployment rates may remain or increase. Prices may start falling, wage increases reduce if they are present at all and the value of the currency may deflate.

That’s why people should know when to start saving or what’s the best asset to invest in. If you just go with the flow, you may end up falling into the same trap.

To avoid it, you need to have impeccable financial insight. However, it may be hard to predict such an outcome without a professional consultant.

2. Investors May (Wrongly) Invest Out of Their Comfort Zone

When the housing prices go up, but so do dividends and rents, the majority of investors don’t want to miss the opportunity, so they rush into buying these assets.

But there’s a big problem.

A lot of those who jump at the chance aren’t aware of the complexity of the market. Many investors go out of their comfort zone, even if they have no prior experience.

Because of this, they end up buying assets that potentially fluctuate more than they are comfortable with. Causing possible sleepless nights later on. Or buy property that was a little out of reach but now becomes affordable. And when interest rates rise again (and they always do) repayment create significant strain on the purse strings. If they don’t assess the long-term state of the economy and their own risk profile, they can create a lot of financial stress later on.

What if the economy tanks and it becomes impossible to rent out the property you bought?

That’s just one of many possible negative outcomes.

It’s vital to have a financial plan that stands the test of time and a financial planner to guide you through, empowering you to make well-informed financial decisions. No matter the market conditions.

3. The Turnaround Can Be Painful

The financial tides are constantly shifting.

But a period of low interest rates usually doesn’t last long. History has often witnessed sudden changes in the market. A few months or years of low interest rates could lead to a new period of increased austerity.

Your future depends on the choices that you make in the present. If you’re focusing on the current situation too much, you won’t be ready for what comes next.

There’s always a chance for the economy to fall into a liquidity trap. The inflation may get worse and you may experience various unexpected movements.

The key is to know what you’re doing.

Are you just hoping that everything will turn out well or do you understand the market?

If you have a strategic financial plan in place and expert advice on top of that, you’ll learn how to spot the opportunities.

Make Educated Guesses

Truth be told, a period of low interest rates is a good time to make some financial decisions. However, there’s a real chance that it may go wrong. The present situation shouldn’t trick you into thinking that every choice is a good choice.

Take your time to make a financial plan so you don’t regret any option that you take. Of course, it would be better if you mapped out your plan with an expert.

Our experts at RJ Sanderson have decades of experience in doing exactly that. We’ve helped hundreds of clients take correct financial choices and improve their lifestyle.

The right investment strategy is one that moves you toward your lifestyle potential without losing sleep at night. Let an RJS Strategic Planner guide you to a strategy that will meet your goals. Call us on 03 9794 0010 for a complimentary consultation.

Book an appointment! Email:info@rjswm.com.au

This blog has been prepared by RJS Wealth Management Pty. Ltd. ABN 24 156 207 126. RJS Wealth Management Pty. Ltd. is a Corporate Authorised Representative (No. 438158) of Modoras Pty. Ltd. ABN 86 068 034 908 an Australian Financial Services and Credit Licensee (Number 233209). The information and opinions contained in this blog is general information only and is not intended to represent specific personal advice (Accounting, taxation, financial, insurance or credit). No individual’s personal circumstances have been taken into consideration for the preparation of this material. Any individual making a decision to buy, sell or hold any particular financial product should make their own assessment taking into account their own particular circumstances. The information and opinions herein do not constitute any recommendation to purchase, sell or hold any particular financial product. Modoras Pty Ltd recommends that no financial product or financial service be acquired or disposed of or financial strategy adopted without you first obtaining professional personal financial advice suitable and appropriate to your own personal needs, objectives, goals and circumstances. Information, forecasts and opinions contained in this blog can change without notice. Modoras Pty. Ltd. does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained within, Modoras Pty. Ltd. does not warrant that the articles within are free from errors, inaccuracies or omissions. To the extent permissible by law, neither Modoras Pty. Ltd. nor its employees, representatives or agents (including associated and affiliated companies) accept liability for loss or damages incurred as a result of a person acting in reliance of this publication.

Market Volatility – a look at the last 90 years

Market volatility can be driven by a number of influencing factors. Often thought of as a simple numbers game, the share market can be heavily influenced by human emotion and market sentiment. When confidence is low, the share market may drop, caused by an increase in shares being sold. When market confidence increases, purchasing of shares increases, and values often rise.

It is important to understand market volatility has occurred since the market itself began. The point here is, downturns are more common than one may expect. Learning how to budget, or save or invest wisely, are important skills to learn. Continue reading “Market Volatility – a look at the last 90 years”

Holding Tight During Market Volatility

We know that market volatility can be off-putting to investors who might be considering equity markets as an investment option. But depending on your financial goals and time frame, market volatility doesn’t need to be a precluding factor when making decisions about your investments.

By mitigating the risks that market volatility brings and knowing how to stay calm when the market is in turmoil, equity investments could be the answer to reaching your lifestyle potential.

Stick to the Plan During Market Volatility

Attempting to guess when gains and losses are going to happen will only hurt your investment in the long run because market performance is almost impossible to predict. By adjusting your investments this way, you could miss out on the best performing days for your portfolio which are critical for your overall returns. The share market has a historical long term trend upwards, and by stepping in and out of the market you’ll miss out on these benefits.

Volatility is a Normal Part of Long-Term Investing

Levels of volatility can vary so it’s important to understand that volatility is normal and there’s no need to panic. We work with you to figure out your risk profile to ensure you can cope with the levels of volatility that might occur with your chosen investment.

Understanding that volatility is a normal part of long-term investing in particular options can help to reduce your concern and worry.

The Benefits of Regular Investing

Regular investing can help you reap the benefits of ‘dollar cost averaging’. It means you’re spreading your purchases over a period of time and not locking your investment in at a single day’s rate. By investing this way, you will have opportunities to invest in a falling market which is when good deals can be found.

Diversification is Key

A diversified portfolio may be the key to managing market volatility. If you’re exposed to a particular industry that may not be performing, it’s likely you’ll also have investments in an industry that is doing well. The differences in asset performances may help to smooth out your return and also minimise risk.

Look for Opportunities to Grow

Corrections are a normal part of market cycles and can create opportunities for growth. A correction can make some prices more attractive which gives you the potential for higher than normal returns when the market bounces back.

Understand your Investment Strategy

Don’t underestimate the power of knowing the ‘nuts and bolts’ behind your investment strategy. This includes knowing why and how it has been developed. By understanding your investment strategy, it helps you to be comfortable with the level of volatility expected and you won’t be surprised by short-term market actions or outcomes.

Don’t Let Emotions Lead you Astray

Stay true to your investment strategy and don’t allow the sentiment of the market dictate your actions. If you find you’re getting the confidence wobbles about your investment, speak to an experienced financial planner before making any changes.

Take a look at our fact sheet on market volatility which goes into greater detail on why staying calm during unsettling performance periods could benefit you in the long run.

The right investment strategy is one that moves you toward your lifestyle potential without losing sleep at night. Let an RJS Strategic Planner guide you to a strategy that will meet your goals. Call us on 03 9794 0010 for a complimentary consultation.

Book an appointment! Email:info@rjswm.com.au

This blog has been prepared by RJS Wealth Management Pty. Ltd. ABN 24 156 207 126. RJS Wealth Management Pty. Ltd. is a Corporate Authorised Representative (No. 438158) of Modoras Pty. Ltd. ABN 86 068 034 908 an Australian Financial Services and Credit Licensee (Number 233209). The information and opinions contained in this blog is general information only and is not intended to represent specific personal advice (Accounting, taxation, financial, insurance or credit). No individual’s personal circumstances have been taken into consideration for the preparation of this material. Any individual making a decision to buy, sell or hold any particular financial product should make their own assessment taking into account their own particular circumstances. The information and opinions herein do not constitute any recommendation to purchase, sell or hold any particular financial product. Modoras Pty Ltd recommends that no financial product or financial service be acquired or disposed of or financial strategy adopted without you first obtaining professional personal financial advice suitable and appropriate to your own personal needs, objectives, goals and circumstances. Information, forecasts and opinions contained in this blog can change without notice. Modoras Pty. Ltd. does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained within, Modoras Pty. Ltd. does not warrant that the articles within are free from errors, inaccuracies or omissions. To the extent permissible by law, neither Modoras Pty. Ltd. nor its employees, representatives or agents (including associated and affiliated companies) accept liability for loss or damages incurred as a result of a person acting in reliance of this publication.