Private health insurance rebate and Medicare levy surcharge changes. June 2012

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1 June 2012 IN THIS ISSUE Private health insurance rebate and Medicare Levy surcharge changes 30 June is around the corner Tax Changes affecting Small businesses Changes to the timing of Trust resolutions Living-Away-From-Home Allowance changes Superannuation Changes (a) $25,000 Contributions Cap (b) New Budget Announcements Anti-Avoidance provisions in state of flux Director Penalty Regime Taxable Payments Reporting Building and Construction Industry The table summarises how much rebate an individual can claim if they have private health insurance and how much Medicare levy surcharge an individual has to pay if they don t have sufficient private hospital cover from a private health insurer. Singles (income) Families (income) % of insurance premium = rebate* Medicare levy surcharge % No change Tier 1 Tier 2 Tier 3 $84,000 $168,000 $84,001 - $97,000 $168,001 - $194,000 $97,001 - $130,000 $194,001 - $260,000 30% 20% 10% 0% 0% 1% 1.25% 1.5% $130,001 $260,001 *If you are an older taxpayer, the rebate amounts are higher. Private health insurance rebate and Medicare levy surcharge changes From 1 July 2012, access to the private health insurance rebate becomes means tested by reference to how much income an individual earns. Not all taxpayers will be entitled to the 30% rebate. Some higher income-earning taxpayers will be entitled to a lesser rebate amount and individuals and families whose income is higher than the top threshold amount will no longer be entitled to any rebate at all. The way you claim your rebate (either directly from your private health insurer, through your tax return or from Medicare) should not change. If you are a higher income earner, the cost to you personally of your private health insurance is likely to be more because of this change. If you are concerned about how these changes might affect you in the coming income year, speak to your Health Fund or us about the possible impact of these changes. The three tier income thresholds also apply to calculate who has to pay the Medicare levy surcharge and how much they have to pay.

2 30 June is around the corner The end of the financial year is fast approaching and it s time to start planning to prepare for your 2012 Income Tax Return. Now is a good time to start reviewing certain assets and liabilities owned by your business and consider what should be done prior to 30 June Some suggested areas for review are: Review your depreciable assets (capital allowances) register and write-off or dispose of any assets no longer used. Examples of depreciable assets are computer equipment, office furniture (eg desks and chairs) and kitchen appliances; Carry out any repairs and maintenance required so you can recognise the deduction by 30 June; Review receivables and see if any bad debts can be written off; Negotiate with lenders to see if you can prepay some investment loan interest expenses prior to year end; Re-consider funding strategies for your business end-of-year is a good time to consider whether you have the right debt funding and equity funding mix in place; Consider any newly announced concessions from the recent May Budget. There may be things you can do now to take advantage of these concessions in the next financial year. For example, do you need to dispose of assets prior to year end? Do you need to defer acquiring certain assets until after the new financial year begins? Note! The standard deduction of $500 that was set to begin on 1 July 2012 is no longer going to be introduced. So, you must continue to keep your receipts so you can claim all your relevant work-related expenses which exceed $300 in total in the and future income years. Tax rebate changes from 1 July 2012 From 1 July 2012, the following tax rebates are going to change: Net medical expenses tax offset (NMETO) - a means test will be introduced for this tax offset. For taxpayers with adjusted taxable income above the Medicare levy surcharge thresholds ($84,000 for singles and $168,000 for couples or families in the income year), the threshold above which a taxpayer may claim medical expenses tax offset will be increased to $5,000 (indexed annually thereafter) and the rate of reimbursement will be reduced to 10% for eligible out-of-pocket expenses incurred on costs above $5,000 limit. Mature age worker tax offset (MAWTO) - The MAWTO will be phased out for taxpayers born on or after 1 July This will not affect any person who currently receives MAWTO. Access to the MAWTO will be maintained for taxpayers who are aged 55 years or older in the current income year ( ). Essentially this means people who are of age and have qualified maintain this rebate but younger people will not qualify when they become 55 years old. Tax Changes affecting Small Businesses Small Business Benchmark Updates Small business benchmarks are financial ratios developed to help a business compare its financial performance to similar businesses in the same industry. The benchmarks provide guidance on what figures, such as amounts of income, the ATO would normally expect a business in that particular industry to report. The ATO uses these benchmarks to work out which businesses in particular industries might be avoiding tax by not reporting some or all of their income. The ATO has updated its small business benchmarks with information from the 2010 financial year and they have also published new activity statement ratios for a range of industries. Benchmarks are now based on the most recent data available. The number of benchmark ratios has increased so businesses can now check their performance and recordkeeping against a greater range of ratios.

3 If your business falls outside the benchmarks that apply to your particular business, you may need to consider reviewing your records to ensure all your income and expenses, in particular cash amounts, are being recorded. Businesses in the same industry will differ from each other, though there will be common themes among them. It is well worth taking the time to review your business s individual circumstances and satisfy yourself you are able to account for any difference between the industry benchmark and your business s performance. We will be happy to assist you to review your business s performance and look at ways to bring your business s performance to within the industry benchmarks, if appropriate. A) Changes starting in the Income Year i) Small Business: instant asset write-off and simplified depreciation An instant write-off amount of $6,500 (increased from $1,000) will apply to small businesses who acquire low cost assets from 1 July Low cost assets might include, for example, inexpensive items of equipment, such as office furniture. In addition, an instant write-off for the first $5,000 of the cost of a motor vehicle purchased by a small business will also be available (unless the vehicle can be written off immediately). Other changes simplifying depreciation for small businesses include the creation of a general small business pool. This will be made up of depreciating assets that you might already have in separate pools of assets (that are being depreciated at a faster rate than if they were not in a pool) that will now be combined. Assets will be depreciated at a rate of 15% in the first year and at 30% in each subsequent year. If you are currently considering some new asset purchases, we can assist in helping you decide when you should make those purchases. See us for advice on new business asset purchases, including what and when you should purchase. ii) Entrepreneurs tax offset changes The entrepreneurs tax offset is a tax offset equal to 25% of the income tax payable on your business income if you have an aggregated turnover of $50,000 or less. The entrepreneurs tax offset ceases to be available on 30 June The new small business asset instant write-offs and depreciation pool in effect replace this tax offset. B) Budget Announcement Loss Carry Back for small business As announced in the Federal Budget on 8 May 2012, starting in the income year, companies (and entities taxed like companies) will be able to carry back up to $1 million of tax losses incurred in the year to offset against tax paid in the income year. From the income year, tax losses will be able to be carried back and offset against tax paid up to two years earlier. You can talk to us about how you might be able to take advantage of these rules and carry back any tax losses your business may have to offset against tax you have paid in prior years. Note! If you incur any tax losses in the income year, you might be able to carry them back to offset against tax paid in earlier years. Speak to us to ascertain whether you are able to do this.

4 Changes to the Timing of Trust Resolutions In prior income years, trustees who were required to make resolutions prior to distributing income to beneficiaries had until 31 August following the end of the income year to make the resolutions. This extension came out of two old income tax rulings which the ATO withdrew in September This means that all trustees affected by this change must issue their resolutions by 30 June. As this change applies to the current year (1 July 2011 to 30 June 2012), trustees will need to make their resolutions by 30 June Check with your tax adviser how this change might affect you if you are a trustee. Living-Away-From-Home Allowance Changes The Budget edition of TaxWise referred to recently announced changes to the living-awayfrom-home allowance (LAFHA). The proposed changes: Mean that employees, rather than employers, will be liable to tax on any LAFHA received that is not exempt; Limit access to LAFHA to temporary residents who maintain a residence in Australia and who are required to live away from it for work purposes; Require individuals to substantiate their actual expenditure on food and accommodation in excess of the statutory amount. These changes are due to apply from 1 July All employers who provide these types of benefits to their employees should consider reviewing their current arrangements and seeing how these proposed changes might affect those arrangements. If you think the proposed LAFHA changes will impact arrangements you have in place with your employees, you can speak to us to discuss how these changes might affect you and your employees. Note! The legislation has not been finalised yet so the details of the changes could change. Your tax adviser is the best person to keep you up to date with these developments. Superannuation changes A) Previous Announcements In March 2012, changes to super were announced. These changes include: The superannuation concessional contributions cap will remain at $25,000 for individuals under 50 years of age up to and including the financial year, commencing 1 July 2013; From 1 July 2011, eligible individuals will be able to have refunded to them contributions to their superannuation fund that exceeded the concessional contributions cap (amounts up to $10,000 only). This amount will be treated as assessable income to the individual (and subject to tax at the individual s applicable marginal tax rate for the year) rather than being subject to excess contributions tax. Employers MUST report on employees payslips the amount of superannuation contributions they will make on behalf of an employee as well as the date on which they expect to pay the contribution into the superannuation fund. The employer must also specify on the payment slip the name and number (if applicable) of the fund to which the contribution has been or will be paid.

5 B) Budget Announcements The following announcements were made in the Budget in relation to superannuation changes: DEFERRAL OF THE HIGHER CONCESSIONAL CONTRIBUTION CAPS There were two announcements made in the budget that will impact SMSF members, the higher tax rate on contributions for high income earners and the deferral of the higher concessional contribution cap for individuals aged 50 and over. The deferral of the higher cap is by far of greatest significance as individuals nearing retirement have watched as the Government has stripped away the amount able to be contributed over the past few years. Having originally cut the concessional cap in half in 2009/10, to take effect form 1July 2012 for those aged 50 and over, the Government then announced they were increasing the concessional cap to $50,000, as long as an individual s superannuation balance was less than $500,000. Having determined that this is now too difficult to implement by 1 July 2012, they have postponed the measure until 1 July The end result is that an individual aged 50 or over is now limited to $25,000 from 1 July 2012 regardless of their account balance. This is compounded by the fact that the Government have frozen indexation of the concessional cap until 1 July 2014, a measure announced late in To further discourage individuals aged 50 and over who earn income greater than $300,000 they will be taxed at an additional rate of 15% on their $25,000 contribution which means they will end up paying the same tax on $25,000 as they would have previously on $50, % CONTRIBUTION TAX FOR HIGH INCOME EARNERS The definition of income includes taxable income, concessional superannuation contributions, adjusted fringe benefits, total net investment losses, target foreign income, tax-free government pensions and benefits, less child support. If an individual s income only exceeds the $300,000 threshold because of concessional contributions then it will only be the amount of the contribution in excess on the threshold that will be tax at 30%. Example: An individual earns $280,000 and makes a concessional contribution of $25,000. In this instance only $5,000 will be taxed at 30%. The measure confirms that the tax is only applicable to contributions and does not affect the tax on other income received by a Fund. Whilst the Government have indicated they will consult with the Superannuation industry and other stakeholders, presumably the ATO, about the design and implementation it is likely to mirror the superannuation surcharge system (an to an extent excess contributions) where the ATO data match information from an individual s personal tax return and the SMSF Member Contribution Statements and then issue an assessment to the Fund for the tax liability. Anti-avoidance provisions in flux Anti-avoidance provisions contained in the tax law are aimed at trying to prevent taxpayers from structuring transactions and entering arrangements designed to avoid tax. Avoiding tax is different to evading tax which is a criminal offence. Anti-avoidance provisions might apply in cases such as where a taxpayer tries, for example, to structure a transaction to gain a tax benefit that may not ordinarily arise if the transaction is carried out in another way and there aren t necessarily sound commercial reasons why the transaction was structured in a particular way. From 1 July 2012 an individual earning greater than $300,000 will pay an additional 15% tax on concessional contributions.

6 On 1 March 2012, the Federal Government announced that changes will be made to the existing general anti-avoidance provisions contained in the Federal Income Tax Act. The Government has not specified how it intends to change the general anti-avoidance provisions, though the amendments are intended to clarify how these provisions apply. However it is important to be aware that the changes are intended to apply from 1 March So if you are currently considering entering into a transaction, you should seek advice from your tax adviser around the potential tax implications that may arise from the proposed transaction and guidance on what impact the general anti-avoidance provisions might have, if any. Director Penalty Regime Proposed amendments to the director penalty regime were announced by the Assistant Treasurer on 18 April 2012 to expand the tax law protections afforded to protect workers entitlements and impose greater obligations on directors. The amendments will: expand the director penalty regime to include superannuation guarantee amounts meaning that directors will also be held personally liable for their company failing to pay employees super contributions; ensure that directors cannot have their director penalties remitted by placing their company into administration or liquidation when unpaid Pay As You Go (PAYG) withholding or superannuation guarantee amounts remain unpaid three months after the due date; and restrict access to PAYG withholding credits for company directors and their associates where the company has failed to pay withheld amounts to the Commissioner. Anyone who is a director of a company with employees should familiarise themselves with these proposed amendments as they directly impact a director s obligations and responsibilities under the tax law in respect of employee entitlements. The good news is there are some concessions under the proposed amendments: new directors will have time to familiarize themselves with a company s accounts (30 days instead of 14 days) before being held liable for the company s debts. The ATO will be required to serve penalty notices on directors in all cases before commencing action. Directors will also have available to them a new defence where they may face penalties for superannuation debts where, broadly, they had a reasonable basis for thinking that the worker was a contractor rather than an employee. The amendments are contained in an exposure draft. Directors concerned by these proposed changes should consult us to keep an eye out for when these changes might become law. Taxable Payments Reporting Building and Construction Industry If you are in the Building and Construction industry and you have an Australian Business Number (ABN), you may need to report certain payments you make to contractors for certain building and construction services. You need to report certain details in relation to the contractor to whom you make payments, including their ABN, name, address and amount you paid them (including GST). Generally, these amounts need to be reported to the ATO by 21 July, which is very soon after the financial year end. As these rules apply from 1 July 2012, it might be a good time now to look at the kinds of records you keep in relation to payments you make to contractors and see if you need to change anything to help you comply with these new rules. We can assist you with the types of records you might need to start keeping to help you meet this obligation, or it might turn out that you don t need to change any of your record-keeping details and you will be able to meet this obligation.

7 Tip! You should take the opportunity now to consider the impact of this reporting obligation and make any necessary changes now so you are ready for 21 July 2013! Please contact us if you need help with this. DISCLAIMER Taxwise News is distributed quarterly by professional tax practitioners to provide information of general interest to their clients. The content of this newsletter does not constitute specific advice. Readers are encouraged to consult their tax adviser for advice on specific matters.

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