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If you run a small business through a company and you decide to sell it, you have the choice of either selling the business assets themselves (together with any goodwill) or selling your shares in the company.

Access to the CGT small business concessions

Usually, such decisions are made on the basis of relevant commercial considerations (eg, due diligence and future liability issues).

However, if you are seeking to access the CGT small business concessions on any sale, then you should also consider whether it is better to sell the business assets per se or the shares in the company.

While in principle there should be no difference in terms of the CGT outcome in selling either, it may well be easier to access the concessions by adopting one approach over the other.

For example, if you sell the business assets at the company level you will need to find one or more controllers of the company (ie, broadly someone with a 20% or more interest in it at the relevant time) in order to be able to access the concessions.

And, depending on the circumstances, this can be both easier and harder than it looks.

Furthermore, in the case of the “retirement exemption”, it is necessary to actually pay any exempted capital gain to this controller in order to be able to use the concession (or to put it into their superannuation if they are aged under 55 at the relevant time).

On the other hand, if you can use the “15 year exemption”, it is enough that such a person exists – without the need to pay the exempted gain to them.

“Assets used in carrying on a business”

Most importantly however, if you choose to sell the shares in the company, the company itself must have certain attributes – the most important of which is that 80% or more of its assets (by market value) must be assets used in carrying on a business.

This, in turn, raises the thorny issue of how money in the bank is to be treated – and there is often a fine line between whether it is considered to be used in carrying on a business or not.

More hurdles to jump for eligibility

Furthermore, if the company has “controlling interests” in any other entity, then the assets of any such entity also must be also taken into account in determining if this test is met.

And, of course, as with the application of the CGT small business concessions in any circumstances, the “taxpayer’’ must satisfy either the $2m turnover test or the $6m maximum net asset value (MNAV) test.

And where shares or units are sold, the “taxpayer’’ is the individual who owns the shares and where the business assets are sold the “taxpayer” is the company or trust itself. In either case, the tests can be difficult to apply because the “taxpayer’’ includes affiliates and connected entities (ie, related parties).

By way of example, if you sell the business assets of a company and you use the $6m MNAV test, then any person who has a 40% or more shareholding in the company will be a connected entity and their assets (other than personal ones such as superannuation and their home) will also have to be taken into account. Importantly, this can include investment properties and shares.

And then there is the difficult task of determining what liabilities relate to those assets for the purposes of this test – especially where the business assets are sold.

Suffice to say, the issues surrounding the question of whether you should sell the business assets of a company or the shares in them when seeking to apply the CGT small business concessions are complex.

Furthermore, the same issues arise in respect of deciding whether to sell the units in a unit trust that operates a small business or the assets of the business itself.

We are here to help

In any of these scenarios we are here to help – as this is a matter which clearly requires the expertise of a tax professional.

A person who is not a resident of Australia for tax purposes is nevertheless liable for capital gains tax (CGT) on certain assets located in Australia. And these assets are assets which have a “fundamental” connection with Australia – and are broadly as follows:

• real property (ie, land) located in Australia – including leases over such land;
• certain interests in Australian “land rich” companies or unit trusts;
• business assets used in carrying on a business in Australia through a “permanent establishment”; and
• options or rights over such property.

This means that such assets will be subject to CGT in Australia regardless of the owner’s tax residency status.

Importantly, in relation to real property, this also includes a home that the foreign resident may have owned in Australia. And this home will not be entitled to the CGT exemption for a home if the owner is a foreign resident when they sell or otherwise dispose of it.

Furthermore, a purchaser of property from a foreign resident will be subject to a “withholding tax” requirement, whereby they have to remit a certain percentage of the purchase price to the ATO as an “advance payment” in respect of the foreign resident’s CGT liability. However, this requirement is subject to certain thresholds and variations.

Importantly, a foreign resident will generally not be entitled to the 50% CGT discount on any capital gain that is liable to CGT in Australia – subject to an adjustment for any periods when they owned the asset when they were a resident of Australia.

In relation to a foreign resident’s liability for CGT on certain interests in Australian “land rich” companies

or unit trusts, this rule broadly requires the foreign resident to:

• own at least 10% of the interest in the company or trust at the time of selling the interest (or at any time in the prior two years); and
• at the time of sale, more than 50% of the assets of the company or trust (by market value) are attributable to land in Australia.

This means that interest owned by foreign residents in private companies and unit trusts can potentially be caught by these rules.

Moreover, the application of these rules can be very difficult, particularly as a foreign resident can be caught by them at certain times and not others.

It is also worth noting that if someone ceases to be an Australia resident and becomes a foreign resident for tax purposes, then they will generally be deemed to have sold such interests at that time and be liable for CGT on them. However, this is subject to the right to opt out of this deemed sale rule – but this “opt-out” has other important CGT consequences.

On the other hand, the rule that applies to make a deceased person liable for CGT in their final tax return for assets that are bequeathed to a foreign resident beneficiary does not apply to certain assets – and these assets are any of the above assets with a “fundamental” connection with Australia.

And this may be further complicated by the fact that, for example, at the time of making the will, the beneficiary may not have been a foreign resident.

The application of Australia’s CGT rules to foreign residents can be very complex – especially given the “variable” nature of some of the rules. Therefore, it is vital to speak to us if you have a “foreign residency” issue.

Since 1 July 2024, the age at which individuals can access their superannuation increased to age 60. So what does this mean for those planning on accessing their superannuation upon reaching this age?

What is preservation age?

Access to superannuation benefits is generally restricted to members who have reached “preservation age”, which is the minimum age at which you can access your superannuation benefits. Prior to 1 July 2024, a person’s preservation age could range from 55 to 60 as it depends on their date of birth. Preservation age has been slowly increasing over the years and has finally reached its legislated maximum age limit of age 60, as shown in the table below:

This means anyone born on or after 1 July 1964 will have a preservation age of 60.

It’s important to note that preservation age is not the same as your Age Pension age. To get the Age Pension, you must be age 67 or over, depending on when you were born (and other rules you need to meet). So even if you reach preservation age, it could be some time before you are 5eligible to receive the Age Pension from Services Australia (ie, Centrelink).

What does this change mean for me?

Once you have reached preservation age, you may receive your superannuation benefits as:

• A lump sum or as an income stream once you have retired (or a combination of both), or
• A transition to retirement income stream while you continue to work.

Furthermore, once you turn age 60 your superannuation benefits (ie, any lump sum withdrawals and/or pension payments) will generally be tax-free.

This change simplifies the tax rules as previously those between preservation age and age 60 were subject to tax on lump sum withdrawals and pension payments. Now, the tax treatment of superannuation benefits depends on whether you are above or below age 60 – there is no need to consider preservation age which is based on a person’s date of birth.

Need more information?

If you’re wondering what your superannuation withdrawal options are or how tax may apply to your superannuation benefits, transition to retirement or superannuation income streams, contact us today for a chat.

Whether you are a resident or non-resident of Australia for tax purposes has significant consequences for you.

Primarily, if you are a resident of Australia for tax purposes you will be liable for tax in Australia on income you derive from all sources – including of course from overseas (eg, an overseas bank account, rental property, an interest in a foreign business, etc).

On the other hand, if you are a non-resident of Australia for tax purposes, you will only be liable for tax on income that is sourced in Australia (including capital gains on certain property such as real estate in Australia).

And while there may be difficulty in determining the source of income in some cases, if you are a resident for tax purposes, the principle of liability for tax in Australia on income from all sources remains clear.

Resident of Australia for tax purposes

So, what does it mean to be a resident of Australia for tax purposes?

Well, broadly, it means you “reside” in Australia (as commonly understood), unless the Commissioner is satisfied that your permanent place of abode is outside Australia.

However, a recent decision of the Federal Court has shed some light on this matter – especially the oftenmisunderstood presumption that “connections with Australia” is all that counts.

“Connections with Australia”

The Federal Court case involved a mechanical engineer who was posted to Dubai for a period of six years, followed by a posting to Thailand, but who had continuous family ties to Australia (in that he financially supported his wife and daughters who were living in Perth).

Originally, the taxpayer was found to be a resident of Australia for tax purposes essentially because of his continuous ties to Australia and the fact that he did not establish personal ties overseas while he was living there (other than via his work commitments).

However, the Court found that “connections with Australia” was not the key test but rather the key matter was where one intended to treat as home for the time being, but not necessarily forever, ie, not necessarily “permanently”.

Likewise, it said that the matter of residency is worked out on income year by income year basis (ie, one particular year of income at a time) and it doesn’t mean a person has to have the intention of living in a particular location forever.

Among other things, the case may have implications for people who work overseas on a contract basis for periods of time, but still maintain family ties to Australia.

It may also mean that closer scrutiny will have to be paid to determine a person’s residency on a yearby-year basis and not just “locking” them into a residency or non-residency status from the beginning of any relevant change in their circumstances.

And of course, there is also the key issue of when in fact your residency status may change!

We are here to help

Suffice to say, if you find yourself in any such circumstances (eg, you undertake a foreign posting for a period or you decide to move overseas for some time but still maintain connections here), you will need to speak to us about your residency status – and the tax implications thereof.

A common question that is often asked is whether amounts can be added to a superannuation pension account once it has commenced.

The short answer 

Unfortunately, the answer is no. Although your pension account can continue to increase due to investment earnings, such as interest and dividends, any further capital cannot be added to the current pension account. As such, once a pension (usually an “account-based pension”) has commenced, you cannot add any more contributions or money to that same pension account. 

To recap, an account-based pension is a regular income stream bought with money from your superannuation when you retire. It is the most common type of superannuation pension as they offer regular, flexible and tax-effective income from your superannuation benefits. 

The benefit of commencing an account-based pension is that investment earnings are tax free and once you turn 60, your pension payments will also be tax free. However the main trade-off for these tax concessions is that you have to withdraw a fixed amount of your pension balance each year based on your age. 

The alternative solution 

If you want to make additional contributions or consolidate an existing superannuation benefit with an account-based pension that you have already commenced, you will need to close your existing pension account and commence a new pension account. 

Once you stop your pension, you can then add to it by making further contributions or combine it with any other existing superannuation benefits you may have in accumulation (ie, non-pension) phase. Once all amounts have been consolidated, you can then commence a new, larger account-based pension. 

Alternatively, you can start another pension account with any new contributions that may come from your existing savings or from your existing account-based pension income that you haven’t spent. Taking this approach will ensure that no changes occur to your existing pension account. 

Be aware of the transfer balance cap 

As the name suggests, the transfer balance cap (TBC) limits the total amount of superannuation that can be transferred into a pension where there is no tax on investment earnings. The current TBC limit is $1.9 million as of 1 July 2024. 

However, if you started your pension before 1 July 2023, your personal TBC will be somewhere between $1.6 to 1.9 million, depending on your circumstances. So if you are thinking about transferring more money into a pension account, note that this amount will towards your personal TBC. 

It’s also worth noting that if you want to hold more than $1.9 million in your pension account, you will need to keep the remainder in accumulation phase. Penalties apply for exceeding your TBC and you will also be required to withdraw the excess amount from your pension account to bring it back within your TBC limit. 

Last word 

If you are considering adding more money to your pension account, or want to learn more about how to make the most of your pension account, let us know and we can help guide you in the right direction. 

Tax file numbers (TFNs) are so much an everyday element when dealing with tax and the ATO that many taxpayers won’t give it a second thought when tax return software responds with an “invalid” message when a TFN is entered. 

The common thought will be that it’s human error, so naturally one’s first reaction will be to check the numbers you entered, followed by carefully re-entering them. 

Most of the time the problem will be fixed and it’s business as usual, but here’s a passing thought — how does the tax return software know what is, and what is not, a valid TFN? Especially when you consider that its validity or otherwise is not dependant on matching those numbers with someone’s name and/or birthday and/or address and so on. These identifiers are used to cross-check a person’s identity of course, but the initial validity of a TFN is known via another factor — the “TFN algorithm”. 

This verification algorithm, also known as a check digit algorithm, is embedded in each unique TFN. As with a lot of these things, this is best explained using an example. However, you need to keep a number in mind, which in this case is the number 11. 

To make the algorithm work, a fixed weighting is applied to each number of the TFN. In order from the left, these weightings are 1, 4, 3, 7, 5, 8, 6, 9, 10.

Example: 123 456 782
See table below: as 253 is a multiple of 11, the TFN is valid. 

Probably the most overlooked reason for the housing affordability crisis in Australia at the moment is the capital gains tax (CGT) exemption for a person’s home itself. 

But not this alone. 

Rather, it is probably the exemption in conjunction with all the various concessions a person can use to access the exemption. 

And these concessions can be extraordinarily useful depending on a person’s particular circumstances. So, let’s run through a few of the main concessions: 

The concession for changing houses. This applies if you buy a new home before you sell the old one. It allows you to treat both homes as your CGT-exempt home for a period of up to six months while you sell the old home. But there are important conditions that must be met in order to use it.

The concession for moving into a house. This allows you to treat your new home as your main residence for the entire period you own it, even though you may not have moved into it straight away. However, it is subject to important limits and restrictions – and generally requires you to move in “as soon as it is practicable” to do so. 

The absence concession. This is an extraordinarily useful concession that allows you to treat your home as your “CGT exempt main residence” even though you may not be living in it for a lengthy period. In the case that you rent it in your absence this period lasts for six years, and if your home is not rented it lasts indefinitely. However, it is likewise subject to important conditions before you can use it – including that the residence must have been your home on a bona-fide basis. (And the ATO does track such matters!) 

The building or renovation concession. This allows you to treat vacant land as your CGT-exempt home for a period of up to four years where you build a new home on it and move in as soon as it is completed and live in it as your home for a period of at least three months. This concession can also be used where you leave your existing home to do major renovations – or even in a knock-down, re-build situation. 

Again, these and other concessions are extremely useful depending on your particular circumstances – and can actually be used to allow you to access a full (or at least partial) CGT main residence exemption in a way that was probably never originally envisaged.

And in the case of the absence concession, for example, it even allows you to negatively gear the property during the six-year period of absence that you rent it! 

On the other hand, there are also some CGT rules that can expose your home to a partial CGT exemption in a number of circumstances. 

For example, there is a rule that spouses (including de-facto spouses and same sex spouses) cannot each have a CGT exempt main residence on different residences for the same period that they are spouses. And this may apply in a variety of situations. However, it seems to be a rule that the ATO does not actively pursue – nevertheless it is there in the tax law. 

Another rule that may limit your ability to claim a CGT exemption on your home is where you may subdivide some of it off and sell it or transfer it to another party (eg, typically on the subdivision and sale of part of a large backyard). And this rule may be highly relevant in the current housing market – especially given more flexible council regulations. 

If you are considering buying or selling a home – or find yourself thinking that you may need to use any of these concessions – we can advise you on their applicability to your case and how you can use them most effectively. 

There can often be a fine line between whethera person is carrying on property development activities or is “merely realising an asset”. 

For example, it may not be clear whether the extent of a person’s development activity in respect of, say, subdividing his or her backyard and building one or more units of accommodation and selling them either amounts to property development or merely realizing an asset – and one that has been used mainly for domestic purposes. 

And a person may be considered to be carrying on property development activities if they are not in the business of property development and it is a one-off activity. 

Suffice to say, the tax consequences between property development and “merely realising an asset” are entirely different. 

In the case of carrying out property development activity, the gains are assessable as ordinary income (or as business income) – and, importantly, without the benefit of the capital gains tax (CGT) 50% discount which would otherwise reduce the assessable amount. 

However, relevant expenditure incurred is generally deductible as it is incurred, ie, in the income year that it is incurred. And this may be of great benefit to the developer. 

On the other hand, if a person is “merely realising an asset” then any gain is only accounted for under the concessionally taxed CGT regime (and with the benefit of the 50% CGT discount, if generally the land has been owned for more than 12 months). 

Furthermore, in this case, if the property in question was acquired before 20 September 1985 then there will be no consequences (either CGT or ordinary income). And there are still quite a few pre-CGT properties around that are ripe for realisation. 

So, how does the Tax Office tell the difference between the two when it is not abundantly clear from the nature of the activity itself? 

Well, several factors are particularly important (among the many that can be taken into account). 

These include the intention with which the person originally acquired the land. To develop it and on-sell it for a profit? Or merely for some other non-profit purpose? For example, to live in it as their home (although this distinction is getting harder to tell in the current property market!). 

Another key factor is the extent to which the person gets involved in the activity. As a broad principle, where a person is less involved in the activity and merely acts passively it is generally considered to be “merely realising an asset”. But this is not a hard and fast rule. 

There are also important GST consequences depending on the nature of the activity and the property involved. 

Finally, it should be stressed that just because the nature of the activity is a one-off transaction it does not mean that the person is immune from being taxed on the profits as ordinary or business  income. 

If you are contemplating carrying out any such activity, come and have a chat to us first so we can help you do things with the best possible tax outcomes.

If you’re a high income earner, you may soon be asked to pay an extra 15% tax on the amount of concessional contributions that exceed the $250,000 threshold.

What is Division 293 tax?

Division 293 tax is an additional 15% tax that is payable when your income and concessional contributions exceed $250,000 in 2023/24. To recap, concessional contributions are before tax contributions and are generally taxed at 15% within your fund. This is the most common type of contribution individuals receive as it includes superannuation guarantee payments your employer makes into your fund on your behalf.

Other types of concessional contributions include salary sacrifice contributions and tax-deductible personal contributions.

It’s worth noting that the extra 15% Division 293 tax is payable in addition to the standard 15% tax that is paid on concessional contributions.

How does Division 293 tax work?

You will be liable for Division 293 tax on either your concessional contributions, or the amount of income that is over the $250,000 threshold – whichever amount is lower. 

Income for the purposes of Division 293 includes taxable income from a range of sources, such as:

• Employment and business income
• Reportable fringe benefits
• Investment income
• Net financial investment losses, such as negative gearing losses where deductions attributable to an investment property exceed rental income
  Income you may receive due to a one-off event, such as making a capital gain, receiving a work bonus, or a redundancy or termination payment.

Purpose of Division 293 tax

The purpose of this extra tax is to reduce the tax benefits that high income earners receive from the superannuation system and to level the tax playing field for average income earners.  

Even though high income earners may pay tax on their concessional contributions at 30%, this is still less than the top marginal tax rate of 47% (including Medicare levy) that generally applies to high income earners who are liable for Division 293 tax. As such, making and receiving concessional contributions are still tax effective.

Liability to pay Division 293 tax

The ATO will determine if you need to pay Division 293 tax based on information in your tax return and data they receive from your superannuation fund(s). As a result, there is usually a delay between when the contribution is made and when Division 293 tax is Payable.

The ATO will issue you with a notice of assessment stating the amount of tax payable and provide an authority to enable your superannuation fund to release the money. You also have the choice to pay the tax personally. Note that the tax is due within 21 days of the assessment being issued to you, and certain timeframes also apply if you elect to pay the amount from your superannuation fund.

Need more information?

Contact us today if you think you might be liable to pay Division 293 tax and want more information about your options.

When hiring new staff, there are certain steps you should follow to cover off on your tax, workplace, and superannuation obligations.

CONFIRM THEY ARE LEGALLY PERMITTED TO WORK IN AUSTRALIA 

Australian citizens, permanent residents and New Zealand citizens are legally permitted to work in Australia. If the worker does not fall into these categories you must, before employing them, confirm they have a visa granting them permission to work here. For more information, visit the Department of Home Affairs website https://immi.homeaffairs.gov.au/visas 

EMPLOYEE OR CONTRACTOR? 

Establish the nature of the engagement – is the worker an employee or contractor? This matters from a tax perspective because employers will have PAYG withholding obligations to employees. By contrast, no PAYG withholding obligations are owed to contractors unless there is a PAYG voluntary withholding agreement in place. You and a contract worker (payee) can enter into a voluntary agreement to withhold an amount of tax from each payment you make to them. This is a good way to help independent contractors meet their tax obligations. 

A voluntary agreement can cover a specific task or apply to successive arrangements between you and the worker. Either you or the contractor can end a voluntary agreement at any time by notifying the other in writing. 

The employee/contractor distinction also matters for superannuation purposes. Employees are generally entitled to superannuation. From 1 July 2022, this also includes employees who earn less than $450 per month. On the other hand, contractors are not entitled to superannuation unless they work under a contract that is wholly or principally for their labour. 

While in many cases, the status of a worker may be clear cut, if as an employer you are in any doubt about the character of the relationship, then you are encouraged by the ATO to use their Employee Contractor Decision Tool. The tool asks the user a series of questions, and then reaches a result depending on the answers provided. Print out the result and keep it on file. If you need further guidance or disagree with the result, speak to us.

PAPERWORK 

Before commencing employment, employees should complete the following forms: 

• TFN declaration – this is so employers can work out how much tax to withhold from employees. 
• Standard super choice form – to offer eligible employees their choice of superannuation fund. 

Employers must fill in the details of their nominated super fund, also known as a default fund, before providing the form to an employee. Employees can access and complete pre-filled commencement forms through ATO online services via myGov. 

REQUEST STAPLED SUPER FUND 

If you take on a new employee and they don’t choose a super fund, employers will have an extra step to take to comply with the choice of fund rules. Employers may need to request an employee’s “stapled super fund” details from the ATO. A stapled super fund is an existing super account linked, or “stapled”, to an individual employee so it follows them as they change jobs. This aims to reduce account fees. Employers can request stapled super fund details from the ATO using ATO online services. 

CONFIRM PAY RATES 

An employee’s minimum wages, including penalty rates, overtime rates, and allowances will in most cases be set out in the relevant workplace Award. Additionally, some employees have special minimum wages rates in their Award, for instance juniors, apprentices, and trainees. On the Fair Work front, employers are also generally required to provide new employees with a Fair Work Information Statement. Contact Fair Work Australia on 13 13 94 for information about applicable rates. 

STATE AND TERRITORY OBLIGATIONS 

Other issues may be in play when you take on a new employee, such a workers’ compensation coverage.