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Did you know you can reduce your income tax by making a large personal tax-deductible contribution from your take-home pay to your super? This strategy may be particularly useful if you will be earning more income this financial year or if you have sold an asset this year and made a large capital gain.

What is a personal deductible contribution?

A personal deductible contribution is a type of concessional contribution that you make with your own money and claim as a personal tax deduction in your tax return, subject to meeting certain eligibility criteria (see Are you eligible to make a personal deductible contribution? on page 7).

Other types of concessional contributions include superannuation guarantee (SG) contributions from your employer and amounts you salary sacrifice to superannuation.

The cap on concessional contributions is currently $27,500 per year in 2023/24. However certain individuals may be eligible to use the “catch-up” concessional contribution rules to make a larger contribution.

What are catch-up concessional contributions?

You can carry forward any unused concessional contribution cap amounts that have accrued since 2018/19 for up to five financial years and use them to make concessional contributions in excess of the annual concessional contribution cap.

You can make a concessional contribution using the unused carry forward amounts provided your total superannuation balance at the end of the previous financial year (ie, 30 June 2023) is below $500,000.

Once you start to use some of your unused cap amounts, the rules operate on a first-in first-out basis. That is, any unused cap amounts are applied to increase your concessional contribution cap in order from the earliest year to the most recent year. So, when you use some of your unused cap from prior years (by making additional superannuation contributions), the unused cap from the earliest of the five-year period is used first.

And remember, if you don’t use your accrued carry forward amounts after five years, your unused cap amounts will expire. So it’s best to use it before you lose it!

Carry forward contributions may provide strategic opportunities to make larger personal deductible contributions in financial years where you may have a higher level of taxable income, for example, due to assessable capital gains. See the example below.

Seek advice

It’s important to seek advice before you make any superannuation contribution. Getting it wrong could mean a loss of all or part of your deduction and may also cause you to exceed the contribution caps which can lead to paying excess contributions tax.

SCENARIO

I run a small business that requires me to travel quite a lot, particularly to country areas where I will often stay overnight. To save on accommodation costs, I have purchased a caravan. I have a business logo on the side of the caravan that is on display when I attend town shows and events. Will the costs of purchasing and maintaining my caravan be deductible in my individual income tax return?

GUIDANCE

In these challenging and changing times, many have jumped on the modern version of the proverbial band wagon and purchased a caravan or motor home to use for work or business-related travel.

It is a common misconception that specific rules govern whether you can claim a tax deduction for the costs of purchasing and maintaining a caravan or motor home. A caravan or motor home is no different to any other work or business asset you own, and the extent the expenses are deductible will depend upon the extent you use the caravan or motor home for income-producing purposes. The complexity does not arise because the expenses relate to a caravan or motor home, but that the expenses (in our scenario above) are essentially travel and accommodation expenses, and this is an area of tax law that can be difficult to apply in practice.

Travel and accommodation expenses are deductible under the tax legislation where you incur these expenses gaining or producing assessable income, or they are necessarily incurred in carrying on your business.

Travel between two unrelated work locations is also deductible where neither of the two work locations is your home (although in this case, the costs may still be deductible under the general deduction provision).

Travel costs will not be deductible if they are a prerequisite to earning income, if you are living away home (rather than travelling on work) nor if they are as a result of your own personal choice or circumstances, eg, the costs are not deductible just because you decide it is more convenient to stay overnight. It would seem that if it is reasonable that you would stay overnight rather than travelling to and from a location within a day, and the reason cannot be attributed to a personal choice, then it is more likely the travel would be viewed as work-related.

Keeping a diary would help support your deduction (and is necessary as a sole trader travelling for six or more consecutive nights).

Generally, the depreciation and GST claim on a caravan or motorhome is not limited by the car limit (currently $68,108) because a caravan or motorhome (designed to carry a load of more than one tonne) is not a ‘car’ as defined in the tax legislation.

What if my business logo is on my caravan?

The good news is while the cost of the business logo will ordinarily be tax deductible as advertising, the bad news is the ATO is firmly of the view that placing a business logo on the side of a caravan (or any type of motor vehicle) will not turn private travel into business travel, even if the signage is affixed permanently. This means if the travel expenses are not tax deductible without a logo, the travel expenses will not be deductible with a logo. n

Early last month, the ATO issued a reminder around auditors. If you have an SMSF, you need to appoint an approved SMSF auditor for each income year, no later than 45 days before you need to lodge your SMSF annual return (SAR).

Your SMSF’s audit must be finalised before you lodge, as you’ll need some information from the audit report to complete the SAR. You must ensure the correct auditor details are provided in the SAR, otherwise you may be penalised.

Your auditor will perform a financial and compliance audit of your SMSF’s operations before lodging. Remember, an audit is required even if no contributions or payments are made in the financial year.

Your approved SMSF auditor must be:

• registered with the Australian Securities and Investment Commissioner – and you’ll need to provide their SMSF auditor number on your SAR
• independent – auditors shouldn’t audit a fund where they:
  • hold any financial interest in the fund, or where they have a close personal or business relationship with members or trustees
  • work for a firm which provides your fund with other services such as certain accounting services, tax, super or financial planning advice.

If a fund doesn’t meet the rules for operating an SMSF, the auditor may be required to report any contraventions to the ATO.

Approved SMSF auditors can be busy so it’s a good idea to start this process early when the time comes around. n

You can find a list of approved SMSF auditors on the ASIC website.

The capital gains tax (CGT) discount can reduce by 50% a capital gain that you make when you dispose of (sell) a CGT asset that you have owned for 12 months or more. However, the discount is only available to:

• individuals (but not foreign or temporary residents)
• complying superannuation funds (33% discount applies, not 50%)
• trusts, and
• life insurance companies in respect of a discount capital gain from a CGT event in respect of a CGT asset that is a complying superannuation asset.

The most notable omission from this list is companies. They are not eligible for the general discount. This should be factored in when assessing which entity is chosen to acquire a CGT asset.

12-month requirement

The tax legislation requires that to qualify for the general discount, the asset must have been acquired at least 12-months before the time of the CGT event (sale).

The 12-month period requires that 365 days (or 366 in a leap year) must pass between the day the CGT asset was acquired and the day on which the CGT event happens…effectively 12-months and two days! If a taxpayer is nearing the 12-month mark, they should consider delaying the sale where possible until this timeframe is satisfied and therefore becomes eligible for the discount.

For the purposes of satisfying the 12-month holding period, beneficiaries can treat an inherited asset as though they have owned it since:

• the deceased acquired the asset, if they acquired it on or after 20 September 1985
• the deceased died, if they acquired the asset before 20 September 1985.

Note more generally that for CGT assets acquired before 20 September 1985, no CGT is payable anyway.

Foreign residents

The CGT discount no longer applies to discount capital gains of foreign or temporary residents or Australian residents who have a period of foreign residency after the below date. However, the CGT discount will still apply to the portion of the discount capital gain of a foreign resident individual that accrued up until 8 May 2012 (the date of announcement).

This measure applies where:

• an individual has a discount capital gain, including a discount capital gain as a result of being a beneficiary of a trust, from a CGT event that occurred after 8 May 2012, and
• the individual was a foreign resident or a temporary resident at any time on or after 8 May 2012.

The effect of the measure is to:

• retain the full CGT discount for discount capital gains of foreign resident individuals to the extent the increase in value of the CGT asset occurred prior to 9 May 2012
• remove the CGT discount for discount capital gains of foreign and temporary resident individuals accrued after 8 May 2012, and
• apportion the CGT discount for discount capital gains where an individual has been an Australian resident, and a foreign or temporary resident, during the period after 8 May 2012. The discount percentage is apportioned to ensure the full 50% discount percentage is applied to periods where the individual was an Australian resident.

If you have any questions about the 50% discount, please contact us.

Sometimes promoters of schemes target self-managed super funds (SMSFs). Schemes can include tax avoidance arrangements that inappropriately channel money or assets into your SMSF so you pay less tax. They may also include arrangements promoting the illegal early release of benefits from your fund for personal use.

To assist you with identifying schemes that may jeopardise your SMSF’s compliance, the ATO recently updated its web content to provide more information:

• Schemes targeting SMSFs
• Residential property purchased through illegal schemes.

Remember, if:

• You’ve been approached by a someone who recommends you set up an SMSF or use your existing SMSF to participate in one of these schemes or a similar arrangement, you should check the ASIC Financial Register to make sure they have a financial licence. If you’re in doubt, you should seek a second opinion from a licenced adviser who is independent from the scheme.
• You’re already dealing with a suspected promoter of an SMSF scheme, then you should contact the ATO immediately so they can help.

CAUTION!

Don’t be tempted by ‘too good to be true’ schemes. You may risk losing some or all of your retirement savings and receive significant penalties if you enter into one of these schemes. You could also be disqualified as a trustee of your SMSF and may be required to wind up your fund. 

If the subject of self-education leads to, or is likely to lead to, an increase in the taxpayer’s income from current (but not new) income-earning activities, a deduction for self-education expenses incurred will be allowable.

There is no specific provision in the income tax legislation that allows a deduction for selfeducation expenses. Rather the expenditure falls for consideration under the general deductibility provision of the Tax Act. In broad terms this allows for, but also limits, deductible expenses to those incurred in the course of earning assessable income. This requires a close nexus between the outgoing and assessable income: the outgoing must be incidental and relevant to the gaining of the assessable income.

Principle 1 – the self-education maintains or improves current skills or knowledge

Where a taxpayer’s income-earning activities are based on the exercise of a skill or some specific knowledge, a deduction for self-education expenses incurred will be allowable where the subject of self-education enables the taxpayer to maintain or improve that skill or knowledge. The High Court decision of FC of T v Finn [1961] HCA 61; 106 CLR 60 is a leading authority for this principle. In this case, Finn, a senior government architect, was allowed deductions for expenses incurred on an overseas tour focused on the study of architecture.

This principle requires an assessment of a taxpayer’s current skills and knowledge compared against the subject of self-education, and a consideration of how close the subject is to those current (not future) income-earning activities. (The ATO advises the relevant employment activities are the duties and tasks expected of an employee to perform their job and are usually set out in an employee’s duty statement / contract of employment.)

Principle 2 – the self-education leads to, or is likely to lead to, an increase in income from current income-earning activities

If the subject of self-education leads to, or is likely to lead to, an increase in the taxpayer’s income from current (but not new) income-earning activities, a deduction for self-education expenses incurred will be allowable.

It is not necessary for the expected increase in income or promotion to be realised for self-education expenses to be deductible, for example, if the taxpayer’s employment was terminated before gaining the promotion or increase. However, the expenses should be incurred whilst the taxpayer was employed (even if on leave without pay), and generally with a real prospect or likelihood of leading to such an increase or promotion.

The important thing for taxpayers is to retain their receipts in relation to their self-education. If you have any questions around what expenses are claimable, contact us.

The ATO has issued a reminder around trademarks!

For background, a trademark legally protects your brand and helps customers distinguish your products or services in the market from others. Trademarks can be used to protect a logo, phrase, word, letter, colour, sound, smell, picture, movement, aspect of packaging or any combination of these. In short, they protect your brand, products and services.

Trademarks are different from a business name which is the name you trade under. For exclusive rights to your business name, you’ll need to protect it with a trademark. This will help you:

• ■ protect your name and stop others from trading with it
• ■ get exclusive use of that trademark throughout Australia
• ■ have protection in all Australian states and territories for an initial period of ten years.

Trademarks are intellectual property.

Other types of intellectual property include:

• ■ patents
• ■ design rights
• ■ plant breeder’s rights
• ■ copyright
• ■ trade secrets.

While you don’t need a registered trademark to apply for an ABN, registering a trademark for your business name, logo, or other sign means you have exclusive rights to use your trademark in Australia.

• ■ A registered trademark is a licensable and saleable asset. It also provides a legal avenue to stop others from using it on similar goods and services. A 5-minute check can help save you a lot of disappointment and work.
• ■ Check out IP Australia for more information and get your trademark sorted today.
• ■ The same ATO release, reminds taxpayers of the business registrations and insurances that may be required for your new business.

As a new business, you may also need to:

• ■ register for goods and services tax (GST)
• ■ register for pay as you go (PAYG) withholding and meet your super obligations for any employees you hire
• ■ register for fringe benefits tax (FBT) when you are providing fringe benefits to your employees.

You can apply for an ABN and other key business registrations through the Business Registration Service. You may also need business insurance and licences to protect your business. It’s important to understand the licences and permits you need to do certain activities and help protect your business and employees.

For individuals who have retired and met a condition of release, or who have turned 65 and are still working, you can receive your superannuation as a super income stream, as a lump sum, or a combination of both. This third option is quite popular for those who have yet to pay out their house, for example – a lump sum is withdrawn to pay off the remainder of the mortgage, and the balance used to commence a super income stream.

1. Lump sum

If your super fund allows it, you may be able to withdraw some or all of your super in a single payment. This payment is called a lump sum.

You may be able to withdraw your super in several lump sums. However, if you ask your provider to make regular payments from your super it may be classed as an income stream.

The downside to lump sums from a tax perspective is that once you take a lump sum out of your super, it is no longer considered to be super, and thus no longer enjoys the superannuation tax concessions (15% on earnings and capital gains, and tax-free if you convert your super into an income stream). That is, if you invest the lump sum outside of super, earnings on those investments are not taxed as super and may need to be declared in your tax return.

Further, if you’re over age 60, super money you access from super will generally be tax free, but if you’re under 60, you might have to pay tax on your lump sum.

2. Super income stream

A super income stream is a series of regular payments from your super provider (paid at least annually). The payments must be made over an identifiable period of time and meet the minimum annual payments for super income streams. To find out what will happen if the income stream doesn’t meet the minimum annual payment, see Minimum annual payment not made.

The payments don’t need to be at the same interval, and the amount paid may also vary.

Super income streams are a popular investment choice for retirees because they help you manage your income and spending. Super income streams are sometimes called pensions or annuities.

One of the most common income streams is an account-based income stream. This is an account made up of money you’ve accumulated in super, which allows you to draw a regular income once you retire. An account-based income stream includes market-linked pensions that started on or after 1 July 2017.

Your provider or SMSF normally continues to invest the money in your super account and adds returns from investments to your account. Your account balance fluctuates with market performance.

Each year you can withdraw as much as you like through your account-based super income stream (unless you’re receiving a transition to retirement income stream).

You must withdraw a minimum amount each year – based on your age and account balance. There may be income tax implications if your provider does not pay you the minimum amount each year.

You can continue to receive your super income stream until there is no money in your account.

How long your super income stream lasts depends on how much you take out each year and what investment returns you receive. There is a limit on the amount you can transfer into retirement phase; this is known as the transfer balance cap.

The chief advantage of this type of withdrawal is that earnings on the remainder of your account inside of superannuation are taxed concessionally.

Take-home message

Check with your super provider and adviser to find out what options are available to you, and which are best for your circumstances. n

The ATO has issued a reminder for companies wishing to claim a tax offset for their R&D (research and development) activities. The reminder was issued in the context of the ATO’s success in the Federal Court decision T.D.S. Biz Pty Ltd v FCT. 1

By way of background, the research and development tax incentive (R&DTI) helps companies innovate and grow by offsetting some of the costs of eligible R&D.

The incentive aims to boost competitiveness and improve productivity across the Australian economy by:

• encouraging industry to conduct R&D that they may not otherwise have conducted
• improving the incentive for smaller firms to undertake R&D
• providing business with more predictable, less complex support.

Broadly speaking, your eligibility to claim the tax offsets will depend on whether you:

• are an R&D entity
• incurred notional deductions of at least $20,000 on eligible R&D activities.

You are not eligible for an R&D tax offset if you are either:

• an individual
• a corporate limited partnership
• an exempt entity (where your entire income is exempt from income tax)
• a trust (with the exception of a public trading trust with a corporate trustee).

For income years commencing on or after 1 July 2021, entities engaged in R&D may be entitled to:

• A refundable offset of 18.5% above the company’s tax rate.
• A flat non-refundable offset based on a progressive marginal tiered R&D intensity threshold. Increasing rates of benefit apply for incremental research and development expenditure by intensity:
  • 0 to 2% intensity: an 8.5% premium to the company’s tax rate
  • greater than 2% intensity: a 16.5% premium to the company’s tax rate.

Turning back to the aforementioned case, the ATO successfully contended that the taxpayer conducted significant R&D activities outside Australia by purchasing components designed, developed and fabricated overseas without an Advance Overseas Finding from the Department of Industry, Science and Resources.

The ATO states that, while companies can claim an offset for R&D expenditure incurred by them on R&D activities conducted overseas, there is a requirement to hold an Advance Overseas Finding for those activities.

If your company is conducting R&D, contact us to determine if you are eligible for the offset.

SMSF trustees with limited recourse borrowing arrangements (LRBAs) are now feeling the impact of ten interest rate rises since May 2022 in one hit, from July 2023.

SMSF trustees relying on the ATO’s safe harbour terms to ensure that an LRBA remains, at all times, at arm’s length will face an increase in monthly repayments of interest and principal from 1 July 2023.

The arm’s length annual interest rate for 2023/24, as determined under the ATO’s safe harbour terms is based on the published rate for the month of May 2023 of the Reserve Bank of Australia’s Indicator Lending Rate for banks providing standard variable housing loans for investors.

In accordance with the ATO’s safe harbour interest rate for SMSFs with a related-party LRBA that is funding the purchase of real property, the relevant interest rate for 2023/24 will increase to 8.85%. This is an increase of 3.5% from the former rate of 5.35%.

Where the LRBA is funding the purchase of listed shares or listed units in a unit trust, the safe harbour rules require an additional margin of 2%, meaning the relevant interest rate for 2023/24 has increased to 10.85%. This will make SMSF cashflow more important than ever. Speak to your SMSF advisor around how to maximise cashflow, including making additional contributions to your fund where you have the capacity to do so.

On the flip-side, higher interest rates are resulting in super funds pilling more money into cash and bonds as they look for low risk investments. Funds have been increasing their exposure to cash and cash products from 18% of their savings pools last year to 22% so far this year, a new report shows.1

Their exposure to the share market through direct investment dropped by 5% at the same time, as they funnelled their money into less volatile assets such as term deposits.

A reminder though that such a change in strategy must be consistent with your overall SMSF investment strategy, and may or may not be in the best interests of younger members whose circumstances may call for a higher risk, bolder investment strategy.