eurovision 2012

Finally – it’s here – I have been waiting for this weekend for the last 12 months. Forget about the AFL grand final, forget about FA cup – what I am talking about is much better and exciting than that. Yes – I am talking about EUROVISION SONG CONTEST – 3 glorious nights of pure entertainment like we have never seen before. So jump on my band wagon and improve your life by experiencing this extravaganza…….

Now back to more boring taxation:

As we are heading towards the end of the financial year, for the next few weeks I will concentrate on articles to do with tax. Tax time is good for us accountants but not so good with tarpapers because as a rule we all hate tax - right?

The tax office regularly is in contact with us tax agents with emails and here is the latest one:

“In the lead up to tax time, your clients may ask you about minimizing tax through tax-effective schemes. You can help your clients avoid penalties or tax debts by explaining the difference between legitimate tax minimisation and abusive tax avoidance schemes.
Your clients may ask you about minimising tax throughtax-effective schemes. They may ask you to complete a tax return based on advice they obtained from another scheme promoter. You can help your clients avoid penalties or tax debts by explaining the difference between legitimate tax minimisation and abusive tax avoidance schemes. Taxpayers are entitled to minimise their taxation liabilities and receive benefits provided under the law through investment activities. However, investment schemes and legal structures that do not comply with the law are considered to be aggressive tax planning arrangements – commonly referred to as tax schemes.”

To date I don’t think there is a tax avoidance scheme that I have not come across or heard of in the past but they keep coming around every year. Personally, I will never get involved in anything that I know is a sham and clients asking me to get involved with them are quickly shown the door. And yet for some reason there is still that feeling amongst some people that there is that “secret” on how not to pay tax.

There are genuine legal items that may reduce the tax you pay but they are all part of the legitimate tax rules.

So, before you consider any fancy tax schemes – think about it, research it and if still not sure speak to a professional. The Tax Office comes down very hard on tax cheats.

Remember! It is your responsibility to comply with the tax laws. If you are involved in a tax avoidance scheme you will be liable for firstly for the tax that you avoided in the first place, plus penalties plus interest. You have been WARNED……….

news reports

Yesterday morning I got into the car to come to work and as usual I put on the news to catch up with the overnight news and I wish I hadn’t - the leading news item was that the sharemarket overnight lost “billions of dollars!!!!” due to some problems with Greece.

And to make things worse the announcer went on to say that superannuation funds have also lost over $70 billion or as he put it “wiped off”. I thought “oh no, this is not going to be a good day for me” because I know that these sorts of news do create panic and worry in people’s minds.

By now you should know sharemarkets going down is not something to ignore but at the same time it should not cause you concern because the reality is that the sharemarket does not lose money for anyone – what it does is it reduces the “paper value” of any shares at a given point of time

e.g. let’s say you have 1,000 shares in Company X which is valued at say $2.50 each giving a total value of $25,000. If the market goes down to say $2.28 per share - you have not lost any shares, you will still have the same 1,000 shares it is just the total value of those shares as of that moment will be $22,800. Technically, this is a loss of $2,200 but it is only “paper loss”. In other words, you will only lose that money if you choose to sell them then. But if you don’t sell and keep the 1,000 shares and wait for the shares to go up then you would recover that loss.

This is why it is important for people that dabble in the sharemarket to do so for the longer period of time – not for the short term.

And the same applies to property. Recent articles in the papers reported that property values are down by 10% from the same time last year. So if you bought a property last year for let’s say $500,000 then the value of that property now is $450,000. Now if someone told you that your house is worth 10% less than say 12 months, would you feel that you have lost money? Of course not. You would definitely like to know that the value has gone up but if the market says that it is down then you just accept it and get on with life. Would you panic and sell your house for 10% less? Of course not.

I hope my explanation will help you understand what the news reports mean when they scream “Property values are down!! Or billions have been wiped off sharemarkets”.

Just ignore it but if “the worry persists” see your financial adviser.

tax schemes warning

Couple of days ago the Tax Commissioner Michael D’Ascenzo issued a press release warning taxpayers to steer clear of tax avoidance - 

“It is at this time of year we see an increase in the number of tax avoidance schemes being promoted. As appealing as an investment opportunity may sound, sometimes the promised tax benefits might not be available under the law," Mr D'Ascenzo explained.

Modern tax schemes can be very sophisticated and may masquerade as complex investments or other arrangements that can appeal even to experienced investors. Just like genuine investments, these schemes might promise you 'wealth creation' or financial security. Others can exploit your social or environmental conscience by promising you large up-front tax deductions for donations to charity or 'green initiatives'. Many are marketed via social media or glossy promotional brochures, with offers of exclusivity and the stamp of approval from so-called 'experts'.

My advice – DON’T FALL FOR THESE SCHEMES without first doing your research and seeking independent advice. If you're considering entering into an arrangement that will affect your tax liabilities, it's important to carefully investigate and understand the tax consequences before making your investment decision.

You know the old saying: if it seems too good to be true, it probably is.

If not sure, feel free to ask me – my business is to keep your financial affairs in proper order.

super beneficiaries

Superannuation and wills

For most people superannuation will be their second biggest asset after their home and it is important to know how it works with regards to will.

The technical set up of a superannuation fund is this: superannuation benefits are not owned directly by fund members, but are held in trust and only the trustee of the superannuation fund is permitted to pay them. And because superannuation money is put aside for retirement, it is treated differently to other estate assets on the death of a superannuation fund member.

Nominating a beneficiary

A member can not make instructions in their will on how the superannuation funds are to be distributed. What the member can do is to nominate a beneficiary to receive their superannuation benefits in the event of their death. And in order for the trustee of the superannuation fund to accept that member’s nomination of beneficiary, the beneficiary must meets the definition of dependant in the SIS Act, or their legal personal representative (LRP), who may then distribute the proceeds in accordance with the will.

Definition of dependant

The superannuation definition of a dependant, because only superannuation dependants can receive a death benefit (except where there is no dependant), but only tax dependants receive concessional tax treatment on superannuation death benefits received.

Dependants under superannuation legislation

Superannuation death benefits can be paid to ‘dependants’ as defined in sub-section 10(1) of the SIS Act. This includes:

-          spouse (including de facto and same sex partners)

-          children (of any age)

-          financial dependants

-          people in an interdependency relationship with the deceased, or

-          the deceased’s LPR on behalf of the estate.

Dependants under taxation legislation

While the SIS Act governs who can receive superannuation death benefits, it is the Income Tax Assessment Act that governs the tax consequences of the payment of superannuation death benefits. For tax purposes, a death benefits dependant is defined to include:

-          a spouse or former spouse (including de facto and same sex partners)

-          a child, aged less than 18

-          any person who had an interdependency relationship with the member just prior to death

-           any person who was a dependant of the member just prior to death, or

-           any person who receives a superannuation lump sum because of the death of another

Taxation of superannuation death benefits

What all this means is that the dependants you nominate are likely to pay tax unless they fall within the definitions of the tax legislation. For example, all proceed (regardless of the amount) paid to a dependant for tax purposes, will be tax free. The same applies where a lump-sum superannuation death benefit is paid to an estate and the estate pays the proceeds to a dependant for tax purposes.

If the proceeds of a lump-sum superannuation death benefit are to be paid to a non-dependant, the tax-free component of the payment will be tax free. However, the taxable component will be subject to tax at up to either 16.5 per cent or 31.5 per cent (including the Medicare levy but excluding flood levy) depending on whether the taxable component is a taxed element or an untaxed element.

So what should you do?

As soon as you read this blog – take the time to find out from your superannuation fund who your beneficiaries are. Most clients do have their spouses and children, which in most case is OK – but over the years as marriages break-up and the children grow up and stop being financially dependant then it is time to change the nominations. As a rule, if your children are grown up, married and have their own separate lives they should not be nominated as beneficiaries in your superannuation fund.

If not sure, feel free to ask me – my business is to keep your financial affairs in proper order.

debt - burden or benefit

There aren’t too many people today without some debt. The thing about a debt is that it can be a benefit or a burden. What is it for you?

From my experience most people don’t understand how to manage debts so for them it becomes a “burden”.

When is a debt a burden?

When it is used for purchases that don’t generate income or it does not suit your personal circumstances such as expensive cars, trips overseas or shopping sprees. These expenses do bring much joy in the short term BUT in the long term, if you don’t pay it off fairly quickly, this debt can become a burden. A debt that becomes a burden can have disastrous effect on relationships, work and general everyday life.

I understand that events in life make it necessary for many to take on debts for education, medical treatment or on loss of employment and while some of this type of debt is a necessity, it’s important not to borrow too heavily.

Know what suits your needs, what you can afford to borrow and keep within a budget.

When is a debt a benefit?

When it is to purchase an investment property or shares. In this case you will benefit (hopefully) from any increase in the value of the investment, while potentially reducing the amount of any income tax to be paid along the way. You can also use the rental income or dividends to reduce the debt.

How do you make debt a benefit?

The first step is to prioritise your debts. Work out which is the most urgent debt that needs to be paid off, because not all debt is borrowed under the same conditions. Think about the fees, penalties, interest rate and the term of each debt.

Secondly, consolidate your debts. Simply put, combine your loans into one. It makes repayments more manageable and can reduce the amount of interest you have to pay. But you need to make sure that the interest on the new loan is less than that of the old loans and that you don’t use your credit card to take on additional debt.

If you have savings, it may help to pay off whatever debt you can. This may be practical if you’re paying more in loan interest than you’re earning through interest on your savings or share dividends.

And finally!

Dispose of all credit cards, except for one that has the lowest interest rate, because you may need a credit card in an emergency. And learn how to spend less – this always helps.

If you are in or may be falling into a serious debt situation, tackle the issue head on – ignoring debt won’t make it go away. Talk to me – I can help you get your finances

gifting of assets

I have noticed recently an increase in the number of financial planning clients who want to arrange their affairs so that they can eventually get their Age Pension. And some of these clients are those that have accumulated many assets, including numerous rental properties.

Of course there is a way of achieving this result but the process is not a quick, one-line answer – the whole process is a little more complicated and time consuming because in each case I will need to assess the implications of the Centrelink gifting rules, taxation and of course the State Revenue Office (SRO) if there is a transfer of properties as a gift. The gifting of rules are not that complicated.

What is a gift?

A gift is any money or property that is given away and for which a person does not receive adequate financial consideration. Gifting may also be referred to as disposal or deprivation. 

How much can a person give away?

Both a single person and a couple can give away $10,000 per financial year, up to a maximum of $30,000 over a rolling five-year period.

So what happens if a person gives away more than these levels?

This is the most important question to answer because unless it is done correctly it can cost the clients a lot more than the pension benefits that they may receive.

What are the implications of gifting properties?

1. Capital Gains Tax
2. Stamp Duties and
3. Centrelink “deeming rules”

So if you are getting close to retirement, you have accumulated some assets and your intentions are to live on the Age Pension – then you need to plan your affairs. am afraid it is not as simple as “let’s transfer the property and we will get a pension”.

Errol Flynn

Almost, on a daily basis, after I meet with clients I am reminded of an old article that I have kept about Errol Flynn, which referred to his wild lifestyle of women, drugs, alcohol and over spending (man, why cant I do that?)

One of his quotes caught my eye and for the first time I realized the secret to why most of us just don’t know how to handle money:

“The problem is I can not reconcile my gross lifestyle with my net income”.

How true is that? Are you in the same situation of not being able to reconcile your gross lifestyle with your net income? Here are some of my suggestions that may help you:

ACCEPT that you can not afford everything in life.

ACCEPT that you must give up some things in order to have others e.g. if you want to buy something then you may need to cancel dinner for that week so you can use the money for the purchase.

ACCEPT that you need to learn to be smarter with your finances:

- if you have a debt then you must work towards reducing it. Don’t worry about tax deductions, negative gearing etc. A debt is a debt – it is not a tax benefit.

- understand Cash Flow v Tax Benefits – you will be surprised how much better you will be.

- don’t wait until 2 days before the end of the financial year to ring your accountant and ask how you can reduce your tax - ring him in July so you will have 12 months to prepare for it.

- if you are in business and you have been thinking of buying assets for the business - think about it now – so many people have rushed in before the end of the year to buy cars thinking that they will “reap” the tax system. Not true – tax deductions will only work for genuine expenditure not for the forced expenditure.

- think about your investments - learn about the timing of markets and the great opportunities when the markets are down. 

- and finally, keep buying those Tatts tickets