Posted on March 22, 2019 by Francis Soale
Taxpayers with different forms of Investments must consider a range of tax laws dealing with the income, assets and deductions relating to these investments. It is not uncommon for these taxpayers to make mistakes when preparing their income tax returns, some examples of these are as follows:
Cash Management Trust Income – commonly declared in the income tax return as interest rather than a trust distribution. Cash management trusts distribute net income in the same manner as other trusts. A statement should be obtained at year end from the financial service provider indicating what the gross distribution and any management fees deducted were.
Listed investment trust dividends – often include a listed investment company capital gain. A deduction is available to investors that have access to the CGT discount rate. The deduction is equal to 50% of the capital gain for individuals and trusts but not available to companies, if the asset has been held for 12 months or more.
Trust distributions – will likely record the taxable distribution on annual tax statement showing the distribution less the 50% CGT discount. However, the statement may not accurately reflect an investing taxpayer’s investment structure and period of ownership. The investor should first check they have:
- held the asset for at least 12 months,
- are eligible to use the 50% CGT discount rate, and
- grossed up the capital gain in the tax return before the discount is applied.
Another important note for investors who receive franked distributions to note is the “holding period rule” when determining their entitlement to franking credits. The holding period rule requires the shares are continuously held “at risk” for at least 45 days (90 days for certain preference shares) to be eligible for the franking tax offset.
Additionally, the ‘small shareholder exemption’ rule will apply for individuals when determining eligibility to franking credits. Under the small shareholder exemption, the holding period rule is disregarded if the total franking credit entitlement is below $5,000.
Other issues for consideration
Foreign tax issues:
In some instances, investments by residents in one country made in another country may be taxed in both countries (subject to any “double tax agreement” between the relevant countries). To prevent double taxation, Australian taxpayers are entitled to claim a non-refundable foreign income tax offset for foreign tax paid on an amount included in their assessable income. The foreign tax offset is limited to the lower amount of the foreign income tax paid and the “foreign tax offset cap”. The cap is calculated by determining the Australian tax payable on the taxpayer’s foreign taxed income. As an alternative to calculating the cap, the taxpayer can choose to use a $1,000 minimum cap.
Goods and services tax:
Share traders are generally not required to register for GST. Although share traders are carrying on an enterprise because GST turnover is defined to exclude “input taxed” supplies (commonly share sales are input taxed supplies), the requirement to register for GST will only exist if taxable supplies from other sources exceed the $75,000. Where an enterprise is being carried on, an investor can register for GST voluntarily where the registration threshold is not met. However, there may be limits on the refund of input tax credits for financial supplies.
Current year income losses arising from the negative gearing of investment income can generally be offset against other current year income. If current year income is insufficient to fully use the investment losses, income losses may be carried forward to be offset against future income subject to certain loss rules (such as for a trust or company). Capital losses may only be offset against capital gains. If there is insufficient capital gain in a year to absorb a capital loss, the excess capital loss may also be carried forward and used in later years.
Non-residents are not required to provide a TFN to investment bodies as TFN withholding rules do not apply. However, they will need to advise the investment body that they are a non-resident.
Non-residents are subject to non-resident withholding tax on specified types of income. Withholding tax is payable on interest, unfranked dividends, royalties or fund payments to non-resident unitholders of managed funds. Generally, the payer is responsible for withholding, reporting and remitting the amounts to the ATO.
Tax file number withholding: Investment bodies such as banks are required to withhold tax from investment earnings where the taxpayer does not quote a TFN or ABN. TFN withholding tax is refundable on provision of a valid TFN or upon lodgement of the income tax return.
Records and substantiation of expenses:
Taxpayers are required to keep records for taxation purposes for five years. Typically, the records to be retained include receipts, accounts, property records and other documents that relate to assessable income (for example, PAYG payment summaries, interest, annual trust tax statements and dividend statements). Failure to keep adequate records may attract penalties from the ATO.
If you have any questions in relation to the taxation of your investments, please contact our office on (08) 9316 7000.
Posted on by Tom Francis
With an election looming GeersSullivan have been carefully monitoring the announced tax policies of both parties. This month we are focusing on the already announced policies of the Labor party and in April’s edition, following the release of the budget, we will highlight what the Liberal party are offering.
While both parties will announce a variety of tax policies and changes, we believe the following will have the biggest impact on our clients:
Reduced access to franking credit refunds
Franking credits represent tax paid by a company on its profits and are passed on to shareholders when dividends are declared. The logic is that the company has already paid a certain amount of tax and you as the final recipient should only have to pay the difference between that amount and what you would pay if you earned the same profit personally. Where your tax rate is lower than the company, you have been able to receive a cash refund for the difference since 1 July 2000.
Labor will remove the right to a refund for 1 July 2019, meaning franking credits can only reduce your total tax bill to zero and not be taken as a cash refund. For individuals whose main source of income is dividends this could be a big deal depending on their income level. However, where your income is from mixed sources and includes salary and wages the impact should be minimal.
Self-Managed Superannuation Funds are expected to be more heavily affected due to their low tax rate of between 0% and 15%, especially those with a high percentage of franked income (dividends, trust distributions with franking credits).
Some exemptions to the change were also announced, most importantly that pensioners earning franked income and SMSFs with at least one pensioner member will be exempt. A pensioner has been defined as a person in receipt of a government pension or allowance, most commonly the age pension or a disability pension.
Changes to tax on investments
Labor propose an end to negative gearing of investments (think rental properties, shares and similar assets) and also a reduction to the CGT discount. These are commonly reported in the media as changes to property taxes but will actually impact all investments.
In ending negative gearing Labor propose two specific changes:
- That losses incurred through investing, such as holding a portfolio of shares and other listed securities or operating a rental property, be quarantined and only available to offset other investment income or any capital gain eventually made on the sale of the assets
- That existing investments will be grandfathered and exempt from the change, as will investments in new residential housing stock (the construction of a rental property)
In reducing the CGT discount Labor will:
- Reduce the discount from 50% to 25% for assets that have been held for more than 12 months
- Grandfather the 50% discount for all assets purchased before the start date of the policy
- Make no changes to the superfund CGT discount which is currently 1/3rd
- Preserve the discount as is for small business assets
A start date for both policies is yet to be announced.
Minimum tax rate on discretionary trust distributions
Currently an adult beneficiary of a trust pays tax at their marginal rate on any distribution received. This created planning opportunities where profits could be distributed to the beneficiary with the lowest possible tax rate. Under Labor’s policy the minimum tax rate for trust distributions will be 30%. This policy will only apply to discretionary trusts (commonly family trusts) so therefore excludes unit trusts and public unit trusts (commonly managed investment products from BT, MLC and similar are public unit trusts).
A 30% tax rate is still substantially lower than the top marginal rate of 45% and therefore we expect trusts to remain popular for managing family wealth. Notably the high tax rates for income paid to minors will remain under the policy.
Faster depreciation for larger plant and equipment
Labor will introduce a 20% instant write off (known as the Australian Investment Guarantee) for plant and equipment purchased after 1 July 2021 and costing more than $20,000. Notably the policy will exclude passenger vehicles and expenditure on buildings and structure.
The 20% write off will be in addition to normal depreciation deductions.
Let’s assume Manufacturing Co purchases new machinery costing $5 million. Manufacturing Co will be able to immediately expense 20 per cent ($1 million) of its investment in the first year. The remaining 80 per cent ($4 million) is then depreciated over the effective life of the asset from the first year— which in this case is 10 per cent per year, or $400,000.
This means Manufacturing company A can write off a total of $1.4 million in the first year
No more borrowing in super funds
Labor have announced they will bring an end to limited recourse borrowing arrangements in super funds. These have been extremely popular as a way to invest in property through super. Labor’s policy appears to exclude existing arrangements so no changes will need to be made to existing investments.
Labor have released a raft of policies effecting individuals:
- The top marginal tax rate will increase from 45% to 47% for four years. We’re currently unsure if this would be achieved through a levy like the previous Temporary Budget Repair Levy or by increasing the actual tax rate
- Deductions for managing tax affairs will be limited to $3,000 per person. This change is only applicable to tax agent fees claimed in individual tax returns, not trust, company or partnership returns
- Tax cuts proposed in 2022 and 2024 will be abandoned, existing cuts beginning in 2019 financial year will be maintained
- The non-concessional super contributions cap will be reduced from $100,000 to $75,000. No start date has been advised
- Division 293 tax (additional tax on concessional super contributions) will now apply to those earning $200,000 or more rather than $250,000. Again, no start date has been announced
- Catch-up concessional contributions for those with low super balances ($500,000 or less) will be abandoned, as will deductible personal super contributions for salary and wage earners (Labor will re-introduce the 10% rule)
- Super guarantee will begin to increase again from 9.5% to 12%. Labor have added a caveat that this will apply ‘when prudent’ to do so
- The $450 per month minimum threshold for paying super will be abolished meaning super must be paid on the first dollar of salary and wages