Ian Wood

Varying your PAYG withholding

Ian Wood · July 18, 2012 ·

With the start of the the new financial year, comes a new tax year. This provides an opportunity to vary the amount of PAYG withholding, as well as varying the amount of Medicare levy which is deducted from payments by employers.

PAYG Withholding Variation

Where your expected tax liability for the full financial year is different from the amount of payments made to you, then you may vary the amount that is withheld from payments made from you.

You can request either an increase or a decrease in the amount that is withheld from payments made to you during the year. This might be the case where you expect a large refund due to having higher than normal tax deductible expenses, e.g. negatively geared rental property or share portfolio, motor vehicle expenses etc.

You can vary your PAYG withholding online here.

Medicare Levy Variation

A declaration can be completed to vary the amount of Medicare Levy withheld from payments for the following circumstances

you are in one of the Medicare Levy exemption categories;
the combined weekly income of your and your spouse is less than $740 (or greater if you have children or students to maintain);
you are a sole parent with weekly income of less than $808 (or greater if more than one child);
you have to pay the additional 1% Medicare Levy surcharge and want to increase the amount withheld to cover the surcharge;
you want to claim an exemption from HELP or Financial supplement repayments due to low family income.

The form can be found here.

To vary or not to vary: that is the question

The choice becomes one of getting a large refund in a lump sum at the end of the tax year, versus taking the refund in smaller payments throughout the year.

Sometimes the answer comes down to your budgeting skills – can you save and make good use of the smaller regular amounts?

The Value Add – July 2012

Ian Wood · July 1, 2012 ·

“Why does a slight tax increase cost you two hundred dollars and a substantial tax cut save you thirty cents?” ~ Peg Bracken

Financial Year 2013 – what do the tax changes bring?

With 1 July 2012 signalling the beginning of a new financial year, there are a number of tax changes and financial strategies that should be considered to make the most of your position in the year ahead.
If you wish to discuss anything in this newsletter, feel free to contact Value Beyond to see how we may assist.

1. Making budgets and planning for the coming year

While the ending of a financial year brings with it the need to review accounts and information in order to lodge tax returns, this also signals the beginning of a new financial year. This is a good time to consider the year ahead and make some plans so that next 30 June does not come around before you realise.

Budgets are essential to understanding what you expect of your business and personal finances, as well as understanding your cash flow so that expenses are not unexpected and any financial strain is minimised.

Reviewing investments, businesses and structuring can provide opportunities for improvement and change which can result in large financial benefits, both this year and over the future financial years.

2. Private Health Insurance

Changes to the Medicare Levy Surcharge and the government’s Private Health Insurance Rebate mean that you could end up paying more tax and more for your premiums.

If your income exceeds $84,000 per year for a single, or $168,000 for a family then you face either a 1% – 1.5% Medicare Levy Surcharge if you don’t have Private Hospital Cover, or your rebate is reduced to 20% – 0% if you do have cover.

A cost/benefit analysis is required to determine if the cost and benefits of private health insurance outweigh the additional tax being charged.

More information can be found here.

3. Small Business depreciation changes

From 1 July 2012, small businesses (turnover < $2 million p.a.) can claim an immediate deduction for assets costing less than $6,500 (excl GST). This threshold is an increase from $1,000 per asset, which represents a significant saving for those businesses looking to invest in equipment.

While the tax savings are significant, as the purchase of additional equipment is an investment decision it must be considered necessary for the business. Spending money on unnecessary items just to save tax is never a good financial decision.

More information can be found here.

4. Changes to superannuation

Following the release of the 2012 Federal Budget, changes to the superannuation caps have reduced the maximum deductible amount that can be contributed to superannuation. The concessional contribution cap (deductible contributions) is now $25,000 per year, and the non-concessional contribution cap (non-deductible contributions) is $150,000 per year.

While this limits the amount of money that individuals can contribute towards their retirement in a tax effective manner, there are other strategies such as utilising the CGT cap, and choosing investments such as owning your own business property in a SMSF.

These strategies need to make financial sense and help you achieve your long terms goals, but they can provide a significant boost to your retirement savings.

5. Changes to the taxation of trusts

There has been much talk about the change in the taxation of trusts following the Bamford case, and the recent legislative changes. Add to that the changes in the ATO’s administrative approach to trust resolutions and you could be mistaken for thinking that trusts are no longer a viable option.

As with any entity structure, the key action is to understand what is required to remain compliant, and plan your strategy around those requirements, making sure you are still achieving your objectives.

There are still plenty of reasons to utilise trusts (see free e-book), so if you have any doubts, contact us to discuss your position.

6. Director penalties for unpaid tax and super

New rules apply which make directors’ personally liable for their company’s unpaid PAYG withholding and superannuation guarantee amounts. In addition, the rules may reduce the director’s entitlement to credits for PAYG withholding where these amounts have not been paid to the ATO.

As the new rules place more responsibility on company directors, the change has highlighted how important it is for directors to keep up to date with the company’s obligations and ensure that the company remains compliant.

This need also highlights the importance of obtaining good advice to ensure that all obligations are met.

7. R & D Tax Incentive

Commencing on 1 July 2011, the new R & D Tax Incentive provides a refundable offset of up to 45% for businesses with a turnover under $20 million, where they have qualifying R & D expenditure.

While there are numerous conditions including registering with AusIndustry and keeping the necessary records documenting the research plan and expenses incurred, the refundable offset may provide much needed funding to enable the project to financially succeed.

8. Giving non-business and non-financial areas of your life priority

“After a visit to the beach, it’s hard to believe that we live in a material world.” ~ Pam Shaw

While our work and business affairs take up a large part of the time we spend each day, this does not mean that we can ignore other aspects of our lives. By taking time out for health, hobbies and holidays, this can release stress, ease tensions, improve relationships, and increase the focus and enthusiasm brought to our work lives.

While money is an important aspect of what motivates our actions, in most cases the desire to improve our financial position is actually to achieve other outcomes such as being able to enjoy our recreation time and to spend time with loved ones.

Why not start doing that today? As they say, there is no time like the present!

Changes to Medicare Levy Surcharge and Private Health Insurance rebate

Ian Wood · June 27, 2012 ·

Following the release of the budget in May 2012, changes have been made to the Medicare Levy Surcharge and the government’s Private Health Insurance rebate.

Currently the Medicare Levy Surcharge is a flat 1% of “income for surcharge purposes” where income exceeds the threshold level of $80,000 per year, and the taxpayer does not have an appropriate level of private health insurance hospital cover.

From 1 July 2012, the rate will increase to a maximum of 1.5% for singles earning more than $130,000 and families earning more than $260,000.

	Unchanged	Tier 1	Tier 2	Tier 3
Singles	$0 – $84,000	$84,000 – $97,000	$97,001 – $130,000	$130,001 and above
Families	$0 – $168,000	$168,001 – $194,000	$194,001 – $260,000	$260,001 and above
MLS	0%	1%	1.25%	1.5%
Rebate	30%	20%	10%	0%

Medical Expenses Offset

In addition to these changes, where income exceeds the lower threshold of $84,000 for singles and $168,000 for families, the medical expenses offset is also changing.

The rebate is currently on out-of-expenses exceeding $2,060, with a rebate of 20% available.

This will change to apply to out-of-expenses exceeding $5,000 with a rebate of 10% available.

What to do?

Where your income will exceed the thresholds, the additional Medicare Levy Surcharge and the decrease in Medical Expenses Offset make the benefits of the additonal cover of private health insurance greater.

Conversely, the reduction of the government rebate for private health insurance makes the overall cost of private health insurance greater than previously.

As always, the decision is one of balancing the tax outcomes with the comfort of being covered for unforseen medical costs.

Trusts: what needs to be done before 30 June 2012

Ian Wood · June 11, 2012 ·

Trusts have received a lot of attention from the government, Australian Taxation Office (ATO) and in the media recently. A number of changes have made the job of being a trustee even trickier than it already was. However, with the right guidance and advice it doesn’t have to be too hard to do the right thing by yourself and the beneficiaries.

If you have any questions, or any doubts as to what you should do before 30 June 2012, contact Value Beyond and get the help you need to keep your trust up to date.

These tips can be found in a downloadable PDF here: [wp_lightbox_special_anchor_text_pdf link=”http://valuebeyond.com.au/wp-content/uploads/2012/06/Trust-Resolutions-to-distribute-income-for-30-June-2012.pdf” width=”600″ height=”800″ title=”Trusts: What needs to be done before 30 June 2012″ text=”Click here to open the PDF file”]

Trust Resolutions
While much has been written about the changes to the tax laws relating to trust distributions, and the recent change by the ATO removing their administrative policy allowing trustees until 31 August to prepare their resolutions distributing trust income, there is still a lot of confusion as to what this all means for trusts. Practical advice is outlined further below.

TFN Withholding In addition, TFN withholding rules have been put into place so that trusts also now have to notify the ATO of the Tax File Number of each beneficiary who receives a present entitlement from the trust. Failure to do so will result in the trust having to withhold 46.5% of the distribution and pay that amount to the ATO. The beneficiary will get a credit for the amount withheld when they lodge their tax return.

Trusts are required to notify the beneficiary’s TFN by the last day of the month after the end of the quarter. This means those reports are due 28 July 2012 for the quarter ending 30 June 2012.

Where that beneficiary has received a distribution in the 2010 year and 2011 year and their TFN was included in the distribution section of the trust’s tax return, this is sufficient for that beneficiary’s TFN to have been reported.

Trust Resolutions

The changes mean that for the 2012 financial/income year a trust must have resolved how it is going to distribute its income by 30 June 2012. If no resolution is made, then the income of the trust will be distributed according to the trust deed. This may result in the default beneficiaries receiving the income in equal proportions, or the trustee will be assessed on the income where no beneficiary is specifically entitled. Neither of these outcomes may be desirable.

TIPS –The top tips when considering how to distribute a trust’s income as trustee:

Read the trust deed. This should be the first step for any trustee or adviser, as it contains the rules for that particular trust.
Read the ATO’s rulings and guidance found on their website.
Get advice. This area of tax and trust law is extremely complex, and this has not been made any easier by the recent changes
If in any doubt regarding the different types of income, distribute the whole of the trust’s income on a percentage basis to the beneficiaries.

This fourth option leaves the least amount of room for error, and particularly avoids the undesirable outcome of the trustee being taxed on income to which no beneficiary is specifically entitled to. It may not provide the optimum tax outcome however.

How to deal with Trust Income

Following the changes in legislation, the resolution must deal with the distribution of 3 key types of income:

Franked distributions
Net Capital Gains
All other income

Franked distributions and net capital gains have specific tax laws relating to how those types of income are dealt with in the context of the overall distribution of income.

In dealing with the trust income and the different classes, it becomes vitally important that trustees refer back to the trust deed to ensure they have the power to stream different classes of income, and that they adequately deal with all the income of the trust.

No split into different classes of income

If a trustee does not stream different classes of income (or does not have the power to do so in the trust deed) to different beneficiaries, then each beneficiary will be entitled to each type of income on a proportionate basis according to the percentage that their share of the income represents of the trust’s total income. If a beneficiary is entitled to a specific amount, then that specific amount is converted to a percentage to determine their share of each class of income.

Example – The XYZ trust derives franked distributions of $70,000 (plus $30,000 franking credits), $100,000 capital gain and $50,000 interest income. The trustee resolves to distribute the income 50% to John, and 50% to Mary. John’s entitlement and the amount he will include in his tax return as a trust distribution will be $35,000 of franked income plus $15,000 franking credits, $50,000 capital gain and $25,000 interest income. Mary will include the same.

Example– Using the example above, if the trustee had resolved to distribute $55,000 of income to John and the remainder to Mary, then the distribution would be worked out as follows: Total income of the trust is $70,000 + $100,000 + $50,000 = $220,000. John’s share is $55,000/$220,000 = 25%. Therefore John would be entitled to $17,500 of franked distribution (plus $7,500 of franking credits), $25,000 of the capital gain, and $12,500 of interest income. Mary would be entitled to the balance of the income.

Stream different classes of income

Where beneficiaries are distributed specific types of income (e.g. franked dividends, capital gains, interest income), it is very important that the trustees follow the rules specifically so that the resolution results in the intended distributions being effective for tax purposes.

Franked dividends/distribution
Where a trust has received a franked dividend or franked distribution, then the beneficiary’s entitlement to that franked distribution is worked out using their percentage share of the franked distribution. The beneficiary’s entitlement to the franking credits attaching to that distribution is also worked out using their percentage share of the distribution.

Complexity arises where a beneficiary is entitled to a specified dollar figure of the franked distribution, rather than a percentage of the franked distributions. If the total of the specified amounts are not equal to the total franked distribution derived by the trust, then the amount left over will be distributed according to each beneficiary’s share of the other remaining income of the trust.

Example – The XYZ trust receives a franked distribution of $50,000 (plus plus interest income of $100,000. The trustee resolves that John is entitled to $40,000 of the franked distribution and 25% of the remaining income of the trust. Mary is entitled to 75% of the remaining income of the trust. As not all of the franked distribution has been specifically distributed, the remaining $10,000 ($50,000 – $40,000) is then split according to the beneficiaries share of the remaining income. This would then result in the $10,000 being split $2,500 to John and $7,500 to Mary.

This results in the total franked distribution being distributed 85% or $42,500 to John ($40,000 specific entitlement plus $2,500) and 15% or $7,500 to Mary. The franking credits would accordingly be split 85%/15% to John and Mary respectively.

This situation become even further complicated where there are expenses that are specifically attributable to a class of income, and even more so where those expenses are greater than the amount of income in that class.

Capital Gains
Much like the discussion above relating to franked distributions, a beneficiary’s share of a trust’s capital gains is based on their percentage entitlement to the capital gains of the trust where capital gains are specifically distributed. This is relatively straightforward where the trustee resolves to distribute to beneficiaries based on percentages, but becomes more complex where a beneficiary is entitled to a specific amount that does not equal the total of the capital gains of the trust.

Where capital gains are not dealt with specifically by the trustee as a separate class of income, then they will be distributed in accordance with each beneficiaries percentage share of the income of the trust generally

Conclusion

Distributing a trust’s income can be quite a complex task, particularly if the trustee seeks to distribute the different classes of income in different percentage or dollar amount entitlements to other classes of income.

In summary, the tips at the beginning of this analysis provide a simple summary of the steps to take when trustees are considering how to distribute the trust’s income:

1. Read the trust deed. This should be the first step for any trustee or adviser, as it contains the rules for that particular trust.
2. Read the ATO’s rulings and guidance found on their website.
3. Get advice. This area of tax and trust law is extremely complex, and this has not been made any easier by the recent changes
4. If in any doubt regarding the different types of income, distribute the whole of the trust’s income on a percentage basis to the beneficiaries.

Particularly if you remain unsure, then follow step 2 – get advice! As the saying goes, an ounce or prevention is worth a pound of cure.